Capital Resources. Capitalization of the Company, as of December 31, 2000, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,942,500 (compared with $1,995,000 and $2,362,500 as of December 31, 1999 and 1998, respectively), and earnings retained for use in the business of $16,247,004. The reduction in the amount of paid-in capital with respect to the Shares as of December 31, 2000 compared with December 31, 1999 is primarily attributable to redemption of Shares with nil unearned premiums. The decrease in paid-in capital as of
The Company had a net underwriting loss of $1,130,535 in 2000 compared to net underwriting losses of $4,190,723 and $3,182,108 in 1999 and 1998 respectively. During 2000, the Company earned premiums of $54,378,800
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, 2000 and 1999.
Notwithstanding the Redemption and the Recapture, there can be no assurance that the Company will not experience significant adverse underwriting results in the future and there can be no assurance that MIC would recapture additional business from the Company if the Company does experience significant adverse underwriting results.
In addition to the Redemption and Recapture, the Company continues to work with MIC to evaluate ways for improving its underwriting performance. MIC continues to contact unprofitable accounts and implement procedures to improve profitability at those accounts. If unprofitable trends continue at some accounts, then steps are initiated to discontinue ceding new business into the Company with respect to such accounts. Additionally, MIC continues to place claims adjusters at some unprofitable accounts. Furthermore, claim approval empowerment levels have been significantly reduced or eliminated.
Investment income in 2000 was $4,808,908 compared to $655,755 and $10,375,464 for the years ended December 31, 1999 and 1998, respectively. The increase in investment income during 2000 compared to 1999 arose primarily as a result of reduced realized losses on 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. The decrease in investment income during 1999 compared to 1998 arose primarily as a result of realized losses on sales of investment securities as Rothschild, the prior investment manager, attempted to minimize the impact of increasing interest rates.
Unrealized gains on investment securities held at December 31, 2000 were $2,732,423 compared to unrealized losses at December 31, 1999 of $162,459. The increase in unrealized gains as of December 31, 2000 compared to December 31, 1999 resulted primarily from the improved performance of the fixed income markets and the related increase in market value of the fixed income portfolio.
At December 31, 2000 approximately 19% (1999-10%) of the Company's investment portfolio was in a U.S. dollar denominated international equity fund and the remaining 81% (1999 - 90%) was held in cash and U.S. dollar denominated fixed- income securities.
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, 2000, the Company had furnished such a letter of credit in the amount of $76,050,000.
A discussion of the Company's accounting policies for derivative instruments is included in Note 3 to the consolidated financial statements included herein.
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, 2000 and 1999, the net fair value asset exposure to interest rate risk was approximately $75 million and $93.9 million, respectively. As of December 31, 2000 and 1999, the potential loss in fair value resulting from a hypothetical 10% increase in interest rates would be approximately $1.5 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, 2000 and 1999, 100% of investments were denominated in U.S. dollars.
The Company has developed fair value estimates by utilization of available market information or other appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair market value amounts. In addition, the above discussion and the estimated amounts generated from the sensitivity analyses referred to above include forward- looking statements of market risk which assume, for analytical purposes, that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted previously are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should be considered projections of future events or losses.
5. Statement of Changes in Shareholders Equity for the years ended December 31, 2000, 1999 and 1998 .............................. 42 - 43 -------
Investments, all of which are available for sale, are comprized 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 original maturities of less than 90 days are classified as cash equivalents. Unrealized appreciation (depreciation) is included in accumulated other comprehensive income.
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 statement 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.
Governments and their agencies $ 9,486,283 $ 259,398 $ - $ 9,745,681
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
Foreign governments and their agencies $18,175,335 $ - $ (799,400) $17,375,935
Due after one year through five years $29,635,354 $30,030,550 Due after five years through ten years $12,072,012 $12,518,465 Due after ten years through thirty years $31,590,866 $32,478,394 ----------- ----------- $73,298,232 $75,027,409 =========== ===========
In the years ended December 31, 2000, 1999 and 1998, costs in the amount of $98,992, $141,696 and $69,280 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board of Directors provided that the director representing holders of the Participating Stock votes in favor of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock.
The Company has provided an irrevocable letter of credit to MIC, in the amount of $76,050,500 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 percent of assumed premiums 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, 2001, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $5,937,880.
Retained earnings applicable to the Common and Participating Stockholders are comprized of the following:
Common Participating Total ---------- ------------- ----------- Balance (Deficit), December 31, 1997 $ (8,158) $18,623,926 $18,615,768
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) ---------- ----------- -----------
At March 21, 2001 the Board of Directors declared and paid dividends in the amount of $3,083,096 to the participating stockholders on record as at December 31, 2000.