-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPw4urlGsSJkzghtFuyzgq5Xoz4/Bi16rA2jGzjEJJa2iHhk8DAlLHuWd1yOOKsP Z1WZ2hu1xXGM/jkNGtijJQ== 0000898080-97-000111.txt : 19970326 0000898080-97-000111.hdr.sgml : 19970326 ACCESSION NUMBER: 0000898080-97-000111 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTORS MECHANICAL REINSURANCE CO LTD CENTRAL INDEX KEY: 0000790381 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-06534 FILM NUMBER: 97562762 BUSINESS ADDRESS: STREET 1: TRIDENT HOUSE CITY: BRIDGETOWN BARBADOS STATE: C8 ZIP: 00000 BUSINESS PHONE: 8094364895 MAIL ADDRESS: STREET 1: SUTHERLAND ASBILL & STREET 2: 1275 PENNSYLVANIA AVE N W CITY: WASHINGTON STATE: DC ZIP: 20004-2404 10-K 1 FORM 10-K 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, 1996 Or Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission file number 33-6534 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Exact name of registrant as specified in its charter) Barbados Not Applicable (State or other jurisdiction (I.R.S. employer identification of incorporation or organization) number) Financial Services Centre Bishops Court Hill Not Applicable St. Michael, Barbados, W.I. (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (246) 436-4895 Securities registered pursuant to Section 12(b) of the Act: Name of each Title of each class Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 1997, was $1,950,000. 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, 1997 Common Stock, no-par value 2,000 Participating Stock, no-par value 26,000 * Based on current offering price of $75 per share. PART I Item 1. BUSINESS INTRODUCTION Motors Mechanical Reinsurance Company, Limited (the "Company") was incorpo rated in Barbados on June 12, 1986. It became registered in Barbados as an insurer on June 30, 1986 and commenced insurance operations on December 11, 1987. The business of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by Motors Insurance Corporation ("MIC") to the extent such policies are attributable to an MIC Mechanical account in respect of which a series of shares is issued and outstanding (the "Policies"). These policies are issued either to General Motors Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and retroceded to the Company. Shares of the Company's Participating Stock (the "Shares") are sold to persons designated by owners of motor vehicle sales franchises with respect to which MIC maintains an MIC Mechanical Account. A separate series is created for Shares relating to each MIC Mechanical Account, and a separate "Subsidiary Capital Account" is maintained for each such series. The profitability of the Company reflects both underwriting and investment experience, which is allocated among the Subsidiary Capital Accounts. THE RETROCESSION The Retroceding Company. MIC, the retroceding company under the Retrocession Agreement described below, is a stock insurance company organized under the laws of New York. All of MIC's outstanding stock is owned by 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, as well as in Canada and Europe. 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. The remaining 25% of the gross 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 gross 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 gross premium as the premiums are earned. Settlements between the Company and MIC are made quarterly. The Agreement may be terminated at any time by mutual consent of the parties, or by either party upon 30 days written notice. Upon termination of the Agreement, MIC and the Company will remain bound by their respective obligations under the Agreement with respect to risks retroceded prior to the close of business on the date of termination. However, risks not yet retroceded to the Company under the Agreement shall remain risks of MIC. The Retrocession Agreement -- Supplemental Agreement. MIC from time to time enters into agreements with Franchise owners for which an MIC Mechanical Account is established, pursuant to which MIC, acting for itself and on behalf of certain of its subsidiaries, agrees to cede or retrocede to another insurance company mutually satisfactory to MIC and the respective Franchise owners the unexpired liability on service contracts, insured under the Policies, sold after the date specified in each such agreement. This liability can be ceded or retroceded to dealer-owned companies organized specifically with respect to a particular Franchise or, if a series of Shares is issued which relates to the Franchise, pursuant to an agreement between MIC and the Company (the "Supplemental Retrocession Agreement"). For this purpose, unexpired liability means MIC's liability in respect of the remaining period of coverage under the Policy as of the effective date of the cession. Under the Supplemental Retrocession Agreement, unexpired liability in respect of the Policies is assumed on the same basis as risks retroceded to the Company under the principal Retrocession Agreement. Types of Risks Subject to Retrocession. Coverages assumed under the Agreement are limited to service contracts or insurance policies insured or reinsured by MIC that provide indemnification against specific motor vehicle mechanical repairs not covered by manufacturer's new vehicle warranties. Such service contracts or insurance policies often provide additional coverages, such as towing and rental allowances. Loss Reserves. Reserves are balance sheet liabilities representing estimates of amounts needed in the future to pay claims with respect to insured events which have occurred as of the balance sheet dates. For purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserves are established after an annual actuarial review, 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, 1996, 1995, and 1994 were 66.6%, 67.5% and 69.6% respectively. The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1994, 1995 and 1996: Year Ended 12/31/94 12/31/95 12/31/96 Beginning balance in reserves for losses......... $1,910,030 $2,660,270 $3,480,334 ---------- ---------- ---------- Add-provision for losses incurred related to: Current claim year........ 14,893,890 19,540,192 24,080,078 Prior claim years......... (63,724) (109,160) (42,251) ---------- ---------- ---------- Total.............. 14,830,166 19,431,032 24,037,827 ---------- ---------- ---------- Deduct-paid losses attributable to: Current claim year........ 12,527,026 16,461,768 20,330,269 Prior claim years......... 1,552,900 2,149,200 2,903,588 ---------- ---------- ---------- Total................. 14,079,926 18,610,968 23,233,857 ---------- ---------- ---------- Ending balance in reserves for losses.................. $2,660,270 $3,480,334 $4,284,304 ========== ========== ========== The following table analyzes the development of losses and loss adjustment expenses from February 1, 1989 through December 31, 1996.
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 Liability for unpaid claims and claims adjustment expense $1,396,542 $1,622,855 $1,910,030 $2,660,270 $3,480,334 $4,284,304 ========== ========== ========== ========== ========== ========== Paid (cumulative) in subsequent year(s) $ 912,465 $1,261,788 $1,552,900 $2,149,200 $2,903,588 Estimated unpaid liability as of year end* 186,542 226,818 293,406 401,910 534,495 ---------- ---------- ---------- ---------- ---------- Cumulative Deficiency (Redundancy) $ (297,535) $ (134,249) $ (63,724) $ (109,160) $ (42,251) ========== ========== ========== ========== ========== */ 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.
The table shows initial estimated reserves at December 31, 1996, 1995, 1994, 1993, 1992, 1991 and 1990 and January 31, 1990 and amounts paid on claims unsettled at each prior period end. Claims are typically processed for payment at the time the claim is reported. Therefore, the recorded claim liability at each year end represents the estimated incurred but not reported claims and claims in the process of payment. The cumulative deficiency or redundancy represents the total change in reserve estimates covering prior years. The policies reinsured by the Company are written for multiple years (up to six years) and losses do not occur equally over the period for which the policy is written but tend to be clustered in the later years. Therefore, loss experience for prior years may not be indicative of that for future years. INVESTMENT INCOME A major source of income to an insurance company is income earned on the investment of amounts not currently required to meet losses or expenses. The principal funds available for investment by the Company come from accumulated capital, and the cumulative excess of premiums collected over losses and operating expenses paid. The Company's funds are invested in a manner consistent with investment guidelines that are established by the Board. The Company invests primarily in U.S. dollar-denominated securities issued outside of the United States by non-United States private or governmental issuers, and U.S. dollar-denominated bank certificates of deposit issued by foreign banks and foreign branches of U.S. banks. Subject to the satisfaction of certain conditions, the Company may make limited investments in non-U.S. dollar denominated bonds, on a fully currency-hedged basis. The Company may invest only in securities and certificates which are rated at least Aa3 by Moody's or AA- by Standard & Poor's or the equivalent, or are guaranteed by such an issuer. However, certain unrated securities may also be held if, in the opinion of the investment manager, they have at least equivalent credit standing to the above rating standard. The Board reviews on a regular basis and, where appropriate, revises the investment objectives and guidelines for the Company's funds. There can be no assurance, however, as to whether a particular investment objective, once adopted, can be achieved or that adverse factors would not cause a decrease in the overall value of the Company's investment portfolio. Investments in non-U.S. securities, particularly those of non-governmental issuers, may involve considerations not ordinarily associated with investments in U.S. issuers. These considerations include, but are not limited to, the possibility of expropriation, the unavailability of financial information or difficulty in interpreting such information when it is prepared under local accounting or regulatory standards, the possible negative impact of political, social or diplomatic developments, and the possible imposition of withholding taxes by local taxing authorities. Rothschild Asset Management Limited ("Rothschild") manages the investment and reinvestment of the Company's funds in accordance with the investment policies and guidelines established by the Board. Rothschild, which is one of the leading institutions engaged in the management of offshore fixed-income portfolios, and which has been providing this service since 1974, is an affiliate of NM Rothschild and Sons Limited, a prominent merchant bank in London which has been in the investment management business worldwide for more than 100 years. Rothschild charges a management fee of 0.3% per annum on the first $20,000,000 of assets under management based on the market value of the Company's investment portfolio at the end of each calendar quarter, and 0.15% per annum on the excess thereof. ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS The Company has established a Subsidiary Capital Account with respect to the Common Stock as a class, and establishes such an account with respect to each series of Shares at the time a series is issued. Subsidiary Capital Accounts are maintained solely for the purpose of the allocations described below, and do not serve any other legal or accounting function. None of the Company's assets are segregated or earmarked with respect to those accounts. The consideration received by the Company upon the issuance of a particular series of Shares and the Common Stock as a class are allocated to the Subsidiary Capital Account for that series or class. Items of income and expense, and losses, attributable to insurance underwriting activities are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. Investment experience, and other items of income and expense, gains and losses and distributions with respect to the Capital Stock, are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. All such accounting determinations are made using accounting principles generally accepted in the United States, unless otherwise required by the Articles. For purposes of the following description, items shall be "related" to the Subsidiary Capital Account for the series identified with the MIC Mechanical Account to which such items can be attributed. (1) Allocations with respect to underwriting activities are made as follows: (a) With respect to premiums ceded by MIC to the Company, 100% to the related Subsidiary Capital Account; provided, however, that an amount equal to 1-1/3% of those premiums, net of related ceding commissions, are subtracted from such Subsidiary Capital Account and allocated to the Subsidiary Capital Account for the Common Stock. (b) With respect to any agents' or brokers' commissions, commissions recaptured, unearned premiums, reinsurance premiums ceded, and any United States excise tax, 100% to the related Subsidiary Capital Account. (c) With respect to losses incurred, and any amount of losses recovered through salvage, subrogation, reimbursement or otherwise one hundred percent (100%) shall be allocated to the related Subsidiary Capital Account. For the purpose of this section (1)(c), losses incurred includes both paid and unpaid (reported and unreported) losses. (d) With respect to return premiums, 98-2/3% to the related Subsidiary Capital Account and 1-1/3% to the Subsidiary Capital Account for the Common Stock. (2) Any expenses or liabilities attributable to day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the number of series issued and outstanding at the end of the fiscal quarter immediately preceding the fiscal quarter in which the expense or liability is incurred, provided, that for purposes of such allocation, series of shares issued during the current calendar year and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded. (3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed. (4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses. (5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of the end of the quarter preceding the date on which the expense or liability is incurred. (6) (a) Investment income, net of any direct investment expense, is allocated among the Subsidiary Capital Accounts pro rata based upon the relative Investment Asset Balance (as defined in subparagraph (b) below) of each of those accounts as of the last day of the quarter preceding the quarter for which the investment income is being allocated. For these purposes, net investment income includes realized (but not unrealized) gains and losses. (b) The Investment Asset Balance of each Subsidiary Capital Account is equal to the capital and surplus of each account, increased by: (i) the unearned portions of the written premiums that have been collected by the Company attributable to those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated, net of any applicable commissions and taxes; (ii) the outstanding loss reserves attributable to each of those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated; and (iii) any other outstanding liability that has been charged to the account as of the last day of the quarter preceding the quarter for which the income is being allocated. (7) (a) If, after the credits and charges described in paragraphs 1-6 above are made to the Subsidiary Capital Accounts there exists a deficit in one or more of the accounts, then each such deficit is allocated to and charged against: (i) first, the Subsidiary Capital Account for the Common Stock to the extent of Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common Stock equal to that 1-1/3% of the premiums ceded to the Company during the immediately preceding five-year period which was subtracted from the Subsidiary Capital Accounts for the Shares pursuant to paragraph 1(a) above, net of losses allocated to that account during such period pursuant to the allocation procedure described in this paragraph 7 and net of return premiums allocated to that Account during such period pursuant to the allocation procedure described in paragraph (1)(d) above); (ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon the relative earned premiums allocated to each such account for the quarter for which the allocation is being made, provided, however, that only accounts which have positive balances are taken into account for purposes of this allocation; (iii) then, the remaining Subsidiary Capital Accounts for the Shares with positive balances as of the last day of the quarter for which the allocation is being made, pro rata, based upon such balances; and (iv) then, to the extent necessary, the Subsidiary Capital Account for the Common Stock. (b) If, as a result of an allocation of a deficit as described in subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated in the manner provided in that subparagraph before applying a subsequent subparagraph. (c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a series of Shares had a deficit that was allocated to and charged against the Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital Account for any series of Shares, then at the end of any succeeding quarter for which that account otherwise would show an account balance greater than zero, the balance is reallocated to the Restricted Earned Surplus until all reductions of that surplus attributable to that Subsidiary Capital Account have been restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro rata based on the relative amount of deficits allocated to such accounts, until all reductions of such Subsidiary Capital Accounts after January 1, 1995 have been restored. Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that account is absorbed by other Subsidiary Capital Accounts, in general, as follows: The amount of such excess losses is charged first to the Restricted Earned Surplus portion of the Subsidiary Capital Account of the Common Stock. Any remaining losses, should the Restricted Earned Surplus be exhausted, is allocated among the Subsidiary Capital Accounts of other participating series. Any then unabsorbed losses are charged to the Subsidiary Capital Account of the Common Stock. Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital Accounts for the Shares in the manner described above must be restored from the Subsidiary Capital Account that drew the funds if at any time it returns to a positive balance. (8) (a) Dividends, payments upon redemption or liquidation (described below), and any other distributions with respect to the Capital Stock are allocated to the Subsidiary Capital Account for the class or series with respect to which the dividend, payment or distribution was made. (b) Where all Shares of a series are repurchased by the Company pursuant to its right of first refusal or redeemed in accordance with the Company's procedures for redemption, the Subsidiary Capital Account for that series is terminated. Thereafter, all underwriting income and expenses, and losses that would have been allocated to the terminated account, are allocated among the Subsidiary Capital Accounts of the existing series of Shares pro rata based upon relative earned premiums attributable to each of those accounts for the calendar quarter in which the item was earned or incurred; provided, however, that a net deficit for any such period is allocated to the Subsidiary Capital Account for the Common Stock (to the extent of Restricted Earned Surplus) before allocating any remaining deficits to the Subsidiary Capital Accounts for the participating series. Using the procedures described above, the Company has allocated items of gain and loss to the Subsidiary Capital Account for each series. Initially each Account had a balance of $7,500 representing the amount paid for the Shares of that series. During the year ended December 31, 1996, $2,661,124 of net underwriting gains and $548,525 of administrative expenses were allocated among the 254 series of Shares outstanding as of December 31, 1996, and $5,341,924 of net investment income was allocated among such series of Shares and the Common Stock. As of December 31, 1996, 207 series of Shares outstanding had balances greater than $7,500 (ranging from $7,788 to $534,098) and 47 of such series had balances less than $7,500 (ranging from $7,339 to zero). (The amounts in the Subsidiary Capital Accounts can fluctuate substantially and therefore may not be indicative of future results.) At December 31, 1996, an aggregate of $2,207,958 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 32 Subsidiary Capital Accounts and remained outstanding at that date. In addition, at December 31, 1996, net deficits of $537,992 associated with 4 series of Shares that have been redeemed had been charged against Restricted Earned Surplus and remained outstanding at that date. As of December 31, 1996, $981,497 of aggregate deficits has been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this amount $284,048 is available to be recovered from deficit accounts should they return to profitability and to the extent that the risk fund is repaid in full. The Subsidiary Capital Account for the Common Stock had, at the time it was established, a balance of approximately $200,000, representing the capital paid in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary Capital Account is not affected directly by underwriting gains and losses attributable to the various Subsidiary Capital Accounts related to series of Shares, but is affected by those gains and losses indirectly to the extent that one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit, in which case an allocation to the Subsidiary Capital Account for the Common Stock will result, in the manner described above. The allocations of income and expense, gains and losses, and distributions described above are subject to approval by the Board, and when so approved are considered final and conclusive and will be binding on all holders of Shares for all purposes including without limitation any redemption of Shares pursuant to the Company's procedures for redemption. Barbados insurance law requires that the Company maintain certain levels of net assets, calculated without regard to unrealized gains or losses. The Company is currently in compliance with these requirements. However, in the event that the Company is unable to comply with such requirements in the future, it has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. EMPLOYEES The Company does not have any full-time employees. Rather, the Company relies on Alexander Insurance Managers (Barbados) Ltd. (the "Manager") to handle its day-to-day operations. (See "Business of the Company -- Insurance Management Agreement," below.) In addition, corporate secretarial services for the Company are provided by Colybrand Company Services Limited of St. Michael, Barbados. The Company's Board of Directors and the committees thereof, however, remain responsible for the establishment and implementation of policy decisions. COMPETITION The insurance business is extremely competitive. MIC management believes that at present, MIC and its subsidiaries are, as a group, one of the largest mechanical repair insurers of new GM vehicles in the United States. There are other major companies offering similar coverage. Because the insurance business of the Company is limited to the assumption of certain motor vehicle mechanical service agreement reinsurance business ceded by MIC, the profitability of the Company depends to a large degree on the success experi enced by MIC and its affiliates in competing with those other insurers. Many commercial insurance groups are seeking to capture additional mechanical insurance business by offering to assist automobile dealers in the formation of their own dealer-owned reinsurance companies. MIC has assisted in the establishment of such companies for a number of qualified dealers. However, MIC believes that participation in the Company represents a practical alternative for dealers who do not have the available capital, insurance management expertise or time for the personal involvement necessary for their own reinsurance company. INSURANCE MANAGEMENT AGREEMENT The Company has entered into an Insurance Management Agreement (the "Management Agreement") with the Manager, pursuant to which the Manager collects and disburses funds on behalf of the Company, provides accounting, clerical, telephone, telex, 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 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 and/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 Shares at each calendar month end. For the year ended December 31, 1996, the Company incurred fees payable to the Manager in the amount of $204,674. 