UNITED STATES
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, 2003
or
|_| Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from _________ to ________________
Commission file number 033-06534
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Exact Name of Registrant as Specified in Its Charter)
Barbados Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
One Financial Place Not Applicable
Collymore Rock (Zip Code)
St. Michael, Barbados, W.I.
(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: None
Title of Each Class Name of Each
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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES No X
------ -----
Aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of December 31, 2003, was $1,545,000.*
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class As of December 31, 2003
Common Stock, no-par value 2,000
Participating Stock, no-par 20,600
value
* Based on last offering price of $75.00 per share.
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TABLE OF CONTENTS
Page
ITEM 1. BUSINESS............................................................4
ITEM 2. PROPERTIES.........................................................12
ITEM 3. LEGAL PROCEEDINGS..................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................12
ITEM 6. SELECTED FINANCIAL DATA............................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................39
ITEM 9A CONTROLS AND PROCEDURES............................................39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................39
ITEM 11. EXECUTIVE COMPENSATION.............................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................41
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...42
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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" that anticipate results
based on management's plans that are subject to uncertainty. These statements
are made subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or current facts
and may be identified by their use of words like "plans," "will," "anticipates,"
"estimates," "intends," "believes" and other words with similar meanings. These
statements may address, among other things, our strategy for growth, product
development, regulatory approvals, market position, expenses, financial results
and reserves. Forward-looking statements are based on management's current
expectations of future events. We cannot guarantee that any forward-looking
statement will be accurate. However, we believe that our forward-looking
statements are based on reasonable, current expectations and assumptions.
Whether or not actual results differ materially from forward-looking statements
may depend on numerous foreseeable and unforeseeable risks and uncertainties,
some of which relate particularly to our business, such as our ability to set
adequate premium rates and maintain adequate reserves, our ability to compete
effectively and our ability to grow our business through internal growth as well
as though acquisitions. Other risks and uncertainties however, may be related to
the insurance industry generally or the overall economy, such as regulatory
developments, industry consolidation and general economic conditions and
interest rates. We assume no obligation to update any forward-looking statements
as a result of new information or future events or developments.
If the expectations or assumptions underlying our forward-looking statements
prove inaccurate or if risks or uncertainties arise, actual results could differ
materially from those predicted in our forward-looking statements.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Motors Mechanical Reinsurance Company, Limited (the "Company") was incorporated
in Barbados on June 12, 1986. It became registered in Barbados as an insurer on
June 30, 1986 and commenced insurance operations on December 11, 1987.
The business of the Company is the assumption of risks under motor vehicle
mechanical service agreements. These risks are initially insured by MIC Property
and Casualty Corp. or another subsidiary of General Motors Corporation ("GM")
and then ceded to Motors Insurance Corporation ("MIC"). The Company only assumes
risks attributable to an MIC Mechanical Account maintained by MIC with respect
to one or more motor vehicle sales franchises (each a "Franchise") for which a
series of participating shares in the Company ("Shares") is issued and
outstanding (the "Policies"). A series of Shares is identified with a particular
MIC Mechanical Account and a separate "Subsidiary Capital Account" is maintained
for each series. The financial results of the Company reflect both underwriting
and investment experience, which is allocated among the Subsidiary Capital
Accounts. See "Business-Allocations To Subsidiary Capital Accounts."
THE RETROCESSION
The Retroceding Company
MIC, the retroceding company under the Retrocession Agreement described below,
is a stock insurance company organized under the laws of Michigan. All of the
Common Stock of the Company and all of MIC's outstanding stock is owned by GMAC
Insurance Holdings, Inc. ("GMACI"), which, in turn, is the parent company of
MIC and an indirect 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 in the Asia-Pacific
4
region. MIC's A.M. Best Company's insurance financial rating is currently A
(Excellent), one of the highest possible ratings.
The Retrocession Agreement-Principal Agreement
The Company has entered into a "quota share" retrocession agreement (the
"Retrocession Agreement"), which became effective as of December 11, 1987.
Pursuant to the Retrocession Agreement, MIC retrocedes to the Company, and the
Company is obligated to assume, MIC's risks with respect to policies issued by
MIC or 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 100% of the original gross premium, reduced by ceding commissions, and
cancellations, in a two-step process. At the time the Policies are written, the
Company assumes 100% of the risk with respect to these policies and MIC pays 75%
of the net premiums written to the Company. The remaining 25% of the net
premiums written is paid to the Company as the underlying premiums are earned.
The Company pays MIC a ceding commission in an amount equal to (i) 20% of net
premium ceded to the Company that is attributable to Policies sold on or after
October 1, 2001 and (ii) 25% of net premium ceded to the Company that is
attributable to Policies sold prior to October 1, 2001. Net settlements between
the Company and MIC are made quarterly and will fluctuate quarter to quarter.
The Retrocession 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 Retrocession Agreement, MIC and the Company will remain bound by their
respective obligations under the Retrocession 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 Retrocession Agreement shall
remain risks of MIC.
