-----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, Wdn4oqs9GSI0w5gS57G5uDm7b5MIUxiJ7ZiTmVcEClK61MuVjqQRkcmWbnOEcuZZ zK1/HVQqfGBN8MroAobzow== 0000898080-99-000117.txt : 19990402 0000898080-99-000117.hdr.sgml : 19990402 ACCESSION NUMBER: 0000898080-99-000117 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99580958 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, 1998 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, 1999, was $2,362,500.* 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, 1999 Common Stock, no-par value 2,000 Participating Stock, no-par value 31,500 * 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 entities selling motor vehicles 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 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, 1998, 1997, and 1996 were 79.4%, 68.1% and 66.6% respectively. The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1998, 1997 and 1996:
Year Ended 12/31/98 12/31/97 12/31/96 Beginning balance in reserves for losses......... $ 5,421,160 $ 4,284,304 $ 3,480,334 ----------- ----------- ----------- Add-provision for losses incurred related to: Current claim year........ 45,843,093 31,904,950 24,080,078 Prior claim years......... (290,547) (746,024) (42,251) ----------- ----------- ---------- Total................. 45,552,546 31,158,926 24,037,827 ----------- ----------- ---------- Deduct-paid losses attributable to: Current claim year........ 40,767,738 27,024,981 20,330,269 Prior claim years......... 4,812,150 2,997,089 2,903,588 ----------- ----------- ---------- Total................. 45,579,888 30,022,070 23,233,857 ----------- ----------- ---------- Ending balance in reserves for losses.................. $ 5,393,818 $ 5,421,160 $ 4,284,304 =========== =========== ===========
The following table analyzes the development of losses and loss adjustment expenses from January 1, 1993 through December 31, 1998.
Years Ended 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 Liability for unpaid claims and claims adjustment expense $1,910,030 $2,660,270 $3,480,334 $4,284,304 $5,421,160 $5,393,818 ========== ========== ========== ========== ========== ========== Paid (cumulative) in subsequent year(s) $1,552,900 $2,149,200 $2,903,588 $2,997,089 $4,812,150 Estimated unpaid liability as of year end* 293,406 401,910 534,495 541,191 318,463 ---------- ---------- ---------- ---------- ---------- Cumulative Redundancy $ 63,724 $ 109,160 $ 42,251 $ 746,024 $ 290,547 ========== ========== ========== ========== ==========
*/ 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, 1998, 1997, 1996, 1995, 1994, and 1993 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. At present, 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 also may invest up to 20% of its portfolio in equities. 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 bond portfolio 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 at any time during the twelve calendar months preceding the end of the fiscal quarter in which the expense or liability is incurred and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded. (3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed. (4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses. (5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of 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, 1998, $2,626,787 of net underwriting losses and $555,321 of administrative expenses were allocated among the 315 series of Shares outstanding as of December 31, 1998, and $10,375,464 of net investment income was allocated among such series of Shares and the Common Stock. As of December 31, 1998, 236 series of Shares outstanding had balances greater than or equal to $7,500 (ranging from $7,672 to $809,892) and 79 of such series had balances less than $7,500 (ranging from $7,453 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, 1998, an aggregate of $3,530,320 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 67 Subsidiary Capital Accounts and remained outstanding at that date including net deficits of $946,174 associated with 7 series of Shares that have been redeemed. As of December 31, 1998, $2,702,259 of aggregate deficits has been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this amount $2,004,811 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, 1998, the Company incurred fees payable to the Manager in the amount of $228,968. 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 thirteen 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, 1998. 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, 1999 there were 545 holders of Shares of record, representing 315 series of Shares. (c) Under the Articles of Incorporation, the holders of Shares are entitled to receive minimum dividends equal to their pro-rata share of 20% of net income attributable to the associated Subsidiary Capital Account provided (I) the Company meets the Barbados regulatory requirements without regard to any letter of credit or guarantee, and (ii) the related Subsidiary Capital Account would also meet those requirements after giving effect to the dividend. In February of 1999, February of 1998, March of 1997 and April of 1996, the Company declared dividends of $4,066,464, $5,171,956, $4,196,730 and $4,007,483 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, 1998, 1997, 1996, 1995 and 1994 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, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 is included elsewhere herein.
