SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of
- ----- The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Or
Transition Report Pursuant to Section 13 or 15(d) of
- ----- The Securities Exchange Act of 1934
Commission file number 33-6534
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Exact name of registrant as specified in its charter)
Barbados Not Applicable
(State or other jurisdiction (I.R.S. employer identification
of incorporation or organization) number)
Financial Services Centre
Bishops Court Hill Not Applicable
St. Michael, Barbados, W.I. (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code (246) 436-4895
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1998, was $2,152,500.*
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class As of March 1, 1998
----- -------------------
Common Stock, no-par value 2,000
Participating Stock, no-par value 28,700
* Based on current offering price of $75 per share.
PART I
Item 1. BUSINESS
INTRODUCTION
Motors Mechanical Reinsurance Company, Limited (the "Company") was incorpo rated
in Barbados on June 12, 1986. It became registered in Barbados as an insurer on
June 30, 1986 and commenced insurance operations on December 11, 1987.
The business of the Company is the assumption of motor vehicle mechanical
service agreements arising under insurance policies reinsured by Motors
Insurance Corporation ("MIC") to the extent such policies are attributable to an
MIC Mechanical account in respect of which a series of shares is issued and
outstanding (the "Policies"). These policies are issued either to General Motors
Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and
retroceded to the Company. Shares of the Company's Participating Stock (the
"Shares") are sold to persons designated by owners of motor vehicle sales
franchises with respect to which MIC maintains an MIC Mechanical Account. A
separate series is created for Shares relating to each MIC Mechanical Account,
and a separate "Subsidiary Capital Account" is maintained for each such series.
The profitability of the Company reflects both underwriting and investment
experience, which is allocated among the Subsidiary Capital Accounts.
THE RETROCESSION
The Retroceding Company. MIC, the retroceding company under the Retrocession
Agreement described below, is a stock insurance company organized under the laws
of New York. All of MIC's outstanding stock is owned by GMAC Insurance Holdings,
Inc., a subsidiary of General Motors Acceptance Corporation which, in turn, is a
wholly owned subsidiary of GM. MIC, directly and through its subsidiaries,
offers property and casualty coverages in all 50 states and the District of
Columbia, Canada, Europe, Latin America and Asia Pacific. MIC consistently has
been awarded A.M. Best Company's insurance financial rating of A + (Superior),
one of the highest possible ratings.
The Retrocession Agreement -- Principal Agreement. The Company has entered into
a "quota share" retrocession agreement (the "Agreement") which became effective
as of December 11, 1987. Pursuant to the Agreement, MIC retrocedes to the
Company, and the Company is obligated to assume, MIC's risks in respect of
policies issued by any MIC subsidiary and reinsured by MIC that cover motor
vehicle mechanical service agreements, to the extent that risks under such
policies are attributable to an MIC Mechanical Account in respect of which a
series of Shares is issued and outstanding. MIC retrocedes 100% of the risk and
the Company receives 75% of the original gross premium, reduced by agents'
commissions, if any, and cancellations. The remaining 25% of the net premium is
retained by MIC as a ceding commission. The Company assumes 75% of the risk with
respect to these policies and MIC pays 56.25% of the net premium at the time the
policies are written. The remaining 25% of the risk is ceded to the Company and
MIC pays 18.75% of the net premium as the premiums are earned. Net settlements
between the Company and MIC are made quarterly and accordingly will fluctuate
quarter to quarter.
The Agreement may be terminated at any time by mutual consent of the parties, or
by either party upon 30 days written notice. Upon termination of the Agreement,
MIC and the Company will remain bound by their respective obligations under the
Agreement with respect to risks retroceded prior to the close of business on the
date of termination. However, risks not yet retroceded to the Company under the
Agreement shall remain risks of MIC.
The Retrocession Agreement -- Supplemental Agreement. MIC from time to time
enters into agreements with Franchise owners for which an MIC Mechanical Account
is established, pursuant to which MIC, acting for itself and on behalf of
certain of its subsidiaries, agrees to cede or retrocede to another insurance
company mutually satisfactory to MIC and the respective Franchise owners the
unexpired liability on service contracts, insured under the Policies, sold after
the date specified in each such agreement. This liability can be ceded or
retroceded to dealer-owned companies organized specifically with respect to a
particular Franchise or, if a series of Shares is issued which relates to the
Franchise, pursuant to an agreement between MIC and the Company (the
"Supplemental Retrocession Agreement"). For this purpose, unexpired liability
means MIC's liability in respect of the remaining period of coverage under the
Policy as of the effective date of the cession. Under the Supplemental
Retrocession Agreement, unexpired liability in respect of the Policies is
assumed on the same basis as risks retroceded to the Company under the principal
Retrocession Agreement.
Types of Risks Subject to Retrocession. Coverages assumed under the Agreement
are limited to service contracts or insurance policies insured or reinsured by
MIC that provide indemnification against specific motor vehicle mechanical
repairs not covered by manufacturer's new vehicle warranties. Such service
contracts or insurance policies often provide additional coverages, such as
towing and rental allowances.
Loss Reserves. Reserves are balance sheet liabilities representing estimates of
amounts needed in the future to pay claims with respect to insured events which
have occurred as of the balance sheet dates.
For purposes of establishing loss reserves, the Company relies upon the advice
of MIC. Loss reserves are established after periodic actuarial reviews, based on
judgments of the effects of technological change, manufacturers' warranties, and
MIC's historical experience with motor vehicle mechanical service agreements.
Consequently, the determination of loss reserves is an estimate and a process
inherently subject to a number of highly variable factors. Any adjustments to
reserves are reflected in the operating results for the periods in which they
become known.
The Company's incurred loss ratios (losses incurred as a percentage of net
premium earned) on all mechanical business for the years ended December 31,
1997, 1996, and 1995 were 68.1%, 66.6% and 67.5% respectively.
The following table sets forth an analysis of changes in the loss reserves for
the years ended December 31, 1997, 1996 and 1995:
Year Ended
-----------------------------------------------
12/31/97 12/31/96 12/31/95
-------- -------- --------
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........ 31,904,950 24,080,078 19,540,192
Prior claim years......... (746,024) (42,251) (109,160)
----------- ---------- -----------
Total................. 31,158,926 24,037,827 19,431,032
----------- ---------- -----------
Deduct-paid losses
attributable 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
=========== =========== ===========
The following table analyzes the development of losses and loss adjustment
expenses from January 1, 1992 through December 31, 1997.
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid
claims and claims
adjustment expense $1,622,855 $1,910,030 $2,660,270 $3,480,334 $4,284,304 $5,421,160
========== ========== ========== ========== ========== ==========
Paid (cumulative) in
subsequent year(s) $1,261,788 $1,552,900 $2,149,200 $2,903,588 2,997,089
Estimated unpaid
liability as of
year end* 226,818 293,406 401,910 534,495 541,191
---------- ---------- ---------- ---------- ----------
Cumulative Deficiency
(Redundancy) $ (134,249) $ (63,724) $ (109,160) $ (42,251) $ (746,024)
========== ========== ========== ========== ==========
* Because mechanical breakdown claims are generally paid within 90 days of
when they are incurred, liability for unpaid claims incurred in prior years
is negligible. Accordingly, liability for unpaid claims incurred in all
prior years has been combined at each year end.
</TABLE>
The table shows initial estimated reserves at December 31, 1997, 1996, 1995,
1994, 1993, and 1992 and amounts paid on claims unsettled at each prior period
end. Claims are typically processed for payment at the time the claim is
reported. Therefore, the recorded claim liability at each year end represents
the estimated incurred but not reported claims and claims in the process of
payment. The cumulative deficiency or redundancy represents the total change in
reserve estimates covering prior years.
The policies reinsured by the Company are written for multiple years (up to six
years) and losses do not occur equally over the period for which the policy is
written but tend to be clustered in the later years. Therefore, loss experience
for prior years may not be indicative of that for future years.
INVESTMENT INCOME
A major source of income to an insurance company is income earned on the
investment of amounts not currently required to meet losses or expenses. The
principal funds available for investment by the Company come from accumulated
capital and the cumulative excess of premiums collected over losses and
operating expenses paid.
The Company's funds are invested in a manner consistent with investment
guidelines that are proposed by the Investment Committee for adoption by the
Board. The Company invests primarily in U.S. dollar-denominated securities
issued outside of the United States by non-United States private or governmental
issuers and U.S. dollar-denominated bank certificates of deposit issued by
foreign banks and foreign branches of U.S. banks. Subject to the satisfaction of
certain conditions, the Company may make limited investments in non-U.S. dollar
denominated bonds, on a fully currency-hedged basis. The Company may invest only
in securities and certificates which are rated at least Aa3 by Moody's or AA- by
Standard & Poor's or the equivalent, or are guaranteed by such an issuer.
However, certain unrated securities may also be held if, in the opinion of the
investment manager, they have at least equivalent credit standing to the above
rating standard. The Investment Committee reviews on a regular basis and, where
appropriate, recommends for Board approval revisions to the investment
objectives and guidelines for management of the Company's funds. There can be no
assurance, however, as to whether a particular investment objective, once
adopted, can be achieved or that adverse factors would not cause a decrease in
the overall value of the Company's investment portfolio.