The Retrocession Agreement-Supplemental Retrocession 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 vehicle 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, the unexpired liability with respect to 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
Risks assumed under the Retrocession Agreement and the Supplemental Retrocession
Agreement are limited to coverages under insurance policies insured or reinsured
by MIC that provide indemnification against specific motor vehicle mechanical
repairs not covered by manufacturer's new vehicle warranties set forth in a
service contract. Such service contracts often provide additional coverages,
such as towing and rental allowances. Coverages with respect to routine vehicle
maintenance are not assumed under the Retrocession Agreement or the Supplemental
Retrocession Agreement.
Credit For Reinsurance
The Retrocession Agreement and Supplemental Retrocession Agreement (together,
the "Retrocession Agreements") require the Company to establish, to the extent
requested by MIC, letters of credit, trust accounts, or a combination thereof at
the Company's option to permit MIC to obtain full credit for such reinsurance.
In accordance with the terms and conditions of the Retrocession Agreements, MIC
may utilize the letters of credit or the assets deposited into the trust
accounts for any of the following purposes:
5
o to reimburse MIC for the Company's share of premiums returned for
business retroceded under the Retrocession Agreements on account of
cancellations of such business;
o to reimburse MIC for the Company's share of losses paid by MIC under
the terms and provisions of the business retroceded under the
Retrocession Agreements;
o to fund an account with MIC in an amount at least equal to the Minimum
Funding Requirement (as such term is defined in the Retrocession
Agreements); and
o to pay any other amounts that MIC claims is due under the Retrocession
Agreements.
INVESTMENT INCOME
A major source of income to an insurance company is income earned on the
investment of amounts not currently required for the payment of 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,
operating expenses, and dividends paid. The Company's funds are invested in a
manner consistent with investment guidelines that are proposed by the Investment
Committee and adopted by the Company's Board of Directors (the "Board").
The Company's investment portfolio consists of U.S. dollar denominated fixed
income securities and shares of a U.S. dollar denominated international equity
fund. At December 31, 2003, 2002 and 2001, 79%, 86% and 82%, respectively, of
the Company's investment portfolio, based on fair market value, consisted of
fixed income securities with the balance of the portfolio consisting of shares
of the international equity fund.
Effective February 8, 2000, the Company entered into an investment management
agreement with BlackRock International, Ltd. ("BlackRock") pursuant to which
BlackRock manages the investment and reinvestment of the Company's fixed income
portfolio in accordance with the Company's investment guidelines. BlackRock is a
subsidiary of BlackRock, Inc., which manages assets on behalf of more than 400
institutions through a variety of equity, fixed income, liquidity and
alternative investment, and mutual fund products. Under the terms of the
investment management agreement, BlackRock charges a management fee calculated
as a percentage of the net asset value of the Company's portfolio it manages.
The applicable percentage is based on the aggregate amount of assets managed by
BlackRock on behalf of the Company and certain other related entities. The
applicable percentage on the first $50 million of assets under management on
behalf of the foregoing entities is higher than the percentage that is
applicable on assets in excess of $50 million.
In addition to fixed income securities, pursuant to a plan adopted in early
1999, the Company may invest a portion of its investment portfolio in equity
securities, provided that the portion of the Company's investment portfolio
consisting of equity securities may not exceed 30% of the overall investment
portfolio, based on fair market value. The Company has invested $16.5 million in
equity securities by purchasing shares in the Capital International Fund (the
"Fund"), an investment company incorporated under the laws of Luxembourg. The
market value of the Company's equity portfolio at December 31, 2003, 2002, and
2001 was approximately $17.8 million, $12.6 million, and $16.0 million,
respectively.
During 2003, upon review of the Company's investment portfolio, certain fixed
income securities were in an unrealized loss position that was deemed to be
other than temporary in nature. As a result, the Company reported an impairment
charge of $0.02 million in 2003. In 2002, such writedowns for other than
temporary impairment were $0.16 million. In order to determine whether any other
than temporary losses needed to be recognized for any of the Company's
individual securities held, the Company evaluated, among other things, the
length of time and the extent that the underlying security has been valued at
less than cost; the financial health of the issuer of the underlying security,
including any specific events which may influence the issuer; the Company's
intent and ability to hold the investment; and the underlying security's rating
as determined by an independent rating agency.
At December 31, 2003, the cost of the Fund was $16.5 million with a fair market
value of $17.8 million. The net unrealized gain/(loss) position of the Fund at
December 31, 2003, 2002, and 2001 was $1.3 million, ($3.8 million), and ($0.3
million), respectively. The Company's investment in the Fund was reviewed using
the applicable criteria
6
described above. Based on this review, no charge for other than temporary
impairment was recorded in 2003 for the Company's investment in the Fund.
The Fund's investment objective is capital appreciation and it aims to achieve
this objective through the continuous management of a diversified portfolio of
transferable securities consisting primarily of common stocks, researched and
selected on a world-wide basis. Shares of the Fund are denominated in United
States Dollars and are all of the same class and have like rights and
liabilities. Shares of the Fund are listed on the Luxembourg and Amsterdam Stock
Exchanges. The Fund had approximately $3.3 billion in total net assets (based on
fair market value) as of December 31, 2003.