December 31 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Premiums Assumed $ 72,634,160 $ 57,071,313 $ 47,410,037 $ 44,084,952 $ 38,371,896 ============= ============ ============ ============ ============ Premiums Earned $ 57,845,674 $ 45,701,595 36,077,699 $ 28,800,689 $ 21,316,685 Net Investment Income 10,375,464 5,704,678 5,341,924 5,563,573 1,227,816 ------------ ------------ ------------ ------------ ------------ Total Income 68,221,138 51,406,273 41,419,623 34,364,262 22,544,501 Less Losses and Expenses 61,027,782 43,503,363 33,965,100 27,462,338 20,825,943 ------------ ------------ ------------ ------------ ------------ Net Income* $ 7,193,356 $ 7,902,910 $ 7,454,523 $ 6,901,924 $ 1,718,558 ============ ============ ============ ============ ============ Dividends Per Common Share 0 0 0 0 0 Total Assets $139,312,516 $123,065,286 $106,041,164 $ 91,526,976 $ 66,012,284 Total Policy Reserves and Other Liabilities 115,786,948 100,999,317 88,479,590 76,350,313 60,246,641 Stockholders' Equity 23,525,568 22,065,969 17,561,574 15,176,663 5,765,643 Dividends Paid on Participating Shares 5,171,956 4,196,730 4,007,483 1,188,614 2,156,304
*/ 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 $16,077,051 in 1998 from $17,304,385 in 1997 and $17,588,199 in 1996. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1999 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 $110,243,074 as of December 31, 1998, and $95,454,588 as of December 31, 1997. 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 26, 1999, the Board of Directors authorized the payment of dividends aggregating $4,066,464 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, 1998, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $2,362,500 (compared with $2,115,000 and $1,905,000 as of December 31, 1997 and 1996, respectively), and earnings retained for use in the business of $20,629,009. 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, 1999, the Company's required minimum net assets computed in accordance with Barbados law was approximately $6,284,567, compared to total capital and retained earnings computed for purposes of Barbados law of $23,191,509. Results of Operations. During the year ended December 31, 1998, the Company had net income of $7,193,356 compared to $7,902,910 and $7,454,523 for the years ended December 31, 1997 and 1996, respectively. As described below, the decrease in net income during 1998 compared to the previous year was primarily a result of an underwriting loss which partially offset an increase in investment income. The increase in net income in 1997 compared to 1996 was primarily a result of an increase in investment income combined with a modest increase in underwriting income. The Company had a net underwriting loss of $3,182,108 in 1998 compared to net underwriting income of $2,198,232 and $2,112,599 for the years ended December 31, 1997 and 1996, respectively. The net underwriting loss recorded during 1998 reflected an increase in the Company's loss ratio (the ratio of losses incurred to premiums earned) as more fully described below. 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 of the Company. During 1998, the Company earned premiums of $57,845,674 compared to $45,701,595 and $36,077,699 during 1997 and 1996, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1998, and the continuing flow of reinsurance premiums from series issued in prior years. During 1998, the Company issued 37 new series of Shares and redeemed 4 series of Shares for a net increase of 33 series. There were a total of 315 series outstanding at December 31, 1998 compared to 282 and 254 series of Shares outstanding at December 31, 1997 and 1996, respectively. The Company incurred losses and administrative expenses during the year ended December 31, 1998 of $61,027,782 compared with $43,503,363 and $33,965,100 for the years ended December 31, 1997 and 1996, respectively. Expenses in 1998 were comprised of losses paid and provisions for losses incurred of $45,552,545, ceding commissions and excise taxes of $14,919,916 and operating expenses of $555,321. Losses incurred in 1997 and 1996 were $31,118,622 and $24,037,827 respectively. The loss ratio for the year ended December 31, 1998 was 78.7% compared to 68.1% and 66.6% for the years ended December 31, 1997 and 1996, respectively. The loss ratio in 1998 resulted from loss experience which was heavily influenced by the type of repairs and price of repaired parts. During the second and third quarters 1998 unusually hot weather in certain areas of the United States resulted in a higher number of covered repairs for mechanical components such as air conditioners and water pumps which contributed to higher loss costs. Loss