-----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, Ftn+5KoPuasw5Hb1m5yOhVs/H5+Jnb1xzpQ4V6gv8pOPGxzJhtuGsj4TRZ/xs2Od 4BFQ0qXbqZoYKWfUrrRK4w== 0000898080-98-000053.txt : 19980401 0000898080-98-000053.hdr.sgml : 19980401 ACCESSION NUMBER: 0000898080-98-000053 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE 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: SEC FILE NUMBER: 033-06534 FILM NUMBER: 98583315 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, 1997 Or Transition Report Pursuant to Section 13 or 15(d) of - ----- The Securities Exchange Act of 1934 Commission file number 33-6534 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Exact name of registrant as specified in its charter) Barbados Not Applicable (State or other jurisdiction (I.R.S. employer identification of incorporation or organization) number) Financial Services Centre Bishops Court Hill Not Applicable St. Michael, Barbados, W.I. (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (246) 436-4895 Securities registered pursuant to Section 12(b) of the Act: Name of each Title of each class Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 1998, was $2,152,500.* Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class As of March 1, 1998 ----- ------------------- Common Stock, no-par value 2,000 Participating Stock, no-par value 28,700 * Based on current offering price of $75 per share. PART I Item 1. BUSINESS INTRODUCTION Motors Mechanical Reinsurance Company, Limited (the "Company") was incorpo rated in Barbados on June 12, 1986. It became registered in Barbados as an insurer on June 30, 1986 and commenced insurance operations on December 11, 1987. The business of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by Motors Insurance Corporation ("MIC") to the extent such policies are attributable to an MIC Mechanical account in respect of which a series of shares is issued and outstanding (the "Policies"). These policies are issued either to General Motors Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and retroceded to the Company. Shares of the Company's Participating Stock (the "Shares") are sold to persons designated by owners of motor vehicle sales franchises with respect to which MIC maintains an MIC Mechanical Account. A separate series is created for Shares relating to each MIC Mechanical Account, and a separate "Subsidiary Capital Account" is maintained for each such series. The profitability of the Company reflects both underwriting and investment experience, which is allocated among the Subsidiary Capital Accounts. THE RETROCESSION The Retroceding Company. MIC, the retroceding company under the Retrocession Agreement described below, is a stock insurance company organized under the laws of New York. All of MIC's outstanding stock is owned by GMAC Insurance Holdings, Inc., a subsidiary of General Motors Acceptance Corporation which, in turn, is a wholly owned subsidiary of GM. MIC, directly and through its subsidiaries, offers property and casualty coverages in all 50 states and the District of Columbia, Canada, Europe, Latin America and Asia Pacific. MIC consistently has been awarded A.M. Best Company's insurance financial rating of A + (Superior), one of the highest possible ratings. The Retrocession Agreement -- Principal Agreement. The Company has entered into a "quota share" retrocession agreement (the "Agreement") which became effective as of December 11, 1987. Pursuant to the Agreement, MIC retrocedes to the Company, and the Company is obligated to assume, MIC's risks in respect of policies issued by any MIC subsidiary and reinsured by MIC that cover motor vehicle mechanical service agreements, to the extent that risks under such policies are attributable to an MIC Mechanical Account in respect of which a series of Shares is issued and outstanding. MIC retrocedes 100% of the risk and the Company receives 75% of the original gross premium, reduced by agents' commissions, if any, and cancellations. The remaining 25% of the net premium is retained by MIC as a ceding commission. The Company assumes 75% of the risk with respect to these policies and MIC pays 56.25% of the net premium at the time the policies are written. The remaining 25% of the risk is ceded to the Company and MIC pays 18.75% of the net premium as the premiums are earned. Net settlements between the Company and MIC are made quarterly and accordingly will fluctuate quarter to quarter. The Agreement may be terminated at any time by mutual consent of the parties, or by either party upon 30 days written notice. Upon termination of the Agreement, MIC and the Company will remain bound by their respective obligations under the Agreement with respect to risks retroceded prior to the close of business on the date of termination. However, risks not yet retroceded to the Company under the Agreement shall remain risks of MIC. The Retrocession Agreement -- Supplemental Agreement. MIC from time to time enters into agreements with Franchise owners for which an MIC Mechanical Account is established, pursuant to which MIC, acting for itself and on behalf of certain of its subsidiaries, agrees to cede or retrocede to another insurance company mutually satisfactory to MIC and the respective Franchise owners the unexpired liability on service contracts, insured under the Policies, sold after the date specified in each such agreement. This liability can be ceded or retroceded to dealer-owned companies organized specifically with respect to a particular Franchise or, if a series of Shares is issued which relates to the Franchise, pursuant to an agreement between MIC and the Company (the "Supplemental Retrocession Agreement"). For this purpose, unexpired liability means MIC's liability in respect of the remaining period of coverage under the Policy as of the effective date of the cession. Under the Supplemental Retrocession Agreement, unexpired liability in respect of the Policies is assumed on the same basis as risks retroceded to the Company under the principal Retrocession Agreement. Types of Risks Subject to Retrocession. Coverages assumed under the Agreement are limited to service contracts or insurance policies insured or reinsured by MIC that provide indemnification against specific motor vehicle mechanical repairs not covered by manufacturer's new vehicle warranties. Such service contracts or insurance policies often provide additional coverages, such as towing and rental allowances. Loss Reserves. Reserves are balance sheet liabilities representing estimates of amounts needed in the future to pay claims with respect to insured events which have occurred as of the balance sheet dates. For purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserves are established after periodic actuarial reviews, based on judgments of the effects of technological change, manufacturers' warranties, and MIC's historical experience with motor vehicle mechanical service agreements. Consequently, the determination of loss reserves is an estimate and a process inherently subject to a number of highly variable factors. Any adjustments to reserves are reflected in the operating results for the periods in which they become known. The Company's incurred loss ratios (losses incurred as a percentage of net premium earned) on all mechanical business for the years ended December 31, 1997, 1996, and 1995 were 68.1%, 66.6% and 67.5% respectively. The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1997, 1996 and 1995: Year Ended ----------------------------------------------- 12/31/97 12/31/96 12/31/95 -------- -------- -------- Beginning balance in reserves for losses......... $ 4,284,304 $ 3,480,334 $ 2,660,270 ----------- ----------- ----------- Add-provision for losses incurred related to: Current claim year........ 31,904,950 24,080,078 19,540,192 Prior claim years......... (746,024) (42,251) (109,160) ----------- ---------- ----------- Total................. 31,158,926 24,037,827 19,431,032 ----------- ---------- ----------- Deduct-paid losses attributable to: Current claim year........ 27,024,981 20,330,269 16,461,768 Prior claim years......... 2,997,089 2,903,588 2,149,200 ----------- ---------- ----------- Total................. 30,022,070 23,233,857 18,610,968 ----------- ---------- ----------- Ending balance in reserves for losses.................. $ 5,421,160 $ 4,284,304 $ 3,480,334 =========== =========== =========== The following table analyzes the development of losses and loss adjustment expenses from January 1, 1992 through December 31, 1997.
Years Ended ---------------------------------------------------------------------- 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 -------- -------- -------- -------- -------- -------- Liability for unpaid claims and claims adjustment expense $1,622,855 $1,910,030 $2,660,270 $3,480,334 $4,284,304 $5,421,160 ========== ========== ========== ========== ========== ========== Paid (cumulative) in subsequent year(s) $1,261,788 $1,552,900 $2,149,200 $2,903,588 2,997,089 Estimated unpaid liability as of year end* 226,818 293,406 401,910 534,495 541,191 ---------- ---------- ---------- ---------- ---------- Cumulative Deficiency (Redundancy) $ (134,249) $ (63,724) $ (109,160) $ (42,251) $ (746,024) ========== ========== ========== ========== ========== * Because mechanical breakdown claims are generally paid within 90 days of when they are incurred, liability for unpaid claims incurred in prior years is negligible. Accordingly, liability for unpaid claims incurred in all prior years has been combined at each year end.
The table shows initial estimated reserves at December 31, 1997, 1996, 1995, 1994, 1993, and 1992 and amounts paid on claims unsettled at each prior period end. Claims are typically processed for payment at the time the claim is reported. Therefore, the recorded claim liability at each year end represents the estimated incurred but not reported claims and claims in the process of payment. The cumulative deficiency or redundancy represents the total change in reserve estimates covering prior years. The policies reinsured by the Company are written for multiple years (up to six years) and losses do not occur equally over the period for which the policy is written but tend to be clustered in the later years. Therefore, loss experience for prior years may not be indicative of that for future years. INVESTMENT INCOME A major source of income to an insurance company is income earned on the investment of amounts not currently required to meet losses or expenses. The principal funds available for investment by the Company come from accumulated capital and the cumulative excess of premiums collected over losses and operating expenses paid. The Company's funds are invested in a manner consistent with investment guidelines that are proposed by the Investment Committee for adoption by the Board. The Company invests primarily in U.S. dollar-denominated securities issued outside of the United States by non-United States private or governmental issuers and U.S. dollar-denominated bank certificates of deposit issued by foreign banks and foreign branches of U.S. banks. Subject to the satisfaction of certain conditions, the Company may make limited investments in non-U.S. dollar denominated bonds, on a fully currency-hedged basis. The Company may invest only in securities and certificates which are rated at least Aa3 by Moody's or AA- by Standard & Poor's or the equivalent, or are guaranteed by such an issuer. However, certain unrated securities may also be held if, in the opinion of the investment manager, they have at least equivalent credit standing to the above rating standard. The Investment Committee reviews on a regular basis and, where appropriate, recommends for Board approval revisions to the investment objectives and guidelines for management of the Company's funds. There can be no assurance, however, as to whether a particular investment objective, once adopted, can be achieved or that adverse factors would not cause a decrease in the overall value of the Company's investment portfolio. Investments in non-U.S. securities, particularly those of non-governmental issuers, may involve considerations not ordinarily associated with investments in U.S. issuers. These considerations include, but are not limited to, the possibility of expropriation, the unavailability of financial information or difficulty in interpreting such information when it is prepared under local accounting or regulatory standards, the possible negative impact of political, social or diplomatic developments, and the possible imposition of withholding taxes by local taxing authorities. Rothschild Asset Management Limited ("Rothschild") manages the investment and reinvestment of the Company's funds in accordance with the investment policies and guidelines recommended by the Investment Committee and adopted by the Board. Rothschild is one of the leading institutions engaged in the management of offshore fixed-income portfolios and has been providing this service since 1974 as an affiliate of NM Rothschild and Sons Limited, a prominent merchant bank in London which has been in the investment management business worldwide for more than 100 years. Rothschild charges a management fee of 0.225% per annum on the first $20,000,000 of assets under management, 0.20% per annum on the next $20,000,000 and 0.15% per annum on the excess thereof based on the market value of the Company's investment portfolio at the end of each calendar quarter. ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS The Company has established a Subsidiary Capital Account with respect to the Common Stock as a class, and establishes such an account with respect to each series of Shares at the time a series is issued. Subsidiary Capital Accounts are maintained solely for the purpose of the allocations described below, and do not serve any other legal or accounting function. None of the Company's assets are segregated or earmarked with respect to those accounts. The consideration received by the Company upon the issuance of a particular series of Shares and the Common Stock as a class are allocated to the Subsidiary Capital Account for that series or class. Items of income and expense and losses attributable to insurance underwriting activities are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. Investment experience, and other items of income and expense, gains and losses and distributions with respect to the Capital Stock, are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. All such accounting determinations are made using accounting principles generally accepted in the United States, unless otherwise required by the Articles. For purposes of the following description, items shall be "related" to the Subsidiary Capital Account for the series identified with the MIC Mechanical Account to which such items can be attributed. (1) Allocations with respect to underwriting activities are made as follows: (a) With respect to premiums ceded by MIC to the Company, 100% to the related Subsidiary Capital Account; provided, however, that an amount equal to 1-1/3% of those premiums, net of related ceding commissions, are subtracted from such Subsidiary Capital Account and allocated to the Subsidiary Capital Account for the Common Stock. (b) With respect to any agents' or brokers' commissions, commissions recaptured, unearned premiums, reinsurance premiums ceded, and any United States excise tax, 100% to the related Subsidiary Capital Account. (c) With respect to losses incurred, and any amount of losses recovered through salvage, subrogation, reimbursement or otherwise one hundred percent (100%) shall be allocated to the related Subsidiary Capital Account. For the purpose of this section (1)(c), losses incurred includes both paid and unpaid (reported and unreported) losses. (d) With respect to return premiums, 98-2/3% to the related Subsidiary Capital Account and 1-1/3% to the Subsidiary Capital Account for the Common Stock. (2) Any expenses or liabilities attributable to day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the number of series issued and outstanding at the end of the fiscal quarter immediately preceding the fiscal quarter in which the expense or liability is incurred, provided, that for purposes of such allocation, series of shares issued during the current calendar year and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded. (3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed. (4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses. (5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of the end of the quarter preceding the date on which the expense or liability is incurred. (6) (a) Investment income, net of any direct investment expense, is allocated among the Subsidiary Capital Accounts pro rata based upon the relative Investment Asset Balance (as defined in subparagraph (b) below) of each of those accounts as of the last day of the quarter preceding the quarter for which the investment income is being allocated. For these purposes, net investment income includes realized (but not unrealized) gains and losses. (b) The Investment Asset Balance of each Subsidiary Capital Account is equal to the capital and surplus of each account, increased by: (i) the unearned portions of the written premiums that have been collected by the Company attributable to those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated, net of any applicable commissions and taxes; (ii) the outstanding loss reserves attributable to each of those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated; and (iii) any other outstanding liability that has been charged to the account as of the last day of the quarter preceding the quarter for which the income is being allocated. (7) (a) If, after the credits and charges described in paragraphs 1-6 above are made to the Subsidiary Capital Accounts there exists a deficit in one or more of the accounts, then each such deficit is allocated to and charged against: (i) first, the Subsidiary Capital Account for the Common Stock to the extent of Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common Stock equal to that 1-1/3% of the premiums ceded to the Company during the immediately preceding five-year period which was subtracted from the Subsidiary Capital Accounts for the Shares pursuant to paragraph (1)(a) above, net of losses allocated to that account during such period pursuant to the allocation procedure described in this paragraph (7) and net of return premiums allocated to that Account during such period pursuant to the allocation procedure described in paragraph (1)(d) above); (ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon the relative earned premiums allocated to each such account for the quarter for which the allocation is being made, provided, however, that only accounts which have positive balances are taken into account for purposes of this allocation; (iii) then, the remaining Subsidiary Capital Accounts for the Shares with positive balances as of the last day of the quarter for which the allocation is being made, pro rata, based upon such balances; and (iv) then, to the extent necessary, the Subsidiary Capital Account for the Common Stock. (b) If, as a result of an allocation of a deficit as described in subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated in the manner provided in that subparagraph before applying a subsequent subparagraph. (c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a series of Shares had a deficit that was allocated to and charged against the Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital Account for any series of Shares, then at the end of any succeeding quarter for which that account otherwise would show an account balance greater than zero, the balance is reallocated to the Restricted Earned Surplus until all reductions of that surplus attributable to that Subsidiary Capital Account have been restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro rata based on the relative amount of deficits allocated to such accounts, until all reductions of such Subsidiary Capital Accounts after January 1, 1995 have been restored. Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that account is absorbed by other Subsidiary Capital Accounts, in general, as follows: The amount of such excess losses is charged first to the Restricted Earned Surplus portion of the Subsidiary Capital Account of the Common Stock. Any remaining losses, should the Restricted Earned Surplus be exhausted, is allocated among the Subsidiary Capital Accounts of other participating series. Any then unabsorbed losses are charged to the Subsidiary Capital Account of the Common Stock. Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital Accounts for the Shares in the manner described above must be restored from the Subsidiary Capital Account that drew the funds if at any time it returns to a positive balance. (8) (a) Dividends, payments upon redemption or liquidation (described below), and any other distributions with respect to the Capital Stock are allocated to the Subsidiary Capital Account for the class or series with respect to which the dividend, payment or distribution was made. (b) Where all Shares of a series are repurchased by the Company pursuant to its right of first refusal or redeemed in accordance with the Company's procedures for redemption, the Subsidiary Capital Account for that series is terminated. Thereafter, all underwriting income and expenses, and losses that would have been allocated to the terminated account, are allocated among the Subsidiary Capital Accounts of the existing series of Shares pro rata based upon relative earned premiums attributable to each of those accounts for the calendar quarter in which the item was earned or incurred; provided, however, that a net deficit for any such period is allocated to the Subsidiary Capital Account for the Common Stock (to the extent of Restricted Earned Surplus) before allocating any remaining deficits to the Subsidiary Capital Accounts for the participating series. Using the procedures described above, the Company has allocated items of gain and loss to the Subsidiary Capital Account for each series. Initially each Account had a balance of $7,500 representing the amount paid for the Shares of that series. During the year ended December 31, 1997, $2,701,252 of net underwriting gains and $503,020 of administrative expenses were allocated among the 282 series of Shares outstanding as of December 31, 1997, and $5,704,678 of net investment income was allocated among such series of Shares and the Common Stock. As of December 31, 1997, 223 series of Shares outstanding had balances greater than or equal to $7,500 (ranging from $7,500 to $714,297) and 59 of such series had balances less than $7,500 (ranging from $6,760 to zero). (The amounts in the Subsidiary Capital Accounts can fluctuate substantially and therefore may not be indicative of future accumulated amounts.) At December 31, 1997, an aggregate of $2,808,551 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 46 Subsidiary Capital Accounts and remained outstanding at that date including net deficits of $589,940 associated with 4 series of Shares that have been redeemed. As of December 31, 1997, $1,278,936 of aggregate deficits has been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this amount $581,488 is available to be recovered from deficit accounts should they return to profitability and to the extent that the risk fund is repaid in full. The Subsidiary Capital Account for the Common Stock had, at the time it was established, a balance of approximately $200,000, representing the capital paid in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary Capital Account is not affected directly by underwriting gains and losses attributable to the various Subsidiary Capital Accounts related to series of Shares, but is affected by those gains and losses indirectly to the extent that one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit, in which case an allocation to the Subsidiary Capital Account for the Common Stock will result, in the manner described above. The allocations of income and expense, gains and losses, and