PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For quarterly period ended September 30, 1999
----------------------------------
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from to
--------- ---------
Commission File Number 33-6534
-----------------
Motors Mechanical Reinsurance Company, Limited
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Barbados N/A
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Bishops Court Hill, St. Michael, Barbados N/A
- --------------------------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
(246) 436-4895
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 for 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 the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class As of September 30, 1999
----- ------------------------
Common Stock, no par-value 2,000
Participating Stock, no par-value 30,700
<PAGE>
PAGE 2
This quarterly report, filed pursuant to Rule 13a-13 of the General Rules
and Regulations under the Securities Exchange Act of 1934, consists of the
following information as specified in Form 10- Q:
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
1. Balance Sheets, September 30, 1999 and December 31, 1998.
2. Statements of Income and Retained Earnings for the three
month periods ended September 30, 1999 and 1998 and the nine
month periods ended September 30, 1999 and 1998.
3. Statements of Cash Flows for the nine month periods ended
September 30, 1999 and 1998.
In the opinion of Management, the accompanying financial statements reflect
all adjustments, consisting of normal recurring accruals, which are necessary
for a fair presentation of the results for the interim periods presented.
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<PAGE>
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MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
(Expressed in U.S. Dollars)
Sept 30, 1999 December 31,
(unaudited) 1998
------------ ------------
ASSETS
Investments $ 96,018,725 $ 89,474,377
Cash and cash equivalents 8,430,817 19,504,563
Accrued investment income 2,037,782 1,788,490
Deferred acquisition costs 24,181,324 28,660,753
Prepaid expenses 23,625 0
------------ ------------
Total Assets $130,692,273 $139,428,183
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums $ 93,009,463 $110,243,074
Loss reserves 4,643,263 5,393,818
Due to Motors Insurance Corporation 19,114,910 115,667
Accrued liabilities 223,609 150,056
------------ ------------
Total liabilities 116,991,245 115,902,615
------------ ------------
STOCKHOLDERS' EQUITY
Share Capital
Common Stock-no par value;
Authorized - 2,000 shares;
issued and outstanding -
2,000 200,000 200,000
Participating Stock-no par value;
Authorized - 100,000 shares;
issued and outstanding -
30,700 shares as of September 30,
1999 and 31,500 shares as of
December 31, 1998 2,302,500 2,362,500
------------ ------------
2,502,500 2,362,500
Retained Earnings 13,171,956 20,629,009
Accumulated other comprehensive
(loss) income (1,973,428) 334,059
------------ ------------
Total Stockholders' Equity 13,701,028 23,525,568
------------ ------------
Total Liabilities and Stockholders'
Equity $130,692,273 $139,428,183
============ ============
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<PAGE>
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 AND
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
(Expressed in U.S. Dollars)
Three Month Periods Nine Month Periods
Ended Sept 30, Ended Sept 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME
Reinsurance premiums
assumed $15,630,049 $18,680,819 $52,670,995 $54,738,752
Reinsurance premiums
returned 24,934,234 0 24,934,234 0
Increase (decrease) in
unearned premiums (22,559,363) 3,890,487 (17,233,611) 12,326,183
----------- ----------- ----------- -----------
Premiums earned 13,255,178 14,790,332 44,970,372 42,412,569
----------- ----------- ----------- -----------
Investment income
Interest earned 1,540,605 1,714,696 4,321,589 4,520,786
Realized (losses) gains
on investments (839,940) 2,269,101 (3,545,097) 3,374,836
----------- ----------- ----------- -----------
Investment income 700,665 3,983,797 776,492 7,895,622
----------- ----------- ----------- -----------
TOTAL INCOME 13,955,843 18,774,129 45,746,864 50,308,191
----------- ----------- ----------- -----------
EXPENSES
Acquisition costs 3,421,349 3,845,398 11,691,326 10,908,226
Losses paid 11,147,400 12,337,811 36,402,128 32,154,572
Increase (decrease) in
loss reserves 180,933 305,166 458,761 (261,228)
Administrative expenses
- Related Parties 63,025 57,764 190,092 167,996
