10-Q 1 form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON. D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarterly period ended March 31, 2003 ----------------------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------- --------- Commission File Number 333-34088 -------------------- Integon Re (Barbados), Limited ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Barbados N/A ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Financial Place, Collymore Rock, St. Michael, Barbados N/A ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (246) 436-4895 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class As of March 31, 2003 ----- -------------------- Common Stock, no par-value 1,000,000 Participating Stock, 600 2 This quarterly report, filed pursuant to Rule 13a-13 of the General Rules and Regulations under the Securities Exchange Act of 1934, consists of the following information as specified in Form 10-Q: Part I. FINANCIAL INFORMATION Item 1. Financial Statements 1. Balance Sheets, March 31, 2003 and December 31, 2002. 2. Statements of Operations and Retained Earnings for the three-month periods ended March 31, 2003 and 2002. 3. Statements of Cash Flows for the three-month periods ended March 31, 2003 and 2002. In the opinion of management, the accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results for the interim periods presented. The information furnished for the three-month ended March 31, 2003 may not be indicative of results for the full year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 3 INTEGON RE (BARBADOS), LIMITED BALANCE SHEETS (Expressed in U.S. Dollars)
March 31, 2003 December 31, 2002 (unaudited) (Audited) ASSETS Cash and cash equivalents 1,475,335 1,261,920 Accrued interest income 0 383 Due from Motors Insurance Corporation 140,313 221,477 Due from common shareholder 110,360 97,784 Deferred costs 139,549 140,982 ---------- ---------- Total Assets $1,865,557 $1,722,546 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums 406,842 398,793 Reserves for unpaid losses 169,584 74,082 ---------- ---------- Total Liabilities 576,426 472,875 ---------- ---------- STOCKHOLDERS' EQUITY Share Capital Common Stock-no par value; Authorized - unlimited shares; issued and outstanding - 1,000,000 shares at March 31, 2003 and December 31, 2002 $1,000,000 $1,000,000 Participating Stock Authorized - unlimited shares; issued and outstanding - 600 shares at March 31, 2003 and December 31, 2002 150,000 150,000 ---------- ---------- 1,150,000 1,150,000 Retained Earnings 139,131 99,671 ---------- ---------- Total Stockholders' Equity 1,289,131 1,249,671 ---------- ---------- Total Liabilities and Stockholders' Equity $1,865,557 $1,722,546 ========== ==========
4 INTEGON RE (BARBADOS), LIMITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) (Expressed in U.S. Dollars) Three Month Periods Ended March 31, 2003 2002 INCOME Reinsurance premiums assumed $ 311,513 $ 0 (Increase)/Decrease in unearned premium (8,049) 0 --------- -------- Premiums earned 303,464 0 --------- -------- INTEREST INCOME 1,996 2,370 --------- -------- TOTAL INCOME 305,460 2,370 --------- -------- EXPENSES Acquisition and other costs 105,399 0 Losses paid 65,099 0 Increase in loss reserves 95,502 0 --------- -------- TOTAL EXPENSES 266,000 0 --------- -------- NET INCOME 39,460 2,370 RETAINED EARNINGS, beginning of period 99,671 76,262 --------- -------- RETAINED EARNINGS, end of period $ 139,131 $ 78,632 ========== ======== 5 INTEGON RE (BARBADOS), LIMITED STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002 UNAUDITED (Expressed in U.S. Dollars)
Three Month Periods Ended March 31, 2003 2002 ----------- ------------- Cash flows from operating activities: Reinsurance premiums received $ 223,612 $ - Administrative expenses paid and recoverable (12,576) (5,339) Interest income received 2,379 2,278 ------------ ------------- Net cash provided by/(used in) operating activities 213,415 (3,061) ------------ ------------- Increase in cash and cash equivalents 213,415 (3,061) Cash and cash equivalents, beginning of period 1,261,920 1,012,372 ------------ ------------- Cash and cash equivalents, end of period $ 1,475,335 $ 1,009,311 ============ ============= Reconciliation of net income to net cash provided by/(used in) operating activities: Net income $ 39,460 $ 2,370 Change in: Accrued interest income 383 (92) Due from Motors Insurance Corporation 81,164 0 Due from common shareholder (12,576) (5,339) Deferred expenses 1,433 0 Unearned premiums 8,049 0 Reserves for unpaid losses 95,502 0 ------------ ------------- Net cash provided by/(used in) operating activities $ 213,415 $ (3,061) ============ =============