Investments in non-U.S. securities, particularly those of non-governmental
issuers, may involve considerations not ordinarily associated with investments
in U.S. issuers. These considerations include, but are not limited to, the
possibility of expropriation, the unavailability of financial information or
difficulty in interpreting such information when it is prepared under local
accounting or regulatory standards, the possible negative impact of political,
social or diplomatic developments, and the possible imposition of withholding
taxes by local taxing authorities.
Rothschild Asset Management Limited ("Rothschild") manages the investment and
reinvestment of the Company's funds in accordance with the investment policies
and guidelines recommended by the Investment Committee and adopted by the Board.
Rothschild is one of the leading institutions engaged in the management of
offshore fixed-income portfolios and has been providing this service since 1974
as an affiliate of NM Rothschild and Sons Limited, a prominent merchant bank in
London which has been in the investment management business worldwide for more
than 100 years. Rothschild charges a management fee of 0.225% per annum on the
first $20,000,000 of assets under management, 0.20% per annum on the next
$20,000,000 and 0.15% per annum on the excess thereof based on the market value
of the Company's investment portfolio at the end of each calendar quarter.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company has established a Subsidiary Capital Account with respect to the
Common Stock as a class, and establishes such an account with respect to each
series of Shares at the time a series is issued. Subsidiary Capital Accounts are
maintained solely for the purpose of the allocations described below, and do not
serve any other legal or accounting function. None of the Company's assets are
segregated or earmarked with respect to those accounts.
The consideration received by the Company upon the issuance of a particular
series of Shares and the Common Stock as a class are allocated to the Subsidiary
Capital Account for that series or class. Items of income and expense and losses
attributable to insurance underwriting activities are determined and allocated
to the Subsidiary Capital Accounts as of the end of each quarter. Investment
experience, and other items of income and expense, gains and losses and
distributions with respect to the Capital Stock, are determined and allocated to
the Subsidiary Capital Accounts as of the end of each quarter. All such
accounting determinations are made using accounting principles generally
accepted in the United States, unless otherwise required by the Articles.
For purposes of the following description, items shall be "related" to the
Subsidiary Capital Account for the series identified with the MIC Mechanical
Account to which such items can be attributed.
(1) Allocations with respect to underwriting activities are made as follows:
(a) With respect to premiums ceded by MIC to the Company, 100% to the related
Subsidiary Capital Account; provided, however, that an amount equal to 1-1/3% of
those premiums, net of related ceding commissions, are subtracted from such
Subsidiary Capital Account and allocated to the Subsidiary Capital Account for
the Common Stock.
(b) With respect to any agents' or brokers' commissions, commissions recaptured,
unearned premiums, reinsurance premiums ceded, and any United States excise tax,
100% to the related Subsidiary Capital Account.
(c) With respect to losses incurred, and any amount of losses recovered through
salvage, subrogation, reimbursement or otherwise one hundred percent (100%)
shall be allocated to the related Subsidiary Capital Account. For the purpose of
this section (1)(c), losses incurred includes both paid and unpaid (reported and
unreported) losses.
(d) With respect to return premiums, 98-2/3% to the related Subsidiary Capital
Account and 1-1/3% to the Subsidiary Capital Account for the Common Stock.
(2) Any expenses or liabilities attributable to day-to-day Company operations,
excluding any United States Federal income taxes, shall be allocated among all
Subsidiary Capital Accounts for the Shares pro rata in accordance with the
number of series issued and outstanding at the end of the fiscal quarter
immediately preceding the fiscal quarter in which the expense or liability is
incurred, provided, that for purposes of such allocation, series of shares
issued during the current calendar year and series with respect to which
unearned premium is zero as of the date of such allocation, shall be excluded.
(3) Any United States Federal income tax liability (and any interest thereon or
any penalties related thereto) is allocated among the Subsidiary Capital
Accounts based upon the relative contribution of each of those accounts to the
taxable income of the Company upon which the tax (or any interest or penalties)
is imposed.
(4) Any expenses or liabilities attributable to the sale and issuance of Shares,
including but not limited to the costs of compliance with regulations and
requirements of the Securities and Exchange Commission and state securities laws
(but not including ongoing periodic reporting costs), are allocated to the
Subsidiary Capital Account for the Common Stock; however, MIC may undertake to
pay such expenses.
(5) Any expenses or liabilities of the Company not allocable in the manner
described in paragraphs 2 through 4 above are allocated among the Subsidiary
Capital Accounts on the basis of the relative balances of those accounts as of
the end of the quarter preceding the date on which the expense or liability is
incurred.
(6) (a) Investment income, net of any direct investment expense, is allocated
among the Subsidiary Capital Accounts pro rata based upon the relative
Investment Asset Balance (as defined in subparagraph (b) below) of each of those
accounts as of the last day of the quarter preceding the quarter for which the
investment income is being allocated. For these purposes, net investment income
includes realized (but not unrealized) gains and losses.
(b) The Investment Asset Balance of each Subsidiary Capital Account is equal to
the capital and surplus of each account, increased by:
(i) the unearned portions of the written premiums that have been collected by
the Company attributable to those accounts as of the last day of the quarter
preceding the quarter for which the income is being allocated, net of any
applicable commissions and taxes;
(ii) the outstanding loss reserves attributable to each of those accounts as of
the last day of the quarter preceding the quarter for which the income is being
allocated; and
(iii) any other outstanding liability that has been charged to the account as of
the last day of the quarter preceding the quarter for which the income is being
allocated.
(7) (a) If, after the credits and charges described in paragraphs 1-6 above are
made to the Subsidiary Capital Accounts there exists a deficit in one or more of
the accounts, then each such deficit is allocated to and charged against:
(i) first, the Subsidiary Capital Account for the Common Stock to the extent of
Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the
portion of the earned surplus, if any, in the Subsidiary Capital Account for the
Common Stock equal to that 1-1/3% of the premiums ceded to the Company during
the immediately preceding five-year period which was subtracted from the
Subsidiary Capital Accounts for the Shares pursuant to paragraph (1)(a) above,
net of losses allocated to that account during such period pursuant to the
allocation procedure described in this paragraph (7) and net of return premiums
allocated to that Account during such period pursuant to the allocation
procedure described in paragraph (1)(d) above);
(ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon
the relative earned premiums allocated to each such account for the quarter for
which the allocation is being made, provided, however, that only accounts which
have positive balances are taken into account for purposes of this allocation;
(iii) then, the remaining Subsidiary Capital Accounts for the Shares with
positive balances as of the last day of the quarter for which the allocation is
being made, pro rata, based upon such balances; and
(iv) then, to the extent necessary, the Subsidiary Capital Account for the
Common Stock.
(b) If, as a result of an allocation of a deficit as described in subparagraph
(ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the
Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated
in the manner provided in that subparagraph before applying a subsequent
subparagraph.
(c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a
series of Shares had a deficit that was allocated to and charged against the
Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital
Account for any series of Shares, then at the end of any succeeding quarter for
which that account otherwise would show an account balance greater than zero,
the balance is reallocated to the Restricted Earned Surplus until all reductions
of that surplus attributable to that Subsidiary Capital Account have been
restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro
rata based on the relative amount of deficits allocated to such accounts, until
all reductions of such Subsidiary Capital Accounts after January 1, 1995 have
been restored.
Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that
account is absorbed by other Subsidiary Capital Accounts, in general, as
follows: The amount of such excess losses is charged first to the Restricted
Earned Surplus portion of the Subsidiary Capital Account of the Common Stock.
Any remaining losses, should the Restricted Earned Surplus be exhausted, is
allocated among the Subsidiary Capital Accounts of other participating series.
Any then unabsorbed losses are charged to the Subsidiary Capital Account of the
Common Stock.
Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital
Accounts for the Shares in the manner described above must be restored from the
Subsidiary Capital Account that drew the funds if at any time it returns to a
positive balance.
(8) (a) Dividends, payments upon redemption or liquidation (described below),
and any other distributions with respect to the Capital Stock are allocated to
the Subsidiary Capital Account for the class or series with respect to which the
dividend, payment or distribution was made.
(b) Where all Shares of a series are repurchased by the Company pursuant to its
right of first refusal or redeemed in accordance with the Company's procedures
for redemption, the Subsidiary Capital Account for that series is terminated.
Thereafter, all underwriting income and expenses, and losses that would have
been allocated to the terminated account, are allocated among the Subsidiary
Capital Accounts of the existing series of Shares pro rata based upon relative
earned premiums attributable to each of those accounts for the calendar quarter
in which the item was earned or incurred; provided, however, that a net deficit
for any such period is allocated to the Subsidiary Capital Account for the
Common Stock (to the extent of Restricted Earned Surplus) before allocating any
remaining deficits to the Subsidiary Capital Accounts for the participating
series.
Using the procedures described above, the Company has allocated items of gain
and loss to the Subsidiary Capital Account for each series. Initially each
Account had a balance of $7,500 representing the amount paid for the Shares of
that series. During the year ended December 31, 1997, $2,701,252 of net
underwriting gains and $503,020 of administrative expenses were allocated among
the 282 series of Shares outstanding as of December 31, 1997, and $5,704,678 of
net investment income was allocated among such series of Shares and the Common
Stock.
