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, 1999
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)
One Financial Place
Collymore Rock 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
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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, 2000, was $1,995,000.*
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, 2000
----- -------------------
Common Stock, no-par value 2,000
Participating Stock, no-par value 26,600
- ----------
* Based on current offering price of $75 per share.
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PART I
Item 1. BUSINESS
INTRODUCTION
Motors Mechanical Reinsurance Company, Limited (the "Company") was incorporated
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.
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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 Michigan. 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.
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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
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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,
1999, 1998, and 1997 were 80%, 78.8% and 68.1% respectively.
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The following table sets forth an analysis of changes in the loss reserves for
the years ended December 31, 1999, 1998 and 1997:
Year Ended
-------------------------------------------
12/31/99 12/31/98 12/31/97
-------- -------- --------
Beginning balance in
reserves for losses....... $ 5,393,818 $ 5,421,160 $ 4,284,304
----------- ----------- -----------
Add-provision for losses
incurred related to:
Current claim year..... 47,211,542 45,843,093 31,904,950
Prior claim years...... (427,390) (290,547) (746,024)
----------- ----------- -----------
Total............... 46,784,152 45,552,546 31,158,926
----------- ----------- -----------
Deduct-paid losses
attributable to:
Current claim year..... 43,514,155 40,767,738 27,024,981
Prior claim years...... 3,938,576 4,812,150 2,997,089
----------- ----------- -----------
Total............... 47,452,731 45,579,888 30,022,070
Ending balance in reserves
for losses................ $ 4,725,239 $ 5,393,818 $ 5,421,160
=========== =========== ===========
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The following table analyzes the development of losses and loss adjustment
expenses from January 1, 1994 through December 31, 1999.
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid
claims and claims
adjustment expense $2,660,270 $3,480,334 $4,284,304 $5,421,160 $5,393,818 $4,725,239
========== ========== ========== ========== ========== ==========
Paid (cumulative) in
subsequent year(s) $2,149,200 $2,903,588 $2,997,089 $4,812,150 3,938,576
Estimated unpaid
liability as of
year end* 401,910 534,495 541,191 318,463 1,027,852
---------- ---------- ---------- ---------- ----------
Cumulative Redundancy $ 109,160 $ 42,251 $ 746,024 $ 290,547 $ 427,390
========== ========== ========== ========== ==========
</TABLE>
*/ 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.
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The table shows initial estimated reserves at December 31, 1999, 1998, 1997,
1996, 1995, and 1994 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.
Effective February 8, 2000, the Company entered into an investment management
agreement with BlackRock International, Ltd. ("BlackRock") pursuant to which
BlackRock manages the investment and reinvestment of the Company's fixed income
portfolio in accordance with the Company's investment guidelines. BlackRock is a
subsidiary of BlackRock, Inc. which had approximately $164.5 billion of assets
under management as of December 31, 1999. BlackRock, Inc. manages assets on
behalf of more than 3,000 institutions and 150,000 individuals through a variety
of equity, fixed income, liquidity and
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alternative investment, and mutual fund products. Under the terms of the
investment management agreement, BlackRock charges a management fee calculated
as a percentage of the net asset value of the Company's portfolio managed by
BlackRock. The applicable percentage is based on the aggregate amount of assets
managed by BlackRock on behalf of the Company and certain other related
entities. The applicable percentage is tiered on the first $50 million of assets
under management on behalf of the foregoing entities and lower on all assets in
excess of $50 million. Prior to the effective date of the Company's agreement
with BlackRock, the Company's fixed income portfolio was managed by Rothschild
Asset Management Limited ("Rothschild").
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. In February of 2000, the Company began implementing new investment
guidelines for its fixed income portfolio. Under these guidelines, the Company
is permitted to invest in U.S. Treasury and agency securities, agency and non
agency mortgage backed securities, obligations or domestic and foreign
corporations, asset-backed securities, taxable municipal securities and money
market instruments. In addition to these fixed income securities, pursuant to a
plan adopted in early 1999, the Company may invest a portion of its investment
portfolio in equity securities provided that the portion of the Company's
investment portfolio consisting of equity securities may not exceed 30%.
Under the investment guidelines for fixed income securities in effect prior to
the implementation of the new investment guidelines, the Company had invested
primarily in U.S. dollar-denominated securities issued outside of the United
States by non-United States private or governmental issuers, U.S.
dollar-denominated back certificates of deposit issued by foreign banks and
foreign
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branches of U.S. banks, and, in certain situations, non-U.S. dollar denominated
bonds, on a fully currency-hedged basis. It is anticipated that the Company's
fixed income investment portfolio will not be completely converted to
investments permitted under the new guidelines until the latter half of 2000.
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.
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
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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.
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(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 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 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
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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
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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
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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.
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(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, 1999, $3,519,136 of net
underwriting losses and $671,587 of administrative expenses were allocated among
the series of Shares outstanding during the year ended December 31, 1999, and
$655,755 of net investment income was allocated among such series of Shares and
the Common Stock.
As of December 31, 1999, 165 series of Shares outstanding had balances greater
than or equal to $7,500 (ranging from $7,641 to $389,764) and 101 of such
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series had balances less than $7,500 (ranging from $7,399 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, 1999, an
aggregate of $4,201,365 had been advanced from the Restricted Earned Surplus
(which forms a portion of the Account established for the Common Stock owned by
MIC) to 123 Subsidiary Capital Accounts and remained outstanding at that date
including net deficits of $2,901,638 associated with 51 series of Shares that
have been redeemed. As of December 31, 1999, $6,226,105 of aggregate deficits
has been reallocated among the Subsidiary Capital Accounts of the Shares and
remained outstanding. Of this amount $5,528,657 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.
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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 experienced by MIC and its affiliates
in competing with those other insurers.
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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
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Shares at each calendar month end. For the year ended December 31, 1999, the
Company incurred fees payable to the Manager in the amount of $237,360.
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 fourteen 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.
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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
One Financial Place, Collymore Rock, 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.
<PAGE>
PAGE 23
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, 1999.
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, 2000
there were 473 holders of Shares of record, representing 266 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
1999, February of 1998 and March of 1997, the Company declared dividends of
$4,066,464, $5,171,956 and $4,196,730 respectively. These dividends were
declared as a varying percentage of earned surplus attributable
<PAGE>
PAGE 24
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, 1999,
1998, 1997, 1996 and 1995 have been derived from financial statements audited by
Deloitte & Touche, independent chartered accountants, whose report with respect
to their audits of the financial statements as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 is included
elsewhere herein.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Premiums Assumed $ 67,104,475 $ 72,634,160 $ 57,071,313 $ 47,410,037 $ 44,084,952
Premiums Returned $ 24,934,234 $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============ ============
Premiums Earned $ 58,471,950 $ 57,845,674 $ 45,701,595 $ 36,077,699 $ 28,800,689
Net Investment
Income 655,755 10,375,464 5,704,678 5,341,924 5,563,573
------------ ------------ ------------ ------------ ------------
Total Income 59,127,705 68,221,138 51,406,273 41,419,623 34,364,262
Less Losses and
Expenses 62,662,673 61,027,782 43,503,363 33,965,100 27,462,338
------------ ------------ ------------ ------------ ------------
Net (Loss) Income* (3,534,968) $ 7,193,356 $ 7,902,910 $ 7,454,523 $ 6,901,924
Dividends Per
Common Share 0 0 0 0 0
Total Assets $132,504,762 $139,428,183 $123,065,286 $106,041,164 $ 91,526,976
Total Policy
Reserves and
Other Liabilities 117,281,645 115,902,615 100,999,317 88,479,590 76,350,313
Stockholders'
Equity 15,223,117 23,525,568 22,065,969 17,561,574 15,176,663
Dividends Paid on
Participating
Shares 4,066,464 5,171,956 4,196,730 4,007,483 1,188,614
</TABLE>
*/ 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.
