The following selected financial data for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 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, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 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. Net cash provided by operating activities has increased to $17,588,199 in 1996 from $16,418,640 in 1995 and $14,960,494 in 1994. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1997 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years.
On April 11, 1996, the Board of Directors authorized the payment of dividends to eligible holders of Participating Shares. See "Market For Registrant's Common Equity And Related Stockholder Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends.
The Company had net underwriting income of $2,112,599 in 1996 compared to $1,338,351 and $490,742 for the years ended December 31, 1995 and 1994, respectively. The increase in underwriting income during 1996 was the result of an increase in the amount of premiums earned coupled with a modest improvement in the loss ratio (the ratio of losses incurred to premiums earned). During 1996, the Company earned premiums of $36,077,699 compared to $28,800,689 and $21,316,685 during 1995 and 1994, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1996, and the continuing flow of reinsurance premiums from series issued in prior years. During 1996, the Company issued 16 new series of Shares and redeemed 3 series of Shares for a net increase of 13 series. There were a total of 254 series outstanding at December 31, 1996 compared to 241 and 222 series of Shares outstanding at December 31, 1995 and 1994, respectively.
3. Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 ............ 29
ASSETS Investments $ 66,647,930 $59,898,265 Cash and cash equivalents 12,926,272 7,093,106 Accrued investment income 1,453,691 2,532,813 Due from Motors Insurance Corporation 3,158,064 3,095,587 Deferred acquisition costs 21,855,207 18,907,205 ------------ -----------
Reinsurance premiums assumed $47,410,037 $44,084,952 $38,371,896 Increase in unearned premiums (11,332,338) (15,284,263) (17,055,211) ----------- ----------- -----------
Acquisition costs 9,378,748 7,486,469 5,540,539 Losses paid 23,233,857 18,610,968 14,079,926 Increase in loss reserves 803,970 820,064 750,240 Administrative expenses: Related Parties 211,001 174,443 171,135 Other 337,524 370,394 284,103 ---------- ----------- -----------
(DEDUCT)/ADD: REDEMPTION OF PARTICIPATING STOCK (51,529) 7,500 22,500 ----------- ----------- -----------
All of the common stock of the Company is owned by Motors Insurance Corporation ("MIC"). MIC is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC.
Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation.
Gross Gross Unrealized Unrealized Fair Cost Appreciation Depreciation Value ----------- ------------ ------------ -----------
Total $66,104,409 $ 787,276 $ (243,755) $66,647,930 =========== ========== ========== ===========
Fair Cost Value ----------- ----------- Due after one year through five years $51,424,773 $51,784,023
Due after five years through ten years 14,679,636 14,863,907 ----------- -----------
The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1996, 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 counterparties. Market risk is mitigated because the forward contracts hedge corresponding non-U.S. dollar investments. The notional amount of forward contracts outstanding at December 31, 1996 was nil.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1996, 1995 and 1994:
Beginning balance in reserves for losses $ 3,480,334 $ 2,660,270 $ 1,910,030 ------------ ------------ ------------
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1996, 1995 and 1994 decreased by $42,251, $109,160 and $63,724 respectively, because of lower actual claims.
During 1996, 16 additional series of 100 shares of Participating Stock were issued as compared with 20 for the year ended December 31, 1995. In addition, in 1996 the Board of Directors redeemed 3 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 1996.
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, 1996, there were no funds held in escrow.
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 shares 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.
Barbados law requires that the Company maintain a minimum capitalization based generally on the amount of premiums earned in the preceding year. At January 1, 1997, the Company's required minimum capital computed in accordance with Barbados law was approximately $4,107,770.