As of December 31, 1997, 223 series of Shares outstanding had balances greater
than or equal to $7,500 (ranging from $7,500 to $714,297) and 59 of such series
had balances less than $7,500 (ranging from $6,760 to zero). (The amounts in the
Subsidiary Capital Accounts can fluctuate substantially and therefore may not be
indicative of future accumulated amounts.) At December 31, 1997, an aggregate of
$2,808,551 had been advanced from the Restricted Earned Surplus (which forms a
portion of the Account established for the Common Stock owned by MIC) to 46
Subsidiary Capital Accounts and remained outstanding at that date including net
deficits of $589,940 associated with 4 series of Shares that have been redeemed.
As of December 31, 1997, $1,278,936 of aggregate deficits has been reallocated
among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of
this amount $581,488 is available to be recovered from deficit accounts should
they return to profitability and to the extent that the risk fund is repaid in
full.
The Subsidiary Capital Account for the Common Stock had, at the time it was
established, a balance of approximately $200,000, representing the capital paid
in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary
Capital Account is not affected directly by underwriting gains and losses
attributable to the various Subsidiary Capital Accounts related to series of
Shares, but is affected by those gains and losses indirectly to the extent that
one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit,
in which case an allocation to the Subsidiary Capital Account for the Common
Stock will result, in the manner described above.
The allocations of income and expense, gains and losses, and distributions
described above are subject to approval by the Board, and when so approved are
considered final and conclusive and will be binding on all holders of Shares
for all purposes including without limitation any redemption of Shares pursuant
to the Company's procedures for redemption.
Barbados insurance law requires that the Company maintain certain levels of net
assets, calculated without regard to unrealized gains or losses. The Company is
currently in compliance with these requirements. However, in the event that the
Company is unable to comply with such requirements in the future, it 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.
EMPLOYEES
The Company does not have any full-time employees. Rather, the Company relies
on Aon Insurance Managers (Barbados) Ltd. (the "Manager") to handle its
day-to-day operations. (See "Business of the Company -- Insurance Management
Agreement," below.) In addition, corporate secretarial services for the
Company are provided by Colybrand Company Services Limited of St. Michael,
Barbados. The Company's Board of Directors and the committees thereof,
however, remain responsible for the establishment and implementation of policy
decisions.
COMPETITION
The insurance business is extremely competitive. MIC management believes that at
present, MIC and its subsidiaries are, as a group, one of the largest mechanical
repair insurers of new GM vehicles in the United States. There are other major
companies offering similar coverage. Because the insurance business of the
Company is limited to the assumption of certain motor vehicle mechanical service
agreement reinsurance business ceded by MIC, the profitability of the Company
depends to a large degree on the success experi enced by MIC and its affiliates
in competing with those other insurers. Many commercial insurance groups are
seeking to capture additional mechanical insurance business by offering to
assist automobile dealers in the formation of their own dealer-owned reinsurance
companies. MIC has assisted in the establishment of such companies for a number
of qualified dealers. However, MIC believes that participation in the Company
represents a practical alternative for dealers who do not have the available
capital, insurance management expertise or time for the personal involvement
necessary for their own reinsurance company.
INSURANCE MANAGEMENT AGREEMENT
The Company has entered into an Insurance Management Agreement (the "Management
Agreement") with the Manager, pursuant to which the Manager collects and
disburses funds on behalf of the Company, provides accounting, clerical,
telephone, facsimile, information management and other services for the Company,
and advises and consults with the Company in regard to all aspects of the
Company's retrocession activities. The current Management Agreement is for a
continuous term subject to termination by either party upon 90 days advance
written notice.
Pursuant to the Management Agreement, the Manager has undertaken to maintain an
office in Barbados to perform its duties. Further, during the term of the
Management Agreement and generally for a period of one year thereafter, the
Manager has agreed not to provide management or accounting services for any
other company which, by the nature of its operations, is offering, insuring or
reinsuring motor vehicle mechanical service agreements or extended warranty or
related coverages on a multi-state basis in the United States or Canada with
respect to motor vehicles sold by franchised GM dealerships. Under the terms of
the Management Agreement, the Company pays the Manager a fixed annual fee plus a
monthly variable fee based on the number of outstanding series of Shares at each
calendar month end. For the year ended December 31, 1997, the Company incurred
fees payable to the Manager in the amount of $217,969.
The Manager is responsible for the payment of the salaries of its officers and
employees and all office and staff overhead and other costs attributable to its
services on the Company's behalf. However, out-of-pocket expenses, such as
telephone, facsimile, postage, courier delivery, travel and other items are
borne by the Company on an expense reimbursement basis.
The Manager performs services similar to those performed for the Company for
several other entities. The Manager has twelve employees. In addition, the
Manager may draw upon the resources of its affiliates as needed to provide the
services contemplated under the Management Agreement. No employee of the Manager
devotes all of his or her time to the business of the Company. However, the
Manager is obligated to devote all employee time necessary to ensure the
performance of the Manager's duties under the Management Agreement. The Manager
is subject to the control and direction of the Board.
The Manager has served in that capacity since 1986. The Manager was incorporated
in Barbados in 1984, and is an affiliate of the Aon Group of Companies ("Aon"),
an international insurance brokerage and insurance consulting firm. Aon, through
its subsidiaries, offers and insures motor vehicle mechanical service
agreements, extended warranty and related coverages with respect to vehicles
sold by automobile dealerships in the United States.
Under the terms of the Management Agreement the Manager will treat all
information concerning the business of the Company as confidential and will not
disclose such information to Aon or any Aon affiliate without consent of the
Company.
BARBADOS REGULATION AND TAXES
The Company's business is subject to regulation under the Barbados Exempt
Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal
requirements of the Exempt Insurance Act require the Company to maintain its
principal office in Barbados, appoint various professional advisors, and to meet
certain capitalization and annual reporting requirements with respect to its
operating activities and solvency requirements.
Under the Exempt Insurance Act, no income tax, capital gains tax or other direct
tax or impost is levied in Barbados on the results of the Company's operations
(except as noted below), or on transfers of securities or assets of the Company
to any person who is not a resident of Barbados. The Company has received a
guarantee from the Minister of Finance of Barbados that such benefits and
exemptions will be available for a period ending December 31, 2031. Until
December 31, 2016 the Company will be required to pay an annual licencing fee,
which is currently $2,500, to obtain such guarantee. Thereafter, the Company
will be subject to tax at a rate of 2% on its taxable income provided that the
amount of such tax will not exceed $2,500 per annum.
Item 2. PROPERTIES
The Company neither owns nor maintains any office space or facilities. Rather,
the business office for the Company is provided by the Manager and is located at
The Financial Services Centre, Bishops Court Hill, St. Michael, Barbados. The
Company believes that these facilities are adequate for its current and
anticipated future needs. In addition, the Manager supplies all equipment for
the Company.
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is no public market for the Shares or the other capital stock of the
Company, and none is expected to develop. Transfer of the Shares is restricted
by the terms of a Stock Purchase Agreement and requires approval by the
Supervisor of Insurance in Barbados.
(b) All of the common stock of the Company is held by MIC. As of March 1, 1998
there were 487 holders of Shares of record, representing 287 series of Shares.
(c) Under the Articles of Incorporation, the holders of Shares are entitled to
receive minimum dividends equal to their pro-rata share of 20% of net income
attributable to the associated Subsidiary Capital Account provided (i) the
Company meets the Barbados regulatory requirements without regard to any letter
of credit or guarantee, and (ii) the related Subsidiary Capital Account would
also meet those requirements after giving effect to the dividend. In February of
1998, March of 1997, April of 1996 and April of 1995, the Company declared
dividends of $5,171,956, $4,196,730, $4,007,483 and $1,188,614 respectively.
These dividends were declared as a varying percentage of earned surplus
attributable to each series of Shares with the percentage applicable depending
on the amount of earned surplus attributable to such series.
(d) The Board considers the minimum regulatory capital requirement, a provision
for fluctuations in the value of the Company's investment portfolio and a
provision for adverse development of loss experience to determine an appropriate
minimum capital level and therefore the amount of dividends to be paid. The
Board's objective is to maintain adequate capital to provide capacity for growth
in premium so that dividends may be paid annually. There can be no assurance
that a prior dividend amount will be paid in the future.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1997,
1996, 1995, 1994 and 1993 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, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 is included
elsewhere herein.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Premiums Assumed $ 57,071,313 $ 47,410,037 $44,084,952 $38,371,896 $27,779,063
============ ============ =========== =========== ===========
Premiums Earned $ 45,701,595 36,077,699 $28,800,689 $21,316,685 $15,429,611
Net Investment
Income 5,704,678 5,341,924 5,563,573 1,227,816 2,700,242
------------ ------------ ----------- ----------- -----------
Total Income 51,406,273 41,419,623 34,364,262 22,544,501 18,129,853
Less Losses and
Expenses 43,503,363 33,965,100 27,462,338 20,825,943 15,425,146
------------ ------------ ----------- ----------- -----------
Net Income* $ 7,902,910 $ 7,454,523 $ 6,901,924 $ 1,718,558 $ 2,704,707
============ ============ ============ =========== ===========
Dividends Per
Common Share 0 0 0 0
Total Assets $123,065,286 $106,041,164 $91,526,976 $66,012,284 $50,359,633
Total Policy
Reserves and
Other Liabilities 100,999,317 88,479,590 76,350,313 60,246,641 42,430,269
Stockholders' Equity 22,065,969 17,561,574 15,176,663 5,765,643 7,929,364
Dividends Paid on
Participating Shares 4,196,730 4,007,483 1,188,614 2,156,304 2,021,504
* 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.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 decreased to
$17,304,385 in 1997 from $17,588,199 in 1996 and $16,871,927 in 1995. The
Company believes that such funds will be sufficient to meet its liquidity
requirements in 1998 and in future years to which its reinsurance liabilities
extend. No capital expenditures are expected during the next few years.