<PAGE>
PAGE 25
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. The Company believes that such funds will be sufficient to meet
its liquidity requirements in 2000 and in future years to which its reinsurance
liabilities extend. No capital expenditures are expected during the next few
years.
<PAGE>
PAGE 26
The Company had unearned premium reserves of $93,941,365 as of December 31,
1999, and $110,243,074 as of December 31, 1998. 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. The decrease in the
amount of the unearned premium reserves in 1999 compared to 1998 is primarily
attributable to the Recapture which is discussed in more detail below under
"Results of Operations."
Capital Resources. Capitalization of the Company, as of December 31, 1999, was
comprised of paid-in capital with respect to the Common Stock of $200,000,
paid-in capital with respect to the Shares of $1,995,000 (compared with
$2,362,500 and $2,115,000 as of December 31, 1998 and 1997, respectively), and
earnings retained for use in the business of $13,190,576. The reduction in the
amount of paid-in capital with respect to the Shares as of December 31, 1999
compared with December 31, 1998 and 1997 is primarily attributable to the
Redemption and Recapture discussed below under "Results of Operations."
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
<PAGE>
PAGE 27
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,
2000, the Company's required minimum net assets computed in accordance with
Barbados law was approximately $6,347,195, compared to total capital and
retained earnings computed for purpose of Barbados law of $15,385,576.
Results of Operations. During the year ended December 31, 1999, the Company had
net losses of $3,534,968 compared to net income of $7,193,356 and $7,902,910 for
the years ended December 31, 1998 and 1997, respectively. As described below,
the decrease in net income during 1999 compared to the previous year was
primarily as a result of increases in underwriting losses incurred and decreases
in investment income. The decrease in net income in 1998 compared to 1997 arose
from increases in underwriting losses incurred which were partially offset by
increases in investment income.
The Company had a net underwriting loss of $4,190,723 in 1999 compared to net
underwriting loss of $3,182,108 in 1998 and net underwriting income of
$2,198,232 in 1997. During 1999, the Company earned premiums of $58,471,950
compared to $57,845,674 and $45,701,595 during 1998 and 1997, respectively.
Premium income increased as a result of the issuance of additional series of
Shares during the year ended December 31, 1999, and the continuing flow of
reinsurance premiums from series issued in prior years, although this increase
was offset, in part, by the Recapture as discussed below. During 1999, the
Company issued 2 new series of Shares and redeemed 51 series of Shares (of which
37 were attributable to the Recapture) for a net decrease of 49 series. There
were a total of 266 series outstanding at December 31, 1999 compared to
<PAGE>
PAGE 28
315 and 282 series of Shares outstanding at December 31, 1998 and 1997,
respectively.
The Company incurred losses and administrative expenses during the year ended
December 31, 1999 of $62,662,673 compared with $61,027,782 and $43,503,363 for
the years ended December 31, 1998 and 1997, respectively. Expenses in 1999 were
comprised of losses paid and provisions for losses incurred of $46,784,152,
ceding commissions and excise taxes of $15,206,934 and operating expenses of
$671,587. Losses incurred in 1998 and 1997 were $45,552,545 and $31,118,622,
respectively. The loss ratio for the year ended December 31, 1999 was 80%
compared to 78.8% and 68.1% for the years ended December 31, 1998 and 1997,
respectively.
As a result of its adverse underwriting results, the Company, working with MIC,
took steps during 1999 to improve its underwriting performance. During 1999, the
Company's 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 (the "Redemption"). Because the subsidiary capital account for these
series had a balance of zero, the redemption price for the Shares was zero.
In addition to the Redemption, MIC agreed to commute the unearned premium and
all unpaid losses as of the end of the second quarter of 1999 that were
attributable to 37 series of Shares that, as discussed below, the Board voted to
redeem (the "Recapture"). In exchange for assuming these unearned premium and
unpaid loss reserves, the Company agreed to pay $19,660,649 to MIC, which amount
represented the unearned premium and unpaid losses as of June 30, 1999 that were
attributable to the commuted business (after offset by the 25%
<PAGE>
PAGE 29
ceding commission and 1% federal excise taxes previously paid by the Company
with respect to the recaptured business). If MIC had not recaptured this
business from the Company, the Company would have experienced materially larger
underwriting losses and a higher loss ratio for the year ended December 31,
1999.
Notwithstanding the Redemption and the Recapture, there can be no assurances
that the Company will not continue to experience significant adverse
underwriting results. In addition, there can be no assurances that MIC would
recapture additional business from the Company if the Company does experience
significant adverse underwriting results in the future.
In addition to the Redemption and Recapture, the Company continues to work with
MIC to evaluate ways for improving its underwriting performance. MIC continues
to contact unprofitable accounts and implement procedures to discontinue ceding
new business into the Company with respect to such accounts. Additionally, MIC
continues to place claims adjusters at some unprofitable accounts. Furthermore,
claim approval empowerment levels have been significantly reduced or eliminated.
The Company incurred operating expenses during the year ended December 31, 1999
of $671,587 compared to $555,321 and $503,020 for the years ended December 31,
1998 and 1997, respectively, which amounts do not include expenses paid directly
by MIC. MIC has agreed to pay directly certain such costs relating to
registering and issuing shares if such costs can not be allocated to the
Subsidiary Capital Account for the Common Stock. In 1999 $141,697 of such costs
were paid directly by MIC compared to $69,280 and $77,329 for the years ended
December 31, 1998 and 1997, respectively.
<PAGE>
PAGE 30
Investment income in 1999 was $655,755 compared to $10,375,464 and $5,704,678
for the years ended December 31, 1998 and 1997, respectively. The decrease in
investment income during 1999 arose primarily as a result of realized losses on
sales of investment securities as Rothschild, the prior investment manager,
attempted to minimize the impact of increasing interest rates.
The increase in investment income during 1998 compared to 1997 arose primarily
as a result of increased sales of investment securities to take advantage of
market opportunities presented by uncertainty in the U.S. dollar denominated
international equity markets.
The sale of investment securities for the year ended December 31, 1999 resulted
in realized losses of $5,255,474 compared to realized gains of $4,404,651 and
$750,923 for the years ended December 31, 1998 and 1997, respectively. Interest
earned for the year ended December 31, 1999 was $5,911,229 compared to
$5,970,813 and $4,953,755 for the years ended December 31, 1998 and 1997,
respectively. Interest earned during 1999 compared to 1998 was largely unchanged
as a result of very little change in the amount of assets under management or
their coupon rates. The increase in interest earned during 1998 compared to 1997
was largely a result of an increase in the amount of assets under management
combined with a slight increase in the overall rate of return.
Unrealized losses on investment securities held at December 31, 1999 was
$162,459 compared to unrealized gains at December 31, 1998 of $334,059. The
decrease in unrealized gains as of December 31, 1999 compared to December 31,
1998 resulted primarily from the continued poor performance of the fixed income
markets and the related decline in market value of the fixed income
<PAGE>
PAGE 31
portfolio which was offset, in part, by the increase in market value of the
Company's investment in the equity fund.