- Other 88,213 67,425 292,553 265,469
----------- ----------- ----------- -----------
TOTAL EXPENSES 14,900,920 16,613,564 49,034,860 43,235,035
----------- ----------- ----------- -----------
NET (LOSS) INCOME (945,077) 2,160,565 (3,287,996) 7,073,156
RETAINED EARNINGS,
beginning of period 14,146,110 18,356,403 20,629,009 18,615,768
LESS: DIVIDENDS 0 0 (4,066,464) (5,171,956)
LESS: REDEMPTION OF
PARTICIPATING STOCK (29,077) (23,159) (102,593) (23,159)
----------- ----------- ----------- -----------
RETAINED EARNINGS,
end of period $13,171,956 $20,493,809 $13,171,956 $20,493,809
=========== =========== =========== ===========
</TABLE>
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<PAGE>
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MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 (UNAUDITED)
(Expressed in U.S. Dollars)
Nine Month Periods
Ended Sept. 30,
1999 1998
----------- -----------
Cash flows from operating activities:
Reinsurance premiums collected $54,936,354 $30,134,340
Losses and acquisition expenses paid (52,963,826) (25,691,013)
Administrative expenses paid (539,482) (351,091)
Investment income received 4,119,197 4,269,445
----------- -----------
Net cash provided by operating activities 5,552,243 8,361,681
----------- -----------
Cash flows from investing activities:
Purchases of investments (294,876,253) 154,108,002)
Sales of investments 282,479,321 152,924,666
----------- -----------
Net cash invested (12,396,932) (1,183,336)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Participating
Stock 15,000 187,500
Redemption of participating stock (177,593) 0
Dividends paid (4,066,464) (5,171,956)
----------- -----------
Net cash used in financing activities (4,229,057) (4,984,456)
----------- -----------
(Decrease) increase in cash and cash
equivalents (11,073,746) 2,193,889
Cash and cash equivalents, beginning
of period 19,504,563 5,645,482
----------- -----------
Cash and cash equivalents, end
of period $ 8,430,817 $ 7,839,371
=========== ===========
Reconciliation of net income to net cash
provided by operating activities:
Net (loss)income (3,287,996) 4,912,591
Realized losses(gains) on investments 3,545,097 (1,105,735)
Change in:
Accrued investment income (249,292) 1,461,355
Due from Motors Insurance Corporation 18,999,243 (2,583,827)
Deferred acquisition costs 4,479,429 (2,193,921)
Prepaid expenses (23,625) (35,686)
Unearned premiums (17,233,611) 8,435,696
Loss reserves (750,555) (566,394)
Accrued liabilities 73,553 37,602
----------- -----------
Net cash provided by operating activities $ 5,552,243 $ 8,361,681
=========== ===========
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<PAGE>
PAGE 6
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations
Liquidity. 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 investment by the Company. Such funds will
be available to meet the Company's liquidity requirements.
Pursuant to the terms of the recapture by MIC (the Company's sole retroceding
company and common shareholder) of certain business from the Company, as
discussed in more detail below, the Company is obligated to make a payment to
MIC in the amount of $19,660,649. It is anticipated that the Company will use
cash and the proceeds from the sale of investment assets to fund this payment.
It is anticipated that the Company will continue to be able to generate
sufficient funds from operations to meet other current liquidity needs. No
capital expenditures are expected in the foreseeable future.
Capital Resources. During the quarter ended September 30, 1999, no new series of
Shares were added and 4 series of Shares were redeemed bringing the total number
of series issued and outstanding to 307 as of the end of the quarter. As of
September 30, 1999, the share capital of the Company was $2,502,500 (compared
with $2,562,500 as of December 31, 1998) comprised of paid in capital with
respect to the Common Stock of $200,000 and paid in capital with respect to
Participating Shares of $2,302,500 (compared with $2,362,500 as of December 31,
1998). As discussed below, subsequent to the end of the quarter under review,
the Board of Directors voted to redeem 37 series of Participating Stock for no
value.
The Company had surplus from retained earnings in the amount of $13,171,956 as
of September 30, 1999 compared with $20,629,009 as of December 31, 1998. The
reduction in retained earnings has arisen primarily as a result of a dividend
payment of $4,066,464 in February of 1999 and the net loss for the period which
is discussed more fully below.