The Company had unearned premium reserves of $95,454,588 as of December 31,
1997, and $84,084,870 as of December 31, 1996. These amounts are attributable to
the long-term nature of the contracts sold. Such contracts may extend for up to
72 months from 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. 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 expiration of the underlying manufacturer's warranty, most premium
is not recognized as earned until such expiration. Since very little premium is
recognized as earned until the expiration of the underlying warranty, most of
the premium written in any year is recorded as unearned.
On February 27, 1998, the Board of Directors authorized the payment of dividends
aggregating $5,171,956 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.
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 losses and administrative expenses during the year ended
December 31, 1997 of $43,503,363 compared with $33,965,100 and $27,462,338 for
the years ended December 31, 1996 and 1995, respectively. Expenses in 1997 were
comprised of losses paid and provisions for losses incurred of $31,118,622,
ceding commissions and excise taxes of $11,881,721 and operating expenses of
$503,020. Losses incurred in 1996 and 1995 were $24,037,827 and $19,431,032
respectively. The loss ratio for the year ended December 31, 1997 was 68.1%
compared to 66.6% and 67.5% for the years ended 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.
Investment income in 1997 was $5,704,678 compared to $5,341,924 and $5,563,573
for the years ended December 31, 1996 and 1995, respectively. The increase in
investment income during 1997 compared to 1996 was attributable to an overall
increase in funds available for investment and somewhat higher yields available
in the U.S. and other global bond markets. The decrease in investment income
during 1996 compared to 1995 was attributable to the lower market yields that
resulted from the sharp bond market rally of the previous year. The sale of
investment securities for the year ended December 31, 1997 resulted in realized
gains of $750,923 compared to realized gains of $64,244 and $1,404,232 for the
years ended December 31, 1996 and 1995, respectively. The increases in realized
gains during the year under review arise primarily as a result of increased
sales of investment securities to take advantage of market opportunities
presented by fluctuations in interest rates as well as the gains generated by
the resumption of recent years trends of declining bond yields. Interest earned
for the year ended December 31, 1997 was $4,953,755 compared to $5,277,680 and
$4,159,341 for the years ended December 31, 1996 and 1995, respectively. The
increase in interest earnings during 1996 compared to 1995 was largely a result
of an increase in the amount of assets under management. The decrease from 1996
compared to 1997 resulted from lower available yields.
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.
At December 31, 1997 and 1996, 100% of the Company's investments were in U.S.
dollar-denominated fixed-income securities. The Company's investment manager
seeks to identify non-U.S. dollar-denominated investments that offer a higher
rate of return (net of currency hedging costs) than would be available in the
market for similarly rated U.S. dollar-denominated bonds. The instruments used
to hedge non-U.S. dollar-denominated investments involve, to varying degrees,
elements of credit risk in the event a counterparty should default on its
obligation under the hedge instrument. Such credit risk is managed through the
selection of financially sound counterparties and periodic monitoring of
counterparty financial condition. The Company's investment guidelines do not
permit the use of derivatives in managing interest rate risk.
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.
The foregoing Management Discussion and Analysis contains various forward
looking statements within the meaning of applicable federal securities laws and
are based upon the Company's current expectations and assumptions concerning
future events, which are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those anticipated.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
1. Independent Auditors' Report................... 32
2. Balance Sheets, December 31 , 1997 and 1996.... 33
3. Statements of Income and Retained Earnings
for the years ended December 31, 1997,
1996 and 1995 ............................... 34
4. Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ............ 35
5. Notes to Financial Statements.................. 36 - 43
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Motors Mechanical Reinsurance Company, Limited
Financial Services Centre
Bishops Court Hill
St. Michael, Barbados
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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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.
s/DELOITTE & TOUCHE
CHARTERED ACCOUNTANTS
Bridgetown, Barbados
February 16, 1998
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Expressed in U.S. Dollars)
1997 1996
------------ ------------
ASSETS
Investments 3,7 $ 88,585,513 $ 66,647,930
Cash and cash equivalents 7 5,645,482 12,926,272
Accrued investment income 3,178,446 1,453,691
Due from Motors Insurance Corporation 841,927 3,158,064
Deferred acquisition costs 24,813,918 21,855,207
------------ ------------
Total Assets $123,065,286 $106,041,164
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
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;
Authorized - 2,000 shares;
Issued and outstanding
- 2,000 shares 200,000 200,000
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
============ ============
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Expressed in U.S. Dollars)
Years Ended
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
INCOME
Reinsurance
premiums assumed 6 $57,071,313 $47,410,037 $44,084,952
Increase in
unearned premiums (11,369,718) (11,332,338) (15,284,263)
----------- ----------- -----------
Premiums earned 45,701,595 36,077,699 28,800,689
----------- ----------- -----------
Investment income
Interest earned 4,953,755 5,277,680 4,159,341
Realized gains
on investments 750,923 64,244 1,404,232
----------- ----------- -----------
Investment income - net 5,704,678 5,341,924 5,563,573
---------- ----------- -----------
TOTAL INCOME 51,406,273 41,419,623 34,364,262
----------- ----------- -----------
EXPENSES
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
----------- ----------- -----------
TOTAL EXPENSES 43,503,363 33,965,100 27,462,338
----------- ----------- -----------
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
LESS: DIVIDENDS (4,196,730) (4,007,483) (1,188,614)
(DEDUCT) ADD: REDEMPTION OF
PARTICIPATING STOCK (3,465) (51,529) 7,500
----------- ----------- -----------
RETAINED EARNINGS, end of year $18,615,768 $14,913,053 $11,517,542
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Expressed in U.S. dollars)
Years Ended
---------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance premiums collected $ 57,014,145 $ 46,031,997 $ 42,818,628
Losses and acquisition
expenses paid (42,436,530) (34,302,453) (28,599,428)
Administrative expenses paid (502,230) (501,147) (540,841)
Investment income received 3,229,000 6,359,802 3,193,568
------------ ------------ ------------
Net cash provided by operating
activities 17,304,385 17,588,199 16,871,927
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (318,139,315) (232,194,343) (182,526,749)
Sales and maturities of investments 297,544,335 224,400,822 170,483,482
------------ ------------ ------------
Net cash invested (20,594,980) (7,793,521) (12,043,267)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Participating Stock 217,500 120,000 150,000
Redemption of Participating Stock (10,965) (74,029) 0
Dividends paid (4,196,730) (4,007,483) (1,188,614)
------------ ------------ ------------
Net cash used in financing activities (3,990,195) (3,961,512) (1,038,614)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (7,280,790) 5,833,166 3,790,046
CASH AND CASH EQUIVALENTS, beginning
of year 12,926,272 7,093,106 3,303,060
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year $ 5,645,482 $ 12,926,272 $ 7,093,106
============ ============ ============
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 7,902,910 $ 7,454,523 $ 6,901,924
Realized gains on investments (750,923) (64,244) (1,404,232)
Change in:
Accrued investment income (1,724,755) 1,079,122 (973,618)
Due from Motors Insurance
Corporation 2,316,137 (62,477) 219,919
Deferred acquisition costs (2,958,711) (2,948,002) (3,975,738)
Unearned premiums 11,369,718 11,332,338 15,284,263
Loss reserves 1,136,856 803,970 820,064
Accrued liabilities 13,153 (7,031) (655)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 17,304,385 $ 17,588,199 $ 16,871,927
============ ============ ============
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Expressed in U.S. Dollars)
Note 1. OPERATIONS
The Company is incorporated under the laws of Barbados and is a
licensed insurer under the Exempt Insurance Act, 1983, and amendments
thereto.
All of the common stock of the Company is owned by Motors Insurance
Corporation ("MIC"), a member of the GMAC Insurance Group. 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.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are stated in United States dollars and are
prepared in conformity with accounting principles generally accepted
within the United States of America.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 and 1997 presentation.
Premium Income and Acquisition Costs
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.
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.
Investments
Investments, all of which are available for sale, are comprised of
interest-bearing marketable securities 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 stockholders' equity.
Realized gains and losses on the sale of investments are included as
investment income and are calculated based on average costs.
Loss Reserves
The Company provides for unsettled, reported losses based on estimates
of the final settlement, with an experience factor added to provide
for losses incurred but not reported. The final settlement may be
greater or less than the amounts provided. Any such differences, when
they become known, are recognized in current operations.
Taxation
The Company has received an undertaking from the Barbados Government
exempting it from all local income, profits and capital gains taxes
for a period ending December 31, 2016. Thereafter and until December
31, 2031, the Company will be subject to tax at a rate of 2% on its
taxable income provided that the amount of such tax will not exceed
$2,500 per annum.
Stockholders who are United States residents are taxed in the United
States on their share of the Company's income on a deemed distribution
basis.
Earnings Per Share
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).