experience in 1998 also reflected, in part, implementation of previously announced increases in suggested list prices of parts to dealers. The ceding company, MIC, believes that dealer management is a key factor in loss experience. Many of the dealerships producing mechanical business assumed by the Company are profitable. At dealerships where loss experience has been unprofitable, MIC has recently implemented loss cost procedures including on-site adjusters and/or empowerment restrictions. MIC believes these loss cost procedures should have a favourable effect on the performance of those unprofitable accounts. However, there can be no assurance that such results will be achieved. The Company incurred operating expenses during the year ended December 31, 1998 of $555,321 compared to $503,020 and $548,525 for the years ended December 31, 1997 and 1996, 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 1998, $69,280 of such costs were paid directly by MIC compared to $77,329 and $64,848 for the years ended December 31, 1997 and 1996, respectively. Investment income in 1998 was $10,375,464 compared to $5,704,678 and $5,341,924 for the years ended December 31, 1997 and 1996, respectively. The increase in investment income during 1998 arose primarily as a result of increases in gains on sale of investment securities as more fully described below. 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 sale of investment securities for the year ended December 31, 1998 resulted in realized gains of $4,404,651 compared to realized gains of $750,923 and $64,244 for the years ended December 31, 1997 and 1996, respectively. The increases in realized gains during the year under review arose primarily as a result of increased sales of investment securities to take advantage of market opportunities presented by uncertainty in the U.S. dollar denominated international equity markets. Interest earned for the year ended December 31, 1998 was $5,970,813 compared to $4,953,755 and $5,277,680 for the years ended December 31, 1997 and 1996, respectively. The increase in interest earned during 1998 compared to 1997 was largely a result of an increase in the amount of assets under management combined with a slight increase in the overall rate of return. The decrease from 1996 compared to 1997 resulted from lower available yields. Unrealized appreciation on investment securities held at December 31, 1998 was $334,059 compared to unrealized appreciation at December 31, 1997 of $1,135,201. The decrease in unrealized appreciation as of December 31, 1998 compared to December 31, 1997 resulted from sales of investment securities during the third and fourth quarters of 1998 to take advantage of market conditions. Although at December 31, 1998 and 1997, 100% of the Company's investments were in U.S. dollar-denominated fixed-income securities, the Company's fixed income investment manager seeks on occasion 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. 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, 1998, the Company had furnished such a letter of credit in the amount of $88,075,000. In June 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards ("FASB") No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. Under this statement all items required to be recognized under accounting standards as components of comprehensive income must be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has adopted this accounting standard in 1998. Adopting the accounting standard has no impact on reported net income of the Company. Year 2000 Many computerized systems and microprocessors that are used by the Company's Manager have the potential for operational problems if they lack the ability to handle the transition to the Year 2000. The effects of the Year 2000 issue are also complicated by the Company's dependence on its common shareholder, from whom the Company assumes all of its business, as well as other service providers such as investment advisors and custodians. The Year 2000 issue has the potential to cause disruption to the business of the Company and its customers. In early 1998, the Company initiated communications with its Manager and other service and technology providers in order to assess and reduce the risk that the Company's operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. Motors Insurance Corporation, the Company's key retroceding company and common shareholder, has completed its Year 2000 assessment phase and is in the remediation phase with respect to its critical systems. The Company does not separately own or license any computers or computer software applications, instead it has outsourced these functions through an Insurance Management Agreement. To