At December 31, 1999 approximately 10% of the Company's investment portfolio was
in a U.S. dollar denominated international equity fund and the remaining 90% was
invested in U.S. dollar denominated fixed-income securities. At December 31,
1998, 100% of the Company's investment portfolio was in U.S.
dollar denominated fixed income securities.
As a result of the investment return experienced by the Company, during 1999,
the Company's Board of Directors appointed BlackRock to replace Rothschild as
the investment manager of the Company's fixed income portfolio and the Board
adopted new investment guidelines for the portfolio. (See "Item 1. BUSINESS
INVESTMENT INCOME.")
Pursuant to the Retrocession Agreement, the Company must furnish to MIC
collateral in the form of an irrevocable letter of credit of at least 12 months
duration equal in amount to the unearned premium in respect of risks retroceded
and unpaid loss reserves (including reserves for losses incurred but not
reported) otherwise required to be maintained by MIC in respect of the Policies.
As of December 31, 1999, the Company had furnished such a letter of credit in
the amount of $90,000,000.
Year 2000
The Company does not separately own or license any computers or computer
software applications. Accordingly, the Company had minimal exposure with
respect to the transition to Year 2000 on its computerized systems and
microprocessors. During 1999 the Company completed communications and
assessments with the Manager and other service and technology providers,
<PAGE>
PAGE 32
including those on which the Company is dependent, to ensure adequacy with the
transition to Year 2000. Also during 1999, MIC successfully completed its
assessment and remediation project to address the Year 2000.
To date, the Company has not experienced any material adverse effects on its
business, results of operations or financial condition as a result of the Year
2000 Issue. Furthermore, because the Company does not own or licence any
computers or computer software applications, it did not incur any expenses with
respect to remediation of Year 2000.
The Company will continue to monitor its own operations, and the operations of
third parties that are critical to the Company's operations, for potential year
2000-related problems. However, the Company does not anticipate that it will
discover any future Year 2000 issues that will have a material effect on its
business, results of operations, or financial condition.
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 1997, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("FASB") No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Under this statement all items required to be recognized under accounting
standards as components of comprehensive income must be reported in
<PAGE>
PAGE 33
a financial statement that is displayed with the same prominence as other
financial statements. The Company has adopted this accounting standard in 1998.
Adopting the accounting standard has no impact on reported net income of the
Company.
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.
Market Risk
The Company is exposed to market risk from changes in interest rates, foreign
currency exchange rates, and certain equity security prices. Market risk is
inherent to all financial instruments. Active management of market risk is
integral to the Company's operations which seeks to manage its exposure to
market risk generally by monitoring the character of investments that are
purchased or sold.
A discussion of the Company's accounting policies for derivative instruments is
included in Note 3 to the consolidated financial statements included herein.
<PAGE>
PAGE 34
The following analyses are based on sensitivity analysis tests that assume
instantaneous, parallel shifts in exchange rates, interest rates, and interest
rate yield curves. There are shortcomings inherent to the sensitivity analyses
presented. The model assumes interest rate changes are instantaneous, parallel
shifts in the yield curve. In reality, changes are rarely instantaneous or
parallel. Although certain assets may have similar maturities or periods to
repricing, they may not react correspondingly to changes in market interest
rates. Also, the interest rates on certain types of assets may fluctuate with
changes in market interest rates, while interest rates on other types of assets
may lag behind changes in market rates. The Company does not hold any financial
instruments for trading purposes.
Interest Rate Risk. The Company has exposure to economic losses due to interest
rate risk arising from changes in the level or volatility of interest rates and
attempts to mitigate that exposure through active portfolio management. The
Company's investment guidelines do not permit the use of derivatives in managing
interest rate risk. As of December 31, 1999 and 1998, the net fair value asset
exposure to interest rate risk was approximately $93.9 million and $89.5
million, respectively. As of December 31, 1999 and 1998, the potential loss in
fair value resulting from a hypothetical 10% increase in interest rates would be
approximately $2.1 million and $2.1 million, respectively.
Foreign Exchange Risk. Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the value of
financial instruments. At December 31, 1999 and 1998, 100% of investments were
denominated in U.S. dollars.
<PAGE>
PAGE 35
Equity Price Risk. Equity price risk results from changes in the level or
volatility of equity prices which affect the value of equity securities. At
December 31, 1999, the Company had approximately 10% of its portfolio invested
in an international equity fund. Prior to 1999, the Company had no investments
in equity securities. As of December 31, 1999, the net fair value asset exposure
to equity price risk was approximately $11.8 million, and the potential gain in
fair value resulting from a hypothetical 10% increase in the underlying equity
prices would be approximately $1.2 million.
Overall Limitations and Forward-Looking Statements
The Company has developed fair value estimates by utilization of available
market information or other appropriate valuation methodologies. However,
considerable judgement is required in interpreting market data to develop
estimates of fair value; therefore, the estimates are not necessarily indicative
of the amounts that could be realized or would be paid in a current market
exchange. The effect of using different market assumptions and/or estimation
methodologies may be material to the estimated fair market value amounts. In
addition, the above discussion and the estimated amounts generated from the
sensitivity analyses referred to above include forward- looking statements of
market risk which assume, for analytical purposes, that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted previously are the result of analyses
used for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should be considered projections of
future events or losses.
<PAGE>
PAGE 36
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
1. Independent Auditors' Report................... 38
2. Balance Sheets, December 31, 1999 and 1998..... 39
3. Statements of Income and Retained Earnings
for the years ended December 31, 1999,
1998 and 1997 ............................... 40
4. Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ............ 41
5. Statement of Changes in Shareholders Equity
for the years ended December 31, 1999,
1998 and 1997 ............................. 42 - 43
6. Notes to Financial Statements.................. 44 - 52
<PAGE>
PAGE 37
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Motors Mechanical Reinsurance Company, Limited
One Financial Place
Collymore Rock
St. Michael, Barbados
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance
Company, Limited as of December 31, 1999 and 1998 and the related statements of
(loss)\income and retained earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America.
s/DELOITTE & TOUCHE
CHARTERED ACCOUNTANTS
Bridgetown, Barbados
February 22, 2000
<PAGE>
PAGE 38
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Expressed in U.S. Dollars)
Notes 1999 1998
----- ------------ ------------
<S> <C> <C> <C>
ASSETS
Investments 3,7 79,184,187 89,474,377
Cash & cash equivalents 7 26,602,226 19,504,563
Accrued investment income 2,253,779 1,788,490
Deferred acquisition costs 24,418,570 28,660,753
Prepaid expenses 46,000 0
------------ ------------
Total Assets 132,504,762 139,428,183
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums 93,941,365 110,243,074
Reserves for unpaid losses 4 4,725,239 5,393,818
Accrued liabilities 276,116 150,056
Due to Motors Insurance Corporation 18,338,925 115,667
------------ ------------
Total Liabilities 117,281,645 115,902,615
------------ ------------
COMMITMENTS AND CONTINGENCIES 7
STOCKHOLDERS' EQUITY 5
Share Capital
Common stock - no par value;
Authorised - 2,000 shares;
Issued and outstanding -
2000 shares 200,000 200,000
Participating stock - no par value;
Authorised - 100,000 shares;
Issued and outstanding -
26,600 shares at December 31, 1999
And 31,500 shares at December 31,
1998 1,995,000 2,362,500
------------ ------------
2,195,000 2,562,500
Retained earnings 13,190,576 20,629,009
Accumulated other comprehensive (loss)/income (162,459) 334,059
------------ ------------
Total Stockholders' Equity 15,223,117 23,525,568
------------ ------------
Total Liabilities and
Stockholders' Equity $132,504,762 $139,428,183
============ ============
</TABLE>
The accompanying notes form an integral part of these financial statements.
