*/ Information as to earnings per share is not provided inasmuch as the results for each series of stock will vary with the underwriting experience attributable to each Subsidiary Capital Account established with respect to that series. See Note 2 to the Financial Statements.
Critical Accounting Policies The liability for losses and loss expenses represents the accumulation of estimates for reported losses and a provision for losses incurred but not reported, including claim adjustment expenses. For
Liquidity The Company expects to generate sufficient funds from operations to cover current liquidity needs. 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 Shares, will continue to be the principal sources of funds for the Company. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2002 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected in the foreseeable future.
On March 5, 2002, the Board of Directors authorized the payment of dividends aggregating $4,318,225 to eligible holders of Shares. See "Market for Registrant's Common Equity and Related Stockholders Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends.
The Company had unearned premium reserves of $89,634,122 as of December 31, 2001, compared to $91,915,465 as of December 31, 2000. Unearned premium amounts are attributable to the long-term nature of the contracts sold. Such contracts may extend for up to 84 months from the date of issue. In addition, the risk of loss to the Company under the contract arises primarily after the underlying manufacturer's warranty expires. For new vehicles, the warranty generally covers 36 months or 36,000 miles from the date that the vehicle is initially placed into service. For used vehicles, the applicable warranty period depends on the unexpired portion of the original manufacturer's warranty at the time of purchase of the vehicle. Because the Company has limited exposure to risk of loss prior to
The decrease in unearned premium reserves as of December 31, 2001 compared to December 31, 2000 is primarily attributable to the Company placing certain series of Shares in "run-off." When a series of Shares is placed in run-off, the Company discontinues assuming any risk or receiving any premiums with respect to automotive mechanical service contracts that are sold, after the date that the series is placed in run-off, by the Franchise(s) with respect to which the series of Shares is issued. When a series is placed in run-off, the premium that had been previously ceded to the Company that is attributable to such series of Shares continues to earn out and the unearned premium reserve decreases. As of December 31, 2001, 132 series of Shares were in run-off compared to 129 series as of December 31, 2000.
The Company had a net underwriting loss of $419,846 in 2001 compared to net underwriting losses of $1,130,535 and $4,190,723 in 2000 and 1999, respectively. During 2001, the Company earned premiums of $53,412,569 compared to $54,378,800 and $58,471,950 during 2000 and 1999, respectively. Premium income decreased in both 2001 and 2000 compared to the prior year as a result of (i) the redemption of additional series of Shares during the years ended December 31, 2001 and 2000, (ii) the placement of certain series of Shares in run-off as discussed above, and (iii) the Recapture as discussed below.
The Company incurred losses and administrative expenses during the year ended December 31, 2001 of $53,832,415 compared with $55,509,335 and $62,662,673 for the years ended December 31, 2000 and 1999, respectively. Expenses in 2001 were comprised of losses paid and provisions for losses incurred of $39,224,574, ceding commissions and excise taxes of $13,858,660 and operating expenses of $749,181. Losses incurred in 2000 and 1999 were $40,702,668 and $46,784,152, respectively. The loss ratio for the year ended December 31, 2001 was 73.4% compared to 74.9% and 80.0% for the years ended December 31, 2000 and 1999, respectively. These decreases in losses incurred and loss ratios are primarily attributable to the Recapture and the ongoing efforts by MIC to improve underwriting results with respect to series of Shares that have produced unprofitable business.
During 1999, as a result of its adverse underwriting results, the Company, working with MIC, took steps to improve its underwriting performance. During 1999, the Company's Board of Directors voted to redeem 37 series of Shares that had consistently experienced adverse underwriting results and which the Board determined were unlikely to experience favorable underwriting results in the future (the "Redemption"). Because the Subsidiary Capital Accounts for these series each had a balance of zero, the redemption price for the Shares was zero.
In addition to the Redemption, MIC agreed to commute the unearned premium and all unpaid losses as of the end of the second quarter of 1999 that were attributable to 37 series of Shares that the Board voted to redeem (the "Recapture"). In exchange for assuming these unearned premium and unpaid loss reserves, the Company paid $19,660,649 to MIC during the first quarter of 2000, which amount represented the unearned premium and unpaid losses as of June 30, 1999 that were attributable to the commuted business (after offset by the 25% ceding commission and 1% federal excise taxes previously paid by the Company with respect to the recaptured business). If MIC had not recaptured this business from the Company, the Company would likely have experienced larger underwriting losses and higher loss ratios for the years ended December 31, 2001, 2000 and 1999.