date, the Company has not incurred, expensed or capitalized amounts related to the Year 2000 remediation. The Company does not expect to incur incremental expenses or to forego or delay information technology projects due to Year 2000. In view of the foregoing, the Company does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect the Company and third parties that are critical to the Company's operations. In the event that the Company or its service providers are unable to complete remedial actions or are unable to implement adequate contingency plans in the event that problems are encountered, there could be a material adverse effect on the Company's business, results of operations or financial condition. 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................... 34 2. Balance Sheets, December 31 , 1998 and 1997.... 35 3. Statements of Income and Retained Earnings for the years ended December 31, 1998, 1997 and 1996 ............................... 36 4. Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ............ 37 5. Statement of Changes in Shareholders Equity.... 38 5. Notes to Financial Statements.................. 39 - 46 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, 1998 and 1997 and the related statements of income and retained earnings, and cash flows and changes for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows and its changes for each of the three years in the period ended December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. s/DELOITTE & TOUCHE CHARTERED ACCOUNTANTS Bridgetown, Barbados February 12, 1999 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (Expressed in U.S. Dollars)
Notes 1998 1997 ----- ------------ ------------ ASSETS Investments 3,7 $ 89,474,377 $ 88,585,513 Cash and cash equivalents 7 19,504,563 5,645,482 Accrued investment income 1,788,490 3,178,446 Due (to)/from Motors Insurance Corporation (115,667) 841,927 Deferred acquisition costs 28,660,753 24,813,918 ------------ ------------ Total Assets 139,312,516 123,065,286 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums $110,243,074 $ 95,454,588 Loss reserves 4 5,393,818 5,421,160 Accrued liabilities 150,056 123,569 ------------ ------------ Total Liabilities 115,786,948 100,999,317 ------------ ------------ 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 - 31,500 shares at December 31, 1998 and 28,200 shares at December 31, 1997 2,362,500 2,115,000 ------------ ----------- 2,562,500 2,315,000 Retained earnings 8 20,629,009 18,615,768 Accumulated other comprehensive 3 income 334,059 1,135,201 ------------ ----------- Total Stockholders' Equity 23,525,568 22,065,969 ------------ ------------ Total Liabilities and Stockholders' Equity $139,312,516 $123,065,286 ============ ============
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, 1998, 1997 AND 1996 (Expressed in U.S. Dollars)
Notes Years Ended December 31 ----- -------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- INCOME Reinsurance premiums assumed 6 $72,634,160 $57,071,313 $47,410,037 Increase in unearned premiums (14,788,486) (11,369,718) (11,332,338) ----------- ----------- ----------- Premiums earned 57,845,674 45,701,595 36,077,699 ----------- ----------- ----------- Investment income Interest earned 5,970,813 4,953,755 5,277,680 Realized gains on investments - net 4,404,651 750,923 64,244 ----------- ----------- ----------- Investment income 10,375,464 5,704,678 5,341,924 ----------- ----------- ----------- TOTAL INCOME 68,221,138 51,406,273 41,419,623 ----------- ----------- ----------- EXPENSES Acquisition costs 14,919,916 11,881,721 9,378,748 Losses paid 45,579,887 29,981,766 23,233,857 (Decrease)/Increase in loss reserves (27,342) 1,136,856 803,970 Administrative expenses Related Parties 225,922 219,760 211,001 Other 329,399 283,260 337,524 ----------- ----------- ----------- TOTAL EXPENSES 61,027,782 43,503,363 33,965,100 ----------- ----------- ----------- NET INCOME FOR THE YEAR 7,193,356 7,902,910 7,454,523 RETAINED EARNINGS, beginning of year 18,615,768 14,913,053 11,517,542 LESS: DIVIDENDS (5,171,956) (4,196,730) (4,007,483) DEDUCT REDEMPTION OF PARTICIPATING STOCK (8,159) (3,465) (51,529) ----------- ----------- ----------- RETAINED EARNINGS, end of year $20,629,009 $18,615,768 $14,913,053 =========== =========== ===========
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, 1998, 1997 AND 1996 (Expressed in U.S. dollars)