6 Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations The Company's 2002 Form 10K should be read in conjunction with the following discussion since they contain important information for evaluating the Company's operating results and financial condition. Critical Accounting Policies During the quarter ended March 31, 2003, the Company made no changes in its critical accounting policies as previously disclosed within the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Liquidity The Company was incorporated on March 20, 2000 and commenced operations during the quarter ended September 30, 2002. Its liquidity requirements relate 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 the Company's Participating Shares, are its principal sources of funds. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2003 and in future years to which its reinsurance liabilities will extend. No capital expenditures are expected during the next few years. Capital Resources The Company's capitalization on March 31, 2003, was $1,289,131 consisting of paid in capital with respect to the Common Stock of $1,000,000 and paid in capital with respect to the Participating Shares of $150,000, and earnings retained for use in its business in the amount of $139,131. The Company's capitalization on December 31, 2002, was $1,249,671 consisting of paid in capital with respect to the Common Stock of $1,000,000 and paid in capital with respect to the Participating shares of $150,000 and earnings retained for use in its business in the amount of $99,671. Barbados insurance law requires that the Company maintain a minimum capitalization of $125,000 and, in addition, that the recorded value of the Company's assets exceed its liabilities by: (a) $125,000 where the Company's earned premium in the preceding financial year did not exceed $750,000; (b) an amount equal to 20% of the Company's earned premium for the preceding financial year, where such income exceeded $750,000 but did not exceed $5,000,000; or (c) an amount equal to the aggregate of $1,000,000 and 10% of the amount by which the Company's earned premium for the preceding financial year exceeded $5,000,000. 8 If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. Results of Operations The Company has entered a Retrocession Agreement ("Retrocession Agreement") with Motors Insurance Corporation ("MIC"), pursuant to which MIC retrocedes to the Company, a portion of MIC's risks in respect of certain automobile and motorcycle insurance policies reinsured by MIC (the "Policies"). Under the Retrocession Agreement, MIC retrocedes to the Company a portion (the "Retrocession Percentage") of MIC's risk in respect of the Policies to the extent the Policies are attributable to an Integon Account in respect of which a series of Participating Shares is issued, outstanding and in good standing, and the policies are issued or renewed after the effective date of the Retrocession Agreement. The amount of the Company's liability for any loss paid on a Policy is equal to the Retrocession Percentage multiplied by the amount of the loss. The Company's loss exposure is generally not capped. The Retrocession Percentage, which can be either 20%, 30%, 40% or 50%, is established with respect to each series of Participating Shares. In return for the Company assuming the risk retroceded to it by MIC under the Retrocession Agreement, MIC pays the Company an amount equal to the Retrocession Percentage multiplied by the gross premiums MIC receives with respect to the retroceded business, after cancellations, reduced by: (i) a ceding commission which is equal to the amount of such premiums multiplied by 26.5%, reduced by the amount of certain service fees paid to MIC; (ii) any related agents' or brokers' commissions; and (iii)any U.S. premium excise tax imposed on such premiums. Settlements between MIC and the Company with respect to all amounts under the Retrocession Agreement are made on a quarterly basis. This discussion of the Retrocession Agreement should be read in conjunction with the discussion of the Retrocession Agreement contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. During the quarter ended March 31, 2003, the Company had net income of $39,460 compared with net income of $2,370 for the comparable period in 2002. The Company assumed premiums of $311,513, earned premiums of $303,464 and incurred expenses of 9 $266,000, producing net underwriting income of $37,364. For the quarter, the Company's incurred loss ratio was 52.9% and the combined ratio was 87.7%. Because the Company did not commence operations until the quarter ended September 30, 2002, it had no earned premiums, incurred expenses or underwriting income for the comparable period of 2002. Interest income for the quarter ended March 31, 2003 was $1,996, compared to $2,370 for the comparable period of 2002. The Company's interest income consists of interest earned on short term bank certificates of deposit. The decrease in interest income for