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities are as
follows:
Gross Gross
Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
----------- ------------ ------------ -----------
December 31, 1997:
Foreign governments
and their agencies $27,300,940 $ 524,635 $(119,450) $27,706,125
Corporations 46,527,723 714,077 (15,881) 47,225,919
Supranationals 13,621,649 31,820 - 13,653,469
----------- ---------- --------- -----------
Total $87,450,312 $1,270,532 $(135,331) $88,585,513
=========== ========== ========= ===========
December 31, 1996:
Foreign governments
and their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032
Corporations 27,967,937 298,190 (37,604) 28,228,523
Supranationals 6,540,750 137,625 - 6,678,375
----------- ---------- ---------- -----------
Total $66,104,409 $ 787,276 $ (243,755) $66,647,930
=========== ========== ========== ===========
The cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Cost Fair Value
----------- -----------
Due after one year
through five years $71,184,911 $72,109,353
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 following summarizes net unrealized appreciation (depreciation) on
investments:
Balance, December 31, 1994 $(1,896,089)
Net appreciation 3,547,710
-----------
Balance, December 31, 1995 $ 1,651,621
Net depreciation (1,108,100)
-----------
Balance, December 31, 1996 $ 543,521
Net appreciation 591,680
-----------
Balance, December 31, 1997 $ 1,135,201
===========
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 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.
Note 4. RESERVES FOR UNPAID LOSSES
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 31,904,950 24,080,078 19,540,192
Prior claim years (746,024) (42,251) (109,160)
----------- ----------- -----------
Total 31,158,926 24,037,827 19,431,032
----------- ----------- -----------
Deduct paid losses
attributable 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
=========== =========== ===========
As a result of change in estimates of losses incurred in prior years, the
provisions for losses incurred in 1997, 1996 and 1995 decreased by $746,024,
$42,251 and $109,160 respectively, because of lower actual claims.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC. A prospectus dated
April 21, 1997 is offering 12,000 shares of Participating Stock to
persons certified by owners of certain motor vehicle franchises. The
offering consists of 120 series of 100 shares each at a price of $75
per share.
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.
In the years ended December 31, 1997, 1996 and 1995, costs in the
amount of $77,239, $64,484 and $171,079 respectively, were incurred in
the sale of Participating Stock. The Common Stockholder reimbursed the
Company directly for these expenses.
The holder of Common Stock is entitled to elect five directors, at
least one of whom must be a resident of Barbados. The holder of Common
Stock has no right to vote with respect to liquidation of the Company.
The holder generally has the sole right to vote on matters not
specifically reserved to Participating Stock.
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 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.
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.
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the Company will
assume additional cessions of $31,818,196 ($28,028,290 at December 31,
1996) relating to premiums written by Motors Insurance Corporation but
unearned at the respective period ends. The amounts will be received
as the premiums are earned, net of related acquisition costs.
Note 7. LETTER OF CREDIT
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.
Note 8. RETAINED EARNINGS
Items of income or loss and premiums and expenses attributable to
insurance underwriting activities are determined as of the end of each
calendar quarter and are allocated to the Participating Stockholders'
capital accounts.
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."
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.
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
Net income for the year 18,627 6,883,297 6,901,924
Net transfers 23,732 (23,732) -
Dividends paid - (1,188,614) (1,188,614)
Redemption of participating
stock - 7,500 7,500
--------- ----------- -----------
Balance (Deficit),
December 31, 1995 (10,861) 11,528,403 11,517,542
Net income for the year 14,131 7,440,392 7,454,523
Net transfers 6,147 (6,147) -
Dividends paid - (4,007,483) (4,007,483)
Redemption of participating
stock - (51,529) (51,529)
--------- ----------- -----------
Balance December 31, 1996 9,417 14,903,636 14,913,053
Net income for the year 12,304 7,890,606 7,902,910
Net transfers (29,881) 29,881 -
Dividends paid - (4,196,730) (4,196,730)
Redemption of participating
stock - (3,465) (3,465)
--------- ----------- -----------
Balance (Deficit),
December 31, 1997 $ (8,160) $18,623,928 $18,615,768
========= =========== ===========
PART III
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Five of the current directors of the Company were elected by MIC
through its ownership of the Common Stock at the Annual Shareholders'
Meeting held on March 27, 1997 and one director was elected by the
holders of the Shares at such meeting. The directors and officers of
the Company are as follows:
POSITION WITH THE COMPANY
(AND OTHER EMPLOYMENT DURING
NAME AGE PAST FIVE YEARS)
William B. Noll............. 55 Chairman, Chief Executive Officer,
President and Director (President, GMAC
Insurance Holdings, 1997, Executive Vice
President & Chief Financial Officer,
Motors Insurance Corporation ("MIC") March
1993; Group Vice-President, MIC, 1991-
1993; Vice President, MIC, 1989-1990).
Mr. Noll became President and Director in
1995.
Louis S. Carrio, Jr........ 54 Vice-President and Director (Vice-Pres-
ident, MIC).
Mr. Carrio became Vice-President and
Director in 1991.
Bernard J. Buselmeier....... 42 Vice-President and Director (Vice-
President and Treasurer, MIC, March 1993;
Treasurer, MIC, 1989-1993)
Mr. Buselmeier became Vice-President and
Director in 1995.
John J. Dunn, Jr............ 39 Vice-President and Director (Assistant
Treasurer, MIC, 1995; previously manager,
Coopers & Lybrand, L.L.P.)
Mr. Dunn became Vice-President and
Director in 1996.
Peter R. P. Evelyn ........ 56 Director (Attorney, Evelyn, Gittens &
Farmer, a Barbados law firm).
Mr. Evelyn became a Director in 1986.
Gregory Greenwood ......... 39 Director (President, Greenwood Chevrolet
Inc., Youngstown, OH)
Mr. Greenwood became a Director in 1997.
Ronald W. Jones ........... 45 Vice-President, Finance (Managing
Director, Aon Insurance Managers
(Barbados) Ltd.).
Mr. Jones has served as Vice-President,
Finance since 1987.
Michael B. Boyce........... 57 Secretary (Principal, Colybrand Company
Services, Limited, Barbados, since 1993;
previously principal, Price Waterhouse,
Eastern Caribbean).
Mr. Boyce has served as Secretary since
1994. Mr. Boyce served previously as
Assistant Secretary to the Company.
The directors and officers named above serve in those capacities until
the annual meeting of shareholders next following their election.
Item 11. EXECUTIVE COMPENSATION
No director or officer of the Company is compensated directly for
services as such. However, each director and officer of the Company is
reimbursed for expenses incurred for attendance at Board, committee,
and shareholder meetings. In addition, Mr. Jones is an officer of the
Manager, which receives management fees and compensation for financial
and administrative services. Mr. Evelyn is a member of the law firm of
Evelyn, Gittens & Farmer, which serves as the Company's Barbados
counsel; and Mr. Boyce is affiliated with Colybrand Company Services
Limited, St. Michael, Barbados, which receives compensation for
corporate secretarial services provided to the Company.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MIC owns all of the issued and outstanding shares of the Common Stock
of the Company, which consists of 2,000 shares. Gregory Greenwood, a
director, owns 100 shares of Participating Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item
11, EXECUTIVE COMPENSATION
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Document List
(1) Financial Statements
The following are included in Item 8:
(i) Independent Auditors' Report.
(ii) Balance Sheets, December 31,
1997 and 1996.
(iii) Statements of Income and Retained
Earnings for the years ended
December 31, 1997, 1996 and 1995.
(iv) Statements of Cash Flows for the
years ended December 31, 1997,
1996, and 1995.
(v) Notes to Financial Statements.
(2) Financial Statement Schedules. Schedules are omitted because
of the absence of the conditions under which they are required
or because the information required is presented in the
financial statements or related notes.
(3) Exhibits. The following exhibits are included in response to
Item 14(c):
3(a) Restated Articles of Incorporation and
amendments thereto filed by reference to
Exhibit 3(i) to Quarterly Report on Form 10Q
File No. 33-6534 for the quarterly period ended
June 30, 1996.
3(b) By-laws of the Company dated June 6, 1986 filed by
reference to Exhibit 3(b) of the Registration Statement
on Form S-1, File No. 33-6534, dated June 18, 1986.
4 Specimen Participating Stock Certificate filed by
reference to Exhibit 4 of Amendment No. 1 to
Registration Statement on Form S-1, File No. 33-6534,
dated February 12, 1987.
10(a) Form of Principal Retrocession Agreement
between Motors Insurance Corporation and
Registrant filed by reference to Exhibit 10(a)
of the Registration Statement on Form S-1, File
No. 33-6534, dated June 18, 1986.
10(b) Form of Supplemental Retrocession Agreement
between Motors Insurance Corporation and
Registrant filed by reference to Exhibit 10(b)
of the Registration Statement on Form S-1, File
No. 33-6534 dated June 18, 1986.
10(c) Specimen Stock Purchase Agreement filed by reference to
Exhibit 10(c) to Amendment No. 2 to Registration
Statement on Form S-1, File No. 33-6534, dated May 22,
1987.
10(d) Amended and Restated Stock Purchase Agreement between
Registrant and Motors Insurance Corporation filed by
reference to Exhibit 10(d) to Amendment No. 1 to
Registration Statement on Form S-1, File No. 33-6534,
dated February 12, 1987.
10(e) Insurance Management Agreement between
Registrant and Aon (formerly Alexander)
Insurance Managers (Barbados) Ltd., effective
January 1, 1996 filed by reference to Exhibit
10(e) to Annual Report on Form 10K, File No.
33-6534 for the year ended December 31, 1996.