Results of Operations. During the quarter ended September 30, 1999, the Company
had a net loss of $945,077, compared with net income of $2,160,565 for the
quarter ended September 30, 1998. For the nine month period ended September 30,
1999, the Company had a net loss of $3,287,996, compared with net income of
$7,073,156 for the comparable period in 1998.
As discussed below, the decreases in net income for the quarter and nine month
period ended September 30, 1999 compared to the comparable periods of 1998 are
primarily attributable to less favourable underwriting performance and a decline
in returns on the Company's investment portfolio.
Premiums earned decreased to $13,255,178 during the quarter ended September 30,
1999 compared to $14,790,332 for the same period in
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PAGE 7
1998. Expenses incurred during the quarter ended September 30, 1999 were
$14,900,920 compared to $16,613,564 for the comparable quarter of 1998. The
Company experienced a net underwriting loss for the quarter ended September 30,
1999 of $1,645,742 compared to an underwriting loss of $1,823,232 for the
comparable period in 1998. The ratio of losses incurred to premiums earned for
each of the two quarters ended September 30, 1999 and 1998 was 85.5% primarily
as a result of increases in losses paid.
For the nine month period ended September 30, 1999, the Company had earned
premiums of $44,970,372 compared to $42,412,569 for the comparable period of
1998. Expenses incurred during the nine month period ended September 30, 1999
were $49,034,860 compared to $43,235,035 for the comparable period in 1998. Net
underwriting loss for the Company was $4,064,488 for the nine month period ended
September 30, 1999 compared to $822,466 for the comparable period in 1998. The
loss ratio for the nine month period ended September 30, 1999 was 81.2%,
compared to 75.2% for the nine month period ended September 30, 1998.
As result of adverse underwriting results, the Company, working with MIC, has
continued to evaluate ways to improve its underwriting performance and has
recently taken steps to achieve such goal. Subsequent to the end of the quarter
under review, MIC agreed to commute the unearned premium and all unpaid losses
as of the end of the second quarter of 1999 that are attributable to 37 series
of Shares that, as discussed below, the Board has voted to redeem. In exchange
for assuming this unearned premium and unpaid loss reserves, the Company will
pay $19,660,649 to MIC, which amount represents the unearned premium of
$24,934,234, less the 25% ceding commission and 1% federal excise taxes of
$6,482,901 previously paid by the Company with respect to the commuted business,
plus unpaid losses of $1,209,316, each as of June 30, 1999, that are
attributable to the commuted business. If MIC had not recaptured this business
from the Company, the Company would have experienced materially larger
underwriting losses and higher loss ratios for the three month and nine month
periods ended September 30, 1999.
Subsequent to the end of the quarter under review, the Board of Directors voted
to redeem 37 series of Shares that had consistently experienced adverse
underwriting results and that the Board determined were unlikely to experience
favourable underwriting results in the future. Because the subsidiary capital
account for these series had a balance of zero, the redemption price for the
Shares was zero.
Notwithstanding the redemption by the Board of these series of Shares and the
recapture of business by MIC, there can be no assurances that the Company will
not continue to experience significant adverse underwriting results. In
addition, there can be no assurances that MIC would recapture additional
business from the Company if the Company does experience significant adverse
underwriting results in the future.
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<PAGE>
PAGE 8
Apart from the foregoing redemption of Shares and recapture of business, the
Company continues to work with MIC to evaluate ways for improving its
underwriting performance. MIC continues to contact unprofitable accounts and
implement procedures to discontinue ceding new business into the Company with
respect to such accounts. Additionally, MIC continues to place claims adjusters
at some unprofitable accounts. Furthermore, claims approval empowerment levels
have been significantly reduced or eliminated.
Investment income for the quarter ended September 30, 1999 was $700,665 compared
to income of $3,983,797 for the comparable period of 1998. Investment income for
the nine month period ended September 30, 1999 was $776,492 compared to
$7,895,622 for the comparable period of 1998. During the quarter ended September
30, 1999, the Company realised losses on the sale of investment securities of
$839,940, compared to realised gains of $2,269,101 during the comparable period
of 1998. The Company realized losses on the sale of investment securities during
the quarter and the nine month period ended September 30, 1999 as a result of
sales of fixed income securities, the value of which had decreased as a result
of increases in interest rates.
