The Company does not own any office space or facilities. Rather, the business office for the Company is provided by the Manager and is located at One Financial Place, Collymore Rock, St. Michael, Barbados. The Company believes that these facilities are adequate for its current and anticipated future needs. In addition, the Manager supplies all equipment for the Company.
The following selected financial data for the years ended December 31, 2002 and December 31, 2001, and the period from March 20, 2000 (date of incorporation) to December 31, 2000 have been derived from the Company's audited financial statements.
The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. Accounts that, in our judgment, are most critical to the preparation of our financial statements include policy liabilities and accruals, deferred policy acquisition costs, valuation of certain investments and deferred taxes.
The liability for losses and loss expenses represents the accumulation of estimates for reported losses and a provision for losses incurred but not reported. For purposes of establishing loss reserves, the Company relies upon the advice of Integon. Loss reserve projections are used to estimate loss reporting patterns, loss payment patterns and ultimate claim costs. An inherent assumption in such projections is that historical patterns can be used to
predict future patterns with reasonable accuracy. Because many variables can affect past and future loss patterns, the effect of changes in such variables on the results of loss projections must be carefully evaluated. The evaluation of these factors involves complex, subjective judgments, which may significantly impact the financial statements. Insurance liabilities are, therefore, necessarily based on estimates, and the ultimate liability may vary from such estimates. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed reserves and have a material adverse effect on our results of operations and financial condition. These estimates are regularly reviewed by management and adjustments to such estimates are included in income on a current basis.
Insurance premiums are earned over the terms of the policies. The portion of premiums written applicable to the unexpired term of policies is recorded as unearned premiums.
The Company was incorporated on March 20, 2000 and commenced operations on August 1, 2002. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of the Company's Shares, are its principal sources of funds. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2003 and in future years to which its reinsurance liabilities will extend. No significant capital expenditures are expected during the next few years.
The Company's capitalization on December 31, 2002, 2001, and 2000 consisted of paid-in capital with respect to the Common Stock of $1,000,000, and earnings retained for use in its business in the amount of $99,671 and $76,262 and 43,667, respectively. The Company's capitalization also includes paid-in capital with respect to the Participating Shares of $$150,000 (compared with $0 as of December 31, 2001 and 2000). The increase in the amount of pain-in capital with respect to the Participating Shares is attributable to the issuance of six series of Participating Shares. Barbados insurance law requires that the Company maintain a minimum capitalization of $125,000 and, in addition, that the recorded value of the Company's assets exceed its liabilities by: (a) $125,000 where the Company's earned premium in the preceding financial year did not exceed $750,000; (b) an amount equal to 20% of the Company's earned premium for the preceding financial year, where such income exceeded $750,000 but did not exceed $5,000,000; and (c) an amount equal to the aggregate of $1,000,000 and 10% of the amount by which the Company's earned premium for the preceding financial year exceeded $5,000,000. 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. Currently, the Company's net assets are not less than the amount mandated by Barbados law.
For the year ended December 31, 2002, the Company had net income of $23,409, down from $32,595 in 2001. The decrease in net income is attributable to reduced investment income due to lower interest rates prevailing during the year ended December 31, 2002 compared to the prior period, partially offset by underwriting gains. During 2002, the first year of the Company's reinsurance operations, the Company earned premiums of $213,536, incurred losses of $121,624, and incurred other expenses of $77,859 for an underwriting gain of $14,052. The incurred loss ratio for the year was 57%. Total premiums assumed by the Company were $612,329.
For purposes of establishing loss reserves, the Company relies upon the advice of Integon. Loss reserves are established after periodic actuarial reviews, based on historical claim experience, industry statistics and other factors. Consequently, the determination of loss reserves is an estimate and a process inherently subject to a number of highly variable factors. Consequently, ultimate losses could exceed loss reserves and cause us to have to adjust our loss reserves. Any adjustments to reserves are reflected in the operating results for the periods in which they become known.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", issued in July 2002, addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between Statement 146 and Issue 94-3 relates to Statement 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit costs as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also established that fair value is the objective for initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of this statement did not have a material impact on our results of operations or financial position.
5. Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 18
To the Shareholders of INTEGON RE (BARBADOS), LIMITED One Financial Place Collymore Rock St. Michael, Barbados
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material respects, the financial position of Integon Re (Barbados), Limited as of December 31, 2002 and 2001 and the results of its operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2002 and for the period March 20, 2000 (commencement of operations) to December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
2002 2001 2000 ---- ---- ---- INCOME Reinsurance premiums assumed $612,329 $ - $ - Increase in unearned premiums (398,793) - - ---------- ---------- --------- Premiums earned 213,536 - - ---------- ---------- ---------
EXPENSES Acquisition and other underwriting 77,859 - - Losses 121,624 - - ---------- ---------- --------- 199,483 - - ---------- ---------- ---------
RETAINED EARNINGS, beginning of year/period 76,262 43,667 - ---------- ---------- ---------
RETAINED EARNINGS, end of year/period $99,671 $76,262 $43,667 ========== ========== =========
Total Shareholders' Retained Common Participating Equity Earnings Shares Shares ------------- --------- ---------- ------------- BALANCE, at December 31, 2000 $1,043,667 $43,667 $1,000,000 $ -
Net Income for the year 23,409 23,409 - - ---------- --------- ---------- ---------
The Company was incorporated on January 10, 2000 under the Laws of Barbados and is licensed under the Barbados Exempt Insurance Act. The Company's principal activity is the assumption of risks with respect to property and casualty insurance policies (primarily automobile and motorcycle) sold to consumers in the United States through independent insurance agencies. The policies are reinsured by Motors Insurance Corporation (MIC) and attributable to MIC subsidiary accounts in respect of which shares of participating stock are issued and outstanding. All premiums received were assumed by MIC. The Company commenced its reinsurance operations in the third quarter ending September 30, 2002.
All of the common shares of the Company are owned by Integon Corporation (Integon). Integon is an indirect wholly-owned subsidiary of General Motors Corporation.
Insurance premiums are earned over the terms of the policies. The portion of premiums written applicable to the unexpired terms of policies is recorded as unearned premiums.
The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and gains taxes for a period of fifteen (15) years from the date of incorporation. Thereafter, for a further fifteen (15) years, the Company will be subject to tax at a rate of 2% on its taxable income, but the amount of such tax will not exceed $2,500 per annum.
Beginning balance of reserves for losses $ - $ - -------- -------
Add provision for losses incurred related to: Current claim year 121,624 - -------- ------- Total 121,624 - -------- ------- Deduct paid losses attributable to: Current claim year 47,842 - -------- ------- Ending balance in reserves for losses $74,082 $ - ======== =======
The holder of the common shares shall be entitled to elect five directors of the Company, one of whom must be a resident citizen in Barbados. The holders of the participating shares shall be entitled to elect one director of the Company.
Under the Retrocession Agreement, MIC retrocedes to the Company, a portion (the "Retrocession Percentage") of MIC's risk in respect of certain property and casualty insurance policies that are reinsured by MIC. The amount of the Company's liability for any loss paid on a policy is equal to the Retrocession Percentage multiplied by the amount of the loss. The Retrocession Percentage, which can
be either 20%, 30%, 40% or 50%, is established for each Integon account with respect to which a series of participating shares are issued, outstanding and in good standing. In return for the Company assuming the risk retroceded to the Company by MIC under the Retrocession Agreement, MIC pays the Company an amount equal to the Retrocession Percentage multiplied by the gross premiums MIC receives with respect to the retroceded business, after cancellations, reduced by:
Generally, liquidation of the Company requires approval by at least 75% of the participating shares issued and outstanding.
The Company believes that the Retrocession Agreement contains terms that are no less favorable to the Company than would be obtained in an arms-length transaction. The Retrocession Agreement provides that business will be ceded to the company by MIC on a proportional basis subject to a ceding commission of 26.5% which the Company believes is commercially reasonable.
The Company has entered into an Insurance Management Agreement (the "Management Agreement") with Aon Insurance Managers (Barbados) Ltd. (the "Manager").
Under the Management Agreement, the Manager collects and disburses funds on the Company's behalf, provides accounting, clerical, telephone, facsimile, information management and other services for the Company and advises and consults with the Company about all aspects of the Company's reinsurance activities. Under the terms of the Management Agreement, the Company will pay the Manager a fixed annual fee of $70,000 and a variable monthly fee of approximately $44 per series of Shares outstanding. The Manager is responsible for the payment of the salaries of its officers and employees and all office and staff overhead and other costs attributable to its services on the Company's behalf. However, the Company will pay all out-of-pocket expenses, such as telephone, facsimile, postage, travel and other items on an expense reimbursement basis. The Management Agreement may be terminated by either party upon 90 days advance written notice.