distributions described above are subject to approval by the Board, and when so approved are considered final and conclusive and will be binding on all holders of Shares for all purposes including without limitation any redemption of Shares pursuant to the Company's procedures for redemption. Barbados insurance law requires that the Company maintain certain levels of net assets, calculated without regard to unrealized gains or losses. The Company is currently in compliance with these requirements. However, in the event that the Company is unable to comply with such requirements in the future, it has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. EMPLOYEES The Company does not have any full-time employees. Rather, the Company relies on Aon Insurance Managers (Barbados) Ltd. (the "Manager") to handle its day-to-day operations. (See "Business of the Company -- Insurance Management Agreement," below.) In addition, corporate secretarial services for the Company are provided by Colybrand Company Services Limited of St. Michael, Barbados. The Company's Board of Directors and the committees thereof, however, remain responsible for the establishment and implementation of policy decisions. COMPETITION The insurance business is extremely competitive. MIC management believes that at present, MIC and its subsidiaries are, as a group, one of the largest mechanical repair insurers of new GM vehicles in the United States. There are other major companies offering similar coverage. Because the insurance business of the Company is limited to the assumption of certain motor vehicle mechanical service agreement reinsurance business ceded by MIC, the profitability of the Company depends to a large degree on the success experi enced by MIC and its affiliates in competing with those other insurers. Many commercial insurance groups are seeking to capture additional mechanical insurance business by offering to assist automobile dealers in the formation of their own dealer-owned reinsurance companies. MIC has assisted in the establishment of such companies for a number of qualified dealers. However, MIC believes that participation in the Company represents a practical alternative for dealers who do not have the available capital, insurance management expertise or time for the personal involvement necessary for their own reinsurance company. INSURANCE MANAGEMENT AGREEMENT The Company has entered into an Insurance Management Agreement (the "Management Agreement") with the Manager, pursuant to which the Manager collects and disburses funds on behalf of the Company, provides accounting, clerical, telephone, facsimile, information management and other services for the Company, and advises and consults with the Company in regard to all aspects of the Company's retrocession activities. The current Management Agreement is for a continuous term subject to termination by either party upon 90 days advance written notice. Pursuant to the Management Agreement, the Manager has undertaken to maintain an office in Barbados to perform its duties. Further, during the term of the Management Agreement and generally for a period of one year thereafter, the Manager has agreed not to provide management or accounting services for any other company which, by the nature of its operations, is offering, insuring or reinsuring motor vehicle mechanical service agreements or extended warranty or related coverages on a multi-state basis in the United States or Canada with respect to motor vehicles sold by franchised GM dealerships. Under the terms of the Management Agreement, the Company pays the Manager a fixed annual fee plus a monthly variable fee based on the number of outstanding series of Shares at each calendar month end. For the year ended December 31, 1997, the Company incurred fees payable to the Manager in the amount of $217,969. The Manager is responsible for the payment of the salaries of its officers and employees and all office and staff overhead and other costs attributable to its services on the Company's behalf. However, out-of-pocket expenses, such as telephone, facsimile, postage, courier delivery, travel and other items are borne by the Company on an expense reimbursement basis. The Manager performs services similar to those performed for the Company for several other entities. The Manager has twelve employees. In addition, the Manager may draw upon the resources of its affiliates as needed to provide the services contemplated under the Management Agreement. No employee of the Manager devotes all of his or her time to the business of the Company. However, the Manager is obligated to devote all employee time necessary to ensure the performance of the Manager's duties under the Management Agreement. The Manager is subject to the control and direction of the Board. The Manager has served in that capacity since 1986. The Manager was incorporated in Barbados in 1984, and is an affiliate of the Aon Group of Companies ("Aon"), an international insurance brokerage and insurance consulting firm. Aon, through its subsidiaries, offers and insures motor vehicle mechanical service agreements, extended warranty and related coverages with respect to vehicles sold by automobile dealerships in the United States. Under the terms of the Management Agreement the Manager will treat all information concerning the business of the Company as confidential and will not disclose such information to Aon or any Aon affiliate without consent of the Company. BARBADOS REGULATION AND TAXES The Company's business is subject to regulation under the Barbados Exempt Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal requirements of the Exempt Insurance Act require the Company to maintain its principal office in Barbados, appoint various professional advisors, and to meet certain capitalization and annual reporting requirements with respect to its operating activities and solvency requirements. Under the Exempt Insurance Act, no income tax, capital gains tax or other direct tax or impost is levied in Barbados on the results of the Company's operations (except as noted below), or on transfers of securities or assets of the Company to any person who is not a resident of Barbados. The Company has received a guarantee from the Minister of Finance of Barbados that such benefits and exemptions will be available for a period ending December 31, 2031. Until December 31, 2016 the Company will be required to pay an annual licencing fee, which is currently $2,500, to obtain such guarantee. Thereafter, the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum. Item 2. PROPERTIES The Company neither owns nor maintains any office space or facilities. Rather, the business office for the Company is provided by the Manager and is located at The Financial Services Centre, Bishops Court Hill, St. Michael, Barbados. The Company believes that these facilities are adequate for its current and anticipated future needs. In addition, the Manager supplies all equipment for the Company. Item 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no public market for the Shares or the other capital stock of the Company, and none is expected to develop. Transfer of the Shares is restricted by the terms of a Stock Purchase Agreement and requires approval by the Supervisor of Insurance in Barbados. (b) All of the common stock of the Company is held by MIC. As of March 1, 1998 there were 487 holders of Shares of record, representing 287 series of Shares. (c) Under the Articles of Incorporation, the holders of Shares are entitled to receive minimum dividends equal to their pro-rata share of 20% of net income attributable to the associated Subsidiary Capital Account provided (i) the Company meets the Barbados regulatory requirements without regard to any letter of credit or guarantee, and (ii) the related Subsidiary Capital Account would also meet those requirements after giving effect to the dividend. In February of 1998, March of 1997, April of 1996 and April of 1995, the Company declared dividends of $5,171,956, $4,196,730, $4,007,483 and $1,188,614 respectively. These dividends were declared as a varying percentage of earned surplus attributable to each series of Shares with the percentage applicable depending on the amount of earned surplus attributable to such series. (d) The Board considers the minimum regulatory capital requirement, a provision for fluctuations in the value of the Company's investment portfolio and a provision for adverse development of loss experience to determine an appropriate minimum capital level and therefore the amount of dividends to be paid. The Board's objective is to maintain adequate capital to provide capacity for growth in premium so that dividends may be paid annually. There can be no assurance that a prior dividend amount will be paid in the future. Item 6. SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been derived from financial statements audited by Deloitte & Touche, independent chartered accountants, whose report with respect to their audits of the financial statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 is included elsewhere herein.
December 31 --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Premiums Assumed $ 57,071,313 $ 47,410,037 $44,084,952 $38,371,896 $27,779,063 ============ ============ =========== =========== =========== Premiums Earned $ 45,701,595 36,077,699 $28,800,689 $21,316,685 $15,429,611 Net Investment Income 5,704,678 5,341,924 5,563,573 1,227,816 2,700,242 ------------ ------------ ----------- ----------- ----------- Total Income 51,406,273 41,419,623 34,364,262 22,544,501 18,129,853 Less Losses and Expenses 43,503,363 33,965,100 27,462,338 20,825,943 15,425,146 ------------ ------------ ----------- ----------- ----------- Net Income* $ 7,902,910 $ 7,454,523 $ 6,901,924 $ 1,718,558 $ 2,704,707 ============ ============ ============ =========== =========== Dividends Per Common Share 0 0 0 0 Total Assets $123,065,286 $106,041,164 $91,526,976 $66,012,284 $50,359,633 Total Policy Reserves and Other Liabilities 100,999,317 88,479,590 76,350,313 60,246,641 42,430,269 Stockholders' Equity 22,065,969 17,561,574 15,176,663 5,765,643 7,929,364 Dividends Paid on Participating Shares 4,196,730 4,007,483 1,188,614 2,156,304 2,021,504 * Information as to earnings per share is not provided inasmuch as the results for each series of stock will vary with the underwriting experience attributable to each Subsidiary Capital Account established with respect to that series. See Note 2 to the financial statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Company expects to generate sufficient funds from operations to cover current liquidity needs. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of Shares, will continue to be the principal sources of funds for the Company. Although losses are expected to increase due to the increased level of premiums assumed in each preceding year and the anticipated incidence of claims following the expiration of manufacturers' warranties, available funds from the sources identified above have also grown. Net cash provided by operating activities has decreased to $17,304,385 in 1997 from $17,588,199 in 1996 and $16,871,927 in 1995. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1998 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years. The Company had unearned premium reserves of $95,454,588 as of December 31, 1997, and $84,084,870 as of December 31, 1996. These amounts are attributable to the long-term nature of the contracts sold. Such contracts may extend for up to 72 months from date of issue. In addition, the risk of loss to the Company under the contract arises primarily after the underlying manufacturer's warranty expires. For new vehicles, the warranty generally covers 36 months or 36,000 miles. For used vehicles, the applicable warranty period depends on the unexpired portion of the original manufacturer's warranty at the time of purchase of the vehicle. Because the Company has limited exposure to risk of loss prior to expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned. On February 27, 1998, the Board of Directors authorized the payment of dividends aggregating $5,171,956 to eligible holders of Participating Shares. See "Market For Registrant's Common Equity And Related Stockholder Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends. Capital Resources. Capitalization of the Company, as of December 31, 1997, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $2,115,000 (compared with $1,905,000 and $1,807,500 as of December 31, 1996 and 1995, respectively), and earnings retained for use in the business of $18,615,768. Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 1998, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,070,160, compared to total capital and retained earnings computed for purpose of Barbados law of $20,930,768. Results of Operations. During the year ended December 31, 1997, the Company had net income of $7,902,910 compared to $7,454,523 and $6,901,924 for the years ended December 31, 1996 and 1995, respectively. As described below, the increase in net income during 1997 compared to the previous year was primarily as a result of an increase in investment income combined with a slight increase in underwriting income. The increase in net income in 1996 compared to 1995 arose from improved underwriting performance partially offset by a small decrease in investment income. The Company had net underwriting income of $2,198,232 in 1997 compared to $2,112,599 and $1,338,351 for the years ended December 31, 1996 and 1995, respectively. The modest increase in underwriting income during 1997 was the result of an increase in the amount of premiums earned partially offset by an increase in the loss ratio (the ratio of losses incurred to premiums earned) of the Company. During 1997, the Company earned premiums of $45,701,595 compared to $36,077,699 and $28,800,689 during 1996 and 1995, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1997, and the continuing flow of reinsurance premiums from series issued in prior years. During 1997, the Company issued 29 new series of Shares and redeemed 1 series of Shares for a net increase of 28 series. There were a total of 282 series outstanding at December 31, 1997 compared to 254 and 241 series of Shares outstanding at December 31, 1996 and 1995, respectively. The Company incurred losses and administrative expenses during the year ended December 31, 1997 of $43,503,363 compared with $33,965,100 and $27,462,338 for the years ended December 31, 1996 and 1995, respectively. Expenses in 1997 were comprised of losses paid and provisions for losses incurred of $31,118,622, ceding commissions and excise taxes of $11,881,721 and operating expenses of $503,020. Losses incurred in 1996 and 1995 were $24,037,827 and $19,431,032 respectively. The loss ratio for the year ended December 31, 1997 was 68.1% compared to 66.6% and 67.5% for the years ended December 31, 1996 and 1995, respectively. The Company incurred operating expenses during the year ended December 31, 1997 of $503,020 compared to $548,525 and $544,837 for the years ended December 31, 1996 and 1995, respectively. MIC has agreed to pay directly certain costs of registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 1997, $77,239 of such costs were paid directly by MIC compared to $64,848 and $171,079 for the years ended December 31, 1996 and 1995, respectively. Investment income in 1997 was $5,704,678 compared to $5,341,924 and $5,563,573 for the years ended December 31, 1996 and 1995, respectively. The increase in investment income during 1997 compared to 1996 was attributable to an overall increase in funds available for investment and somewhat higher yields available in the U.S. and other global bond markets. The decrease in investment income during 1996 compared to 1995 was attributable to the lower market yields that resulted from the sharp bond market rally of the previous year. The sale of investment securities for the year ended December 31, 1997 resulted in realized gains of $750,923 compared to realized gains of $64,244 and $1,404,232 for the years ended December 31, 1996 and 1995, respectively. The increases in realized gains during the year under review arise primarily as a result of increased sales of investment securities to take advantage of market opportunities presented by fluctuations in interest rates as well as the gains generated by the resumption of recent years trends of declining bond yields. Interest earned for the year ended December 31, 1997 was $4,953,755 compared to $5,277,680 and $4,159,341 for the years ended December 31, 1996 and 1995, respectively. The increase in interest earnings during 1996 compared to 1995 was largely a result of an increase in the amount of assets under management. The decrease from 1996 compared to 1997 resulted from lower available yields. Unrealized appreciation on investment securities held at December 31, 1997 was $1,135,201 compared to unrealized appreciation at December 31, 1996 of $543,521. The increase in unrealized appreciation as of December 31, 1997 compared to December 31, 1996 likewise resulted from the move towards lower yields that occurred during 1997. At December 31, 1997 and 1996, 100% of the Company's investments were in U.S. dollar-denominated fixed-income securities. The Company's investment manager seeks to identify non-U.S. dollar-denominated investments that offer a higher rate of return (net of currency hedging costs) than would be available in the market for similarly rated U.S. dollar-denominated bonds. The instruments used to hedge non-U.S. dollar-denominated investments involve, to varying degrees, elements of credit risk in the event a counterparty should default on its obligation under the hedge instrument. Such credit risk is managed through the selection of financially sound counterparties and periodic monitoring of counterparty financial condition. The Company's investment guidelines do not permit the use of derivatives in managing interest rate risk. Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 1997, the Company had furnished such a letter of credit in the amount of $77,000,000. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. Under this statement all items required to be recognized under accounting standards as components of comprehensive income must be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt this accounting standard in 1998. Adopting the accounting standard will not have an impact on reported net income. The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon the Company's current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ---- 1. Independent Auditors' Report................... 32 2. Balance Sheets, December 31 , 1997 and 1996.... 33 3. Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995 ............................... 34 4. Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ............ 35 5. Notes to Financial Statements.................. 36 - 43 INDEPENDENT AUDITORS' REPORT To the Stockholders of Motors Mechanical Reinsurance Company, Limited Financial Services Centre Bishops Court Hill St. Michael, Barbados We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1997 and 1996 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Motors Mechanical Reinsurance Company, Limited as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with accounting principles generally accepted in the United States of America. s/DELOITTE & TOUCHE CHARTERED ACCOUNTANTS Bridgetown, Barbados February 16, 1998 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (Expressed in U.S. Dollars) 1997 1996 ------------ ------------ ASSETS Investments 3,7 $ 88,585,513 $ 66,647,930 Cash and cash equivalents 7 5,645,482 12,926,272 Accrued investment income 3,178,446 1,453,691 Due from Motors Insurance Corporation 841,927 3,158,064 Deferred acquisition costs 24,813,918 21,855,207 ------------ ------------ Total Assets $123,065,286 $106,041,164 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums $ 95,454,588 $ 84,084,870 Loss reserves 4 5,421,160 4,284,304 Accrued liabilities 123,569 110,416 ------------ ------------ Total Liabilities 100,999,317 88,479,590 ------------ ------------ COMMITMENTS AND CONTINGENCIES 7 STOCKHOLDERS' EQUITY Share capital 5 Common stock - no par value; Authorized - 2,000 shares; Issued and outstanding - 2,000 shares 200,000 200,000 Participating stock - no par value; Authorized - 100,000 shares; Issued and outstanding - 28,200 shares at December 31, 1997 and 25,400 shares at December 31, 1996 2,115,000 1,905,000 ------------ ------------ 2,315,000 2,105,000 Retained earnings 8 18,615,768 14,913,053 Unrealized appreciation on 3 investments 1,135,201 543,521 ------------ ------------ Total Stockholders' Equity 22,065,969 17,561,574 ------------ ------------ Total Liabilities and Stockholders' Equity $123,065,286 $106,041,164 ============ ============ The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Expressed in U.S. Dollars) Years Ended ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- INCOME Reinsurance premiums assumed 6 $57,071,313 $47,410,037 $44,084,952 Increase in unearned premiums (11,369,718) (11,332,338) (15,284,263) ----------- ----------- ----------- Premiums earned 45,701,595 36,077,699 28,800,689 ----------- ----------- ----------- Investment income Interest earned 4,953,755 5,277,680 4,159,341 Realized gains on investments 750,923 64,244 1,404,232 ----------- ----------- ----------- Investment income - net 5,704,678 5,341,924 5,563,573 ---------- ----------- ----------- TOTAL INCOME 51,406,273 41,419,623 34,364,262 ----------- ----------- ----------- EXPENSES Acquisition costs 11,881,721 9,378,748 7,486,469 Losses paid 29,981,766 23,233,857 18,610,968 Increase in loss reserves 1,136,856 803,970 820,064 Administrative expenses Related Parties 219,760 211,001 174,443 Other 283,260 337,524 370,394 ----------- ----------- ----------- TOTAL EXPENSES 43,503,363 33,965,100 27,462,338 ----------- ----------- ----------- NET INCOME FOR THE YEAR 7,902,910 7,454,523 6,901,924 RETAINED EARNINGS, beginning of year 14,913,053 11,517,542 5,796,732 LESS: DIVIDENDS (4,196,730) (4,007,483) (1,188,614) (DEDUCT) ADD: REDEMPTION OF PARTICIPATING STOCK (3,465) (51,529) 7,500 ----------- ----------- ----------- RETAINED EARNINGS, end of year $18,615,768 $14,913,053 $11,517,542 =========== =========== =========== The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Expressed in U.S. dollars) Years Ended --------------------------------------- 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Reinsurance premiums collected $ 57,014,145 $ 46,031,997 $ 42,818,628 Losses and acquisition expenses paid (42,436,530) (34,302,453) (28,599,428) Administrative expenses paid (502,230) (501,147) (540,841) Investment income received 3,229,000 6,359,802 3,193,568 ------------ ------------ ------------ Net cash provided by operating activities 17,304,385 17,588,199 16,871,927 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (318,139,315) (232,194,343) (182,526,749) Sales and maturities of investments 297,544,335 224,400,822 170,483,482 ------------ ------------ ------------ Net cash invested (20,594,980) (7,793,521) (12,043,267) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Participating Stock 217,500 120,000 150,000 Redemption of Participating Stock (10,965) (74,029) 0 Dividends paid (4,196,730) (4,007,483) (1,188,614) ------------ ------------ ------------ Net cash used in financing activities (3,990,195) (3,961,512) (1,038,614) ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,280,790) 5,833,166 3,790,046 CASH AND CASH EQUIVALENTS, beginning of year 12,926,272 7,093,106 3,303,060 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 5,645,482 $ 12,926,272 $ 7,093,106 ============ ============ ============ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 7,902,910 $ 7,454,523 $ 6,901,924 Realized gains on investments (750,923) (64,244) (1,404,232) Change in: Accrued investment income (1,724,755) 1,079,122 (973,618) Due from Motors Insurance Corporation 2,316,137 (62,477) 219,919 Deferred acquisition costs (2,958,711) (2,948,002) (3,975,738) Unearned premiums 11,369,718 11,332,338 15,284,263 