<PAGE>
PAGE 39
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF (LOSS)/INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Years Ended December 31
----------------------------------------------
Notes 1999 1998 1997
----- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME
Reinsurance premiums
assumed 6 $ 67,104,475 $ 72,634,160 $ 57,071,313
Recapture of unearned reinsurance
premiums 9 (24,934,234) 0 0
Decrease/(Increase) in unearned
premiums 16,301,709 (14,788,486) (11,369,718)
------------ ------------ ------------
Premiums earned 58,471,950 57,845,674 45,701,595
------------ ------------ ------------
Investment income
Interest earned 5,911,229 5,970,813 4,953,755
Realized (losses)/gains
on investments - net (5,255,474) 4,404,651 750,923
------------ ------------ ------------
Investment income 655,755 10,375,464 5,704,678
------------ ------------ ------------
TOTAL INCOME 59,127,705 68,221,138 51,406,273
------------ ------------ ------------
EXPENSES
Acquisition costs 15,206,934 14,919,916 11,881,721
Losses paid 47,452,731 45,579,887 29,981,766
(Decrease)/Increase in loss
reserves (668,579) (27,342) 1,136,856
Administrative expenses
Related Parties 252,299 225,922 219,760
Other 419,288 329,399 283,260
------------ ------------ ------------
TOTAL EXPENSES 62,662,673 61,027,782 43,503,363
------------ ------------ ------------
NET (LOSS)/INCOME FOR THE YEAR (3,534,968) 7,193,356 7,902,910
RETAINED EARNINGS,
beginning of year 20,629,009 18,615,768 14,913,053
LESS: DIVIDENDS (4,066,464) (5,171,956) (4,196,730)
ADD/(DEDUCT) REDEMPTION OF
PARTICIPATING STOCK 162,999 (8,159) (3,465)
------------ ------------ ------------
RETAINED EARNINGS, end of year $ 13,190,576 $ 20,629,009 $ 18,615,768
============ ============ ============
</TABLE>
The accompanying notes form an integral part of these financial statements.
<PAGE>
PAGE 40
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. dollars)
Years Ended December 31
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance premiums collected $ 54,936,354 $ 67,293,382 $ 57,014,145
Losses and acquisition expenses paid (52,963,826) (58,004,044) (42,436,530)
Administrative expenses paid (672,060) (581,648) (502,230)
Investment income received 5,529,962 7,369,361 3,229,000
------------ ------------ ------------
Net cash provided by operating
activities 6,830,430 16,077,051 17,304,385
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (396,939,849) (324,678,378) (318,139,315)
Sales and maturities of investments 401,478,047 327,393,023 297,544,335
------------ ------------ ------------
Net cash from/(used in) investing
activities 4,538,198 2,714,645 (20,594,980)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Participating Stock 15,000 277,500 217,500
Redemption of Participating Stock (219,501) (38,159) (10,965)
Dividends paid (4,066,464) (5,171,956) (4,196,730)
------------ ------------ ------------
Net cash used in financing activities (4,270,965) (4,932,615) (3,990,195)
------------ ------------ ------------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 7,097,663 13,859,081 (7,280,790)
CASH AND CASH EQUIVALENTS, beginning
of year 19,504,563 5,645,482 12,926,272
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year $ 26,602,226 $ 19,504,563 $ 5,645,482
============ ============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net (loss)/income $ (3,534,968) $ 7,193,356 $ 7,902,910
Realised losses/(gains) on
investments 5,255,474 (4,404,651) (750,923)
Change in:
Accrued investment income (465,289) 1,389,956 (1,724,755)
Deferred acquisition costs 4,242,183 (3,846,835) (2,958,711)
Prepaid expenses (46,000) 0 0
Unearned premiums (16,301,709) 14,788,486 11,369,718
Loss reserves (668,579) (27,342) 1,136,856
Accrued liabilities 126,060 26,487 13,153
Due to Motors Insurance
Corporation 18,223,258 957,594 2,316,137
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 6,830,430 $ 16,077,051 $ 17,304,385
============ ============ ============
</TABLE>
The accompanying notes form an integral part of these financial statements.
<PAGE>
PAGE 41
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
December 31, 1999
-------------------------------------------------------------------------------------
Total Accumulated
Shareholders' Other
Participating Comprehensive Retained Comprehensive Common Participating
Equity Loss Earnings (Loss)\Income Stock Stock
------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $23,525,568 $ - $20,629,009 $ 334,059 $ 200,000 $2,362,500
Comprehensive Income:
Net income (3,534,968) (3,534,968) (3,534,968) - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities (496,518) (496,518) - (496,518) - -
-----------
Comprehensive income - $(4,031,486) - - - -
===========
Dividends declared on participating
stock (4,066,464) (4,066,464) - - -
Participating Stock
Issued 15,000 - - - 15,000
Redeemed (219,501) 162,999 - - (382,500)
----------- ----------- ----------- ----------- ----------
Balance at December 31, 1999 $15,223,117 $13,190,576 $ (162,459) $ 200,000 $1,995,000
=========== =========== =========== =========== ==========
Disclosure of reclassification amount
Unrealised holding losses arising
during period (5,751,992)
Add: reclassification adjustment
for losses included in net income 5,255,474
-----------
Net unrealised loss on securities (496,518)
===========
December 31, 1998
-------------------------------------------------------------------------------------
Total Accumulated
Shareholders' Other
Participating Comprehensive Retained Comprehensive Common Participating
Equity Loss Earnings (Loss)\Income Stock Stock
------------- ------------- ----------- ------------- ----------- -------------
Balance at December 31, 1997 $22,065,969 $ - $18,615,768 $ 1,135,201 $ 200,000 $2,115,000
Comprehensive Income:
<PAGE>
PAGE 42
Net income 7,193,356 7,193,356 7,193,356 - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities (801,142) (801,142) - (801,142) - -
-----------
Comprehensive income - $(6,392,214) - - - -
===========
Dividends declared on participating
stock (5,171,956) (5,171,956) - - -
Participating Stock
Issued 285,000 - - - 285,000
Redeemed (45,659) (8,159) - - (37,500)
----------- ----------- ----------- ----------- ----------
Balance at December 31, 1998 $23,525,568 $20,629,009 $ 334,059 $ 200,000 $2,362,500
=========== =========== =========== =========== ==========
Disclosure of reclassification amount
Unrealised holding losses arising
during period 3,603,509
Add: reclassification adjustment
for losses included in net income (4,404,651)
-----------
Net unrealised loss on securities (801,142)
===========
</TABLE>
The accompanying notes form an integral part of these financial statements.