The unrealised position on investments reflected unrealised gains of $334,059 at
December 31, 1998 and unrealised losses of $1,973,428 at September 30, 1999. The
change in the unrealised position during this period was brought about by a
decline in the market value of the portfolio due to increasing interest rates.
For the quarter ended September 30, 1999, the Company had interest income of
$1,540,605 compared to $1,714,696 for the comparable period of 1998. For the
nine month period ended September 30, 1999, the Company had interest income of
$4,321,589 compared to $4,520,786 for the comparable period of 1998. These
decreases were largely attributable to lower coupon rates on the Company's
portfolio of fixed income securities partially offset by an increase in funds
available for investment.
As of September 30, 1999 the Company's investment portfolio comprised
approximately $94 million in fixed income securities, cash and cash equivalents
and approximately $10 million in international equities.
Year 2000
Many computerized systems and microprocessors that are used by the Company's
manager have the potential for operational problems if they lack the ability to
handle the transition to the Year 2000. The effects of the Year 2000 issue are
also complicated by the Company's dependence on its common shareholder, from
whom the Company assumes all of its business, as well as other service providers
such as investment advisors and custodians. The Year 2000 issue has the
potential to cause disruption to the business of the Company and its
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<PAGE>
PAGE 9
customers. In early 1998, the Company initiated communications with its manager
and other service and technology providers in order to assess and reduce the
risk that the Company's operations could be adversely affected by the failure of
these third parties to adequately address the Year 2000 issue. Motors Insurance
Corporation, the Company's key retroceding company and common shareholder, has
completed its Year 2000 assessment phase and is in the remediation and
contingency planning phases with respect to its critical system.
The Company does not separately own or license any computers or computer
software applications. Instead, it has outsourced these functions through an
insurance management agreement. To date, the Company has not incurred, expensed
or capitalised amounts related to the Year 2000 remediation. The Company does
not expect to incur incremental expenses or to forego or delay information
technology projects due to Year 2000. In view of the foregoing, the Company does
not currently anticipate that it will experience a significant disruption of its
business as a result of the Year 2000 issue. However, there is still uncertainty
about the broader scope of the Year 2000 issue as it may affect the Company and
third parties that are critical to the Company's operations. In the event that
the Company or its service providers are unable to complete remedial actions or
are unable to implement adequate contingency plans in the event that problems
are encountered, there could be a material adverse effect on the Company's
business, results of operations or financial condition.
Forward Looking Statements
The foregoing Management Discussion and Analysis contains various forward
looking statements within the meaning of applicable federal securities laws and
are based upon 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.
Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. In the second quarter of 1999, the FASB delayed implementation of
SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new
standard requires that all companies record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
Management is currently assessing the impact of SFAS No. 133 on the consolidated
financial statements of the Company. The Company will adopt this accounting
standard on January 1, 2001, as required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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<PAGE>
PAGE 10
SIGNATURES
Pursuant to the requirements 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
Signing on behalf of
the Registrant, and
Principal Financial Officer
Dated: November 15, 1999
-10-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements contained in the Company's quarterly report on
Form 10-Q for the nine months ended September 30, 1999 and is qualified in its
entirety by references to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 96,018,725
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 96,018,725
<CASH> 8,430,817
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,181,324
<TOTAL-ASSETS> 130,692,273
<POLICY-LOSSES> 4,643,263
<UNEARNED-PREMIUMS> 93,009,463
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 200,000
<OTHER-SE> 13,501,028
<TOTAL-LIABILITY-AND-EQUITY> 130,692,273
44,970,372
<INVESTMENT-INCOME> 4,321,589
<INVESTMENT-GAINS> (3,545,097)
<OTHER-INCOME> 0
<BENEFITS> 36,860,889
<UNDERWRITING-AMORTIZATION> 11,691,326
<UNDERWRITING-OTHER> 482,645
<INCOME-PRETAX> (3,287,996)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,287,996)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,287,996)
<EPS-BASIC> 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>