Loss reserves 1,136,856 803,970 820,064 Accrued liabilities 13,153 (7,031) (655) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 17,304,385 $ 17,588,199 $ 16,871,927 ============ ============ ============ The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (Expressed in U.S. Dollars) Note 1. OPERATIONS The Company is incorporated under the laws of Barbados and is a licensed insurer under the Exempt Insurance Act, 1983, and amendments thereto. All of the common stock of the Company is owned by Motors Insurance Corporation ("MIC"), a member of the GMAC Insurance Group. MIC is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC. Note 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements are stated in United States dollars and are prepared in conformity with accounting principles generally accepted within the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the 1995 financial statements have been reclassified to conform with the 1996 and 1997 presentation. Premium Income and Acquisition Costs Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned. Premiums are written on the basis of quarterly cessions and earned relative to anticipated loss exposures. Acquisition costs, consisting of ceding commissions and excise taxes, are taken into income on the same basis as premiums are earned. Investments Investments, all of which are available for sale, are comprised of interest-bearing marketable securities which are carried at fair value based on quoted market prices and dealer quotes obtained from an external pricing service. Investments with original maturities of less than 90 days are classified as cash equivalents. Unrealized appreciation (depreciation) is included in stockholders' equity. Realized gains and losses on the sale of investments are included as investment income and are calculated based on average costs. Loss Reserves The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations. Taxation The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period ending December 31, 2016. Thereafter and until December 31, 2031, the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum. Stockholders who are United States residents are taxed in the United States on their share of the Company's income on a deemed distribution basis. Earnings Per Share No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8). Note 3. INVESTMENTS The cost and fair value of investments in debt securities are as follows: Gross Gross Unrealized Unrealized Fair Cost Appreciation Depreciation Value ----------- ------------ ------------ ----------- December 31, 1997: Foreign governments and their agencies $27,300,940 $ 524,635 $(119,450) $27,706,125 Corporations 46,527,723 714,077 (15,881) 47,225,919 Supranationals 13,621,649 31,820 - 13,653,469 ----------- ---------- --------- ----------- Total $87,450,312 $1,270,532 $(135,331) $88,585,513 =========== ========== ========= =========== December 31, 1996: Foreign governments and their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032 Corporations 27,967,937 298,190 (37,604) 28,228,523 Supranationals 6,540,750 137,625 - 6,678,375 ----------- ---------- ---------- ----------- Total $66,104,409 $ 787,276 $ (243,755) $66,647,930 =========== ========== ========== =========== The cost and fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Cost Fair Value ----------- ----------- Due after one year through five years $71,184,911 $72,109,353 Due after five years through ten years 16,265,401 16,476,160 ----------- ----------- $87,450,312 $88,585,513 =========== =========== In 1997, gross gains of $1,494,878 and gross losses of $743,955 were realized. In 1996, gross gains of $1,997,197 and gross losses of $1,932,953 were realized. In 1995, gross gains of $2,694,685 and gross losses of $1,290,453 were realized. The following summarizes net unrealized appreciation (depreciation) on investments: Balance, December 31, 1994 $(1,896,089) Net appreciation 3,547,710 ----------- Balance, December 31, 1995 $ 1,651,621 Net depreciation (1,108,100) ----------- Balance, December 31, 1996 $ 543,521 Net appreciation 591,680 ----------- Balance, December 31, 1997 $ 1,135,201 =========== The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1997, 100% of the Company's investments are denominated in U.S. dollars. The Company uses forward currency contracts to hedge its exposure to changes in currency exchange rates relating to its investments denominated in currencies other than the U.S. dollar. The contracts provide for settlement in U.S. dollars in the future. Credit risk is managed by dealing with financially-sound counterparties. Market risk is mitigated because the forward contracts hedge corresponding non-U.S. dollar investments. Note 4. RESERVES FOR UNPAID LOSSES The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 ---- ---- ---- Beginning balance in reserves for losses $ 4,284,304 $ 3,480,334 $ 2,660,270 ----------- ----------- ----------- Add-provision for losses incurred related to: Current claim year 31,904,950 24,080,078 19,540,192 Prior claim years (746,024) (42,251) (109,160) ----------- ----------- ----------- Total 31,158,926 24,037,827 19,431,032 ----------- ----------- ----------- Deduct paid losses attributable to: Current claim year 27,024,981 20,330,269 16,461,768 Prior claim years 2,997,089 2,903,588 2,149,200 ----------- ----------- ----------- Total 30,022,070 23,233,857 18,610,968 ----------- ----------- ----------- Ending balance in reserves for losses $ 5,421,160 $ 4,284,304 $ 3,480,334 =========== =========== =========== As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1997, 1996 and 1995 decreased by $746,024, $42,251 and $109,160 respectively, because of lower actual claims. Note 5. STOCKHOLDERS' EQUITY All of the Company's Common Stock is held by MIC. A prospectus dated April 21, 1997 is offering 12,000 shares of Participating Stock to persons certified by owners of certain motor vehicle franchises. The offering consists of 120 series of 100 shares each at a price of $75 per share. During 1997, 29 additional series of 100 shares of Participating Stock were issued as compared with 16 for the year ended December 31, 1996. In addition, in 1997 the Board of Directors redeemed 1 series of 100 shares at the request of the shareholders. The redeemed series had been previously placed in run off and had reached a fully earned position during 1997. In the years ended December 31, 1997, 1996 and 1995, costs in the amount of $77,239, $64,484 and $171,079 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses. The holder of Common Stock is entitled to elect five directors, at least one of whom must be a resident of Barbados. The holder of Common Stock has no right to vote with respect to liquidation of the Company. The holder generally has the sole right to vote on matters not specifically reserved to Participating Stock. The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board provided that the director representing holders of the Participating Stock votes in favor of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock. From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 1997, there were no funds held in escrow. Note 6. REINSURANCE PREMIUMS Under the provisions of the retrocession agreement, the Company will assume additional cessions of $31,818,196 ($28,028,290 at December 31, 1996) relating to premiums written by Motors Insurance Corporation but unearned at the respective period ends. The amounts will be received as the premiums are earned, net of related acquisition costs. Note 7. LETTER OF CREDIT The Company has provided an irrevocable letter of credit to MIC, in the amount of $77,000,000 to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and investments are assigned to collateralize the letter of credit. Note 8. RETAINED EARNINGS Items of income or loss and premiums and expenses attributable to insurance underwriting activities are determined as of the end of each calendar quarter and are allocated to the Participating Stockholders' capital accounts. An amount equal to 1-1/3 percent of assumed premiums (net of related ceding commissions) is allocated to the capital account of the Common Stockholder. Such allocations accumulate as restricted retained earnings and may be used to advance capital to any Participating Stockholders who incur a deficit in their capital accounts; any such advances are repayable out of future profitable operations of the respective Participating Stockholder. Amounts allocated to the Common Stockholder, net of advances to Participating Stockholders, are presented in the table below as "net transfers." Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of participating stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such share's pro rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part. Barbados law requires that the Company maintain a minimum margin of solvency based generally on the amount of premiums earned in the preceding year. At January 1, 1998, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $5,070,000. Retained earnings applicable to the Common and Participating Stockholders are comprised of the following: Common Participating Total ------ ------------- ----- Balance (Deficit), December 31, 1994 $ (53,220) $ 5,849,952 $ 5,796,732 Net income for the year 18,627 6,883,297 6,901,924 Net transfers 23,732 (23,732) - Dividends paid - (1,188,614) (1,188,614) Redemption of participating stock - 7,500 7,500 --------- ----------- ----------- Balance (Deficit), December 31, 1995 (10,861) 11,528,403 11,517,542 Net income for the year 14,131 7,440,392 7,454,523 Net transfers 6,147 (6,147) - Dividends paid - (4,007,483) (4,007,483) Redemption of participating stock - (51,529) (51,529) --------- ----------- ----------- Balance December 31, 1996 9,417 14,903,636 14,913,053 Net income for the year 12,304 7,890,606 7,902,910 Net transfers (29,881) 29,881 - Dividends paid - (4,196,730) (4,196,730) Redemption of participating stock - (3,465) (3,465) --------- ----------- ----------- Balance (Deficit), December 31, 1997 $ (8,160) $18,623,928 $18,615,768 ========= =========== =========== PART III Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Five of the current directors of the Company were elected by MIC through its ownership of the Common Stock at the Annual Shareholders' Meeting held on March 27, 1997 and one director was elected by the holders of the Shares at such meeting. The directors and officers of the Company are as follows: POSITION WITH THE COMPANY (AND OTHER EMPLOYMENT DURING NAME AGE PAST FIVE YEARS) William B. Noll............. 55 Chairman, Chief Executive Officer, President and Director (President, GMAC Insurance Holdings, 1997, Executive Vice President & Chief Financial Officer, Motors Insurance Corporation ("MIC") March 1993; Group Vice-President, MIC, 1991- 1993; Vice President, MIC, 1989-1990). Mr. Noll became President and Director in 1995. Louis S. Carrio, Jr........ 54 Vice-President and Director (Vice-Pres- ident, MIC). Mr. Carrio became Vice-President and Director in 1991. Bernard J. Buselmeier....... 42 Vice-President and Director (Vice- President and Treasurer, MIC, March 1993; Treasurer, MIC, 1989-1993) Mr. Buselmeier became Vice-President and Director in 1995. John J. Dunn, Jr............ 39 Vice-President and Director (Assistant Treasurer, MIC, 1995; previously manager, Coopers & Lybrand, L.L.P.) Mr. Dunn became Vice-President and Director in 1996. Peter R. P. Evelyn ........ 56 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm). Mr. Evelyn became a Director in 1986. Gregory Greenwood ......... 39 Director (President, Greenwood Chevrolet Inc., Youngstown, OH) Mr. Greenwood became a Director in 1997. Ronald W. Jones ........... 45 Vice-President, Finance (Managing Director, Aon Insurance Managers (Barbados) Ltd.). Mr. Jones has served as Vice-President, Finance since 1987. Michael B. Boyce........... 