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, telex, facsimile, postage, 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 eleven 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 Aon Services Inc., an international insurance brokerage and insurance consulting firm. In December of 1996, Alexander & Alexander was acquired by Aon Corporation Group ("Aon"). 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. The current Management Agreement is continuous until terminated by ninety days written notice from one party to the other. 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, or 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 Financial Services Centre, Bishops Court Hill, St. Michael, Barbados. The Company believes that these facilities are adequate for its current and anticipated future needs. In addition, the Manager supplies all equipment for the Company. Item 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1996. 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. (b) All of the common stock of the Company is held by MIC. As of March 1, 1997 there were 453 holders of Shares of record, representing 260 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 April of 1996, 1995 and 1994, the Company declared dividends of $4,007,483, $1,188,614 and $2,156,304 respectively. These dividends were declared as a varying percentage of earned surplus attributable to each series of Shares with the percentage applicable depending on the amount of earned surplus attributable to such series. Item 6. SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from financial statements audited by Deloitte & Touche, independent chartered accountants, whose report with respect to their audits of the financial statements as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 is included elsewhere herein.
December 31 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Premiums Assumed $ 47,410,037 $44,084,952 $38,371,896 $27,779,063 $19,386,455 ============ =========== =========== =========== =========== Premiums Earned $ 36,077,699 $28,800,689 $21,316,685 $15,429,611 $13,005,184 Net Investment Income 5,341,924 5,563,573 1,227,816 2,700,242 2,522,712 ------------ ----------- ----------- ----------- ----------- Total Income 41,419,623 34,364,262 22,544,501 18,129,853 15,527,896 Less Losses and Expenses 33,965,100 27,462,338 20,825,943 15,425,146 12,020,682 ------------ ----------- ----------- ----------- ----------- Net Income* $ 7,454,523 $ 6,901,924 $ 1,718,558 $ 2,704,707 $ 3,507,214 ============ =========== =========== =========== =========== Dividends Per Common Share 0 0 0 0 0 Total Assets $106,041,164 $91,526,976 $66,012,284 $50,359,633 $36,847,490 Total Policy Reserves and Other Liabilities 88,479,590 76,350,313 60,246,641 42,430,269 29,777,783 Stockholders' Equity 17,561,574 15,176,663 5,765,643 7,929,364 7,069,707 Dividends Paid on Participating Shares 4,007,483 1,188,614 2,156,304 2,021,504 1,021,705 */ 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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Company expects to generate sufficient funds from operations to cover current liquidity needs. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of Shares, will continue to be the principal sources of funds for the Company. Although losses are expected to increase due to the increased level of premiums assumed in each preceding year and the anticipated incidence of claims following the expiration of manufacturers' warranties, available funds from the sources identified above have also grown. Net cash provided by operating activities has increased to $17,588,199 in 1996 from $16,418,640 in 1995 and $14,960,494 in 1994. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1997 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years. The Company had unearned premium reserves of $84,084,870 as of December 31, 1996, and $72,752,532 as of December 31, 1995. 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 little risk of loss prior to expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned. On April 11, 1996, the Board of Directors authorized the payment of dividends to eligible holders of Participating Shares. See "Market For Registrant's Common Equity And Related Stockholder Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends. Capital Resources. Capitalization of the Company, as of December 31, 1996, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,905,000 (compared with $1,807,500 and $1,665,000 as of December 31, 1995 and 1994, respectively), and earnings retained for use in the business of $14,913,053. Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 1997, the Company's required minimum net assets computed in accordance with Barbados law was approximately $4,107,770, compared to total capital and retained earnings computed for purpose of Barbados law of $17,018,053. Results of Operations. During the year ended December 31, 1996, the Company had net income of $7,454,523 compared to $6,901,924 and $1,718,558 for the years ended December 31, 1995 and 1994, respectively. As described below, the increase in net income during 1996 compared to the previous year was primarily due to the improved underwriting results which were partially offset by a small decrease in investment income. The increase in net income during 1995 compared to the previous year was the result of realized gains on the sale of investments, increases in interest earned and improved underwriting results. The Company had net underwriting income of $2,112,599 in 1996 compared to $1,338,351 and $490,742 for the years ended December 31, 1995 and 1994, respectively. The increase in underwriting income during 1996 was the result of an increase in the amount of premiums earned coupled with a modest improvement in the loss ratio (the ratio of losses incurred to premiums earned). During 1996, the Company earned premiums of $36,077,699 compared to $28,800,689 and $21,316,685 during 1995 and 1994, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1996, and the continuing flow of reinsurance premiums from series issued in prior years. During 1996, the Company issued 16 new series of Shares and redeemed 3 series of Shares for a net increase of 13 series. There were a total of 254 series outstanding at December 31, 1996 compared to 241 and 222 series of Shares outstanding at December 31, 1995 and 1994, respectively. The Company incurred losses and administrative expenses during the year ended December 31, 1996 of $33,965,100 compared with $27,462,338 and $20,825,943 for the years ended December 31, 1995 and 1994, respectively. Expenses in 1996 were comprised of losses paid and provisions for losses incurred of $24,037,827, ceding commissions and excise taxes of $9,378,748 and operating expenses of $548,525. Losses incurred in 1995 and 1994 were $19,431,032 and $14,830,166 respectively. The loss ratio for the year ended December 31, 1996 was 66.6% compared to 67.5% and 69.6% for the years ended December 31, 1995 and 1994, respectively. The Company incurred operating expenses during the year ended December 31, 1996 of $548,525 compared to $544,837 and $455,238 for the years ended December 31, 1995 and 1994, respectively. MIC has agreed to pay directly certain costs of registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 1996 $64,848 of such costs were paid directly by MIC compared to $171,079 and $162,989 for the years ended December 31, 1995 and 1994, respectively. Investment income in 1996 was $5,341,924 compared to $5,563,573 and $1,227,816 for the years ended December 31, 1995 and 1994, respectively. The decrease in investment income during 1996 compared to 1995 was attributable to an overall decline in yields in U.S. and non-U.S. dollar positions. The increase in investment income during 1995 compared to 1994 was attributable to realized gains on the sale of investment securities and an increase in interest earned. The sale of investment securities for the year ended December 31, 1996 resulted in realized gains of $64,244 compared to realized gains of $1,404,232 for the year ended December 31, 1995, and realized losses of $1,543,358 for the year ended December 31, 1994. The realized gains during 1995 were due to increased sales of investment securities to take advantage of market opportunities presented by fluctuations in interest rates. Interest earned for the year ended December 31, 1996 was $5,277,680 compared to $4,159,341 and $2,771,174 for the years ended December 31, 1995 and 1994, respectively. The increase in interest earnings during 1996 was largely a result of an increase in the amount of assets under management. Unrealized appreciation on investment securities held at December 31, 1996 was $543,521 compared to unrealized appreciation at December 31, 1995 of $1,651,621. The change in unrealized appreciation as of December 31, 1996 compared to December 31, 1995 is in large part attributable to the fact that the Company's portfolio at December 31, 1996 comprised primarily U.S. dollar securities and U.S. yields were approximating fair market value at that time. At December 31, 1996, 100% of the Company's investments were in U.S. dollar-denominated fixed-income securities compared to 78.5% at December 1995 when approximately 21.5% of the Company's investments were in non-U.S. dollar-denominated bonds, on a fully currency-hedged basis. The Company's investment manager seeks to identify non-U.S. dollar-denominated investments that offer a higher rate of return (net of hedging costs) than would be available in the market for similarly rated U.S. dollar-denominated bonds. The instruments used to hedge non-U.S. dollar-denominated investments involve, to varying degrees, elements of credit risk in the event a counterparty should default on its obligation under the hedge instrument. Such credit risk is managed through the selection of financially sound counterparties and periodic monitoring of counterparty financial condition. The Company's investment guidelines do not permit the use of financial instrument derivatives in managing interest rate risk. Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 1996, the Company had furnished such a letter of credit in the amount of $67,350,000. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page 1. Independent Auditors' Report................... 27 2. Balance Sheets, December 31 1996 and 1995................................ 28 3. Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 ............ 29 4. Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............ 30 5. Notes to Financial Statements.................. 31 - 38 INDEPENDENT AUDITORS' REPORT To the Stockholders of Motors Mechanical Reinsurance Company, Limited Financial Services Centre Bishops Court Hill St. Michael, Barbados We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1996 and 1995 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. s/DELOITTE & TOUCHE CHARTERED ACCOUNTANTS Bridgetown, Barbados February 14, 1997 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (Expressed in U.S. Dollars) 1996 1995 ------------ ----------- ASSETS Investments $ 66,647,930 $59,898,265 Cash and cash equivalents 12,926,272 7,093,106 Accrued investment income 1,453,691 2,532,813 Due from Motors Insurance Corporation 3,158,064 3,095,587 Deferred acquisition costs 21,855,207 18,907,205 ------------ ----------- Total Assets $106,041,164 $91,526,976 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums $ 84,084,870 $72,752,532 Loss reserves 4,284,304 3,480,334 Accrued liabilities 110,416 117,447 ------------ ----------- Total Liabilities 88,479,590 76,350,313 ------------ ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Share capital Common stock - no par value; Authorized - 2,000 shares; Issued and outstanding - 2,000 shares 200,000 200,000 Participating stock - no par value; Authorized - 100,000 shares; Issued and outstanding - 25,400 shares at December 31, 1996 and 24,100 shares at December 31, 1995 1,905,000 1,807,500 ------------ ----------- 2,105,000 2,007,500 Retained earnings 14,913,053 11,517,542 Unrealized appreciation on investments 543,521 1,651,621 ------------ ----------- Total Stockholders' Equity 17,561,574 15,176,663 ------------ ----------- Total Liabilities and Stockholders' Equity $106,041,164 $91,526,976 ============ =========== The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Expressed in U.S. Dollars) 1996 1995 1994 ----------- ----------- ----------- INCOME Reinsurance premiums assumed $47,410,037 $44,084,952 $38,371,896 Increase in unearned premiums (11,332,338) (15,284,263) (17,055,211) ----------- ----------- ----------- Premiums earned 36,077,699 28,800,689 21,316,685 ----------- ----------- ----------- Investment income: Interest earned 5,277,680 4,159,341 2,771,174 Realized gains (losses) on investments 64,244 1,404,232 (1,543,358) ----------- ----------- ----------- Investment income - net 5,341,924 5,563,573 1,227,816 ----------- ----------- ----------- TOTAL INCOME 41,419,623 34,364,262 22,544,501 ----------- ----------- ----------- EXPENSES Acquisition costs 9,378,748 7,486,469 5,540,539 Losses paid 23,233,857 18,610,968 14,079,926 Increase in loss reserves 803,970 820,064 750,240 Administrative expenses: Related Parties 211,001 174,443 171,135 Other 337,524 370,394 284,103 ---------- ----------- ----------- TOTAL EXPENSES 33,965,100 27,462,338 20,825,943 ----------- ----------- ----------- NET INCOME 7,454,523 6,901,924 1,718,558 RETAINED EARNINGS, beginning of year 11,517,542 5,796,732 6,211,978 LESS: DIVIDENDS (4,007,483) (1,188,614) (2,156,304) (DEDUCT)/ADD: REDEMPTION OF PARTICIPATING STOCK (51,529) 7,500 22,500 ----------- ----------- ----------- RETAINED EARNINGS, end of year $14,913,053 $11,517,542 $ 5,796,732 =========== =========== =========== The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (Expressed in U.S. dollars)
1996 1995 1994 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Reinsurance premiums collected $46,031,997 $42,818,628 $35,580,944 Losses and acquisition expenses paid (34,302,453) (28,599,428) (22,168,851) Administrative expenses paid (501,147) (540,841) (527,767) Investment income received 6,359,802 3,193,568 2,076,168 ----------- ----------- ----------- Net cash provided by operating activities 17,588,199 16,871,927 14,960,494 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (232,194,343) (182,526,749) (70,748,944) Sales and maturities of investment 224,400,822 170,483,482 54,189,043 ----------- ------------ ----------- Net cash invested (7,793,521) (12,043,267) (16,559,901) ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Participating Stock 120,000 150,000 270,000 Redemption of Participating Stock (74,029) 0 0 Dividends paid (4,007,483) (1,188,614) (2,156,304) ----------- ----------- ----------- Net cash used in financing activities (3,961,512) (1,038,614) (1,886,304) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,833,166 3,790,046 (3,485,711) CASH AND CASH EQUIVALENTS, beginning of year 7,093,106 3,303,060 6,788,771 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $12,926,272 $ 7,093,106 $ 3,303,060 =========== =========== =========== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 7,454,523 $ 6,901,924 $ 1,718,558 Realized (gains) losses on investments (64,244) (1,404,232) 1,543,358 Change in: Accrued investment income 1,079,122 (973,618) (698,005) Due from Motors Insurance Corporation (62,477) 219,919 (983,528) Deferred acquisition costs (2,948,002) (3,975,738) (4,436,261) Unearned premiums 11,332,338 15,284,263 17,055,211 Loss reserves 803,970 820,064 750,240 Accrued liabilities (7,031) (655) 10,921 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 17,588,199 $16,871,927 $14,960,494 ============ =========== =========== The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS (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"). 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. PRINCIPAL ACCOUNTING POLICIES Basis of Presentation The financial statements are stated in United States dollars and are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 presentation. Premium Income and Acquisition Costs Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned. Premiums are written on the basis of quarterly cessions and earned relative to anticipated loss exposures. Acquisition costs, consisting of ceding commissions and excise taxes, are expensed on the same basis as premiums are earned. Investments Investments are comprised of interest-bearing marketable securities which are carried at fair value based on quoted market prices and dealer quotes obtained from an external pricing service. Investments with original maturities of less than 90 days are classified as cash equivalents. Unrealized appreciation (depreciation) is included in stockholders' equity. Realized gains and losses on the sale of investments are included as investment income and are calculated based on average costs. Loss Reserves The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations. Taxation The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period ending December 31, 2016. Thereafter and until December 31, 2031, the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum. Stockholders who are United States residents are taxed in the United States on their share of the Company's income on a deemed distribution basis. Earnings Per Share No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8). Note 3. INVESTMENTS The cost and fair value of investments in debt securities are as follows: Gross Gross Unrealized Unrealized Fair Cost Appreciation Depreciation Value ----------- ------------ ------------ ----------- December 31, 1996: Debt securities issued by foreign governments and their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032 Debt securities issued by corporations 27,967,937 298,190 (37,604) 28,228,523 Debt securities issued by supra-nationals 6,540,750 137,625 - 6,678,375 ----------- ---------- ---------- ----------- Total $66,104,409 $ 787,276 $ (243,755) $66,647,930 =========== ========== ========== =========== December 31, 1995: Debt securities issued by foreign governments and their agencies $56,243,544 $1,711,611 $ (135,765) $57,819,390 Debt securities issued by supra-nationals 2,003,100 75,775 - 2,078,875 ----------- ---------- ----------- ----------- Total $58,246,644 $1,787,386 $ (135,765) $59,898,265 =========== ========== =========== =========== The cost and fair value of debt securities at December 31, 1996, 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. Fair Cost Value ----------- ----------- Due after one year through five years $51,424,773 $51,784,023 Due after five years through ten years 14,679,636 14,863,907 ----------- ----------- $66,104,409 $66,647,930 =========== =========== In 1996, gross gains of $1,997,197 and gross losses of $1,932,953 were realized. In 1995, gross gains of $2,694,685 and gross losses of $1,290,453 were realized. In 1994, gross gains of $150,704 and gross losses of $1,694,062 were realized. The following summarizes net unrealized appreciation (depreciation) on investments: Balance, December 31, 1993 $ 99,886 Net depreciation (1,995,975) ----------- Balance, December 31, 1994 $(1,896,089) Net appreciation 3,547,710 ----------- Balance, December 31, 1995 $ 1,651,621 Net appreciation 1,108,100 ----------- Balance, December 31, 1996 $ 543,521 =========== The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1996, 100% of the Company's investments are denominated in U.S. dollars. The Company uses forward currency contracts to hedge its exposure to changes in currency exchange rates relating to its investments denominated in currencies other than the U.S. dollar. The contracts provide for settlement in U.S. dollars in the future. Credit risk is managed by dealing with financially-sound counterparties. Market risk is mitigated because the forward contracts hedge corresponding non-U.S. dollar investments. The notional amount of forward contracts outstanding at December 31, 1996 was nil. 