10(f) Investment Management Agreement between Registrant and
N.M. Rothschild Asset Management Limited, effective
January 26, 1988.
20(a) Proxy solicitation materials sent to shareholders
in connection with annual meeting held on March 27,
1997, filed by reference to Exhibit 20(b) to Annual
Report on Form 10-K, File No. 33-6534, for the year
ended December 31, 1996.
20(b) Proxy solicitation materials sent to shareholders
in connection with annual meeting to be held April 23,
1998
27 Financial Data Schedule.
28(c) Certificate of Barbados Residency filed by reference to
Exhibit 28(c) to Amendment No. 1 to Registration
Statement on Form S-1, File No. 33-6534, dated June 18,
1986.
99(a) Certification Form filed by reference to Exhibit 28(a)
to Amendment No. 2 to Registration Statement on Form
S-1, File No. 33-6534, dated June 18, 1986.
99(b) Guarantee issued by the Minister of Finance of Barbados
filed by reference to Exhibit 99(b) to Amendment No. 2
to Registration Statement on Form S-2, File No.
33-60105, dated April 23, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended
December 31, 1997 have been filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Registrant)
By s/Ronald W. Jones
Ronald W. Jones
Vice-President, Finance
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title Date
s/William B. Noll Chairman, Chief Executive March 30, 1990
William B. Noll Officer, President and
Director
s/Louis S. Carrio, Jr. Vice-President and March 23, 1998
Louis S. Carrio, Jr. Director
s/John J. Dunn, Jr. Vice-President and March 30, 1998
John J. Dunn, Jr. Director
s/Bernard J. Buselmeier Vice-President and March 25, 1998
Bernard J. Buselmeier Director
Director
Gregory Greenwood
s/Peter R. P. Evelyn Director March 23, 1998
Peter R. P. Evelyn
s/Ronald W. Jones Vice-President, March 20, 1998
Ronald W. Jones Finance, Principal
Financial and
Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
Proxy solicitation materials were sent to shareholders in connection with
the annual meeting held on March 27, 1997 and in connection with the 1998 annual
meeting, to be held on April 23, 1998.
INVESTMENT MANAGEMENT AGREEMENT
BETWEEN
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
AND
N.M. ROTHSCHILD ASSET MANAGEMENT LIMITED
THIS AGREEMENT is made and entered into this 26th day of January, 1988, by and
between Motors Mechanical Reinsurance Company, Limited, an exempted company,
organised and existing under the laws of Barbados, with offices at Collymore
Rock, St. Michael, Barbados, W.I. (hereinafter referred to as the "Company"),
and N.M. Rothschild Asset Management Limited, a company organised and existing
under the laws of England, with its registered office at New Court, St Swithin's
Lane, London EC4P 4DU (hereinafter referred to as the "Investment Manager").
W I T N E S S E T H:
WHEREAS, the insurance and reinsurance business of the Company in Barbados
involves the investment and reinvestment of premium and loss reserves on a
regular and continuing basis;
WHEREAS, the Investment Manager has demonstrated expertise in the field of
investment portfolio management which should allow it to realise a rate of
return on the invested reserves of the Company allowing for both Capital
appreciation and liquidity;
WHEREAS, the Company desires to appoint the Investment Manager to manage an
investment account and the Investment Manager desires to act in such capacity
under the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and of the mutual covenants
herein contained, the Company and the Investment Manager do hereby agree as
follows:
1. Investment Account. Effective as of 11th December, 1987 (the "Effective
Date"), the Company by resolution of its Board of Directors or Investment
Committee segregated certain of its assets in a separate account to be
administered and invested by the Investment Manager pursuant to the terms hereof
(the "Investment Account").
2. Appointment. Effective as of the Effective Date, the Company hereby appoints
the Investment Manager and the Investment Manager hereby accepts such
appointment to act as an Investment Manager with respect to the Investment
Account.
3. Discretionary Authority and Responsibility. Subject to written investment
guidelines established from time to time by the Company and delivered to the
Investment Manager (the "Investment Guidelines"),the Investment Manager shall be
responsible in its sole judgment and discretion for the management and
investment of the Investment Account.
Upon receipt of any amendment to the Investment Guidelines, the Investment
Manager shall follow such amended Investment Guidelines as to any transaction
thereafter and shall follow such amended Investment Guidelines with respect to
the investments existing at the time of such receipt as promptly as practicable.
In no event shall the Investment Manager follow any Investment Guideline or any
provision of this Agreement which contravenes any applicable law, rule or
regulation of any governmental authority or securities exchange applicable to
the Investment Manager or, where the Company has made the Investment Manager
aware of the same, applicable to the Company; and the Investment Manager shall
give prompt written notice to the Company of any such contravention upon
becoming aware of the same. The Investment Guidelines shall to the best of the
Company's knowledge and belief be consistent with all such applicable laws,
rules and regulations.
4. Powers of Investment Manager. The Investment Manager shall have the following
powers with respect to the management and investment of the Investment Account,
but only to the extent permitted by the Investment Guidelines as they may exist
at any given time, (Exhibit A), provided that the purchase or sale of securities
may be effected by direct communication between the Investment Manager and the
broker handling the transaction with oral followed by written confirmation to
the Company pursuant to procedures agreed to by the parties:
(a) to purchase or subscribe for any securities or other property;
(b) to sell for cash or on credit, to grant options, convert, redeem, exchange
for other securities or other property, to grant, purchase, sell, exercise,
permit to expire, permit to be held in escrow or otherwise to acquire,
dispose of, hold and generally deal in any manner with and in all forms of
options in any combination, to enter into stand-by agreements for future
investment, either with or without a stand-by fee, or otherwise to dispose
of any securities or other property at any time held in the Investment
Account;
(c) to settle, compromise or submit to arbitration any claims, debts, or
damages, due or owing to or from the Investment Account, to commence or
defend suits or legal proceedings and to represent the Company with respect
to the Investment Account in all suits or legal proceedings in any court of
law or before any other body or tribunal; provided, however, that the
Company shall retain the right, in its sole discretion and at its own
expense, to bring, join in or oppose any such suits, proceedings
settlements or arbitrations where or it may be adversely affected by the
outcome or where it is advised by counsel that such action is required on
its part by applicable law;
(d) to exercise any conversion privilege and/or subscription right available in
connection with any securities or other property held in the Investment
Account or permit the same to lapse; to oppose or to consent to the
reorganisation, consolidation, merger, or readjustment of the finances of
any corporation, company or association, or to the sale, mortgage, pledge
or lease of the property of any corporation, company or association any of
the securities of which are held in the Investment Account and to do any
act with reference thereto, including the exercise or non exercise of
options, the making of agreements or subscriptions and the payment of
expenses, assessments or subscriptions, which may be necessary or advisable
in connection therewith, and to hold and retain any securities or other
property in the Investment Account which it may so acquire; and to deposit
any property with any protective, reorganisation or similar committee, and
to pay or agree to pay part of the expenses and compensation of any such
committee and any assessments levied with respect to property so deposited;
(e) to exercise any right, including the right to vote if so directed by the
Company, appurtenant to any securities or other property held in the
Investment Account;
(f) to hold part or all of the Investment Account in an interest bearing
deposit account from time to time, i.e. uninvested in securities;
(g) to purchase, enter, sell, hold and generally deal in any manner in and with
contracts for the immediate or future delivery of financial instruments of
any issuer or of any other property;
(h) to delegate to one or more agents any of its duties hereunder and in its
discretion to provide such information on the composition of the Investment
Account as may prove necessary to such agents; and
(i) to convert monies received with respect to assets in the Investment Account
into U.S. dollars or other currencies through the Investment Manager's
customary channels, including without limitation, the effecting of such
conversions through one of its affiliates.
The words "securities or other property" as used in subparagraph "(a)" shall be
deemed to refer to any intangible personal property or part interest therein,
wherever situate, including but without being limited to governmental, corporate
or personal obligations, trust and participation certificates, certificates of
deposit, notes or other evidences of indebtedness or ownership, secured or
unsecured, common and preferred stocks and options thereon and any other
evidences of indebtedness or ownership, when and if permitted under the
Investment Guidelines.
5. Reports, Valuations, Certificates, Meetings. The Company shall certify the
appointment of the Investment Manager and the amount of the Investment Account
and the Investment Manager shall provide the Company with a certificate
evidencing the Investment Manager's duly authorised representatives for
communications with the Company.
The Investment Manager shall deliver to the Company or its designee monthly
statements indicating all investments in the Investment Account and their market
values as of the close of business on the last business day of each month
together with performance tabulations, a schedule of purchases and sales
including brokerage commissions or other fees, if any, and such other reports as
shall be reasonably requested from time to time by the Company.
The Investment Manager shall, upon the request of the Company, attend meetings
with representatives of the Company to discuss the investment of the Investment
Account assets or shall submit its views in writing as the Company may request
from time to time.
The Company shall from time to time provide the Investment Manager with
Certificates containing the names and specimen signatures of the individuals who
are authorised to act on behalf of the Company. Persons authorised to act on
behalf of the Company may delegate various duties under this Agreement provided
that the power to act on behalf of the Company to amend this Agreement, to
change the amount of the Investment Account, to terminate this Agreement or to
amend the Investment Guidelines may not be delegated. The Investment Manager
shall be fully protected in relying upon any written notice, instruction,
direction or communication that the Investment Manger reasonably believes (based
upon the then current Certificate of the Company) to have been executed by an
individual who is authorised to act on behalf of the Company as the case may be.