57 Secretary (Principal, Colybrand Company Services, Limited, Barbados, since 1993; previously principal, Price Waterhouse, Eastern Caribbean). Mr. Boyce has served as Secretary since 1994. Mr. Boyce served previously as Assistant Secretary to the Company. The directors and officers named above serve in those capacities until the annual meeting of shareholders next following their election. Item 11. EXECUTIVE COMPENSATION No director or officer of the Company is compensated directly for services as such. However, each director and officer of the Company is reimbursed for expenses incurred for attendance at Board, committee, and shareholder meetings. In addition, Mr. Jones is an officer of the Manager, which receives management fees and compensation for financial and administrative services. Mr. Evelyn is a member of the law firm of Evelyn, Gittens & Farmer, which serves as the Company's Barbados counsel; and Mr. Boyce is affiliated with Colybrand Company Services Limited, St. Michael, Barbados, which receives compensation for corporate secretarial services provided to the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MIC owns all of the issued and outstanding shares of the Common Stock of the Company, which consists of 2,000 shares. Gregory Greenwood, a director, owns 100 shares of Participating Stock. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item 11, EXECUTIVE COMPENSATION Part IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Document List (1) Financial Statements The following are included in Item 8: (i) Independent Auditors' Report. (ii) Balance Sheets, December 31, 1997 and 1996. (iii) Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995. (iv) Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995. (v) Notes to Financial Statements. (2) Financial Statement Schedules. Schedules are omitted because of the absence of the conditions under which they are required or because the information required is presented in the financial statements or related notes. (3) Exhibits. The following exhibits are included in response to Item 14(c): 3(a) Restated Articles of Incorporation and amendments thereto filed by reference to Exhibit 3(i) to Quarterly Report on Form 10Q File No. 33-6534 for the quarterly period ended June 30, 1996. 3(b) By-laws of the Company dated June 6, 1986 filed by reference to Exhibit 3(b) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 4 Specimen Participating Stock Certificate filed by reference to Exhibit 4 of Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(a) Form of Principal Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(a) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 10(b) Form of Supplemental Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(b) of the Registration Statement on Form S-1, File No. 33-6534 dated June 18, 1986. 10(c) Specimen Stock Purchase Agreement filed by reference to Exhibit 10(c) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated May 22, 1987. 10(d) Amended and Restated Stock Purchase Agreement between Registrant and Motors Insurance Corporation filed by reference to Exhibit 10(d) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(e) Insurance Management Agreement between Registrant and Aon (formerly Alexander) Insurance Managers (Barbados) Ltd., effective January 1, 1996 filed by reference to Exhibit 10(e) to Annual Report on Form 10K, File No. 33-6534 for the year ended December 31, 1996. 10(f) Investment Management Agreement between Registrant and N.M. Rothschild Asset Management Limited, effective January 26, 1988. 20(a) Proxy solicitation materials sent to shareholders in connection with annual meeting held on March 27, 1997, filed by reference to Exhibit 20(b) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1996. 20(b) Proxy solicitation materials sent to shareholders in connection with annual meeting to be held April 23, 1998 27 Financial Data Schedule. 28(c) Certificate of Barbados Residency filed by reference to Exhibit 28(c) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(a) Certification Form filed by reference to Exhibit 28(a) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(b) Guarantee issued by the Minister of Finance of Barbados filed by reference to Exhibit 99(b) to Amendment No. 2 to Registration Statement on Form S-2, File No. 33-60105, dated April 23, 1996. (b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended December 31, 1997 have been filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant) By s/Ronald W. Jones Ronald W. Jones Vice-President, Finance Date: March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date s/William B. Noll Chairman, Chief Executive March 30, 1990 William B. Noll Officer, President and Director s/Louis S. Carrio, Jr. Vice-President and March 23, 1998 Louis S. Carrio, Jr. Director s/John J. Dunn, Jr. Vice-President and March 30, 1998 John J. Dunn, Jr. Director s/Bernard J. Buselmeier Vice-President and March 25, 1998 Bernard J. Buselmeier Director Director Gregory Greenwood s/Peter R. P. Evelyn Director March 23, 1998 Peter R. P. Evelyn s/Ronald W. Jones Vice-President, March 20, 1998 Ronald W. Jones Finance, Principal Financial and Accounting Officer SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Proxy solicitation materials were sent to shareholders in connection with the annual meeting held on March 27, 1997 and in connection with the 1998 annual meeting, to be held on April 23, 1998. EX-10 2 INVESTMENT MANAGEMENT AGREEMENT INVESTMENT MANAGEMENT AGREEMENT BETWEEN MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED AND N.M. ROTHSCHILD ASSET MANAGEMENT LIMITED THIS AGREEMENT is made and entered into this 26th day of January, 1988, by and between Motors Mechanical Reinsurance Company, Limited, an exempted company, organised and existing under the laws of Barbados, with offices at Collymore Rock, St. Michael, Barbados, W.I. (hereinafter referred to as the "Company"), and N.M. Rothschild Asset Management Limited, a company organised and existing under the laws of England, with its registered office at New Court, St Swithin's Lane, London EC4P 4DU (hereinafter referred to as the "Investment Manager"). W I T N E S S E T H: WHEREAS, the insurance and reinsurance business of the Company in Barbados involves the investment and reinvestment of premium and loss reserves on a regular and continuing basis; WHEREAS, the Investment Manager has demonstrated expertise in the field of investment portfolio management which should allow it to realise a rate of return on the invested reserves of the Company allowing for both Capital appreciation and liquidity; WHEREAS, the Company desires to appoint the Investment Manager to manage an investment account and the Investment Manager desires to act in such capacity under the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the promises and of the mutual covenants herein contained, the Company and the Investment Manager do hereby agree as follows: 1. Investment Account. Effective as of 11th December, 1987 (the "Effective Date"), the Company by resolution of its Board of Directors or Investment Committee segregated certain of its assets in a separate account to be administered and invested by the Investment Manager pursuant to the terms hereof (the "Investment Account"). 2. Appointment. Effective as of the Effective Date, the Company hereby appoints the Investment Manager and the Investment Manager hereby accepts such appointment to act as an Investment Manager with respect to the Investment Account. 3. Discretionary Authority and Responsibility. Subject to written investment guidelines established from time to time by the Company and delivered to the Investment Manager (the "Investment Guidelines"),the Investment Manager shall be responsible in its sole judgment and discretion for the management and investment of the Investment Account. Upon receipt of any amendment to the Investment Guidelines, the Investment Manager shall follow such amended Investment Guidelines as to any transaction thereafter and shall follow such amended Investment Guidelines with respect to the investments existing at the time of such receipt as promptly as practicable. In no event shall the Investment Manager follow any Investment Guideline or any provision of this Agreement which contravenes any applicable law, rule or regulation of any governmental authority or securities exchange applicable to the Investment Manager or, where the Company has made the Investment Manager aware of the same, applicable to the Company; and the Investment Manager shall give prompt written notice to the Company of any such contravention upon becoming aware of the same. The Investment Guidelines shall to the best of the Company's knowledge and belief be consistent with all such applicable laws, rules and regulations. 4. Powers of Investment Manager. The Investment Manager shall have the following powers with respect to the management and investment of the Investment Account, but only to the extent permitted by the Investment Guidelines as they may exist at any given time, (Exhibit A), provided that the purchase or sale of securities may be effected by direct communication between the Investment Manager and the broker handling the transaction with oral followed by written confirmation to the Company pursuant to procedures agreed to by the parties: (a) to purchase or subscribe for any securities or other property; (b) to sell for cash or on credit, to grant options, convert, redeem, exchange for other securities or other property, to grant, purchase, sell, exercise, permit to expire, permit to be held in escrow or otherwise to acquire, dispose of, hold and generally deal in any manner with and in all forms of options in any combination, to enter into stand-by agreements for future investment, either with or without a stand-by fee, or otherwise to dispose of any securities or other property at any time held in the Investment Account; (c) to settle, compromise or submit to arbitration any claims, debts, or damages, due or owing to or from the Investment Account, to commence or defend suits or legal proceedings and to represent the Company with respect to the Investment Account in all suits or legal proceedings in any court of law or before any other body or tribunal; provided, however, that the Company shall retain the right, in its sole discretion and at its own expense, to bring, join in or oppose any such suits, proceedings settlements or arbitrations where or it may be adversely affected by the outcome or where it is advised by counsel that such action is required on its part by applicable law; (d) to exercise any conversion privilege and/or subscription right available in connection with any securities or other property held in the Investment Account or permit the same to lapse; to oppose or to consent to the reorganisation, consolidation, merger, or readjustment of the finances of any corporation, company or association, or to the sale, mortgage, pledge or lease of the property of any corporation, company or association any of the securities of which are held in the Investment Account and to do any act with reference thereto, including the exercise or non exercise of options, the making of agreements or subscriptions and the payment of expenses, assessments or subscriptions, which may be necessary or advisable in connection therewith, and to hold and retain any securities or other property in the Investment Account which it may so acquire; and to deposit any property with any protective, reorganisation or similar committee, and to pay or agree to pay part of the expenses and compensation of any such committee and any assessments levied with respect to property so deposited; (e) to exercise any right, including the right to vote if so directed by the Company, appurtenant to any securities or other property held in the Investment Account; (f) to hold part or all of the Investment Account in an interest bearing deposit account from time to time, i.e. uninvested in securities; (g) to purchase, enter, sell, hold and generally deal in any manner in and with contracts for the immediate or future delivery of financial instruments of any issuer or of any other property; (h) to delegate to one or more agents any of its duties hereunder and in its discretion to provide such information on the composition of the Investment Account as may prove necessary to such agents; and (i) to convert monies received with respect to assets in the Investment Account into U.S. dollars or other currencies through the Investment Manager's customary channels, including without limitation, the effecting of such conversions through one of its affiliates. The words "securities or other property" as used in subparagraph "(a)" shall be deemed to refer to any intangible personal property or part interest therein, wherever situate, including but without being limited to governmental, corporate or personal obligations, trust and participation certificates, certificates of deposit, notes or other evidences of indebtedness or ownership, secured or unsecured, common and preferred stocks and options thereon and any other evidences of indebtedness or ownership, when and if permitted under the Investment Guidelines. 