The following selected financial data for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 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, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 is included elsewhere herein.
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. Although losses are expected to increase due to the increased level of premiums assumed in each preceding year and the anticipated incidence of claims following the expiration of manufacturers' warranties, available funds from the sources identified above have also grown. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2000 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years.
Results of Operations. During the year ended December 31, 1999, the Company had net losses of $3,534,968 compared to net income of $7,193,356 and $7,902,910 for the years ended December 31, 1998 and 1997, respectively. As described below, the decrease in net income during 1999 compared to the previous year was primarily as a result of increases in underwriting losses incurred and decreases in investment income. The decrease in net income in 1998 compared to 1997 arose from increases in underwriting losses incurred which were partially offset by increases in investment income.
315 and 282 series of Shares outstanding at December 31, 1998 and 1997, respectively.
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, as discussed below, the Board voted to redeem (the "Recapture"). In exchange for assuming these unearned premium and unpaid loss reserves, the Company agreed to pay $19,660,649 to MIC, 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 have experienced materially larger underwriting losses and a higher loss ratio for the year ended December 31, 1999.
Notwithstanding the Redemption and the Recapture, there can be no assurances that the Company will not continue to experience significant adverse underwriting results. In addition, there can be no assurances that MIC would recapture additional business from the Company if the Company does experience significant adverse underwriting results in the future.
The increase in investment income during 1998 compared to 1997 arose primarily as a result of increased sales of investment securities to take advantage of market opportunities presented by uncertainty in the U.S. dollar denominated international equity markets.
Unrealized losses on investment securities held at December 31, 1999 was $162,459 compared to unrealized gains at December 31, 1998 of $334,059. The decrease in unrealized gains as of December 31, 1999 compared to December 31, 1998 resulted primarily from the continued poor performance of the fixed income markets and the related decline in market value of the fixed income
portfolio which was offset, in part, by the increase in market value of the Company's investment in the equity fund.
As a result of the investment return experienced by the Company, during 1999, the Company's Board of Directors appointed BlackRock to replace Rothschild as the investment manager of the Company's fixed income portfolio and the Board adopted new investment guidelines for the portfolio. (See "Item 1. BUSINESS INVESTMENT INCOME.")
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, 1999, the Company had furnished such a letter of credit in the amount of $90,000,000.
The Company does not separately own or license any computers or computer software applications. Accordingly, the Company had minimal exposure with respect to the transition to Year 2000 on its computerized systems and microprocessors. During 1999 the Company completed communications and assessments with the Manager and other service and technology providers,
including those on which the Company is dependent, to ensure adequacy with the transition to Year 2000. Also during 1999, MIC successfully completed its assessment and remediation project to address the Year 2000.
The Company will continue to monitor its own operations, and the operations of third parties that are critical to the Company's operations, for potential year 2000-related problems. However, the Company does not anticipate that it will discover any future Year 2000 issues that will have a material effect on its business, results of operations, or financial condition.
In June 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards ("FASB") 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 has adopted this accounting standard in 1998. Adopting the accounting standard has no impact on reported net income of the Company.
Interest Rate Risk. The Company has exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates and attempts to mitigate that exposure through active portfolio management. The Company's investment guidelines do not permit the use of derivatives in managing interest rate risk. As of December 31, 1999 and 1998, the net fair value asset exposure to interest rate risk was approximately $93.9 million and $89.5 million, respectively. As of December 31, 1999 and 1998, the potential loss in fair value resulting from a hypothetical 10% increase in interest rates would be approximately $2.1 million and $2.1 million, respectively.
Foreign Exchange Risk. Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. At December 31, 1999 and 1998, 100% of investments were denominated in U.S. dollars.
3. Statements of Income and Retained Earnings for the years ended December 31, 1999, 1998 and 1997 ............................... 40
5. Statement of Changes in Shareholders Equity for the years ended December 31, 1999, 1998 and 1997 ............................. 42 - 43
To the Stockholders of Motors Mechanical Reinsurance Company, Limited One Financial Place Collymore Rock St. Michael, Barbados
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned.
In June 1998, the Financial Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. It requires that all derivatives be recognized as either assets or liabilities in the balance sheet and measured at fair value. If certain conditions are satisfied, a derivative may be designated as a hedge of an exposure to changes in the value of an asset or liability, variable cash flows for forecasted transactions, or certain foreign currency exposures. For derivatives designated as hedging instruments, net income will be affected by the extent to which the derivative is not effective as a hedge of the underlying instrument. For derivatives not designated as hedges, the gain or loss would be recognized in income in the period of change. Pursuant to Statement No. 137, the effective date of Statement No. 133 was delayed for one year to fiscal years beginning after June 15, 2000. The Company has not completed its evaluation of the impact of this statement on its financial statements upon adoption.
Cost Fair Value ----------- ----------- Due after one year through five years $49,386,022 $47,665,100
Due after five years through ten years 19,946,377 19,670,285 ----------- ----------- $69,332,399 $67,335,385 =========== ===========
The investment portfolio is comprised of approximately 90% in diverse debt securities which do not result in any concentration of credit risk and 10% in an international equity fund. At December 31, 1999, 100% of the Company's investments are denominated in U.S. dollars.
The Company uses forward currency contracts to hedge its exposure to changes in currency exchange rates relating to its investments denominated in currencies other than the U.S. dollar. The contracts provide for settlement in U.S. dollars in the future. Credit risk is managed by dealing with financially-sound counter parties. Market risk is mitigated because the forward contracts hedge corresponding non-U.S. dollar investments. There were no forward contracts outstanding at December 31, 1999 and 1998.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ------ ------ ------ Beginning balance in reserves for losses $ 5,393,818 $ 5,421,160 $ 4,284,304 ----------- ----------- ----------- Add/(deduct)-provision for losses incurred related to:
Current claim year 47,211,542 45,843,093 31,904,950 Prior claim years (427,390) (290,547) (746,024) ----------- ----------- ----------- Total 46,784,152 45,552,546 31,158,926 ----------- ----------- ----------- Deduct paid losses attributable to:
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1999, 1998 and 1997 decreased by 427,390, $290,547 and $746,024 respectively.
All of the Company's Common Stock is held by MIC. The Company is preparing to file a prospectus offering a further 90 series of 100 shares at a price of $75 per share.
In the years ended December 31, 1999, 1998 and 1997, costs in the amount of $141,696, $69,280 and $77,239 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of participating stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such share's pro rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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, 2000, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $6,347,195.
Net income for the year 20,970 7,172,386 7,193,356 Dividends paid 0 (5,171,956) (5,171,956) Redemption of participating stock 0 (8,159) (8,159) ----------- ----------- ----------- Balance, December 31, 1998 $ 12,812 $20,616,197 $20,629,009
During 1999, The Company entered into a recapture agreement with MIC for 37 series of Participating Shares, and to pay MIC a recapture 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 agreed to pay the Company a recapture commission of $6,482,901 which represents the deferred portion of the ceding commission previously paid by the Company.