Years Ended December 31 ----------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Reinsurance premiums collected $67,293,382 $57,014,145 $46,031,997 Losses and acquisition expenses paid (58,004,044) (42,436,530) (34,302,453) Administrative expenses paid (581,648) (502,230) (501,147) Investment income received 7,369,361 3,229,000 6,359,802 ----------- ----------- ----------- Net cash provided by operating activities 16,077,051 17,304,385 17,588,199 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (324,678,378) (318,139,315) (232,194,343) Sales and maturities of investments 327,393,023 297,544,335 224,400,822 ------------ ----------- ------------ Net cash from/(used) in investing activities 2,714,645 (20,594,980) (7,793,521) ------------ ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Participating Stock 277,500 217,500 120,000 Redemption of Participating Stock (38,159) (10,965) (74,029) Dividends paid (5,171,956) (4,196,730) (4,007,483) ----------- ----------- ----------- Net cash used in financing activities (4,932,615) (3,990,195) (3,961,512) ----------- ----------- ----------- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 13,859,081 (7,280,790) 5,833,166 CASH AND CASH EQUIVALENTS, beginning of year 5,645,482 12,926,272 7,093,106 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $19,504,563 $ 5,645,482 $12,926,272 =========== =========== =========== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 7,193,356 $7,902,910 $ 7,454,523 Realized gains on investments (4,404,651) (750,923) (64,244) Change in: Accrued investment income 1,389,956 (1,724,755) 1,079,122 Due from Motors Insurance Corporation 957,594 2,316,137 (62,477) Deferred acquisition costs (3,846,835) (2,958,711) (2,948,002) Unearned premiums 14,788,486 11,369,718 11,332,338 Loss reserves (27,342) 1,136,856 803,970 Accrued liabilities 26,487 13,153 (7,031) ----------- ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 16,077,051 $ 17,304,385 $ 17,588,199 ============ ============ ============
The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (Expressed in U.S. Dollars)
December 31, 1998 ------------------------------------------------------------------------------------------ Accumulated Total Other Shareholders' Comprehensive Retained Comprehensive Common Participating Equity Income Earnings Income Stock Stock ------ ------ -------- ------ ----- ----- Balance at December 31, 1997 $22,065,969 $ - $18,615,768 $1,135,201 $200,000 $2,115,000 Comprehensive Income: Net income 7,193,356 7,193,356 7,193,356 - - - ---------- Other comprehensive income, net of tax: Unrealized loss on securities- net of reclassification (801,142) (801,142) - (801,142) - - ---------- Comprehensive income - $6,392,214 - - - - =========== Dividends declared on participating stock (5,171,956) (5,171,956) - - - Participating stock Issued 285,000 - - - 285,000 Redeemed (45,659) (8,159) - - (37,500) ----------- ----------- ---------- --------- ----------- Balance at December 31, 1998 $23,525,568 $20,629,009 $ 334,059 $200,000 $2,362,500 ============ ============ ========== ========= =========== Disclosure of reclassification amount Unrealized holding gains arising during period 3,603,509 Less: reclassification adjustment for gains included in net income (4,404,651) ----------- Net unrealized loss on securities (801,142)
December 31, 1997 ------------------------------------------------------------------------------------------ Accumulated Total Other Shareholders' Comprehensive Retained Comprehensive Common Participating Equity Income Earnings Income Stock Stock ------ ------ -------- ------ ----- ----- Balance at December 31, 1996 $17,561,574 $ - $14,913,053 $ 543,521 $200,000 $1,905,000 Comprehensive Income: Net income 7,902,910 7,902,910 7,902,910 - - - ---------- Other comprehensive income, net of tax: Unrealized loss on securities- net of reclassification 591,680 591,680 591,680 - - ---------- Comprehensive income - $8,494,590 - - - - ========== Dividends declared on participating stock (4,196,730) (4,196,730) - - - Participating Stock Issued 225,000 - - - 225,000 Redeemed (18,465) (3,465) - - (15,000) ------------ ------------- ----------- --------- ----------- Balance at December 31, 1997 $22,065,969 $18,615,768 $1,135,201 $200,000 $2,115,000 ============ ============= =========== ========= =========== Disclosure of reclassification amount Unrealized holding gains arising during period 1,342,603 Less: reclassification adjustment for gains included in net income (750,923) ------------ Net unrealized gain on securities 591,680 ============
