Capital Resources. Capitalization of the Company, as of December 31, 1997, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $2,115,000 (compared with $1,905,000 and $1,807,500 as of December 31, 1996 and 1995, respectively), and earnings retained for use in the business of $18,615,768. 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, 1998, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,070,160, compared to total capital and retained earnings computed for purpose of Barbados law of $20,930,768.
Results of Operations. During the year ended December 31, 1997, the Company had net income of $7,902,910 compared to $7,454,523 and $6,901,924 for the years ended December 31, 1996 and 1995, respectively. As described below, the increase in net income during 1997 compared to the previous year was primarily as a result of an increase in investment income combined with a slight increase in underwriting income. The increase in net income in 1996 compared to 1995 arose from improved underwriting performance partially offset by a small decrease in investment income.
The Company had net underwriting income of $2,198,232 in 1997 compared to $2,112,599 and $1,338,351 for the years ended December 31, 1996 and 1995, respectively. 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 (the ratio of losses incurred to premiums earned) of the Company. During 1997, the Company earned premiums of $45,701,595 compared to $36,077,699 and $28,800,689 during 1996 and 1995, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1997, and the continuing flow of reinsurance premiums from series issued in prior years. During 1997, the Company issued 29 new series of Shares and redeemed 1 series of Shares for a net increase of 28 series. There were a total of 282 series outstanding at December 31, 1997 compared to 254 and 241 series of Shares outstanding at December 31, 1996 and 1995, respectively.
The Company incurred operating expenses during the year ended December 31, 1997 of $503,020 compared to $548,525 and $544,837 for the years ended December 31, 1996 and 1995, 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 1997, $77,239 of such costs were paid directly by MIC compared to $64,848 and $171,079 for the years ended December 31, 1996 and 1995, respectively.
Unrealized appreciation on investment securities held at December 31, 1997 was $1,135,201 compared to unrealized appreciation at December 31, 1996 of $543,521. The increase in unrealized appreciation as of December 31, 1997 compared to December 31, 1996 likewise resulted from the move towards lower yields that occurred during 1997.
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, 1997, the Company had furnished such a letter of credit in the amount of $77,000,000.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. Under this statement all items required to be recognized under accounting standards as components of comprehensive income must be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt this accounting standard in 1998. Adopting the accounting standard will not have an impact on reported net income.
4. Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ............ 35
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1997 and 1996 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with accounting principles generally accepted in the United States of America.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
LIABILITIES Unearned premiums $ 95,454,588 $ 84,084,870 Loss reserves 4 5,421,160 4,284,304 Accrued liabilities 123,569 110,416 ------------ ------------ Total Liabilities 100,999,317 88,479,590 ------------ ------------ COMMITMENTS AND CONTINGENCIES 7
STOCKHOLDERS' EQUITY Share capital 5 Common stock - no par value;
Participating stock - no par value; Authorized - 100,000 shares; Issued and outstanding - 28,200 shares at December 31, 1997 and 25,400 shares at December 31, 1996 2,115,000 1,905,000 ------------ ------------ 2,315,000 2,105,000
Retained earnings 8 18,615,768 14,913,053 Unrealized appreciation on 3 investments 1,135,201 543,521 ------------ ------------ Total Stockholders' Equity 22,065,969 17,561,574 ------------ ------------ Total Liabilities and Stockholders' Equity $123,065,286 $106,041,164 ============ ============
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Acquisition costs 11,881,721 9,378,748 7,486,469 Losses paid 29,981,766 23,233,857 18,610,968 Increase in loss reserves 1,136,856 803,970 820,064 Administrative expenses Related Parties 219,760 211,001 174,443 Other 283,260 337,524 370,394 ----------- ----------- -----------
NET INCOME FOR THE YEAR 7,902,910 7,454,523 6,901,924 RETAINED EARNINGS, beginning of year 14,913,053 11,517,542 5,796,732
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 and 1997 presentation.
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 same basis as premiums are earned.
Gross Gross Unrealized Unrealized Fair Cost Appreciation Depreciation Value ----------- ------------ ------------ ----------- December 31, 1997:
Foreign governments and their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032
Due after five years through ten years 16,265,401 16,476,160 ----------- ----------- $87,450,312 $88,585,513 =========== ===========
In 1997, gross gains of $1,494,878 and gross losses of $743,955 were realized. 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.
The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1997, 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, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Beginning balance in reserves for losses $ 4,284,304 $ 3,480,334 $ 2,660,270 ----------- ----------- ----------- Add-provision for losses incurred related to:
Current claim year 27,024,981 20,330,269 16,461,768 Prior claim years 2,997,089 2,903,588 2,149,200 ----------- ----------- ----------- Total 30,022,070 23,233,857 18,610,968 ----------- ----------- ----------- Ending balance in reserves for losses $ 5,421,160 $ 4,284,304 $ 3,480,334 =========== =========== ===========
During 1997, 29 additional series of 100 shares of Participating Stock were issued as compared with 16 for the year ended December 31, 1996. In addition, in 1997 the Board of Directors redeemed 1 series of 100 shares at the request of the shareholders. The redeemed series had been previously placed in run off and had reached a fully earned position during 1997.
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, 1997, there were no funds held in escrow.
The Company has provided an irrevocable letter of credit to MIC, in the amount of $77,000,000 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.
An amount equal to 1-1/3 percent of assumed premiums (net of related ceding commissions) 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."
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, 1998, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $5,070,000.
Retained earnings applicable to the Common and Participating Stockholders are comprised of the following:
Common Participating Total ------ ------------- ----- Balance (Deficit), December 31, 1994 $ (53,220) $ 5,849,952 $ 5,796,732