<PAGE>
PAGE 43
<TABLE>
<CAPTION>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
December 31, 1997
-------------------------------------------------------------------------------------
Total Accumulated
Shareholders' Other
Participating Comprehensive Retained Comprehensive Common Participating
Equity Loss Earnings (Loss)\Income Stock Stock
------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $17,561,574 $ - $14,913,053 $ 543,521 $ 200,000 $1,905,000
Comprehensive Income:
Net income 7,902,910 7,902,910 7,902,910 - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities 591,680 591,680 - 591,680 - -
-----------
Comprehensive income - $ 8,494,590 - - - -
===========
Dividends declared on participating
stock (4,196,730) (4,196,730) - - -
Participating Stock
Issued 225,000 - - - 225,000
Redeemed (18,465) (3,465) - - (15,000)
----------- ----------- ----------- ----------- ----------
Balance at December 31, 1997 $22,065,969 $18,615,768 $ 1,135,201 $ 200,000 $2,115,000
=========== =========== =========== =========== ==========
Disclosure of reclassification amount
Unrealised holding losses arising
during period 1,342,603
Add: reclassification adjustment
for losses included in net income (750,923)
-----------
Net unrealised loss on securities 591,680
===========
</TABLE>
The accompanying notes form an integral part of these financial statements.
<PAGE>
PAGE 44
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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 basis of
premiums earned.
<PAGE>
PAGE 45
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Investments
Investments, all of which are available for sale, are comprised of
interest-bearing marketable securities and an investment in an
international equity fund, which are carried at fair value based on quoted
market prices and dealer quotes obtained from an external pricing service.
Investments with original maturities of less than 90 days are classified as
cash equivalents. Unrealised appreciation (depreciation) is included in
accumulated other comprehensive income.
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 and can potentially be significant to the
financial statements.
Derivatives
In June 1998, the Financial Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. It requires that all derivatives be recognized as either assets
or liabilities in the balance sheet and measured at fair value. If certain
conditions are satisfied, a derivative may be designated as a hedge of an
exposure to changes in the value of an asset or liability, variable cash
flows for forecasted transactions, or certain foreign currency exposures.
For derivatives designated as hedging instruments, net income will be
affected by the extent to which the derivative is not effective as a hedge
of the underlying instrument. For derivatives not designated as hedges, the
gain or loss would be recognized in income in the period of change.
Pursuant to Statement No. 137, the effective date of Statement No. 133 was
delayed for one year to fiscal years beginning after June 15, 2000. The
Company has not completed its evaluation of the impact of this statement on
its financial statements upon adoption.
<PAGE>
PAGE 46
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
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 and equity are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised Fair
Cost Appreciation Depreciation Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
December 31, 1999
Foreign governments and
their agencies $18,175,335 $ - $ (799,400) $17,375,935
Corporations 22,951,967 - (637,687) 22,314,280
Supranationals 28,205,097 - (559,927) 27,645,170
----------- ----------- ----------- -----------
Sub Total Debt Securities 69,332,399 - (1,997,014) 67,335,385
Capital International Fund 10,014,247 1,834,555 - 11,848,802
----------- ----------- ----------- -----------
Total $79,346,646 $ 1,834,555 $(1,997,014) $79,184,187
=========== =========== =========== ===========
</TABLE>
<PAGE>
PAGE 47
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd)
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised Fair
Cost Appreciation Depreciation Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
December 31, 1998
Foreign governments and
their agencies $27,522,957 $ 43,649 $(290,075) $27,276,531
Corporations 25,150,984 538,236 (2,142) 25,687,078
Supranationals 36,466,377 154,367 (109,976) 36,510,768
----------- ---------- --------- -----------
Total $89,140,318 $ 736,252 $(402,193) $89,474,377
=========== ========== ========= ===========
</TABLE>
The cost and fair value of debt securities at December 31, 1999, 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 $49,386,022 $47,665,100
Due after five years through ten years 19,946,377 19,670,285
----------- -----------
$69,332,399 $67,335,385
=========== ===========
In 1999, gross gains of $1,571,947 and gross losses of $6,827,421 were
realized. In 1998, gross gains of $6,253,358 and gross losses of $1,848,707
were realized. In 1997, gross gains of $1,494,878 and gross losses of
$743,955 were realized.
The following summarizes net unrealized appreciation (depreciation) on
investments:
Balance, December 31, 1996 $ 543,521
Net appreciation 591,680
-----------
Balance, December 31, 1997 $ 1,135,201
Net depreciation (801,142)
-----------
Balance, December 31, 1998 $ 334,059
Net depreciation (496,518)
-----------
Balance, December 31, 1999 $ (162,459)
===========
<PAGE>
PAGE 48
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd)
The investment portfolio is comprised of approximately 90% in diverse debt
securities which do not result in any concentration of credit risk and 10%
in an international equity fund. At December 31, 1999, 100% of the
Company's investments are denominated in U.S. dollars.
The Company uses forward currency contracts to hedge its exposure to
changes in currency exchange rates relating to its investments denominated
in currencies other than the U.S. dollar. The contracts provide for
settlement in U.S. dollars in the future. Credit risk is managed by dealing
with financially-sound counter parties. Market risk is mitigated because
the forward contracts hedge corresponding non-U.S. dollar investments.
There were no forward contracts outstanding at December 31, 1999 and 1998.
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, 1999, 1998 and 1997:
1999 1998 1997
------ ------ ------
Beginning balance in
reserves for losses $ 5,393,818 $ 5,421,160 $ 4,284,304
----------- ----------- -----------
Add/(deduct)-provision for
losses incurred related to:
Current claim year 47,211,542 45,843,093 31,904,950
Prior claim years (427,390) (290,547) (746,024)
----------- ----------- -----------
Total 46,784,152 45,552,546 31,158,926
----------- ----------- -----------
Deduct paid losses
attributable to:
Current claim year 43,514,155 40,767,738 27,024,981
Prior claim years 3,938,576 4,812,150 2,997,089
----------- ----------- -----------
Total 47,452,731 45,579,888 30,022,070
----------- ----------- -----------
Ending balance in
reserves for losses $ 4,725,239 $ 5,393,818 $ 5,421,160
=========== =========== ===========
<PAGE>
PAGE 49
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 4. RESERVES FOR UNPAID LOSSES (Cont'd)
As a result of change in estimates of losses incurred in prior years, the
provisions for losses incurred in 1999, 1998 and 1997 decreased by 427,390,
$290,547 and $746,024 respectively.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC. The Company is preparing
to file a prospectus offering a further 90 series of 100 shares at a price
of $75 per share.
During 1999, 2 additional series of 100 shares of Participating Stock were
issued as compared with 37 for the year ended December 31, 1998. In
addition, in 1999 the Board of Directors redeemed 14 series of 100 shares
of which 7 series had been previously placed in run off and had reached a
fully earned position during 1999 and 7 were redeemed for nil value. The
Board of Directors also redeemed 37 series of 100 shares for nil value and
thereafter, MIC recaptured the unearned premium and loss reserves for those
series. (See Note 9).
In the years ended December 31, 1999, 1998 and 1997, costs in the amount of
$141,696, $69,280 and $77,239 respectively, were incurred in the sale of
Participating Stock. The Common Stockholder reimbursed the Company directly
for these expenses.
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.
<PAGE>
PAGE 50
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 5. STOCKHOLDERS' EQUITY (Cont'd)
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, 1999,
there were $7,500 in funds held in escrow.
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the Company will assume
additional cessions of $31,313,788 ($36,747,691 at December 31, 1998)
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 $90,000,000 to collateralize the amounts recoverable from the
Company related to the business ceded to it. Cash equivalents and certain
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.