The Company incurred operating expenses during the year ended December 31, 2001 of $749,181 compared to $663,358 and $671,587 for the years ended December 31, 2000 and 1999, respectively. Such amounts do not include expenses paid directly by MIC. The increase in operating expenses for the year ended December 31, 2001 compared to the year ended December 31, 2000 is largely attributable to special reviews of certain operations of the Manager that were performed by the Company's auditors and increased legal fees. MIC has agreed to pay directly certain costs relating to registering and issuing shares if such costs cannot be allocated to the Subsidiary Capital Account for the Common Stock. For the year ended December 31, 2001, $106,751 of such costs were paid directly by MIC compared to $98,992 and $141,697 for the years ended December 31, 2000 and 1999, respectively. The
decrease in such costs for the year ended December 31, 2000 compared to the year ended December 31, 1999 is largely attributable to the costs associated with the Redemption and Recapture during 1999.
Investment income in 2001 was $6,150,764 compared to $4,808,908 and $655,755 for the years ended December 31, 2000 and 1999, respectively. The increase in investment income during 2001 compared to 2000 arose primarily as a result of significant gains realized on the sale of investment securities which was attributable to the positive impact of lower interest rates on the value of the Company's fixed income securities. Likewise, the increases in investment income during 2000 compared to 1999 arose primarily as a result of reduced realized losses on sale of investment securities which was also attributable to the positive impact of lower interest rates on the value of the Company's fixed income securities.
Unrealized gains on investment securities held at December 31, 2001 were $1,769,048 compared to unrealized gains at December 31, 2000 of $2,732,423. The decrease in unrealized gains as of December 31, 2001 compared to December 31, 2000 resulted primarily from a significant change in the unrealized position on the Company's equity portfolio which was largely attributable to overall negative performance of the equity markets during 2001.
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, 2001, the Company had furnished such a letter of credit in the amount of $72,350,000.
3. Statements of Operations and Retained Earnings for the years ended December 31, 2001, 2000 and 1999 33
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars)
The financial statements are stated in United States dollars and prepared in conformity with accounting principles generally accepted within the United States of America.
Certain amounts from 2000 have been reclassified to conform with 2001 classifications.
Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer prior to October 1, 2001 and 80% for policy premiums written by the direct insurer, on and after October, 2001. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned.
Investments, all of which are available for sale, are comprised of interest-bearing marketable securities, and an investment in an international equity fund, which are carried at fair value based on quoted market prices and dealer quotes obtained from an external pricing service. Investments with
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB issued SFAS No. 138 which amends SFAS No. 133 and delayed implementation of SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualified for hedge accounting. The Company adopted this accounting standard on January 1, 2001 as required. Adoption did not have a material impact on the financial position or result of operations of the Company.
No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8).
The cost and fair value of debt securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call on prepay obligations with or without call or prepayment penalties.
The investment portfolio is comprised of approximately 82% in diverse debt securities which do not result in any concentration of credit risk and 18% in an international equity fund. At December 31, 2001 and 2000 100% of the Company's investments are denominated in United States dollars.
During each of the years 2001 and 2000, 1 additional series of 100 shares of Participating Stock was issued. In addition, during 2001 the Board of Directors (the "Board") redeemed ten series of 100 shares which had been previously placed in run off and had reached fully earned position during 2001. During 2000 the Board redeemed eight series of 100 shares, which had been previously placed in run off, of which seven series had reached a fully earned position during 2000. During 1999 the Board of Directors also redeemed 37 series of 100 shares for nil value, and thereafter, MIC recaptured the unearned premium and loss reserves for those series (see Note 9).
In the years ended December 31, 2001, 2000 and 1999 costs in the amount of $106,751, $98,992, and $141,696 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, 2001 and 2000, there were no funds held in escrow.
The Company has provided an irrevocable letter of credit to MIC, in the amount of $72,350,000 ($76,050,500 at December 31, 2000) 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.
During 1999, the Company entered into a recapture agreement with MIC for 37 series of Participating Shares. Under the agreement MIC recaptured premium of $24,934,234, which represents unearned premiums and an amount equal to $1,209,316 for losses incurred, but unpaid in respect to the recapture business as of June 30, 1999. Additionally, MIC has paid the Company a recapture commission of $6,482,901 which represents the deferred portion of the ceding commission previously paid by the Company.