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, 1996, 1995 and 1994: 1996 1995 1994 ---- ---- ---- Beginning balance in reserves for losses $ 3,480,334 $ 2,660,270 $ 1,910,030 ------------ ------------ ------------ Add-provision for losses incurred related to: Current claim year 24,080,078 19,540,192 14,893,890 Prior claim years (42,251) (109,160) (63,724) ------------ ------------ ----------- Total 24,037,827 19,431,032 14,830,166 ------------ ------------ ----------- Deduct paid losses attributable to: Current claim year 20,330,269 16,461,768 12,527,026 Prior claim years 2,903,588 2,149,200 1,552,900 ------------ ------------ ----------- Total 23,233,857 18,610,968 14,079,926 ------------ ------------ ----------- Ending balance in reserves for losses $ 4,284,304 $ 3,480,334 $ 2,660,270 ============ ============ ============ As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1996, 1995 and 1994 decreased by $42,251, $109,160 and $63,724 respectively, because of lower actual claims. Note 5. STOCKHOLDERS' EQUITY All of the Company's Common Stock is held by MIC. A prospectus dated May 10, 1996 is offering 12,000 shares of Participating Stock to persons certified by owners of certain motor vehicle franchises. The offering consists of 120 series of 100 shares each at a price of $75 per share. During 1996, 16 additional series of 100 shares of Participating Stock were issued as compared with 20 for the year ended December 31, 1995. In addition, in 1996 the Board of Directors redeemed 3 series of 100 shares at the request of the shareholders. The redeemed series had been previously placed in run off and had reached a fully earned position during 1996. In the years ended December 31, 1996, 1995 and 1994, costs in the amount of $64,848, $171,079 and $162,989 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses. The holder of Common Stock is entitled to elect five directors, at least one of whom must be a resident of Barbados. The holder of Common Stock has no right to vote with respect to liquidation of the Company. The holder generally has the sole right to vote on matters not specifically reserved to Participating Stock. The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board provided that the director representing holders of the Participating Stock votes in favor of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock. From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 1996, there were no funds held in escrow. Note 6. REINSURANCE PREMIUMS Under the provisions of the retrocession agreement, the Company will assume additional cessions of $28,028,290 ($24,250,844 at December 31, 1995) 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 $67,350,000 to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and investments are assigned to collateralize the letter of credit. Note 8. RETAINED EARNINGS Items of income or loss and premiums and expenses attributable to insurance underwriting activities are determined as of the end of each calendar quarter and are allocated to the Participating Stockholders' capital accounts. An amount equal to 1-1/3 percent of assumed premiums (net of related ceding commissions) is allocated to the capital account of the Common Stockholder. Such allocations accumulate as restricted retained earnings and may be used to advance capital to any Participating Stockholders who incur a deficit in their capital accounts; any such advances are repayable out of future profitable operations of the respective Participating Stockholder. Amounts allocated to the Common Stockholder, net of advances to Participating Stockholders, are presented in the table below as "net transfers." Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of participating stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such shares pro rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part. Barbados law requires that the Company maintain a minimum capitalization based generally on the amount of premiums earned in the preceding year. At January 1, 1997, the Company's required minimum capital computed in accordance with Barbados law was approximately $4,107,770. Retained earnings applicable to the Common and Participating Stockholders are comprised of the following: Common Participating Total ------ ------------- ----- Balance (Deficit), December 31, 1993 (8,274) 6,220,252 6,211,978 Net income (loss) for the year (7,536) 1,726,094 1,718,558 Net transfers (37,410) 37,410 - Dividends paid - (2,156,304) (2,156,304) Redemption of participating stock - 22,500 22,500 --------- ---------- ---------- Balance (Deficit) December 31, 1994 (53,220) 5,849,952 5,796,732 Net income (loss) for the year 18,627 6,883,297 6,901,924 Net transfers 23,732 (23,732) - Dividend paid - (1,188,614) (1,188,614) Redemption of participating stock - 7,500 7,500 --------- ----------- ----------- Balance (Deficit) December 31, 1995 $ (10,861) $11,528,403 $11,517,542 Net income (loss) for the year 14,131 7,440,392 7,454,523 Net transfers 6,147 (6,147) - Dividend paid - (4,007,483) (4,007,483) Redemption of participating stock - (51,529) (51,529) --------- ----------- ----------- Balance December 31, 1996 $ 9,417 $14,903,636 $14,913,053 ========= =========== =========== 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 11, 1996 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............. 54 Chairman, Chief Executive Officer, President and Director (Executive Vice President & Chief Financial Officer, Motors Insurance Corporation ("MIC") March 1993; Group Vice-President, MIC, 1991- 1993; Vice President, MIC, 1989-1990). Mr. Noll became President and Director in 1995. Louis S. Carrio, Jr........ 53 Vice-President and Director (Vice-Pres- ident, MIC). Mr. Carrio became Vice-President and Director in 1991. Bernard J. Buselmeier....... 41 Vice-President and Director (Vice- President and Treasurer, MIC, March 1993; Treasurer, MIC, 1989-1993) Mr. Buselmeier became Vice-President and Director in 1995. John J. Dunn, Jr............ 38 Vice-President and Director (Assistant Treasurer, MIC, 1995; previously manager, Coopers & Lybrand, L.L.P.) Mr. Dunn became Vice-President and Director in 1996. Peter R. P. Evelyn ........ 55 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm). Mr. Evelyn became a Director in 1986. Warren R. Weidner ......... 50 Director (President, Weidner Chevrolet- Geo, Anderson, IN) Mr. Weidner became a Director in 1996. Ronald W. Jones ........... 44 Vice-President, Finance (Managing Director, Alexander Insurance Managers (Barbados) Ltd.). Mr. Jones has served as Vice-President, Finance since 1987. Michael B. Boyce........... 56 Secretary (Principal, Colybrand Company Services, Limited, Barbados, since 1993; previously principal, Price Waterhouse, Eastern Caribbean). Mr. Boyce has served as Secretary since 1994. Mr. Boyce served previously as Assistant Secretary to the Company. The directors and officers named above serve in those capacities until the annual meeting of shareholders next following their election. Item 11. EXECUTIVE COMPENSATION No director or officer of the Company is compensated directly for services as such. However, each director and officer of the Company is reimbursed for expenses incurred for attendance at Board, committee, and shareholder meetings. In addition, Mr. Jones is an officer of the Manager, which receives management fees and compensation for financial and administrative services. Mr. Evelyn is a member of the law firm of Evelyn, Gittens & Farmer, which serves as the Company's Barbados counsel; and Mr. Boyce is affiliated with Colybrand Corporate Services Limited, St. Michael, Barbados, which receives compensation for corporate secretarial services provided to the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MIC owns all of the issued and outstanding shares of the Common Stock of the Company, which consists of 2,000 shares. Warren R. Weidner, a director, owns 100 shares of Participating Stock as a custodian. 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, 1996 and 1995. (iii) Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994. (iv) Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994. (v) Notes to Financial Statements. (2) Financial Statement Schedules. Schedules are omitted because of the absence of the conditions under which they are required or because the information required is presented in the financial statements or related notes. (3) Exhibits. The following exhibits are included in response to Item 14(c): 3(a) Restated Articles of Incorporation and amendments thereto filed by reference to Exhibit 3(i) to Quarterly Report on Form 10Q File No. 33-6534 for the quarterly period ended June 30, 1996. 3(b) By-laws of the Company dated June 6, 1986 filed by reference to Exhibit 3(b) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 4 Specimen Participating Stock Certificate filed by reference to Exhibit 4 of Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(a) Form of Principal Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(a) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 10(b) Form of Supplemental Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(b) of the Registration Statement on Form S-1, File No. 33-6534 dated June 18, 1986. 10(c) Specimen Stock Purchase Agreement filed by reference to Exhibit 10(c) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated May 22, 1987. 10(d) Amended and Restated Stock Purchase Agreement between Registrant and Motors Insurance Corporation filed by reference to Exhibit 10(d) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(e) Insurance Management Agreement between Registrant and Alexander Insurance Managers (Barbados) Ltd., effective January 1, 1996 20(a) Proxy solicitation materials sent to shareholders in connection with annual meeting held on April 11, 1996, filed by reference to Exhibit 20(b) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1995. 20(b) Proxy solicitation materials sent to shareholders in connection with a special meeting held on June 21, 1996. 20(c) Proxy solicitation materials sent to shareholders in connection with annual meeting to be held on March 27, 1997. 27 Financial Data Schedule. 28(c) Certificate of Barbados Residency filed by reference to Exhibit 28(c) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(a) Certification Form filed by reference to Exhibit 28(a) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(b) Guarantee issued by the Minister of Finance of Barbados filed by reference to Exhibit 99(b) to Amendment No. 2 to Registration Statement on Form S-2, File No. 33-60105, dated April 23, 1996. (b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended December 31, 1996 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 17, 1997 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 21, 1997 William B. Noll Officer, President and Director s/Louis S. Carrio, Jr. Vice-President and March 21, 1997 Louis S. Carrio, Jr. Director s/John J. Dunn, Jr. Vice-President and March 21, 1997 John J. Dunn, Jr. Director s/Bernard J. Buselmeier Vice-President and March 21, 1997 Bernard J. Buselmeier Director Director Warren R. Weidner s/Peter R. P. Evelyn Director March 17, 1997 Peter R. P. Evelyn s/Ronald W. Jones Vice-President, March 17, 1997 Ronald W. Jones Finance, Principal Financial and Accounting Officer SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Proxy solicitation materials were sent to shareholders in connection with the annual meeting held on April 11, 1996, a special meeting of the shareholders held on June 21, 1996, and in connection with the 1997 annual meeting, to be held on March 27, 1997. EX-10 2 INSURANCE MANAGEMENT AGREEMENT INSURANCE MANAGEMENT AND ADVISORY SERVICES AGREEMENT BETWEEN ALEXANDER INSURANCE MANAGERS (BARBADOS) LTD AND MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED THIS INSURANCE MANAGEMENT AND ADVISORY SERVICES AGREEMENT made the 1st day of January, 1996. BETWEEN ALEXANDER INSURANCE MANAGERS (BARBADOS) LTD. a body corporate having its Principal Office at The Financial Services Centre, Bishop's Court Hill, St. Michael, in the Island of Barbados (hereinafter referred to as "the Manager"). OF THE FIRST PART AND MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED a body corporate having its Principal Office at The Financial Services Centre, Bishop's Court Hill, St. Michael, in the Island of Barbados (hereinafter referred to as "the Company") OF THE SECOND PART WHEREAS, the Company is based in Barbados and from such country engages in the business of reinsurance and desires certain management, financial, administrative and advisory services to assist it in the accomplishment of such business; and WHEREAS, at its offices in Barbados, the Manager maintains a staff of professional insurance and financial executives and administrative and clerical personnel experienced in providing such services and WHEREAS, the Company and the Manager are desirous of entering into an agreement whereby the Manager will render insurance management, financial, administrative and advisory services as required by the Company. 