6. Custody of Assets. The Investment Manager shall establish custody
arrangements for the physical possession and retention in safe custody to the
order of the Company of all of the assets of the Investment Account and shall be
responsible for the collection of all income due thereon.
7. Brokerage. The Investment Manager will endeavor to secure the best execution
and terms reasonably obtainable in all transactions effected on behalf of the
Company. Except as otherwise specifically directed by the Company, the
Investment Manager shall have complete discretion to select any broker or dealer
(including affiliates of the Investment Manager) to effect such transactions.
8. Representations, Standard of Conduct. The Investment Manager represents and
warrants that it has completed, obtained or performed all registrations,
filings, approvals, authorisations, consents or examinations required of it by
any government governmental authority for the performance of the acts
contemplated by this Agreement, and will maintain such status during the term of
this Agreement.
The Investment Manager acknowledges that it is familiar with and will comply
with the responsibilities demanded of a prudent investment manager in the
performance of its obligations hereunder. The Investment Manager shall, subject
always to the Investment Guidelines, discharge such obligations solely in the
interest of the Company and (i) for the exclusive purpose of providing benefits
to the Company and defraying reasonable expenses of administering the Investment
Account; (ii) with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims by diversifying the investments in the Investment
Account so as to minimize the risk of large losses; and (iii) in accordance with
the provisions of applicable law, as the same may from time to time be amended.
The Investment Manager will not be liable for any errors of fact or judgment or
for any action lawfully taken or omitted to be taken by it or any agent or
representative designated by it, unless such error, act or omission is
attributable to negligence or willful misconduct in which event Investment
Manager shall indemnify and hold the Company harmless from and against any and
all losses and expenses incurred by the Company as a result thereof. The
Investment Manager will neither be responsible for any loss of opportunity
whereby the value of the Investment Account could have been increased nor for
any decline in the value of the Investment Account or other assets of the
Company nor for any loss of cash deposited or advanced by the Investment Manger,
unless such decline or loss is a direct result of the failure of the Investment
Manager or any of its agents to comply with the Company's instructions in which
event Investment Manager shall indemnify the Company as aforesaid.
9. Compensation for Services hereunder as Investment Manager. As compensation
for services rendered hereunder, the Investment Manager shall be paid a fee
equal to 0.225% per annum on the first US$20 million of funds under management,
0.20% per annum on the next $20 million of funds under management and 0.15% per
annum of the balance of funds under management in excess of US$40 million where
the applicable rate is applied to the market value of the portfolio, as adjusted
for capital injections and withdrawals, at each calendar quarter end or the date
of termination of this Agreement. During the initial funding period, fees shall
be prorated to reflect the actual number of days assets were being managed.
Quarterly statements detailing the investment portfolio and fees shall be
rendered to the Company and charged against the Investment Account. No other fee
or transaction charge shall be imposed on the Investment Account or payable
hereunder.
10. Services to Other Clients. The services of the Investment Manger to the
Company are not to be deemed exclusive, it being understood that the Investment
Manager performs investment advisory and management services for various other
clients. The Investment Manager may give advice and take action with respect to
any of its other clients which may differ from advice given or from the timing
or nature of actions taken with respect to the Investment Account.
11. Bonding. The Investment Manager will procure and maintain at its own expense
fidelity bonding in an amount not less than US$50m (fifty million) or such other
amount as may be agreed between the parties from time to time. A letter
confirming such coverage shall be delivered to the Company by the insurers of
the Investment Manager.
12. Assignment of Agreement. The Investment Manager hereby agrees that it shall
not assign or transfer this Agreement without the prior written consent of the
Company.
13. Termination. This Agreement shall continue in effect until terminated by
either the Investment Manager or the Company by giving at least thirty (30) days
prior written notice to the other; except that at the request of the Company,
the Investment Manager shall remain as Investment Manager hereunder until the
Company selects and appoints a successor.
14. Applicable Law. This Agreement shall be construed, administered and enforced
according to the laws of England.
15. Notices. All notices or instructions hereunder shall be in writing and shall
be sent by registered or certified air mail, telex or other means providing for
acknowledgment of receipt addressed to the offices indicated in the preamble
hereof or to such other addresses as the parties may from time to time direct.
In the event the Investment Manager in its absolute discretion accepts oral
instructions from the Company, such instructions shall be confirmed in writing
within a reasonable time thereafter.
16. Acknowledgment for Jurisdiction. The Investment Manager and Company agree
that all claims arising out of this Agreement shall be litigated in a court of
appropriate jurisdiction located in England.
17. Entire Agreement. This Agreement embodies the entire understanding of the
parties, supersedes any prior agreements or understandings with respect to the
subject matter hereof and cannot be altered, amended, supplemented or any
provisions waived, except by written agreement of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first set forth above.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
By: ____________________________ By: ______________________________
Title: ____________________________ Title: ______________________________
N.M. ROTHSCHILD ASSET MANAGEMENT LIMITED
By: ____________________________ By: ______________________________
Title: ____________________________ Title: ______________________________
INVESTMENT MANAGEMENT AGREEMENT
BETWEEN
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
AND
ROTHSCHILD ASSET MANAGEMENT LIMITED
EXHIBIT A
INVESTMENT GUIDELINES
Portfolio Objectives
The primary investment objectives of the Company are to preserve its real
capital base and maintain liquidity needed for claim settlements through a
conservative program of investment in high-quality fixed income securities as
defined in this statement of guidelines. To achieve these objectives, Investment
Manager's strategy and operating practice shall be consistent with the
following:
I. Investment Instruments
Only U.S. dollar denominated fixed income and money market instruments may
be utilised, provided that up to 30% of the portfolio may be invested in
non-U.S. dollar denominated foreign government bonds. Use of these
instruments would be restricted as follows:
(A) No investment may be held at a domestic branch of a U.S. bank,
however, deposits may be held at foreign branches or subsidiaries of
U.S. banks.
(B) No investment may be made in issues which have been registered with
the S.E.C.
(C) No investment may be made in instruments which, at the time of
purchase, will prospectively be subject to non-reclaimable withholding
tax.
(D) No investment may be convertible in nature nor have warrants attaching
thereto.
(E) Time deposits and CD's held at any one bank may not exceed 15 percent
of the portfolio at any point in time.
(F) No investment may be in General Motors Corporation or any of its
affiliates or subsidiaries.
(G) All non-U.S. dollar denominated investments must be fully
currency-hedged into U.S. dollars.
II. Portfolio Diversification
The Investment Manager shall develop guidelines governing the maximum
investment in the securities of any single issuer or guarantor so as to
provide reasonable diversity among the assets which comprise the Investment
Account. A copy of the guidelines in effect at any point in time shall be
provided to the Company, which reserves the right to modify them at its
discretion.
III. Investment Maturity
"The duration of the total portfolio shall be kept within a range of + or -
25% of the duration of the benchmark index."
No investment may have a maturity (or redemption at the holder's option) in
excess of 10 years.
Floating rate notes will be deemed to have a duration determined by the
date of the next coupon change. However, no floating rate note shall be
held whose final maturity or first redemption at holder's option (whichever
is sooner) is greater than ten (10) years.
IV. Investment Quality
Except for interim capital amounts held by the Investment Manager in its
own account all investments must meet one of the following criteria in
order to qualify for inclusion in the portfolio:
(A) The investment must be issued or unconditionally guaranteed by
Organization for Economic Cooperation and Development (OECD)
governments and, in the opinion of the Investment Manager, such
securities are at least equivalent to the minimum quality requirement
set forth below.
(B) The investment must have at least a Moody's rating of Aa3 or S&P of
AA- or the equivalent or A1P1 for maturities under 1 year.
(C) Investments specifically approved in writing by MMRC and Citibank, or
(D) The investment must be unconditionally guaranteed by a company or
entity, satisfying IV(B) above.
V. Investment Performance
Investment performance will be measured against the (new) Salomon Brothers
Eurodollar bond Index (maturities greater than 1 year, excluding issues
rates below Aa3/AA-)
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
By: ........................... By: ..........................
Title: Title:
Date: ........................... Date: ..........................
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTICE
NOTICE is hereby given that the Eleventh Annual Meeting of the Shareholders of
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED will be held at the Miramar
Conference Centre, Royal Pavilion Hotel, St. James, Barbados on Thursday the
23rd day of April, 1998 at 12:00 noon for the following purposes:
1. Adoption of minutes of previous meeting of Shareholders held on March 27th,
1997.
2. To receive and consider the financial statements of the Company for the
twelve month period ended December 31, 1997 together with the independent
auditors' report thereon.
3. To elect directors.
4. To consider the proposal to amend the Restated Articles of Incorporation.
5. To confirm the appointment of Deloitte & Touche as the Company's
independent auditors for the year ended December 31, 1998.
6. To conduct any other business that may properly be transacted at an annual
meeting.
DATED THE 27th DAY OF MARCH, 1998
BY ORDER OF THE BOARD
Michael R. Boyce
AS SECRETARY OF
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
Annual Meeting April 23rd, 1998
PROXY STATEMENT
March 27th, 1998
This proxy statement is furnished by management of Motors Mechanical
Reinsurance Company, Limited (the "Company") in connection with the solicitation
of proxies for use at the annual meeting of the Company to be held on April
23rd, 1998 at 12:00 noon at the Miramar Conference Centre, Royal Pavilion Hotel,
St. James, Barbados. Please complete and return the attached proxy whether or
not you plan to attend the meeting. A proxy may be revoked at any time prior to
the meeting in writing or by attendance of the shareholder at the meeting.
