The following selected financial data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from financial statements audited by Deloitte & Touche, independent chartered accountants, whose report with respect to their audits of the financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 is included elsewhere herein.
On February 26, 1999, the Board of Directors authorized the payment of dividends aggregating $4,066,464 to eligible holders of Participating Shares. See "Market For Registrant's Common Equity And Related Stockholder Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends.
Results of Operations. During the year ended December 31, 1998, the Company had net income of $7,193,356 compared to $7,902,910 and $7,454,523 for the years ended December 31, 1997 and 1996, respectively. As described below, the decrease in net income during 1998 compared to the previous year was primarily a result of an underwriting loss which partially offset an increase in investment income. The increase in net income in 1997 compared to 1996 was primarily a result of an increase in investment income combined with a modest increase in underwriting income.
The Company had a net underwriting loss of $3,182,108 in 1998 compared to net underwriting income of $2,198,232 and $2,112,599 for the years ended December 31, 1997 and 1996, respectively. The net underwriting loss recorded during 1998 reflected an increase in the Company's loss ratio (the ratio of losses incurred to premiums earned) as more fully described below. The modest increase in underwriting income during 1997 was the result of an increase in the amount of premiums earned partially offset by an increase in the loss ratio of the Company. During 1998, the Company earned premiums of $57,845,674 compared to $45,701,595 and $36,077,699 during 1997 and 1996, respectively.
Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1998, and the continuing flow of reinsurance premiums from series issued in prior years. During 1998, the Company issued 37 new series of Shares and redeemed 4 series of Shares for a net increase of 33 series. There were a total of 315 series outstanding at December 31, 1998 compared to 282 and 254 series of Shares outstanding at December 31, 1997 and 1996, respectively.
The loss ratio in 1998 resulted from loss experience which was heavily influenced by the type of repairs and price of repaired parts. During the second and third quarters 1998 unusually hot weather in certain areas of the United States resulted in a higher number of covered repairs for mechanical components such as air conditioners and water pumps which contributed to higher loss costs. Loss experience in 1998 also reflected, in part, implementation of previously announced increases in suggested list prices of parts to dealers.
The ceding company, MIC, believes that dealer management is a key factor in loss experience. Many of the dealerships producing mechanical business assumed by the Company are profitable. At dealerships where loss experience has been unprofitable, MIC has recently implemented loss cost procedures including on-site adjusters and/or empowerment restrictions. MIC believes these loss cost procedures should have a favourable effect on the performance of those unprofitable accounts. However, there can be no assurance that such results will be achieved.
The Company incurred operating expenses during the year ended December 31, 1998 of $555,321 compared to $503,020 and $548,525 for the years ended December 31, 1997 and 1996, 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 1998, $69,280 of such costs were paid directly by MIC compared to $77,329 and $64,848 for the years ended December 31, 1997 and 1996, respectively.
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, 1998, the Company had furnished such a letter of credit in the amount of $88,075,000.
Many computerized systems and microprocessors that are used by the Company's Manager have the potential for operational problems if they lack the ability to handle the transition to the Year 2000. The effects of the Year 2000 issue are also complicated by the Company's dependence on its common shareholder, from whom the Company assumes all of its business, as well as other service providers such as investment advisors and custodians. The Year 2000 issue has the potential to cause disruption to the business of the Company and its customers. In early 1998, the Company initiated communications with its Manager and other service and technology providers in order to assess and reduce the risk that the Company's operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. Motors Insurance Corporation, the Company's key retroceding company and common shareholder, has completed its Year 2000 assessment phase and is in the remediation phase with respect to its critical systems.
The Company does not separately own or license any computers or computer software applications, instead it has outsourced these functions through an Insurance Management Agreement. To date, the Company has not incurred, expensed or capitalized amounts related to the Year 2000 remediation. The Company does not expect to incur incremental expenses or to forego or delay information technology projects due to Year 2000. In view of the foregoing, the Company does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect the Company and third parties that are critical to the Company's operations. In the event that the Company or its service providers are unable to complete remedial actions or are unable to implement adequate contingency plans in the event that problems are encountered, there could be a material adverse effect on the Company's business, results of operations or financial condition.
The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon the 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.
3. Statements of Income and Retained Earnings for the years ended December 31, 1998, 1997 and 1996 ............................... 36
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, 1998 and 1997 and the results of its operations and its cash flows and its changes for each of the three years in the period ended December 31, 1998 in conformity with accounting principles generally accepted in the United States of America.
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (Expressed in U.S. Dollars)
Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 and 1998 presentation.
The cost and fair value of debt securities at December 31, 1998, 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.
The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1998, 100% of the Company's investments are denominated in U.S. dollars.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1998, 1997 and 1996:
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1998, 1997 and 1996 decreased by $290,547, $746,024 and $42,251 respectively, because of lower actual claims.
In the years ended December 31, 1998, 1997 and 1996, costs in the amount of $69,280, $77,239 and $64,848 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 1998, there were no funds held in escrow.
Under the provisions of the retrocession agreement, the Company will assume additional cessions of $36,747,691 ($31,818,196 at December 31, 1997) 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 $88,075,000 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.
Barbados law requires that the Company maintain a minimum margin of solvency based generally on the amount of premiums earned in the preceding year. At January 1, 1999, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $6,284,567.
Net income for the year 14,131 7,440,392 7,454,523 Net transfers 6,147 (6,147) - Dividends paid - (4,007,483) (4,007,483) Redemption of participating stock - (51,529) (51,529) ----------- ------------ ------------ Balance (Deficit), December 31, 1996 9,417 14,903,636 14,913,053
Net income for the year 12,304 7,890,606 7,902,910 Net transfers (29,881) 29,881 - Dividends paid - (4,196,730) (4,196,730) Redemption of participating stock - (3,465) (3,465) ----------- ------------ ------------ Balance (Deficit) December 31, 1997 (8,160) 18,623,938 18,615,768
Net income for the year 20,970 7,172,386 7,193,356 Net transfers (21,529) 21,529 - Dividends paid - (5,171,956) (5,171,956) Redemption of participating stock - (8,159) (8,159) ----------- ------------ ------------ Balance (Deficit), December 31, 1998 $ (8,719) $20,637,728 $20,629,009 =========== ============ ============