1. THE MANAGER agrees and covenants with the COMPANY to undertake and discharge the following obligations, subject at all times to the directions, limitations, approval or general supervision of the Company, the Board of Directors or such other officials of the Company as the Board of Directors may designate:- (a) Authority to Underwrite On the authorisation of the Company to underwrite and accept on behalf of the Company or decline such reinsurance business as may be offered to the Company from time to time. (b) Authority to Execute Underwriting Documents On the authorisation of the Company to sign and issue in the name of the Company policies and contracts of reinsurance together with such binders and other documents as may be required in relation to the conduct of the reinsurance business of the Company. (c) Authority to Act on Claims Matters On behalf of the Company to receive claims for losses including recoveries, and on the authorisation of the Company to arrange to have provided to the Company loss adjustment services, including arrangements for on-site adjustments, by loss adjusters, and thereafter, pay all such claims including survey investigation, legal, and other usual fees and expenses provided that such payment shall be made only out of funds provided by the Company for the purpose. (d) Authority to Retrocede On behalf and with the authorisation of the Company to effect the reinsurance or retrocession of risks accepted on behalf of the Company by the Manager. (e) Maintenance of Books & Records To assist in maintaining on behalf of the Company, separate from the Manager's own books and records, such books of account showing the financial condition of the Company in accordance with the Exempt Insurance Act 1983-9 and the Companies Act 1982-54, and every statutory amendment of the said Acts, and in accordance with established accounting principles applicable to the business of insurance and reinsurance and to submit each year an annual balance sheet and statement of profit and loss to The Board of Directors and the auditor of the Company. The Company, or its duly authorised representative(s) may at any reasonable time inspect the records maintained on its behalf by the Manager. (f) Financial and Statutory Reporting To prepare and make available, upon the request of the Company's directors, interim financial statements and other reports as may reasonably be required by the Company including the preparation of all statutory and other reports as may be required by the Barbados insurance and/or other regulatory authorities, including filings with the Securities and Exchange Commission of the United States of America. (g) Authority to Collect and Invest Funds To collect, on behalf of the Company, reinsurance premiums and all other amounts due the Company and manage and invest Company funds under the Manager's control, pending transfer of available funds to the Investment Manager, as the Board shall from time to time appoint. (h) Maintenance of Staffed Office To maintain a properly staffed office in Barbados to enable the due performance of all duties required under this Agreement. (i) General Authority Generally to do all things necessary for the management of any insurance or reinsurance business which the company is or may hereafter be authorised to undertake. (j) Maintenance of Accounts and Authority to Disburse Funds To maintain on behalf of the Company such bank accounts as shall be necessary and to make disbursements as required to pay charges and expenses properly incurred in the operation of the Company. (k) Other Professional Service Disclaimer It is agreed that the Manager will not provide legal or tax counsel, investment advice, secretarial services or independent auditing services under this Agreement. (l) Restriction on Services Except as specifically authorized by the Company, during the term of this Agreement and for a period of one year after it is the Manager agrees not to provide management or accounting services for any other company which, by the nature of its operations, is offering, insuring or reinsuring mechanical breakdown and/or extended warranty or related coverages on a multi-state basis in the united States of America or Canada, with respect to motor vehicles, sold by franchised General Motors dealerships. The terms of this paragraph shall apply also to any present or future affiliate of the Manager operating in Barbados. The Manager represents that it is authorized to commit to the terms of this paragraph on behalf of such affiliates. (m) Confidential Treatment of Information The Manager will treat as confidential all information, from any source, concerning the business of the company (including information in all books and records referred to in paragraph 3(h), will not use any of it except for the purpose of performing this agreement, and will not divulge any of it to any persons except (i) as may be required in regulatory filings of which the Company has prior notice, and (ii) to Manager's employees who have a need to know the information in order to perform this Agreement and who agree to be bound by the terms of this paragraph. In the event the Manager or any of its present or former employees becomes legally compelled to disclose any of the information, the Manager (or such individuals, as the case may be) will provide the Company with prompt notice, and will disclose only such portions of the information which are legally required to be disclosed. All documents containing any such information will be provided to the Company upon request, subject to the rights of the Manager under paragraph 3(h) with respect to books and records maintained by the Manager. The Company shall be entitled to specific enforcement in the event of any breach or threatened breach of this paragraph, as well as to any other remedy at law or in equity. For purposes of this paragraph, the term "Manager" shall include any present or future affiliate, wherever located, of Alexander Insurance Managers (Barbados) Ltd., which represents that it is authorized to commit to the terms of this paragraph on behalf of such affiliates. Company data shall not be disclosed to any affiliate of the Manager operating in Bermuda except on conditions satisfactory to the Company. The Manager's obligations under this paragraph shall survive termination of this Agreement. 2. The COMPANY agrees and covenants with the MANAGER to undertake and discharge the following obligations:- (a) General Authority To provide sufficient information and instructions to enable the Manager to perform all its duties set out in this Agreement and to prompty comply with any requests by the Manager for information, instructions, or requests for approval. (b) Ratification of Actions To review, and where appropriate, approve or ratify the performance of reasonable actions taken on behalf of the Company, and the forms of any documents and contracts arising therefrom, pursuant to the terms of this Agreement. (c) Investment Disclaimer To be responsible and have sole responsibility for investment decisions, notwithstanding any advice which may be given by the Managers. (d) Managers Fees To pay the Manager a fee, the amount and basis of which shall be mutually agreed by the Company and the Manager and which may be revised from time to time by endorsement to this Agreement. (e) Indemnification To indemnify and defend and keep indemnified the Manager against all costs, expenses, claims, demands and liabilities for which the Manager and its directors, officers, employees and agents may become liable and against all actions, suits, proceedings, claims or demands of any nature whatsoever which may be taken or made against the Manager or which may be incurred or which may arise directly or indirectly by reason of the provision of services under this Agreement or by reason of anything done or omitted to be done in relation thereto except as same may relate to acts of fraud, negligence, contractual breach by default and/or criminal activity by the Manager. 3. It is mutually agreed and covenanted between the MANAGER and the COMPANY that:- (a) Effective Date This Agreement shall be effective from January 1, 1996 replacing as of that date in its entirety the previous agreement between the Manager and the Company made as of June 13, 1986. (b) Term This Agreement shall be continuous until termianted by ninety days written notice from one party to the other. (c) Continuance of Underwriting Contracts on Termination Termination of this Agreement shall not be deemed to effect the termination, prior to expiration of their contract terms of any policies and binders of insurance and reinsurance effected prior to the date of termination of this Agreement. (d) Contractual Liability on Termination Termination of this Agreement shall not relieve either party of liability for performance of any obligations imposed upon said party with respect to business entered into pursuant to this Agreement, which have not been performed at the time of termination, provided that the Manager shall be reimbursed in full for services rendered and expenses incurred subsequent to the effective date of termination under such terms and conditions as may be agreed upon by both parties to ensure the proper and timely completion of their obligations under this contract. (e) Automatic Termination Clause Anything to the contrary in this Agreement notwithstanding, it shall be automatically terminated without notice by insolvency, receivership, bankruptcy or liquidation of either party. (f) Limitations on Manager's Authority The Manager shall have no power to enter into any contract on behalf of Company unless specifically authorised by Company to do so. (g) Professional Conduct of Manager All services performed by the Manager under this agreement shall be performed in a manner consistent with that level of care and skill ordinarily exercised by professionals providing such services in the insurance industry. However, the Manager and its directors, officers, employees and agents (including any person provided by the Manager to the Company to serve as an officer and/or Director of the Company) shall not be liable to the Company for any acts and/or omissions in the conduct of their duties hereunder, except as same may constitute fraud, negligence, contractual breach by default and/or criminal activity. (h) Ownership of Books and Records All books and records of the Company shall remain the property of the Company and shall be delivered promptly to the Company, or its designee following any termination of this Agreement; provided always that the Manager shall have the right to maintain copies of such books and records maintained by it and shall have the right at any time within six years after any termination of this Agreement to inspect such books and records and to make copies thereof or extracts therefrom. (i) Development System Software The Company and the Manager agree that in the event of termination of this Agreement the Company shall have the right to continued use of the development system software. The Company shall be responsible for the provision of operating system software and appropriate hardware for the purposes of operating the development systems software. In consideration for the provision of the development system software and such related user manuals as may be available at the time of acquisition the Company shall pay to the Manager an amount equal to 10% of fees paid to the Manager during the 24 months prior to the termination date under this contract provided that such amount shall not be less than US$40,000. Ownership of, title to and all rights in and to the Programs and the Documentation including copyright and any other proprietary right, shall at times remain with the manager, except that, enhancements made and used solely for the Company, shall become proprietary to the Company, and shall not be used by the Manager relative to any other client without the prior consent of the Company. Except for proprietary enhancements, the Company agrees not to market, distribute or otherwise allow access to the operating software, other than its support staff or technology support vendor. (j) Assignment of Agreement This Agreement shall inure to the benefit of, and be binding upon the parties hereto and shall not be assignable by either party without the written consent of the other. (k) Governing Law This Agreement shall be governed and construed under the laws of Barbados and the parties hereby agree to submit to the non-exclusive jurisdiction of the Courts of Barbados. (l) Execution of Agreement This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (m) Professional Indemnity Insurance The Manager shall at all times during the term of this Agreement maintain: (i) An errors and omissions insurance policy issued by an insurer reasonably acceptable to Company in an amount not less than U.S.