The following selected financial data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from the Company's audited financial statements.
**/ In 1999, MIC recaptured certain insurance business that had been previously ceded to the Company. See Note 9 to the Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations."
expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned.
Capital Resources Capitalization of the Company, as of December 31, 2001, was comprised of paid-in capital with respect to the Common Stock of $200,000 (compared to $200,000 at both December 31, 2000 and 1999), paid-in capital with respect to the Shares of $1,875,000 (compared with $1,942,500 and $1,995,000 as of December 31, 2000 and 1999, respectively), and earnings retained for use in the business of $18,521,974 (compared with $16,247,004 and $13,190,576 as of December 31, 2000 and 1999, respectively). The reduction in the amount of paid-in capital with respect to the Shares as of December 31, 2001 compared with December 31, 2000 is primarily attributable to redemption of Shares with nil unearned premiums. There were a total of 250 series outstanding at December 31, 2001 compared to 259 and 266 series of Shares outstanding at December 31, 2000 and 1999, respectively. During 2001, the Company issued 1 new series of Shares and redeemed 10 series of Shares for a net decrease of 9 series. During 2000, the Company issued 1 new series of Shares and redeemed 8 series for a net decrease of 7 series.
Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary
Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 2002, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,841,257 compared to total capital and retained earnings computed for purpose of Barbados law of $20,596,974.
Results of Operations During the year ended December 31, 2001, the Company had net income of $5,730,918 compared to net income of $3,678,373 for the year ended December 31, 2000 and a net loss of $3,534,968 for the year ended December 31, 1999. The increase in net income in 2001 compared to 2000 is attributable to a $710,689 improvement in underwriting results combined with a $1,341,856 increase in investment income. The increase in net income in 2000 compared to 1999 is attributable to a $3,060,188 improvement in underwriting results combined with a $4,153,153 increase in investment income.
Notwithstanding the Redemption and the Recapture, there can be no assurances that the Company will not experience significant adverse underwriting results in the future and there can be no assurances that MIC would recapture additional business from the Company if the Company does experience significant adverse underwriting results.
The sale of investment securities for the year ended December 31, 2001 resulted in realized gains of $1,632,053, compared to realized losses of $313,531 and $5,255,474 for the years ended December 31, 2000 and 1999, respectively. Interest earned for the year ended December 31, 2001 was $4,518,711 compared to $5,122,439 and $5,911,229 for the years ended December 31, 2000 and 1999, respectively. Interest earned in 2001 compared to 2000, and in 2000 compared to 1999, decreased primarily as a result of the combination of (i) repayment during the first quarter of 2000 of premiums paid to MIC with respect to the Recapture, which represented approximately 20% of the invested assets of the Company, (ii) the movement of investment funds into the equity fund, and (iii) lower interest rates in 2001.
At December 31, 2001 approximately 18% (2000-19%) of the Company's investment portfolio was invested in a U.S. dollar denominated international equity fund and the remaining 82% (2000 - 81%) was invested in U.S. dollar denominated fixed-income securities (in each case, based on fair market value).
Forward Looking Statements The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon Company's current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
4. Statement of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 34-35
5. Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 36
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited (the "company") as of December 31, 2001 and 2000 and the related statements of operations and retained earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Motors Mechanical Reinsurance Company, Limited as of December 31, 2001 and 2000 and the results of its operations, changes in stockholders' equity and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
All of the common stock of the Company is owned by Motors Insurance Corporation (`MIC'), a member of the GMAC Insurance Group. MIC (the "Common Shareholder") is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC.
Premiums are written on the basis of quarterly cessions and earned relative to anticipated loss exposures. Acquisition costs, consisting of ceding commissions and excise taxes, are taken into income on the basis of premiums earned.
The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred, but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations and can potentially be significant to the financial statements.
The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period of fifteen years expiring December 31, 2001. Thereafter, and until December 31, 2016 the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum.
In 2001, gross gains of $2,067,143 and gross losses of $435,090 were realized. In 2000, gross gains of $1,735,049 and gross losses of $2,048,580 were realized. In 1999 gross gains of $1,571,947 and gross losses of $6,827,421 were realised.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 2001, 2000 and 1999:
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 2001, 2000 and 1999 decreased by $1,304,766, $877,045 and $427,390 respectively.
The Common Stockholder is entitled to elect five directors, at least one of whom must be a resident of Barbados. The Common Stockholder has no right to vote with respect to liquidation of the Company. The Common Stockholder generally has the sole right to vote on matters not specifically reserved to Participating Stock.
The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board of Directors provided that the director representing holders of the Participating Stock votes in favour of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock.
Under the provisions of the retrocession agreement, the Company will assume future additional premiums of $29,878,041 ($30,638,488 at December 31, 2000) relating to premiums written by Motors Insurance Corporation but unearned at the respective period ends. The amounts will be received as the premiums are earned, net of related acquisition costs.
An amount equal to 1 percent of assumed premiums is allocated to the capital account of the Common Stockholder. Such allocations accumulate as restricted retained earnings and may be used to advance capital to any Participating Stockholders who incur a deficit in their capital accounts. Any such advances are repayable out of future profitable operations of the respective Participating Stockholder. Amounts allocated to the Common Stockholder, net of advances to Participating Stockholders, are presented in the table below as "net transfers".
Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of Participating Stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such share's pro-rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part.