5. Reports, Valuations, Certificates, Meetings. The Company shall certify the appointment of the Investment Manager and the amount of the Investment Account and the Investment Manager shall provide the Company with a certificate evidencing the Investment Manager's duly authorised representatives for communications with the Company. The Investment Manager shall deliver to the Company or its designee monthly statements indicating all investments in the Investment Account and their market values as of the close of business on the last business day of each month together with performance tabulations, a schedule of purchases and sales including brokerage commissions or other fees, if any, and such other reports as shall be reasonably requested from time to time by the Company. The Investment Manager shall, upon the request of the Company, attend meetings with representatives of the Company to discuss the investment of the Investment Account assets or shall submit its views in writing as the Company may request from time to time. The Company shall from time to time provide the Investment Manager with Certificates containing the names and specimen signatures of the individuals who are authorised to act on behalf of the Company. Persons authorised to act on behalf of the Company may delegate various duties under this Agreement provided that the power to act on behalf of the Company to amend this Agreement, to change the amount of the Investment Account, to terminate this Agreement or to amend the Investment Guidelines may not be delegated. The Investment Manager shall be fully protected in relying upon any written notice, instruction, direction or communication that the Investment Manger reasonably believes (based upon the then current Certificate of the Company) to have been executed by an individual who is authorised to act on behalf of the Company as the case may be. 6. Custody of Assets. The Investment Manager shall establish custody arrangements for the physical possession and retention in safe custody to the order of the Company of all of the assets of the Investment Account and shall be responsible for the collection of all income due thereon. 7. Brokerage. The Investment Manager will endeavor to secure the best execution and terms reasonably obtainable in all transactions effected on behalf of the Company. Except as otherwise specifically directed by the Company, the Investment Manager shall have complete discretion to select any broker or dealer (including affiliates of the Investment Manager) to effect such transactions. 8. Representations, Standard of Conduct. The Investment Manager represents and warrants that it has completed, obtained or performed all registrations, filings, approvals, authorisations, consents or examinations required of it by any government governmental authority for the performance of the acts contemplated by this Agreement, and will maintain such status during the term of this Agreement. The Investment Manager acknowledges that it is familiar with and will comply with the responsibilities demanded of a prudent investment manager in the performance of its obligations hereunder. The Investment Manager shall, subject always to the Investment Guidelines, discharge such obligations solely in the interest of the Company and (i) for the exclusive purpose of providing benefits to the Company and defraying reasonable expenses of administering the Investment Account; (ii) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims by diversifying the investments in the Investment Account so as to minimize the risk of large losses; and (iii) in accordance with the provisions of applicable law, as the same may from time to time be amended. The Investment Manager will not be liable for any errors of fact or judgment or for any action lawfully taken or omitted to be taken by it or any agent or representative designated by it, unless such error, act or omission is attributable to negligence or willful misconduct in which event Investment Manager shall indemnify and hold the Company harmless from and against any and all losses and expenses incurred by the Company as a result thereof. The Investment Manager will neither be responsible for any loss of opportunity whereby the value of the Investment Account could have been increased nor for any decline in the value of the Investment Account or other assets of the Company nor for any loss of cash deposited or advanced by the Investment Manger, unless such decline or loss is a direct result of the failure of the Investment Manager or any of its agents to comply with the Company's instructions in which event Investment Manager shall indemnify the Company as aforesaid. 9. Compensation for Services hereunder as Investment Manager. As compensation for services rendered hereunder, the Investment Manager shall be paid a fee equal to 0.225% per annum on the first US$20 million of funds under management, 0.20% per annum on the next $20 million of funds under management and 0.15% per annum of the balance of funds under management in excess of US$40 million where the applicable rate is applied to the market value of the portfolio, as adjusted for capital injections and withdrawals, at each calendar quarter end or the date of termination of this Agreement. During the initial funding period, fees shall be prorated to reflect the actual number of days assets were being managed. Quarterly statements detailing the investment portfolio and fees shall be rendered to the Company and charged against the Investment Account. No other fee or transaction charge shall be imposed on the Investment Account or payable hereunder. 10. Services to Other Clients. The services of the Investment Manger to the Company are not to be deemed exclusive, it being understood that the Investment Manager performs investment advisory and management services for various other clients. The Investment Manager may give advice and take action with respect to any of its other clients which may differ from advice given or from the timing or nature of actions taken with respect to the Investment Account. 11. Bonding. The Investment Manager will procure and maintain at its own expense fidelity bonding in an amount not less than US$50m (fifty million) or such other amount as may be agreed between the parties from time to time. A letter confirming such coverage shall be delivered to the Company by the insurers of the Investment Manager. 12. Assignment of Agreement. The Investment Manager hereby agrees that it shall not assign or transfer this Agreement without the prior written consent of the Company. 13. Termination. This Agreement shall continue in effect until terminated by either the Investment Manager or the Company by giving at least thirty (30) days prior written notice to the other; except that at the request of the Company, the Investment Manager shall remain as Investment Manager hereunder until the Company selects and appoints a successor. 14. Applicable Law. This Agreement shall be construed, administered and enforced according to the laws of England. 15. Notices. All notices or instructions hereunder shall be in writing and shall be sent by registered or certified air mail, telex or other means providing for acknowledgment of receipt addressed to the offices indicated in the preamble hereof or to such other addresses as the parties may from time to time direct. In the event the Investment Manager in its absolute discretion accepts oral instructions from the Company, such instructions shall be confirmed in writing within a reasonable time thereafter. 16. Acknowledgment for Jurisdiction. The Investment Manager and Company agree that all claims arising out of this Agreement shall be litigated in a court of appropriate jurisdiction located in England. 17. Entire Agreement. This Agreement embodies the entire understanding of the parties, supersedes any prior agreements or understandings with respect to the subject matter hereof and cannot be altered, amended, supplemented or any provisions waived, except by written agreement of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED By: ____________________________ By: ______________________________ Title: ____________________________ Title: ______________________________ N.M. ROTHSCHILD ASSET MANAGEMENT LIMITED By: ____________________________ By: ______________________________ Title: ____________________________ Title: ______________________________ INVESTMENT MANAGEMENT AGREEMENT BETWEEN MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED AND ROTHSCHILD ASSET MANAGEMENT LIMITED EXHIBIT A INVESTMENT GUIDELINES Portfolio Objectives The primary investment objectives of the Company are to preserve its real capital base and maintain liquidity needed for claim settlements through a conservative program of investment in high-quality fixed income securities as defined in this statement of guidelines. To achieve these objectives, Investment Manager's strategy and operating practice shall be consistent with the following: I. Investment Instruments Only U.S. dollar denominated fixed income and money market instruments may be utilised, provided that up to 30% of the portfolio may be invested in non-U.S. dollar denominated foreign government bonds. Use of these instruments would be restricted as follows: (A) No investment may be held at a domestic branch of a U.S. bank, however, deposits may be held at foreign branches or subsidiaries of U.S. banks. (B) No investment may be made in issues which have been registered with the S.E.C. (C) No investment may be made in instruments which, at the time of purchase, will prospectively be subject to non-reclaimable withholding tax. (D) No investment may be convertible in nature nor have warrants attaching thereto. (E) Time deposits and CD's held at any one bank may not exceed 15 percent of the portfolio at any point in time. (F) No investment may be in General Motors Corporation or any of its affiliates or subsidiaries. (G) All non-U.S. dollar denominated investments must be fully currency-hedged into U.S. dollars. II. Portfolio Diversification The Investment Manager shall develop guidelines governing the maximum investment in the securities of any single issuer or guarantor so as to provide reasonable diversity among the assets which comprise the Investment Account. A copy of the guidelines in effect at any point in time shall be provided to the Company, which reserves the right to modify them at its discretion. III. Investment Maturity "The duration of the total portfolio shall be kept within a range of + or - 25% of the duration of the benchmark index." No investment may have a maturity (or redemption at the holder's option) in excess of 10 years. Floating rate notes will be deemed to have a duration determined by the date of the next coupon change. However, no floating rate note shall be held whose final maturity or first redemption at holder's option (whichever is sooner) is greater than ten (10) years. IV. Investment Quality Except for interim capital amounts held by the Investment Manager in its own account all investments must meet one of the following criteria in order to qualify for inclusion in the portfolio: (A) The investment must be issued or unconditionally guaranteed by Organization for Economic Cooperation and Development (OECD) governments and, in the opinion of the Investment Manager, such securities are at least equivalent to the minimum quality requirement set forth below. (B) The investment must have at least a Moody's rating of Aa3 or S&P of AA- or the equivalent or A1P1 for maturities under 1 year. (C) Investments specifically approved in writing by MMRC and Citibank, or (D) The investment must be unconditionally guaranteed by a company or entity, satisfying IV(B) above. V. Investment Performance Investment performance will be measured against the (new) Salomon Brothers Eurodollar bond Index (maturities greater than 1 year, excluding issues rates below Aa3/AA-) MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED By: ........................... By: .......................... Title: Title: Date: ........................... Date: .......................... EX-20 3 PROXY MATERIALS FOR APRIL 23, 1998 SHAREHOLDERS' MEETING MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTICE NOTICE is hereby given that the Eleventh Annual Meeting of the Shareholders of MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED will be held at the Miramar Conference Centre, Royal Pavilion Hotel, St. James, Barbados on Thursday the 23rd day of April, 1998 at 12:00 noon for the following purposes: 1. Adoption of minutes of previous meeting of Shareholders held on March 27th, 1997. 