Shareholders of record as of the date of this proxy statement are entitled
to notice and to vote at the meeting. As of such date, there were 28,700
participating shares outstanding, held by 487 persons representing 287 series.
All the common stock is held by Motors Insurance Corporation ("MIC"), which
organized the Company. Each share entitles the holder to one vote on matters on
which that class of stock is entitled to vote.
This proxy statement is accompanied by notice of the meeting, financial
statements for the year ended December 31, 1997 and a form of proxy.
<PAGE>
ELECTION OF DIRECTORS
The Company has a board of directors consisting of six members. Five
directors, of whom one is a resident of Barbados, are elected by the holder of
the common shares and one director is elected by holders of the participating
shares. Directors serve without compensation other than reimbursement of actual
expenses. They are elected for one year terms.
Mr. William Bradshaw has been nominated to stand for election as director
by the participating shareholders. Other nominations can be made by the holders
of at least two series of participating shares by notifying the secretary in
writing at least ten days prior to the meeting. The nominee receiving the
highest number of votes will be elected.
In addition, five directors will be elected by the common shareholder. It
is anticipated that MIC will choose to re-elect William B. Noll, Bernard J.
Buselmeier, Louis S. Carrio, Jr., John J. Dunn, Jr. and Peter R.P. Evelyn to
serve as directors.
Information regarding the age and current occupation of persons nominated
to be elected or re-elected as directors by the common shareholder and the
person nominated to be elected as director by the participating shareholders is
set forth below.
Position with the Company and Other
Name Age Employment During the Past Five Years
William B. Noll 55 President & Director
(President, GMAC Insurance Holdings
Inc., 1997, Executive Vice President
& Chief Financial Officer, MIC,
March 1993; Group Vice President, MIC,
1991-1993; Vice President, MIC,
1989-1990).
Mr. Noll has been President & Director
since 1995.
Louis S. Carrio, Jr. 54 Vice President and Director
(Vice President, MIC).
Mr. Carrio has been a Vice President
& Director since 1991.
<PAGE>
- 2 -
Bernard J. Buselmeier 42 Vice President & Director
(Executive Vice President & Chief
Financial Officer, Integon Insurance
Group, from April 1998; Vice President
& Treasurer, MIC, 1993-1998; and
Treasurer, MIC, 1989-1993).
Mr. Buselmeier has been Vice
President and Director since 1995.
John J. Dunn, Jr. 39 Vice President & Director
(Vice President & Treasurer, MIC,
from April 1998; Assistant Treasurer,
MIC, 1995-1998; Manager, Coopers &
Lybrand L.L.P., 1990-1995)
Mr. Dunn has been Vice President and
Director since 1996.
Peter R.P. Evelyn 56 Director
(Attorney, Evelyn Gittens & Farmer,
A Barbados Law firm).
Mr. Evelyn has been a Director
since 1986.
William Bradshaw 37 Nominee for Director to be elected by
the participating shareholders.
(Bradshaw Automotive Group, Greer,
South Carolina)
AMENDMENTS OF RESTATED ARTICLES OF INCORPORATION
Allocation of Operating Expenses
Under the terms of the Company's Restated Articles of Incorporation, no
expenses relating to ordinary day-to-day operations of the Company are allocated
to the Subsidiary Capital Account of a series of Shares for the period from the
date of issuance of the Shares to the fiscal year end immediately following such
date. Management has determined that this provision can artificially influence
the timing of the purchase of Shares. In order to prevent such an unintended
incentive, Management proposes that the Articles be amended to provide that no
operating expenses shall be allocated to the Subsidiary Capital Account for a
series of Shares for the first four fiscal quarters that end after the issuance
of the Shares.
Accordingly, Management proposes that the Company's Restated Articles of
Incorporation be amended to read as follows:
<PAGE>
- 3 -
Section 3(1)(2)
Any expenses or liabilities attributable to ordinary day-to-day
Company operations, excluding any United States Federal income taxes,
shall be allocated among all Subsidiary Capital Accounts for the Shares
pro rata on the basis of the number of series issued and outstanding at
the end of the fiscal quarter in which the expense or liability is
incurred, provided that for purposes of such allocation, series of
Shares issued at any time during the twelve calendar months preceding
the end of the fiscal quarter in which the expense or liability is
incurred, and series with respect to which the unearned premium is zero
as of such date, shall be excluded.
Restricted Earned Surplus
Under the terms of the Company's Restated Articles of Incorporation,
Restricted Earned Surplus generally is equal to the amount of premiums allocated
to the Subsidiary Capital Account for the Common shares during a rolling
five-year period, reduced by the amount of deficits allocated to such Account
during such five-year period. In order to accelerate the point in time when
earnings attributable to the Common shares become available to absorb Subsidiary
Capital Account deficits, Management has determined that, for purposes of
determining Restricted Earned Surplus, reductions for deficits should be taken
into account only to the extent that they relate to amounts credited to the
Subsidiary Capital Account for the Common shares during the rolling five-year
calculation period. Management believes that this rule should be implemented at
the earliest time possible taking into account the Company's past accounting
practices with respect to Restricted Earned Surplus. Accordingly, Management
proposes that, effective as of January 1, 1997, the definition of Restricted
Earned Surplus contained under "Definitions" in Section 3 of the Company's
Restated Articles of Incorporation should be amended as follows:
Restricted Earned Surplus - - At any point in time, the
portion of the earned surplus, if any, in the Subsidiary
Capital Account for the Common shares equal to: (i) premiums
allocated to the Subsidiary Capital Account of the Common
shares during the immediately preceding five-year period
pursuant to Section 3(1)(1)(a), plus (ii) deficits restored to
such Account during such period pursuant to Section
3(1)(7)(c), less (iii) return premiums allocated to such
account during such period pursuant to Section 3(1)(1)(d), and
less (iv) deficits allocated to such account during such
period pursuant to Section 3(1)(7)(a)(i) to the extent that
they relate to amounts described in clauses (i) and (ii) of
this definition.
ELECTION OF INDEPENDENT AUDITORS
The Board of Directors proposes that the shareholders confirm the selection
of Deloitte & Touche, Bridgetown, Barbados, as independent auditors to audit the
financial statements of the Company for the year ended December 31, 1998.
Deloitte & Touche has served as the Company's independent auditors since its
inception in 1986. Representatives of Deloitte & Touche are expected to be
present at the Annual Meeting of Shareholders.
<PAGE>
P R O X Y
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
I/We, , a member of the above-named company hereby
appoint Ronald W. Jones, Vice President, Finance of the Company or failing him
Michael R. Boyce, Secretary of the Company, as my/our proxy to vote for me/us on
my/our behalf at the shareholders meeting to be held on the 23rd day of April,
1998 or at any adjournment thereof and in particular to vote for:
(i) The election of Mr. William Bradshaw to serve as a director
representing the participating shareholders.
(ii) The adoption of amendments to the Company's Restated Articles of
Incorporation as they relate to Allocation of Operating Expenses and
Restricted Earned Surplus computations. (iii) The confirmation of
Deloitte & Touche as the independent auditors of the Company for the
current fiscal year.
Dated this ________ day of __________, 1998.
- ------------------------------ ---------------------------
Signature Print Name
As a Shareholder in Series # __________
(for identification purposes, please indicate the
series in which you are a shareholder)
Completed Proxy forms should be returned either by facsimile or overnight mail
to the Company's Barbados address as follows:
c/o Aon Insurance Managers (Barbados) Ltd.
Financial Services Centre, P.O. Box 1304,
Bishops Court Hill,
St. Michael, Barbados, W.I.
Facsimile #: (246) 436-9016
<PAGE>
PROXY
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
MOTORS INSURANCE CORPORATION, a member of the above-named company,
hereby appoints John J. Dunn, Jr., Director of the Company or failing him Robert
E. Capstack, Alternate Director of the Company for Louis S. Carrio, Jr., as its
proxy to vote for it on its behalf at the shareholders meeting to be held on the
23rd day of April, 1998 or at any adjournment thereof.
Dated this ________ day of __________, 1998
MOTORS INSURANCE CORPORATION
By______________________________
________________________________
Print Name
________________________________
Title
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 1997 and is qualified in its entirety by references
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-30-1997
<DEBT-HELD-FOR-SALE> 88,585,513
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 88,585,513
<CASH> 5,645,482
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,813,918
<TOTAL-ASSETS> 123,065,286
<POLICY-LOSSES> 5,421,160
<UNEARNED-PREMIUMS> 95,454,588
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 200,000
<OTHER-SE> 21,865,969
<TOTAL-LIABILITY-AND-EQUITY> 123,065,286
45,701,595
<INVESTMENT-INCOME> 4,953,755
<INVESTMENT-GAINS> 750,923
<OTHER-INCOME> 0
<BENEFITS> 31,118,522
<UNDERWRITING-AMORTIZATION> 11,881,721
<UNDERWRITING-OTHER> 503,020
<INCOME-PRETAX> 7,902,910
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,902,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,902,910
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>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.
</FN>
</TABLE>