$5,000,000; and (ii) A fidelity bond, issued by a company reasonably acceptable to Company, providing coverage for all officers and other employees of the Manager and its affiliates (including "money and securities" coverage) in an amount not less than U.S.$1,000,000. (n) Manager's Indemnification The Manager agrees to hold harmless and indemnify the Company for losses arising out of fraud, negligence reckless conduct or criminal activity of its employees and affiliates' employees in performing services on behalf of Company under this Agreement. (o) Arbitration (i) It is the intention of the Company and the Manager that the customs and practices of the insurance industry shall be given full effect in the operation and interpretation of this Agreement. The parties agree to act in all things with the highest good faith. If the Company and the Manager cannot mutually resolve any dispute that arises out of or relates to this Agreement, whether such dispute arises before or after termination of this Agreement, the disputes shall be decided through arbitration. (ii) This Agreement and the performance of the parties hereunder shall be interpreted, construed and enforced in accordance with the laws of Barbados. The arbitrators shall consider this Agreement as an honourable engagement rather than as a mere legal obligation and they shall reach their decision from the standpoint of equity and the customs and practices of the insurance industry rather than solely from the standpoint of a strict interpretation of the applicable substantive and procedural law. (iii) In initiating arbitration, either the Company or the Manager shall notify the other in writing of its desire to arbitrate, stating the nature of its dispute and the remedy sought. The party to which the notice is sent shall respond to the notification in writing within ten (10) working days of its receipt. At that time, the party also shall assert any dispute it may have that arises out of or relates to this Agreement. (iv) The arbitration hearing shall be before a panel of three (3) arbitrators, each of who must be a present or former officer of a property, casualty insurance company, other than the Company or the Manager or either's affiliates. The Company and the Manager shall each appoint one arbitrator by written notification to the other within twenty-five (25) days of the date of the mailing of the notification initiating the arbitration. These two (2) arbitrators shall then select the third arbitrator within fourteen (14) days after their selection. Should either the Company or the Manager fail to appoint an arbitrator, or should the two (2) arbitrators be unable to agree upon the choice of a third arbitrator, such appointment shall be left to the then current President of the Barbados Bar Association. Once selected, the arbitrators are to decide all substantive and procedural issues involved by a majority of votes. (v) The arbitration hearing shall be held on the date fixed by the arbitrators in the city of Bridgetown, Barbados, unless some other location is mutually agreed on by the parties. In no event shall this date be later than three (3) months after the appointment of the third arbitrator. The arbitrators shall establish pre-arbitration procedures as warranted by the facts and issues of the particular case. Within twenty (20) days after the end of the arbitration hearing, the arbitrators shall issue a written award, from which there shall be no appeal and which any court having jurisdiction of the subject matter and the parties may reduce to judgement. (vi) In their award, the arbitrators shall apportion the costs of arbitration including, but not limited to, their own fees and expenses, as they deem appropriate. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their officers or agents thereunto truly authorised as of the day and year first here and before written. Signed On Behalf of: ALEXANDER INSURANCE MANAGERS (BARBADOS) LTD. By: s/Ronald W. Jones Ronald W. Jones Title: Managing Director Date: March 19, 1997 Signed on Behalf of: MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED By: c/Peter R.P. Evelyn Peter R.P. Evelyn Title: Director Date: March 19, 1997 INSURANCE MANAGEMENT & ADVISORY SERVICES AGREEMENT BETWEEN ALEXANDER INSURANCE MANAGERS (BARBADOS) LTD. AND MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED ENDORSEMENT NO: 1 Reference Section 2 (e) ROUTINE OPERATIONS Effective January 1, 1996 the fee payable to the Manager for services provided under the contract in relation to day to day operations considered to be in the normal course of business will comprise a fixed and variable component payable monthly in arrears excluding reimbursable out-of-pocket expenses. Fixed Fee US$70,000 per annum or US$5,833.33 per month. Variable Fee US$530 per annum per issued and outstanding series of Participating Stock or US$44.17 per month per issued and outstanding series of Participating Stock. Effective January 1, 1996 the number of series of Participating Stock in the Company was 245. The fees outlined above will cover all normal day to day activities and reporting requirements of the Company as follows: (1) Quarterly financial & SEC reporting including production and distribution of Shareholder Statements. (2) Annual financial and SEC reporting including production and distribution of Shareholder Statements, preparation and distribution of IRS Form 5471 income tax returns and preparation of audit file providing assistance to auditors in the performance of their duties. (3) Coordination and preparation of material relevant to the efficient operation and execution of the Company's AGM and Board of Directors meetings held in conjunction therewith, and attendance at such meetings. (4) Execution of such documents as may be required to be filed by the Company in relation to SEC and State filing compliance. (5) Preparation and distribution of annual dividend cheques. (6) Generally reporting to all enquiries for information and/or reports relevant to the above. SPECIAL PROJECTS With respect to special projects, defined as projects which are typically non-recurring and not in the normal course of day to day operations (e.g. defining, programming and testing of changes to shareholder statements, Board or Shareholder meetings not forming part of the annual meetings, work related to review and/or changes in outside service providers, work related to changes in MIC cession information, etc.) then the Company and the Manager will act in good faith to determine an appropriate budget and/or fee relative to such projects which shall be approved by the Company prior to commencement of work by the Manager. For the purposes of calculating fees relative to special projects the following hourly charge out rates will apply. Senior Account Executives US$125 Assistant Accountant Executives US$ 80 Secretarial / Support Staff US$ 45 Reimbursable out-of-pocket expenses will include all costs such as telephone, telex, telecopier, postage, printing, stationery, travel and any other such expenses incurred by the Manager on behalf of the Company as may be agreed with the company from time to time. Signed On Behalf of: ALEXANDER INSURANCE MANAGERS (BARBADOS) LTD. By: s/Ronald W. Jones Ronald W. Jones Title: Managing Director Date: March 19, 1997 Signed on Behalf of: MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED By: s/Ronald W. Jones Peter R.P. Evelyn Title: Director Date: March 19, 1997 EX-20 3 PROXY MATERIALS FOR 6/21/96 SHAREHOLDERS MEETING MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED Special Meeting of the Shareholders June 21, 1996 PROXY STATEMENT May 24, 1996 This proxy statement is furnished by management of Motors Mechanical Reinsurance Company, Limited (the "Company") in connection with the solicitation of proxies for use at a special meeting of the Shareholders to be held on June 21, 1996 at 10:00 am. at the offices of Alexander Insurance Managers (Barbados) Ltd., Financial Services Centre, Bishop's Court Hill, St. Michael, Barbados. Please complete and return the attached proxy whether or not you plan to attend the meeting. A proxy may be revoked at any time prior to the meeting in writing or by attendance of the shareholder at the meeting. Shareholders of record as of the date of this proxy statement are entitled to notice and to vote at the meeting. As of such date, there were 24,700 participating shares outstanding, held by 423 persons representing 247 series. All the common stock is held by Motors Insurance Corporation ("MIC"), which organized the Company. Each share entitles the holder to one vote on matters on which that class of stock is entitled to vote. The adoption of each of the proposals described in this Proxy Statement requires the affirmative vote of MIC and the affirmative vote of the holders of a majority of the participating shares present at the meeting at which the proposal is voted on. This proxy statement is accompanied by notice of the meeting and a form of proxy. AMENDMENT OF BY-LAW NO. 1 At the 19th Directors' Meeting held on April 11, 1996 the Board approved a clarification to ByLaw 6.1 by the addition of the word "directors" immediately before the word "meetings" in line 3 of that By-Law. Consequently the Board of Directors proposes that the shareholders approve the amendment to By-Law 6.1 to read as follows: 6.1 Place of meeting: Meetings of the directors and of any committee of the directors may be held within or outside Barbados provided that no such meeting shall be held in the United States of America and a majority of directors meetings held each year shall be in Barbados. AMENDMENT OF RESTATED ARTICLES OF INCORPORATION Under the terms of the Company's Restated Articles of Incorporation, each series of Shares bears the cost of the ordinary day-to-day operations of the Company, excluding any United States Federal Income Taxes, based on a pro rata allocation in accordance with the relative earned premiums allocated to such accounts for the fiscal quarter in which the expense or liability is incurred. At a meeting of the Board of Directors held in Barbados on April 11, 1996 the Board reviewed this methodology of allocation of operating expenses with due consideration for the total amounts of expense currently incurred by the Company, the number of series participating in the allocation process and the relationship between expenses incurred and the activity relative to each series. In considering all of the above, the Board determined that the Company has reached a level of maturity and operation whereby it would be more equitable for day to day operating expenses to be allocated equally amongst the number of series outstanding at the quarter end immediately preceding the quarter in which the costs are incurred. During fiscal 1995, the allocation of operating expenses based on relative earned premiums resulted in amounts being charged