December 31, 1996 ------------------------------------------------------------------------------------------ Accumulated Total Other Shareholders' Comprehensive Retained Comprehensive Common Participating Equity Income Earnings Income Stock Stock ------ ------ -------- ------ ----- ----- Balance at December 31, 1995 $15,176,663 $ - $11,517,542 $1,651,621 $200,000 $1,807,500 Comprehensive Income: Net income 7,454,523 7,454,523 7,454,523 - - - ---------- Other comprehensive income, net of tax: Unrealized loss on securities- net of reclassification (1,108,100) (1,108,100) - (1,108,100) - - ----------- Comprehensive income - $6,346,423 - - - - =========== Dividends declared on participating stock (4,007,483) (4,007,483) - - - Participating stock Issued 120,000 - - - 120,000 Redeemed (74,029) (51,529) - - (22,500) ----------- ------------ ----------- --------- ----------- Balance at December 31, 1996 $17,561,574 $14,913,053 $ 543,521 $200,000 $1,905,000 ============ ============ =========== ========= =========== Disclosure of reclassification amount Unrealized holding loss arising during period (1,043,856) Less: reclassification adjustment for gains included in net income (64,244) ----------- Net unrealized loss on securities (1,108,100) ============
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, 1998, 1997, AND 1996 (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 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 1996 financial statements have been reclassified to conform with the 1997 and 1998 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 basis of premiums 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. Unrealised appreciation (depreciation) is included in accumulated other comprehensive income. Realized gains and losses on the sale of investments are included as investment income and are calculated based on average costs. Loss Reserves The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations. 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, 1998: Foreign governments and their agencies $27,522,957 $ 43,649 $(290,075) $27,276,531 Corporations 25,150,984 538,236 (2,142) 25,687,078 Supranationals 36,466,377 154,367 (109,976) 36,510,768 ----------- ---------- --------- ---------- Total $89,140,318 $ 736,252 $(402,193) $89,474,377 =========== ========== ========= =========== 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 =========== ========== ========== ===========
Note 3. INVESTMENTS (Cont'd) The cost and fair value of debt securities at December 31, 1998, 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 $58,087,649 $57,989,686 Due after five years through ten years 31,052,669 31,484,691 ----------- ----------- $89,140,318 $89,474,377 =========== =========== In 1998, gross gains of $6,253,358 and gross losses of $1,848,707 were realized. In 1997, gross gains of $1,494,878 and gross losses of $743,955 were realized. In 1996, gross gains of $1,997,197 and gross losses of $1,932,953 were realized. The following summarizes net unrealized appreciation (depreciation) on investments: 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 Net depreciation (801,142) ----------- Balance, December 31, 1998 $ 334,059 =========== The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1998, 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, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Beginning balance in reserves for losses $ 5,421,160 $ 4,284,304 $ 3,480,334 ----------- ----------- ----------- Add/(deduct)-provision for losses incurred related to: Current claim year 45,843,093 31,904,950 24,080,078 Prior claim years (290,547) (746,024) (42,251) ----------- ----------- ----------- Total 45,552,546 31,158,926 24,037,827 ----------- ----------- ----------- Deduct paid losses attributable to: Current claim year 40,767,738 27,024,981 20,330,269 Prior claim years 4,812,150 2,997,089 2,903,588 ---------- ----------- ----------- Total 45,579,888 30,022,070 23,233,857 ----------- ----------- ------------ Ending balance in reserves for losses $ 5,393,818 $ 5,421,160 $ 4,284,304 =========== =========== ===========
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1998, 1997 and 1996 decreased by $290,547, $746,024 and $42,251 respectively, because of lower actual claims. Note 5. STOCKHOLDERS' EQUITY All of the Company's Common Stock is held by MIC. A prospectus dated May 12, 1998 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 1998, 37 additional series of 100 shares of Participating Stock were issued as compared with 29 for the year ended December 31, 1997. In addition, in 1998 the Board of Directors redeemed 4 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 1998. In the years ended December 31, 1998, 1997 and 1996, costs in the amount of $69,280, $77,239 and $64,848 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, 1998, 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 $36,747,691 ($31,818,196 at December 31, 1997) 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 $88,075,000 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, 1999, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $6,284,567. Retained earnings applicable to the Common