<PAGE>
PAGE 51
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 8. RETAINED EARNINGS (Cont'd)
Barbados law requires that the Company maintain a minimum margin of
solvency based generally on the amount of premiums earned in the preceding
year. At January 1, 2000, the Company's required minimum stockholders'
equity computed in accordance with Barbados law was approximately
$6,347,195.
Retained earnings applicable to the Common and Participating Stockholders
are comprised of the following:
Common Participating Total
------ ------------- -----
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 (29,879) 29,879 0
Dividends paid 0 (4,196,730) (4,196,730)
Redemption of participating
stock 0 (3,465) (3,465)
----------- ----------- -----------
Balance (Deficit),
December 31, 1997 $ (8,158) $18,623,926 $18,615,768
Net income for the year 20,970 7,172,386 7,193,356
Dividends paid 0 (5,171,956) (5,171,956)
Redemption of participating
stock 0 (8,159) (8,159)
----------- ----------- -----------
Balance,
December 31, 1998 $ 12,812 $20,616,197 $20,629,009
Net income\(loss) for the year 1,422 (3,536,390) (3,534,968)
Dividends paid 0 (4,066,464) (4,066,464)
Redemption of participating
stock 0 162,999 162,999
----------- ----------- -----------
Balance,
December 31, 1999 $ 14,234 $13,176,342 $13,190,576
=========== =========== ===========
<PAGE>
PAGE 52
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 9. RECAPTURE OF UNEARNED REINSURANCE PREMIUMS
During 1999, The Company entered into a recapture agreement with MIC for 37
series of Participating Shares, and to pay MIC a recapture premium of
$24,934,234, which represents unearned premiums and an amount equal to
$1,209,316 for losses incurred but unpaid in respect to the recapture
business as of June 30, 1999. Additionally, MIC has agreed to pay the
Company a recapture commission of $6,482,901 which represents the deferred
portion of the ceding commission previously paid by the Company.
<PAGE>
PAGE 53
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 April
22, 1999 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............ 57 Chairman, Chief Executive Officer, President
and Director (President, Motors Insurance
Corporation ("MIC"), 1999; Executive Vice-
President & Chief Financial Officer, MIC,
1993-1999).
Mr. Noll became President and Director in
1995.
Thomas D. Callahan ........ 47 Executive Vice-President and Director
(Senior Vice-President, MIC, 1998; Vice-
President, MIC, 1994-1998).
Mr. Callahan became Executive Vice-President
and Director in April of 1999.
John J. Dunn, Jr........... 41 Vice-President and Director (Vice-President
and Treasurer, MIC, 1998; Assistant
Treasurer, MIC, 1995-1998; manager, Coopers
& Lybrand, L.L.P.).
Mr. Dunn became Vice-President and
Director in 1996.
Robert E. Capstack ........ 59 Vice-President and Director (Section Manager,
MIC, 1994; Vice-President, GMAC Securities
Corporation, 1999).
Mr. Capstack became Vice-President and
Director in April of 1999.
<PAGE>
PAGE 54
Peter R. P. Evelyn ....... 58 Director (Attorney, Evelyn, Gittens & Farmer,
a Barbados law firm).
Mr. Evelyn became a Director in 1986.
Diane Sauer .............. 45 Director (Martin Chevrolet, Warren, Ohio).
Ms. Sauer became a Director in April of 1999.
Ronald W. Jones .......... 47 Vice-President, Finance (Managing Director,
Aon Insurance Managers (Barbados) Ltd.).
Mr. Jones has served as Vice-President,
Finance since 1987.
Michael B. Boyce.......... 60 Secretary (Principal, Colybrand Company
Services, Limited, Barbados, since 1993;
previously principal, Price Waterhouse,
Eastern Caribbean).
Mr. Boyce was elected Secretary in 1994.
Mr. Boyce served previously as our Assistant
Secretary.
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.
<PAGE>
PAGE 55
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. Diane Sauer, 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, 1999 and 1998.
(iii) Statements of Income and Retained Earnings for the years
ended December 31, 1999, 1998 and 1997.
(iv) Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
(v) Statement of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
(vi) 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):
<PAGE>
PAGE 56
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
BlackRock International, Ltd.
20(a) Proxy solicitation materials sent to shareholders in
connection with annual meeting held on April 22, 1999, 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.
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.
<PAGE>
PAGE 57
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, 1999 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 29, 2000
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 28, 2000
- ------------------------- Officer, President and
William B. Noll Director
s/Thomas D. Callahan Executive Vice-President and March 28, 2000
- ------------------------- Director
Thomas D. Callahan
s/John J. Dunn, Jr. Vice-President and March 28, 2000
- ------------------------- Director
John J. Dunn, Jr.
s/Robert E. Capstack Vice-President and March 28, 2000
- ------------------------- Director
Robert E. Capstack
Director , 2000
- -------------------------
Diane Sauer
s/Peter R. P. Evelyn Director March 29, 2000
- -------------------------
Peter R. P. Evelyn
s/Ronald W. Jones Vice-President March 29, 2000
- ------------------------- Finance, Principal
Ronald W. Jones Financial and
Accounting Officer
<PAGE>
PAGE 58
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 subsequent to the
filing of this report, proxy solicitation materials will be sent to shareholders
in connection with an annual meeting to be held May 10th, 2000.
INVESTMENT MANAGER AGREEMENT
by and between
Motors Mechanical Reinsurance Company, Limited
and
BlackRock International, Ltd.
<PAGE>
INVESTMENT MANAGER AGREEMENT
THIS AGREEMENT, made as of the 8th day of February, 2000, by and between
Motors Mechanical Reinsurance Company, Limited (hereinafter called the
"Company") and BlackRock International, Ltd. (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Company has all requisite authority to appoint one or more
investment managers to supervise and direct the investment and reinvestment of a
portion of all of the assets of the Company;
THEREFORE, for and in consideration of the premises and of the mutual
covenants herein contained, the parties hereby agree as follows:
1. Appointment and Status as Investment Manager; Delegation of Duties. The
Company hereby appoints the Manager as an "Investment Manager." The Manager does
hereby accept said appointment by its execution of this Agreement. The Manager
does also acknowledge that it is a fiduciary with respect to the assets under
management and assumes the duties, responsibilities and obligations of a
fiduciary. The Company acknowledges that some or all of the Manager's rights and
obligations under this Agreement, including its appointment as investment
manager to the Company, may be delegated by the Manager to BlackRock Financial
Management, Inc.
2. Representations by Company. The Company represents and warrants that (a) it
has all requisite authority to appoint the Manager hereunder, (b) the terms of
the Agreement do not conflict with any obligation by which the Company is bound,
whether arising by contract, operation of law or otherwise and (c) this
Agreement has been duly authorized by appropriate corporate action.