the quarter under review compared to the comparable period of 2002 is attributable to reductions in the rate of interest received on the Company's investments. Reserves for Unpaid Losses Reserves for unpaid losses are balance sheet liabilities representing estimates of amounts needed in the future to pay claims under Policies 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 Integon Corporation. Loss reserves are established after periodic actuarial reviews, based on historical claim experience, industry statistics and other factors. Consequently, the determination of loss reserves is an estimate and a process inherently subject to a number of highly variable factors. Consequently, ultimate losses could exceed loss reserves and cause us to have to adjust our loss reserves. 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 business for the three month period ended March 31, 2003 was 52.9%. At March 31, 2003, the reserves for unpaid losses was $169,584. March 31, 2003 March 31, 2002 -------------- -------------- Beginning Balance in Reserves for Unpaid Losses 74,082 0 -------------- -------------- 10 Add: Provision for Losses Incurred related to: Current Year Claims 134,081 0 Prior Year Claims 26,520 0 -------------- -------------- Total 160,601 0 -------------- -------------- Less: Paid Losses attributable to: Current Year Claims 30,465 0 Prior Year Claims 34,634 0 -------------- -------------- Ending Balance in Reserves for Unpaid Losses 169,584 0 ============== ============== Total $ 65,099 $ 0 ============== ============== Net loss reserves added for claims incurred in the quarter were $103,616, including $43,996 for estimated incurred but not reported (IBNR) claims. Net loss reserves for claims incurred prior to 2003 were reduced by $8,114, which means that less was paid out than expected relative to loss reserve amounts set-up previously for such claims. No change in loss reserves were recorded in the comparable quarter of 2002 as operations of the company did not begin until August 2002. Forward Looking Statements This document contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "will," "anticipates," "estimates," "intends," "believes" and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking statements are based on management's current 11 expectations of future events. We cannot guarantee that any forward-looking statement will be accurate. However, we believe that our forward-looking statements are based on reasonable, current expectations and assumptions. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable risks and uncertainties, some of which relate particularly to our business, such as our ability to set adequate premium rates and maintain adequate reserves, our ability to compete effectively and our ability to grow our business through internal growth as well as though acquisitions. Other risks and uncertainties may be related to the insurance industry generally or the overall economy, such as regulatory developments, industry consolidation and general economic conditions and interest rates. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments. If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in our forward-looking statements. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and executed, can provide only reasonable assurance of achieving the desired control objectives. Within the 90 days prior to the date of this report, the Company's Chief Executive Officer and Principal Financial Officer evaluated, with the participation of the Company's management, the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, which disclosed no significant deficiencies or material weakness, the Company's Chief Executive Officer and Chief Financial Officer concluded that he Company's disclosure 12 controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. Part II. OTHER INFORMATION ----------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 13 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTEGON RE (BARBADOS), LIMITED (Registrant) By: /s/ Ronald W. Jones ------------------- Ronald W. Jones Vice President, Finance Signing on behalf of the Registrant, and Principal Financial Officer Dated: May 13, 2003 CERTIFICATIONS I, Gary Y. Kusumi, Chief Executive Officer of Integon Re (Barbados), Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Integon Re (Barbados), Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Gary Y. Kusumi ---------------------------- Gary Y. Kusumi Chairman, Chief Executive Officer, President and Director I, Ronald W. Jones, Principal Financial Officer of Integon Re (Barbados), Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Integon Re (Barbados), Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Ronald W. Jones --------------------------- Ronald W. Jones Vice-President, Finance and Principal Financial Officer