Capital Resources. Capitalization of the Company, as of December 31, 1996, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,905,000 (compared with $1,807,500 and $1,665,000 as of December 31, 1995 and 1994, respectively), and earnings retained for use in the business of $14,913,053. 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, 1997, the Company's required minimum net assets computed in accordance with Barbados law was approximately $4,107,770, compared to total capital and retained earnings computed for purpose of Barbados law of $17,018,053.
Results of Operations. During the year ended December 31, 1996, the Company had net income of $7,454,523 compared to $6,901,924 and $1,718,558 for the years ended December 31, 1995 and 1994, respectively. As described below, the increase in net income during 1996 compared to the previous year was primarily due to the improved underwriting results which were partially offset by a small decrease in investment income. The increase in net income during 1995 compared to the previous year was the result of realized gains on the sale of investments, increases in interest earned and improved underwriting results.
The Company incurred losses and administrative expenses during the year ended December 31, 1996 of $33,965,100 compared with $27,462,338 and $20,825,943 for the years ended December 31, 1995 and 1994, respectively. Expenses in 1996 were comprised of losses paid and provisions for losses incurred of $24,037,827, ceding commissions and excise taxes of $9,378,748 and operating expenses of $548,525. Losses incurred in 1995 and 1994 were $19,431,032 and $14,830,166 respectively. The loss ratio for the year ended December 31, 1996 was 66.6% compared to 67.5% and 69.6% for the years ended December 31, 1995 and 1994, respectively.
The Company incurred operating expenses during the year ended December 31, 1996 of $548,525 compared to $544,837 and $455,238 for the years ended December 31, 1995 and 1994, respectively. MIC has agreed to pay directly certain costs of registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 1996 $64,848 of such costs were paid directly by MIC compared to $171,079 and $162,989 for the years ended December 31, 1995 and 1994, respectively.
Investment income in 1996 was $5,341,924 compared to $5,563,573 and $1,227,816 for the years ended December 31, 1995 and 1994, respectively. The decrease in investment income during 1996 compared to 1995 was attributable to an overall decline in yields in U.S. and non-U.S. dollar positions. The increase in investment income during 1995 compared to 1994 was attributable to realized gains on the sale of investment securities and an increase in interest earned.
The sale of investment securities for the year ended December 31, 1996 resulted in realized gains of $64,244 compared to realized gains of $1,404,232 for the year ended December 31, 1995, and realized losses of $1,543,358 for the year ended December 31, 1994. The realized gains during 1995 were due to increased sales of investment securities to take advantage of market opportunities presented by fluctuations in interest rates. Interest earned for the year ended December 31, 1996 was $5,277,680 compared to $4,159,341 and $2,771,174 for the years ended December 31, 1995 and 1994, respectively. The increase in interest earnings during 1996 was largely a result of an increase in the amount of assets under management.
Unrealized appreciation on investment securities held at December 31, 1996 was $543,521 compared to unrealized appreciation at December 31, 1995 of $1,651,621. The change in unrealized appreciation as of December 31, 1996 compared to December 31, 1995 is in large part attributable to the fact that the Company's portfolio at December 31, 1996 comprised primarily U.S. dollar securities and U.S. yields were approximating fair market value at that time.
At December 31, 1996, 100% of the Company's investments were in U.S. dollar-denominated fixed-income securities compared to 78.5% at December 1995 when approximately 21.5% of the Company's investments were in non-U.S. dollar-denominated bonds, on a fully currency-hedged basis. The Company's investment manager seeks to identify non-U.S. dollar-denominated investments that offer a higher rate of return (net of hedging costs) than would be available in the market for similarly rated U.S. dollar-denominated bonds. The instruments used to hedge non-U.S. dollar-denominated investments involve, to varying degrees, elements of credit risk in the event a counterparty should default on its obligation under the hedge instrument. Such credit risk is managed through the selection of financially sound counterparties and periodic monitoring of counterparty financial condition. The Company's investment guidelines do not permit the use of financial instrument derivatives in managing interest rate risk.
Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 1996, the Company had furnished such a letter of credit in the amount of $67,350,000.
4. Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............ 30
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1996 and 1995 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
Participating stock - no par value; Authorized - 100,000 shares; Issued and outstanding - 25,400 shares at December 31, 1996 and 24,100 shares at December 31, 1995 1,905,000 1,807,500 ------------ ----------- 2,105,000 2,007,500
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Investment income: Interest earned 5,277,680 4,159,341 2,771,174 Realized gains (losses) on investments 64,244 1,404,232 (1,543,358) ----------- ----------- -----------
NET INCOME 7,454,523 6,901,924 1,718,558 RETAINED EARNINGS, beginning of year 11,517,542 5,796,732 6,211,978
RETAINED EARNINGS, end of year $14,913,053 $11,517,542 $ 5,796,732 =========== =========== ===========
The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period ending December 31, 2016. Thereafter and until December 31, 2031, 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.
Debt securities issued by foreign governments and their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032
Debt securities issued by supra-nationals 6,540,750 137,625 - 6,678,375 ----------- ---------- ---------- -----------
Debt securities issued by foreign governments and their agencies $56,243,544 $1,711,611 $ (135,765) $57,819,390
The cost and fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
In 1996, gross gains of $1,997,197 and gross losses of $1,932,953 were realized. In 1995, gross gains of $2,694,685 and gross losses of $1,290,453 were realized. In 1994, gross gains of $150,704 and gross losses of $1,694,062 were realized.
All of the Company's Common Stock is held by MIC. A prospectus dated May 10, 1996 is offering 12,000 shares of Participating Stock to persons certified by owners of certain motor vehicle franchises. The offering consists of 120 series of 100 shares each at a price of $75 per share.
In the years ended December 31, 1996, 1995 and 1994, costs in the amount of $64,848, $171,079 and $162,989 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
The holder of Common Stock is entitled to elect five directors, at least one of whom must be a resident of Barbados. The holder of Common Stock has no right to vote with respect to liquidation of the Company. The holder generally has the sole right to vote on matters not specifically reserved to Participating Stock.
Under the provisions of the retrocession agreement, the Company will assume additional cessions of $28,028,290 ($24,250,844 at December 31, 1995) 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.
The Company has provided an irrevocable letter of credit to MIC, in the amount of $67,350,000 to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and investments are assigned to collateralize the letter of credit.
Balance December 31, 1996 $ 9,417 $14,903,636 $14,913,053 ========= =========== ===========