3. Management Services. The Manager shall be responsible for the investment and
reinvestment of those assets designated by the Company as subject to the
Manager's management (which assets, together with all additions, substitutions
and alterations thereto are hereinafter called the "Account"). The Account may
include all securities and instruments described in Exhibit A or appropriate to
effect the strategies described therein. The Company does hereby delegate to the
Manager all of its powers, duties and responsibilities with regard to such
investment and reinvestment and hereby appoints the Manager as its agent in fact
with full authority to buy, sell or otherwise effect investment transactions
involving the assets in its name and for the Account. Said powers, duties and
responsibilities shall be exercised exclusively by the Manager pursuant to and
in accordance with its fiduciary responsibilities and the provisions of this
Agreement. In deciding on a proper investment of the Account, the Manager shall
consider the following factors as communicated in writing to the Manager by the
Company from time to time: a) the Company's financial needs such as liquidity,
b) applicable laws, and c) the Account's Investment Guidelines attached as
Exhibit A. In addition, in accordance with the Manager's guidelines in effect
from time to time, the Manager or its agent is authorized, but shall not be
required, to vote, tender or convert any securities in the Account; to execute
waivers, consents and other instruments with respect to such securities; to
endorse, transfer or deliver such securities or to consent to any class action,
plan of reorganization, merger, combination, consolidation, liquidation or
similar plan with reference to such securities; and the Manager shall not incur
any liability to the Company
<PAGE>
by reason of any exercise of, or failure to exercise, any such discretion in the
absence of gross negligence or bad faith.
4. Accounting and Reports. The Manager shall furnish the Company with monthly
appraisals of the Account, performance tabulations, a summary of purchases and
sales and such other reports as shall be agreed upon from time to time. The
Manager shall also reconcile accounting, transaction and asset-summary data with
custodian reports in accordance with the Manager's standard procedures. In
addition, the Manager shall communicate and resolve any significant
discrepancies with the custodian.
5. Other Services. The Manager shall, on invitation, attend meetings with
representatives of the Company to discuss the position of the Account and the
immediate investment outlook, or shall submit its views in writing as the
Company shall suggest from time to time.
6. Compensation. For services hereunder, the Manager shall be compensated in
accordance with Exhibit B, attached hereto. If the management of the Account
commences or ends at any time other than the beginning or end of a calendar
quarter, the quarterly fee shall be prorated based on the portion of such
calendar quarter during which this Agreement was in force.
7. Custodian. The securities in the Account shall be held by a custodian duly
appointed by the Company and the Manager is authorized to give instructions to
the custodian with respect to all investment decisions regarding the Account.
Except as provided in Paragraph 3 above, nothing contained herein shall be
deemed to authorize the Manager to take or receive physical possession of any of
the assets for the Account, it being intended that sole responsibility for
safekeeping thereof (in such investments as the Manager may direct) and the
consummation of all purchases, sales, deliveries and investments made pursuant
to the Manager's direction shall rest upon the custodian.
8. Brokerage. The Company hereby delegates to the Manager sole and exclusive
authority to designate the brokers or dealers through whom all purchases and
sales on behalf of the Account will be made. The Manager will determine the rate
or rates, if any, to be paid for brokerage services provided to the Account. The
Manager agrees that securities are to be purchased through such brokers as, in
the Manager's best judgment, shall offer the best combination of price and
execution. The Manager, in seeking to obtain best execution of portfolio
transactions for the Account, may consider the quality and reliability of
brokerage services, as well as research and investment information and other
services provided by brokers or dealers. Accordingly, the Manager's selection of
a broker or dealer for transactions for the Account may take into account such
relevant factors as (i) price, (ii) the broker's or dealer's facilities,
reliability and financial responsibility, (iii) when relevant, the ability of
the broker to effect securities transactions, particularly with regard to such
aspects as timing, order size and execution of the order, (iv) the broker's or
dealer's recordkeeping capabilities and (v) the research and other services
provided by such broker or dealer to the Manager which are expected to enhance
its general portfolio management capabilities (collectively, "Research"),
notwithstanding that the Account may not be the exclusive beneficiary of such
Research.
9. Confidential Information. All information regarding operations and
investments of the Company shall be regarded as confidential by the Manager.
2
<PAGE>
10. Directions to the Manager. All directions by or on behalf of the Company to
the Manager shall be in writing signed by any two of the following:
Name Title
---- -----
Ronald W. Jones Vice President, Finance
Michael R. Boyce Secretary
Peter R.P. Evelyn Director
The Manager shall be fully protected in relying upon any direction in
accordance with the previous paragraph with respect to any instruction,
direction or approval of the Company, and shall be so protected also in relying
upon a certification duly executed on behalf of the Company as to the names of
persons authorized to act for it and in continuing to rely upon such
certification until notified by the Company to the contrary.
The Manager shall be fully protected in acting upon any instrument,
certificate or paper believed by it to be genuine and to be signed or presented
by the proper persons or to any statement reasonably contained in any such
writing and may accept the same as conclusive evidence of the truth and accuracy
of the statements therein contained.
11. Liabilities of the Manager and the Company. The Company acting in good faith
shall not be liable for any act or omission of the Manager in connection with
the Manager's discharge of its duties; provided, however, this limitation shall
not act to relieve the Company from any responsibility or liability for any
fiduciary responsibility, obligation or duty. The Manager, its officers,
directors and employees, acting in good faith shall not be liable, and shall be
indemnified by the Company against any and all losses, damages, costs, expenses
(including reasonable attorneys' fees), liabilities, claims and demands, for any
action, omission, information or recommendation in connection with this
Agreement, except in the case of the Manager's or such officer's, director's or
employee's actual misconduct, gross negligence, willful violation of any
applicable statute or reckless disregard for its duties; provided, however, this
limitation shall not act to relieve the Manager, its officers, directors and
employees from any responsibility or liability for any responsibility,
obligation or duty which the Manager or such officer, director or employee may
have under any applicable securities act.
12. Non-Exclusive Management. The Company understands that the Manager will
continue to furnish investment management and advisory services to others, and
that the Manager shall be at all times free, in its discretion, to make
recommendations to others which may be the same as, or may be different from
those made to the Account. The Company further understands that the Manager, its
affiliates, and any officer, director, stockholder, employee or any member of
their families may or may not have an interest in the securities whose purchase
and sale the Manager may recommend. Actions with respect to securities of the
same kind may be the same as or different from the action which the Manager, or
any of its affiliates, or any officer, director, stockholder, employee or any
member of their families, or other investors may take with respect thereto.
13. Aggregation and Allocation of Orders. The Company acknowledges that
circumstances may arise under which the Manager determines that, while it would
be both desirable and suitable that a particular security or other investment be
purchased or sold for the account of
3
<PAGE>
more than one of the Manager's clients' accounts, there is a limited supply or
demand for the security or other investment. Under such circumstances, the
Company acknowledges that, while the Manager will seek to allocate the
opportunity to purchase or sell that security or other investment among those
accounts on an equitable basis, the Manager shall not be required to assure
equality of treatment among all of its clients (including that the opportunity
to purchase or sell that security or other investment will be proportionally
allocated among those clients according to any particular or predetermined
standards or criteria). Where, because of prevailing market conditions, it is
not possible to obtain the same price or time of execution for all of the
securities or other investments purchased or sold for the Account, the Manager
may average the various prices and charge or credit the Account with the average
price.
14. Conflict of Interest. The Company agrees that the Manager may refrain from
rendering any advice or services concerning securities of companies of which any
of the Manager's, or affiliates of the Manager's officers, directors, or
employees are directors or officers, or companies as to which the Manager or any
of the Manager's affiliates or the officers, directors and employees of any of
them has any substantial economic interest or possesses material non-public
information, unless the Manager either determines in good faith that it may
appropriately do so without disclosing such conflict to the Company or discloses
such conflict to the Company prior to rendering such advice or services with
respect to the Account.