to the Subsidiary Capital Accounts of outstanding series ranging from zero to US$17,556. Under the proposed revised allocation methodology each series would bear its pro rata share based on the number of series outstanding. This methodology would have resulted in the allocation to each series of approximately US$2,300 in fiscal 1995. The Board has also recommended that to facilitate the marketing of shares, subscribers of new series of Shares would not incur an allocation of operating expense during the period from the date of issue of the Shares to the fiscal year end immediately following such date. In addition, for series in run-off, the Board has recommended that the allocation of operating expenses cease and become zero in the quarter in which the series reflects a fully earned position. The Board of Directors, including the Director representing the Participating Shareholders, unanimously recommend to the shareholders the adoption of the proposed revision to the Company's Restated Articles of Incorporation which they believe represents an equitable allocation of the Company's operating expenses amongst series of shares for the Company's current and future level of operation. In accordance with the foregoing, the Directors propose that the Company's Restated Articles of Incorporation be amended to read as follows: Section 3(1)(2) (2) Any expenses or liabilities attributable to ordinary day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the number of series issued and outstanding at the end of the fiscal quarter immediately preceding the fiscal quarter in which the expense or liability is incurred, provided, that for purposes of such allocation, series of shares issued during the current calendar year and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded. P R O X Y MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED I/We, , a member of the above-named company hereby appoint Ronald W. Jones, Vice President, Finance of the Company or failing him Michael R. Boyce, Secretary of the Company, as my/our proxy to vote for me/us on my/our behalf at the shareholders meeting to be held on the 21st day of June, 1996 or at any adjournment thereof and in particular to vote for: (i) The confirmation of the amendment to By Law 6.1 as contained in the proxy statement dated May 24, 1996. (ii) The approval of the amendment of the Company's Restated Articles of Incorporation as contained in the proxy statement dated May 24, 1996. Dated this _______day of _________________, 1996. - ------------------------------ -------------------------------- Signature Print Name As a Shareholder in Series # __________ (for identification purposes, please indicate the series in which you are a shareholder) Completed Proxy forms should be returned either by facsimile or overnight mail to the Company's Barbados address as follows: c/o Alexander Insurance Manager (Barbados) Ltd. Financial Services Centre, P.O. Box 1304 St. Michael, Barbados, W.I. Facsimile #: (809) 436-9016 PROXY MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS INSURANCE CORPORATION, a member of the above-named company, hereby appoints Peter R.P. Evelyn, Director of the Company or failing him Michael R. Boyce, Secretary of the Company, as its proxy to vote for it on its behalf at a special meeting of the shareholders to be held on the 21st day of June, 1996 or at any adjournment thereof. This Proxy is given specifically and for the sole purpose of voting in favour of the amendment to the Company's By-Law 6.1 concerning the location of meetings and amendment to the Company's Restated Articles of Incorporation concerning the allocation of the Company's day-to-day operating expenses. Dated this ________ day of __________, 1996. MOTORS INSURANCE CORPORATION By______________________________ -------------------------------- Print Name -------------------------------- Title MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTICE NOTICE is hereby given that a Special Meeting of the Shareholders of MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED will be held at the office of Alexander Insurance Managers (Barbados) Ltd., Financial Services Centre, Bishop's Court Hill, St. Michael, Barbados on the 21st day of June, 1996 at 10:00 am. for the following purpose: (i) To consider the proposal to amend By-Law 6.1 (ii) To consider the proposal to amend the Restated Articles of Incorporation. DATED THE DAY OF , 1996 BY ORDER OF THE BOARD Michael R. Boyce AS SECRETARY OF MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED EX-20 4 PROXY MATERIALS FOR 3/27/97 SHAREHOLDERS MEETING MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTICE NOTICE is hereby given that the Tenth Annual Meeting of the Shareholders of MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED will be held at the Miramar Conference Centre, Royal Pavilion Hotel, St. James, Barbados on Thursday the 27th day of March, 1997 at 12:00 noon for the following purposes: 1. Adoption of minutes of previous meeting and of the minutes of the Special Meeting of Shareholders held on June 21, 1996. 2. To receive and consider the financial statements of the Company for the twelve month period ended December 31, 1996 together with the independent auditors' report thereon. 3. To elect directors. 4. To confirm the appointment of Deloitte & Touche as the Company's independent auditors for the year ended December 31, 1997. 5. To conduct any other business that may properly be transacted at an annual meeting. DATED THE 28th DAY OF FEBRUARY, 1997 BY ORDER OF THE BOARD Michael R. Boyce AS SECRETARY OF MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED Annual Meeting March 27, 1997 PROXY STATEMENT February 28th, 1997 This proxy statement is furnished by management of Motors Mechanical Reinsurance Company, Limited (the "Company") in connection with the solicitation of proxies for use at the annual meeting of the Company to be held on March 27, 1997 at 12:00 noon at the Miramar Conference Centre, Royal Pavilion Hotel, St. James, Barbados. Please complete and return the attached proxy whether or not you plan to attend the meeting. A proxy may be revoked at any time prior to the meeting in writing or by attendance of the shareholder at the meeting. Shareholders of record as of the date of this proxy statement are entitled to notice and to vote at the meeting. As of such date, there were 453 participating shares outstanding, held by xxx persons representing 260 series. All the common stock is held by Motors Insurance Corporation ("MIC"), which organized the Company. Each share entitles the holder to one vote on matters on which that class of stock is entitled to vote. This proxy statement is accompanied by notice of the meeting, financial statements for the year ended December 31, 1996 and a form of proxy. ELECTION OF DIRECTORS The Company has a board of directors consisting of six members. Five directors, of whom one is a resident of Barbados, are elected by the holder of the common shares and one director is elected by holders of the participating shares. Directors serve without compensation other than reimbursement of actual expenses. They are elected for one year terms. Mr. Gregory Greenwood has been nominated to stand for election as director by the participating shareholders. Other nominations can be made by the holders of at least two series of participating shares by notifying the secretary in writing at least ten days prior to the meeting. The nominee receiving the highest number of votes will be elected. In addition, five directors will be elected by the common shareholder. It is anticipated that MIC will choose to re-elect William B. Noll, Bernard J. Buselmeier, Louis S. Carrio, Jr., John J. Dunn, Jr. and Peter R.P. Evelyn to serve as directors. Information regarding the age and current occupation of persons nominated to be elected or re-elected as directors by the common shareholder and the person nominated to be elected as director by the participating shareholders is set forth below. Position with the Company and Other Name Age Employment During the Past Five Years William B. Noll 54 President & Director (Executive Vice President & Chief Financial Officer, MIC, March 1993; Group Vice- President, MIC, 1991-1993; Vice President, MIC, 1989-1990). Mr. Noll has been President & Director since 1995. Louis S. Carrio, Jr. 53 Vice-President and Director (Vice-President, MIC). Mr. Carrio has been a Vice-President & Director since 1991. Bernard J. Buselmeier 41 Vice President & Director (Vice-President since 1993 and Treasurer since 1989, MIC). Mr. Buselmeier has been Vice President & Director since 1995. John J. Dunn, Jr. 38 Vice President & Director (Assistant Treasurer since 1995, MIC; Manager, Coopers & Lybrand L.L.P., 1990- 1995) Mr. Dunn has been Vice-President and Director since 1996. Peter R.P. Evelyn 55 Director (Attorney, Evelyn Gittens & Farmer, A Barbados Law firm). Mr. Evelyn has been a Director since 1986. Gregory Greenwood 37 Nominee for Director to be elected by the participating shareholders. (Greenwood Chevrolet, Youngstown, Ohio) ELECTION OF INDEPENDENT AUDITORS The Board of Directors proposes that the shareholders confirm the selection of Deloitte & Touche, Bridgetown, Barbados, as independent auditors to audit the financial statements of the Company for the year ended December 31, 1997. Deloitte & Touche has served as the Company's independent auditors since its inception in 1986. Representatives of Deloitte & Touche are expected to be present at the Annual Meeting of Shareholders. P R O X Y MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED I/We, , a member of the above-named company hereby appoint Ronald W. Jones, Vice President, Finance of the Company or failing him Michael R. Boyce, Secretary of the Company, as my/our proxy to vote for me/us on my/our behalf at the shareholders meeting to be held on the 27th day of March, 1997 or at any adjournment thereof and in particular to vote for: (i) The election of Mr. Gregory Greenwood to serve as a director representing the participating shareholders; (ii) The confirmation of Deloitte & Touche as the independent auditors of the Company for the current fiscal year. Dated this ________ day of __________, 1997. - ------------------------------ --------------------------- Signature Print Name As a Shareholder in Series # __________ (for identification purposes, please indicate the series in which you are a shareholder) Completed Proxy forms should be returned either by facsimile or overnight mail to the Company's Barbados address as follows: c/o Alexander Insurance Managers (Barbados) Ltd. Financial Services Centre, P.O. Box 1304 Bishops Court Hill St. Michael, Barbados, W.I. Facsimile #: (246) 436-9016 PROXY MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS INSURANCE CORPORATION, a member of the above-named company, hereby appoints Bernard J. Buselmeier as its proxy to vote for it on its behalf at the shareholders meeting to be held on the 27th day of March, 1997 or at any adjournment thereof. Dated this ________ day of __________, 1997. MOTORS INSURANCE CORPORATION By______________________________ -------------------------------- Print Name -------------------------------- Title EX-27 5 FINANCIAL DATA SCHEDULE
7 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, 1996 and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 66,647,930 0 0 0 0 0 66,647,930 12,926,272 0 21,855,207 106,041,164 4,284,304 84,084,870 0 0 0 0 0 200,000 17,361,574 106,041,164 36,077,699 5,277,680 64,244 0 24,037,827 9,378,748 548,525 7,454,523 0 7,454,523 0 0 0 7,454,523 0 0 0 0 0 0 0 0 0 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.
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