and Participating Stockholders are comprised of the following: Common Participating Total ----------- ------------- ----------- 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 (Deficit), 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) 18,623,938 18,615,768 Net income for the year 20,970 7,172,386 7,193,356 Net transfers (21,529) 21,529 - Dividends paid - (5,171,956) (5,171,956) Redemption of participating stock - (8,159) (8,159) ----------- ------------ ------------ Balance (Deficit), December 31, 1998 $ (8,719) $20,637,728 $20,629,009 =========== ============ ============ PART III Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Five of the current directors of the Company were elected by MIC through its ownership of the Common Stock at the Annual Shareholders' Meeting held on April 23, 1998 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............. 56 Chairman, Chief Executive Officer, President and Director (President, Motors Insurance Corporation ("MIC"), 1998; President, GMAC Insurance Holdings, 1997, Executive Vice President & Chief Financial Officer, MIC, 1993-1998; Group Vice- President, MIC, 1991-1993; Vice President, MIC, 1989-1990). Mr. Noll became President and Director in 1995. Louis S. Carrio, Jr........ 55 Vice-President and Director (Vice-Pres- ident, MIC). Mr. Carrio became Vice-President and Director in 1991. Bernard J. Buselmeier....... 43 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............ 40 Vice-President and Director (Vice President & Treasurer, MIC, 1998, Assistant Treasurer, MIC 1995-1998; previously manager, Coopers & Lybrand, L.L.P.) Mr. Dunn became Vice-President and Director in 1996. Peter R. P. Evelyn ........ 57 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm). Mr. Evelyn became a Director in 1986. William Bradshaw ......... 49 Director (Bradshaw Automotive Group) Mr. Bradshaw became a Director in 1998. Ronald W. Jones ........... 46 Vice-President, Finance (Managing Director, Aon Insurance Managers (Barbados) Ltd.). Mr. Jones has served as Vice-President, Finance since 1987. Michael B. Boyce........... 58 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. William Bradshaw, 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 (i) Financial Statements The following are included in Item 8: (i) Independent Auditors' Report. (ii) Balance Sheets, December 31, 1998 and 1997. (iii)Statements of Income and Retained Earnings for the years ended December 31, 1998, 1997 and 1996. (iv) Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996. (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 April 23, 1998, filed by reference to Exhibit 20(b) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1997. 20(b)Proxy solicitation materials sent to shareholders in connection with annual meeting to be held on April 22, 1999. 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, 1998 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 24, 1999 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 26, 1999 - ------------------------- Officer, President and William B. Noll Director s/Louis S. Carrio, Jr. Vice-President and March 26, 1999 - ------------------------- Director Louis S. Carrio, Jr. s/John J. Dunn, Jr. Vice-President and March 26, 1999 - ------------------------- Director John J. Dunn, Jr. s/Bernard J. Buselmeier Vice-President and March 26, 1999 - ------------------------- Director Bernard J. Buselmeier - ------------------------- Director William Bradshaw s/Peter R. P. Evelyn - ------------------------- Director March 30, 1999 Peter R. P. Evelyn s/Ronald W. Jones Vice-President March 24, 1999 - ------------------------- Finance, Principal Ronald W. Jones Financial and Accounting Officer SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Proxy solicitation materials were sent to shareholders in connection with the annual meeting held on April 23,1998 and in connection with the 1999 annual meeting, to be held on April 22, 1999. EX-20 2 PROXY MATERIAL MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTICE NOTICE is hereby given that the Twelfth 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 22nd day of April, 1999 at 12:00 noon for the following purposes: 1. Adoption of minutes of previous meeting of Shareholders held on April 23rd, 1998. 2. To receive and consider the financial statements of the Company for the twelve month period ended December 31, 1998 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, 1999. 