2. To receive and consider the financial statements of the Company for the twelve month period ended December 31, 1997 together with the independent auditors' report thereon. 3. To elect directors. 4. To consider the proposal to amend the Restated Articles of Incorporation. 5. To confirm the appointment of Deloitte & Touche as the Company's independent auditors for the year ended December 31, 1998. 6. To conduct any other business that may properly be transacted at an annual meeting. DATED THE 27th DAY OF MARCH, 1998 BY ORDER OF THE BOARD Michael R. Boyce AS SECRETARY OF MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED Annual Meeting April 23rd, 1998 PROXY STATEMENT March 27th, 1998 This proxy statement is furnished by management of Motors Mechanical Reinsurance Company, Limited (the "Company") in connection with the solicitation of proxies for use at the annual meeting of the Company to be held on April 23rd, 1998 at 12:00 noon at the Miramar Conference Centre, Royal Pavilion Hotel, St. James, Barbados. Please complete and return the attached proxy whether or not you plan to attend the meeting. A proxy may be revoked at any time prior to the meeting in writing or by attendance of the shareholder at the meeting. Shareholders of record as of the date of this proxy statement are entitled to notice and to vote at the meeting. As of such date, there were 28,700 participating shares outstanding, held by 487 persons representing 287 series. All the common stock is held by Motors Insurance Corporation ("MIC"), which organized the Company. Each share entitles the holder to one vote on matters on which that class of stock is entitled to vote. This proxy statement is accompanied by notice of the meeting, financial statements for the year ended December 31, 1997 and a form of proxy. ELECTION OF DIRECTORS The Company has a board of directors consisting of six members. Five directors, of whom one is a resident of Barbados, are elected by the holder of the common shares and one director is elected by holders of the participating shares. Directors serve without compensation other than reimbursement of actual expenses. They are elected for one year terms. Mr. William Bradshaw has been nominated to stand for election as director by the participating shareholders. Other nominations can be made by the holders of at least two series of participating shares by notifying the secretary in writing at least ten days prior to the meeting. The nominee receiving the highest number of votes will be elected. In addition, five directors will be elected by the common shareholder. It is anticipated that MIC will choose to re-elect William B. Noll, Bernard J. Buselmeier, Louis S. Carrio, Jr., John J. Dunn, Jr. and Peter R.P. Evelyn to serve as directors. Information regarding the age and current occupation of persons nominated to be elected or re-elected as directors by the common shareholder and the person nominated to be elected as director by the participating shareholders is set forth below. Position with the Company and Other Name Age Employment During the Past Five Years William B. Noll 55 President & Director (President, GMAC Insurance Holdings Inc., 1997, Executive Vice President & Chief Financial Officer, MIC, March 1993; Group Vice President, MIC, 1991-1993; Vice President, MIC, 1989-1990). Mr. Noll has been President & Director since 1995. Louis S. Carrio, Jr. 54 Vice President and Director (Vice President, MIC). Mr. Carrio has been a Vice President & Director since 1991. - 2 - Bernard J. Buselmeier 42 Vice President & Director (Executive Vice President & Chief Financial Officer, Integon Insurance Group, from April 1998; Vice President & Treasurer, MIC, 1993-1998; and Treasurer, MIC, 1989-1993). Mr. Buselmeier has been Vice President and Director since 1995. John J. Dunn, Jr. 39 Vice President & Director (Vice President & Treasurer, MIC, from April 1998; Assistant Treasurer, MIC, 1995-1998; Manager, Coopers & Lybrand L.L.P., 1990-1995) Mr. Dunn has been Vice President and Director since 1996. Peter R.P. Evelyn 56 Director (Attorney, Evelyn Gittens & Farmer, A Barbados Law firm). Mr. Evelyn has been a Director since 1986. William Bradshaw 37 Nominee for Director to be elected by the participating shareholders. (Bradshaw Automotive Group, Greer, South Carolina) AMENDMENTS OF RESTATED ARTICLES OF INCORPORATION Allocation of Operating Expenses Under the terms of the Company's Restated Articles of Incorporation, no expenses relating to ordinary day-to-day operations of the Company are allocated to the Subsidiary Capital Account of a series of Shares for the period from the date of issuance of the Shares to the fiscal year end immediately following such date. Management has determined that this provision can artificially influence the timing of the purchase of Shares. In order to prevent such an unintended incentive, Management proposes that the Articles be amended to provide that no operating expenses shall be allocated to the Subsidiary Capital Account for a series of Shares for the first four fiscal quarters that end after the issuance of the Shares. Accordingly, Management proposes that the Company's Restated Articles of Incorporation be amended to read as follows: - 3 - Section 3(1)(2) Any expenses or liabilities attributable to ordinary day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata on the basis of the number of series issued and outstanding at the end of the fiscal quarter in which the expense or liability is incurred, provided that for purposes of such allocation, series of Shares issued at any time during the twelve calendar months preceding the end of the fiscal quarter in which the expense or liability is incurred, and series with respect to which the unearned premium is zero as of such date, shall be excluded. Restricted Earned Surplus Under the terms of the Company's Restated Articles of Incorporation, Restricted Earned Surplus generally is equal to the amount of premiums allocated to the Subsidiary Capital Account for the Common shares during a rolling five-year period, reduced by the amount of deficits allocated to such Account during such five-year period. In order to accelerate the point in time when earnings attributable to the Common shares become available to absorb Subsidiary Capital Account deficits, Management has determined that, for purposes of determining Restricted Earned Surplus, reductions for deficits should be taken into account only to the extent that they relate to amounts credited to the Subsidiary Capital Account for the Common shares during the rolling five-year calculation period. Management believes that this rule should be implemented at the earliest time possible taking into account the Company's past accounting practices with respect to Restricted Earned Surplus. Accordingly, Management proposes that, effective as of January 1, 1997, the definition of Restricted Earned Surplus contained under "Definitions" in Section 3 of the Company's Restated Articles of Incorporation should be amended as follows: Restricted Earned Surplus - - At any point in time, the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common shares equal to: (i) premiums allocated to the Subsidiary Capital Account of the Common shares during the immediately preceding five-year period pursuant to Section 3(1)(1)(a), plus (ii) deficits restored to such Account during such period pursuant to Section 3(1)(7)(c), less (iii) return premiums allocated to such account during such period pursuant to Section 3(1)(1)(d), and less (iv) deficits allocated to such account during such period pursuant to Section 3(1)(7)(a)(i) to the extent that they relate to amounts described in clauses (i) and (ii) of this definition. ELECTION OF INDEPENDENT AUDITORS The Board of Directors proposes that the shareholders confirm the selection of Deloitte & Touche, Bridgetown, Barbados, as independent auditors to audit the financial statements of the Company for the year ended December 31, 1998. Deloitte & Touche has served as the Company's independent auditors since its inception in 1986. Representatives of Deloitte & Touche are expected to be present at the Annual Meeting of Shareholders. P R O X Y MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED I/We, , a member of the above-named company hereby appoint Ronald W. Jones, Vice President, Finance of the Company or failing him Michael R. Boyce, Secretary of the Company, as my/our proxy to vote for me/us on my/our behalf at the shareholders meeting to be held on the 23rd day of April, 1998 or at any adjournment thereof and in particular to vote for: (i) The election of Mr. William Bradshaw to serve as a director representing the participating shareholders. (ii) The adoption of amendments to the Company's Restated Articles of Incorporation as they relate to Allocation of Operating Expenses and Restricted Earned Surplus computations. (iii) The confirmation of Deloitte & Touche as the independent auditors of the Company for the current fiscal year. Dated this ________ day of __________, 1998. - ------------------------------ --------------------------- Signature Print Name As a Shareholder in Series # __________ (for identification purposes, please indicate the series in which you are a shareholder) Completed Proxy forms should be returned either by facsimile or overnight mail to the Company's Barbados address as follows: c/o Aon Insurance Managers (Barbados) Ltd. Financial Services Centre, P.O. Box 1304, Bishops Court Hill, St. Michael, Barbados, W.I. Facsimile #: (246) 436-9016 PROXY MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS INSURANCE CORPORATION, a member of the above-named company, hereby appoints John J. Dunn, Jr., Director of the Company or failing him Robert E. Capstack, Alternate Director of the Company for Louis S. Carrio, Jr., as its proxy to vote for it on its behalf at the shareholders meeting to be held on the 23rd day of April, 1998 or at any adjournment thereof. Dated this ________ day of __________, 1998 MOTORS INSURANCE CORPORATION By______________________________ ________________________________ Print Name ________________________________ Title EX-27 4 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, 1997 and is qualified in its entirety by references to such financial statements. 12-MOS DEC-31-1997 JAN-01-1997 DEC-30-1997 88,585,513 0 0 0 0 0 88,585,513 5,645,482 0 24,813,918 123,065,286 5,421,160 95,454,588 0 0 0 0 0 200,000 21,865,969 123,065,286 45,701,595 4,953,755 750,923 0 31,118,522 11,881,721 503,020 7,902,910 0 7,902,910 0 0 0 7,902,910 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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