From time to time, when determined by the Manager in its capacity of a
fiduciary to be in the best interest of the Company, the Account may purchase
securities from or sell securities to another account managed by the Manager at
prevailing market levels in accordance with the procedures under Rule 17a-7(b)
of the Investment Company Act of 1940 and other applicable law.
15. Effective Period of Agreement and Amendments. This Agreement shall become
effective on the date hereof. Any amendment to this Agreement shall be written
and signed by both parties to the Agreement.
16. Resignation or Removal of the Manager. The Manager may be removed by the
Company or may resign upon 30 days' notice in writing. On the effective date of
the removal or resignation of the Manager or as close to such date as is
reasonably possible, the Manager shall provide the Company with a final report
containing the same information as required by paragraph 4 above.
17. Assignment. Except as otherwise specifically set forth in this Agreement, no
assignment of this Agreement by the Manager may be made without the consent of
the Company, and any such assignment made without such consent shall be null and
void for all purposes. Subject to the foregoing, this Agreement shall inure to
the benefit of and be binding upon the parties hereto, their successors and
permitted assigns.
18. Severable. Any term or provision of this Agreement which is invalid or
unenforceable in any applicable jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of the
Agreement in any jurisdiction.
19. Applicable Law. This Agreement shall be construed pursuant to, and shall be
governed by, the laws of Scotland.
4
<PAGE>
20. Web-site. The Manager, at the Company's request, will provide access to its
account information electronically, via the world wide web, based upon the
Company's use of a BlackRock issued user id and password. The Company
acknowledges and agrees the world wide web is a continually growing medium and
the Manager does not make any warranty regarding the security related to the
world wide web. The Company must be aware there is no absolute guaranteed system
or technique to fully secure information made available over the web. The
Company agrees that it will not share its user id, password and access to
information provided electronically with any third party.
21. Notices. All notices required or permitted to be sent under this Agreement
shall be sent, if to the Manager:
BlackRock International, Ltd.
7 Castle Street
Edinburgh EH2 3AM Scotland
United Kingdom
Attn: Gordon Anderson, Portfolio Manager
With a copy to:
BlackRock Financial Management, Inc.
345 Park Avenue, 30th Floor
New York, NY 10154
Attention: Robert Connolly, General Counsel
or by facsimile to (212) 409-3744
if to the Company:
One Financial Place
Collymore Rock
St. Michael, Barbados W.I.
or such other name or address as may be given in writing to the other party. All
notices hereunder shall be sufficient if delivered by facsimile, telex, or
overnight mail. Any notices shall be deemed given only upon actual receipt.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
By: s/Ronald W. Jones
---------------------------------
Name: Ronald W. Jones
Title: Vice President, Finance
BLACKROCK INTERNATIONAL, LTD.
By: s/Laurence D. Fink
---------------------------------
Name: Laurence D. Fink
Title: Chairman
6
<PAGE>
Motors Mechanical Reinsurance Company
Investment Guidelines (Exhibit A)
- --------------------------------------------------------------------------------
The Portfolio.......The Motors Mechanical Reinsurance Company Portfolio (the
Portfolio) is a separate account managed by BlackRock
International, Ltd. for the benefit of Motors Mechanical
Reinsurance Company, Limited (the Company).
Investment
Objective...........The Portfolio's investment objective is to provide a total
return that exceeds the total return of the Lehman
Intermediate Aggregate Index (the Index).
Duration
Guidelines..........The Portfolio will be managed to have a targeted duration
within a band of+/-20% around the duration of the Index.
Asset Guidelines....Following are the eligible investments:
(i) U.S. Treasury and agency securities;
(ii) Agency and non-agency mortgage-backed securities backed
by loans secured by residential, multifamily and
commercial properties including, but not limited to
pass-throughs, CMOs, REMICs, SMBS, project loans,
construction loans, and adjustable rate
(iii) obligations of domestic and foreign corporations and
banks, including Yankees and eurobonds;
(iv) asset-backed securities;
(v) taxable municipal securities
(vi) money market instruments
The Portfolio may use futures and/or options for purposes of
yield curve management, maintaining the duration within the
target range and as a substitute for Treasuries.
The Portfolio may purchase private placement or Rule 144A
securities.
Asset Allocation....Except for Treasury or Agency debentures, pass-throughs or
REMICs, no more than 5% of the Portfolio's assets may be
invested in securities of a single issuer.
Credit Criteria.....Securities must be rated investment grade or better by a
nationally recognized credit rating agency at the time of
purchase. Split rated credits will be considered to have the
higher credit rating.
Securities rated BBB or equivalent are limited to 10% of
portfolio net assets.
7
<PAGE>
In the event that a Portfolio investment is downgraded below
these credit quality guidelines, the Investment Manager
shall notify the Company and provide an evaluation and a
recommended course of action.
Money market instruments must be rated A-1 or P-1 or better
at the time of purchase.
Tax Consideration...The Portfolio's assets will not be invested in any
securities or sweep funds that to the knowledge of the
Manager at the time of purchase or investment, are subject
to U.S. withholding tax.
Other Investment
Practices...........Temporary cash balances may be invested by BlackRock in a
money market instrument (A1/P1 or better, less than 390
days) or in a client approved sweep vehicle not subject to
U.S. withholding tax.
The Portfolio may purchase securities on a when-issued basis
or for forward delivery.
The Portfolio may enter into repurchase agreements
collateralized 102% with U.S. Government securities or
mortgage securities as defined above. The maximum term of
these agreements will be 90 days, and the collateral must be
marked-to-market daily.
The Portfolio may enter into covered dollar rolls on
mortgage securities. Covered agreements will be defined as
having similar maturities.
Reinvestment
of Income...........All investment income of the Portfolio and capital gains, if
any, will be added to the assets of the Portfolio, unless
otherwise directed by the Company.
Custodian...........Comerica Bank
8
<PAGE>
Exhibit B
As compensation for rendering services under the Investment Manager Agreement,
the Manager shall be paid a quarterly Management Fee in arrears according to the
Fee Schedule provided below. All assets managed by the Manager for the companies
General Mechanical Reinsurance Company, Limited, Motors Mechanical Reinsurance
Company, Limited and any other related entities, except if otherwise agreed to,
will be consolidated under this Fee Schedule. The Management Fee will be based
on the net asset value of the combined portfolios at the end of each calendar
quarter.
Fee Schedule:
Aggregate Portfolio Net Assets Fee (bps)
- ------------------------------ ---------
First $50 million 25
Assets over $50 million 6.5
9
<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, 1999 and is qualified in its entirety by references
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 79,184,187
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 79,184,187
<CASH> 26,602,226
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,418,570
<TOTAL-ASSETS> 132,504,762
<POLICY-LOSSES> 4,725,239
<UNEARNED-PREMIUMS> 93,941,365
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
200,000
0
<COMMON> 0
<OTHER-SE> 15,023,117
<TOTAL-LIABILITY-AND-EQUITY> 132,504,762
58,471,950
<INVESTMENT-INCOME> 5,911,229
<INVESTMENT-GAINS> (5,255,474)
<OTHER-INCOME> 0
<BENEFITS> 47,452,731
<UNDERWRITING-AMORTIZATION> 15,206,934
<UNDERWRITING-OTHER> 671,587
<INCOME-PRETAX> (3,534,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,534,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,534,968)
<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>