6. To conduct any other business that may properly be transacted at an annual meeting. DATED THE DAY OF , 1999 BY ORDER OF THE BOARD Michael R. Boyce AS SECRETARY OF MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED Annual Meeting April 22nd, 1999 PROXY STATEMENT March 29, 1999 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 22nd, 1999 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 31,500 participating shares outstanding, held by 545 persons representing 315 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, 1998 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. Ms. Diane Sauer 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, John J. Dunn, Jr. and Peter R.P. Evelyn and to elect Thomas D. Callahan and Robert E. Capstack, 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 56 President & Director (President, MIC, 1998, President, GMAC Insurance Holdings Inc., 1997, Executive Vice President & Chief Financial Officer, MIC, 1993; Group Vice President, MIC, 1991-1993; Vice President, MIC, 1989-1990). Mr. Noll has been President & Director since 1995. Thomas D. Callahan 46 Nominee Director Vice President, MIC 1994 - 1998, Senior Vice President, MIC from 1998) Robert E. Capstack 58 Nominee Director (Section Manager, MIC, Vice President GMAC Securities Corporation from 1998) John J. Dunn, Jr. 40 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. ELECTION OF DIRECTORS (CONTINUED) Peter R.P. Evelyn 57 Director (Attorney, Evelyn Gittens & Farmer, A Barbados Law firm). Mr. Evelyn has been a Director since 1986. Diane Sauer 44 Nominee for Director to be elected by the participating shareholders. (Martin Chevrolet Inc., Warren, Ohio) AMENDMENTS OF RESTATED ARTICLES OF INCORPORATION The terms of the Company's Restated Articles of Incorporation ("Articles") provide that Shares are to be issued with respect to specific MIC Agency Accounts, each of which relate to one or more specific "Franchises." The Articles define the term "Franchise" as the right to sell "new" motor vehicles. Management proposes to amend the Articles to clarify that Shares may be issued with respect to entities selling used motor vehicles exclusively as well as entities selling new motor vehicles. Accordingly, Management proposes that the Company's Articles be amended as follows: 1. The term "Franchise" and the definition thereof contained in the Definitions section of paragraph 1 of the Articles is deleted in its entirety. 2. The definition of "MIC Agency Account" contained in the Definitions section of paragraph 1 of the Articles is deleted in it entirety and replaced with the following: "The separate business record maintained by MIC or any of its affiliates to track volume, experience, and commissions with respect to mechanical service agreements sold by one or more particular entities selling new and/or used motor vehicles." 3. The second sentence of Paragraph 3(2)(b) of the Articles is deleted in its entirety and replaced with the following: "A series of Shares shall be issued only to persons or entities acceptable to the Board and certified by the owner(s) of the entity or entities to which the MIC Agency Account relates." 4. Clause (ix) of Paragraph 4(d) of the Articles is deleted in its entirety and replaced with the following: "(ix) a key employee of the entity with respect to which the Shares held by the transferor were issued". 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, 1999. 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 22nd day of April, 1999 or at any adjournment thereof and in particular to vote for: (i) The election of Ms. Diane Sauer to serve as a director representing the participating shareholders. (ii) The adoption of amendments to the Company's Restated Articles of Incorporation as contained in the Company's Proxy Statement dated March 29, 1999. (iii)The confirmation of Deloitte & Touche as the independent auditors of the Company for the current fiscal year. Dated this ________ day of __________, 1999. - ------------------------------ --------------------------- 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 Thomas D. Callahan, Nominee Director of the Company or failing him Robert E. Capstack, Nominee Director of the Company, as its proxy to vote for it on its behalf at the shareholders meeting to be held on the 22nd day of April, 1999 or at any adjournment thereof. Dated this ________ day of __________, 1999 MOTORS INSURANCE CORPORATION By______________________________ -------------------------------- Print Name -------------------------------- Title EX-27 3 FINANCIAL DATA STATEMENT
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 89,474,377 0 0 0 0 0 89,474,377 19,504,563 0 28,660,753 139,312,516 5,393,818 110,243,074 0 0 0 0 0 200,000 23,325,568 139,312,516 57,845,674 5,970,813 4,404,651 0 45,552,545 14,919,916 555,321 7,193,356 0 7,193,356 0 0 0 7,193,356 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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