The Investment Committee of the Company 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 investment portfolio.
There can be no assurance, however, as to whether a particular investment
objective, once adopted, will be achieved or that adverse factors will not cause
a decrease in the overall value of the Company's investment portfolio.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company has established a Subsidiary Capital Account with respect to the
Common Stock as a class, and establishes such an account with respect to each
series of Shares at the time a series is issued. Subsidiary Capital Accounts are
maintained solely for the purpose of the allocations described below, and do not
serve any other legal or accounting function. None of the Company's assets are
segregated or earmarked with respect to those accounts.
The consideration received by the Company upon the issuance of a particular
series of Shares and the Common Stock as a class are allocated to the particular
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 Shares and the Common Stock, are
determined and allocated to the Subsidiary Capital Accounts as of the end of
each quarter.
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% 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 (the "Risk Fund").
(b) With respect to any agents' or brokers' commissions, ceding
commissions, any ceding commissions or 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, 100% shall
be allocated to the related Subsidiary Capital Account. For the
purpose of this paragraph, losses incurred includes both paid and
unpaid (reported and unreported) losses.
(d) With respect to return premiums, 99% to the related Subsidiary Capital
Account and 1% 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
7
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, GMAC Insurance Holdings, Inc. may undertake to pay, but is not
obligated 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 fiscal 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 term "Restricted
Earned Surplus" means the portion of the earned surplus, if any,
in the Subsidiary Capital Account for the Common Stock equal to
the portion 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 fiscal quarter for which the
8
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 fiscal 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 7(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 under paragraph 7(a) above with respect to the
series of shares from which the reallocation is being made, which have
not been previously restored, 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, are allocated among the
Subsidiary Capital Accounts of the other Shares. 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
repaid 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 Shares and the Common
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 as of the last day of the fiscal quarter
in which the unearned portion of premiums that have been ceded to the
Company and allocated to such Subsidiary Capital Account becomes zero.
Subsequent to the effective date of the redemption or repurchase, as
the case may be, any positive balance as of the last day of any
calendar quarter for the Subsidiary Capital Account of any repurchased
or redeemed series of Shares, after application of the provisions of
paragraph 7(c) above, will be allocated among the Subsidiary Capital
Accounts of the existing series of Shares pro rata based upon relative
earned premium attributable to such Subsidiary Capital Accounts for
the calendar quarter then ending and any net deficit will be allocated
in accordance with the provisions of paragraph 7(a) above.
Using the procedures described above, the Company allocates items of gain and
loss to the Subsidiary Capital Account for each series. Initially each
Subsidiary Capital Account had a balance of $7,500 representing the amount
9
paid for the Shares of a particular series of Shares. During the year ended
December 31, 2003, $4,307,205 of net income from underwriting activities (which
excludes investment income). $747,614 of administrative expenses were allocated
among the series of Shares outstanding during the year ended December 31, 2003,
and $4,377,055 of net investment income was allocated among such series of
Shares and the Common Stock.
As of December 31, 2003, 157 series of Shares outstanding had Subsidiary Capital
Account balances greater than or equal to $7,500 (ranging from $8,323 to
$816,300) and 49 series had Subsidiary Capital Account balances less than $7,500
(ranging from $6,969 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, 2003, an aggregate of $6,054,531 had been
advanced from the Restricted Earned Surplus (the "Risk Fund"), which forms a
portion of the Subsidiary Capital Account established for the Common Stock owned
by GMAC Insurance Holdings, Inc. (the "Common Shareholder"), to 113 Subsidiary
Capital Accounts and remained outstanding at that date. This includes net
deficits of $5,032,261 associated with 78 series of Shares that have been
redeemed. As of December 31, 2003, $9,407,512 of aggregate deficits had been
reallocated among the Subsidiary Capital Accounts of the Shares and remained
outstanding. Of this amount, $3,473,285 could be recovered from deficit accounts
should they return to profitability and to the extent that the Risk Fund is
repaid in full. However, there can be no assurances that such deficit accounts
will return to profitability or, if they return to profitability, that they will
generate sufficient profits to repay any portion of deficits previously
allocated to the Subsidiary Capital Account for the other series of Shares.
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 the Common Shareholder for the 2,000 shares of the Common Stock issued to
it. During 2002, 2000 shares of the Common Stock of the Company (representing
all of the common stock of the Company) were purchased from MIC by GMAC
Insurance Holdings, Inc. The Subsidiary Capital Account for the Common Stock 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 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 Corporate Services Limited of St. Michael, Barbados. The Company's Board of
Directors and the committees thereof, however, remain responsible for the
management of the business and affairs of the Company.
COMPETITION
The insurance business is extremely competitive. Management of the Company
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 insurance companies offering similar coverage. Because the
insurance business of the Company is limited to the assumption of Policies
covering certain mechanical motor vehicle service agreement reinsurance business
ceded by MIC, the profitability of the Company depends to a large degree on the
success experienced by MIC and its affiliates in competing with those other
insurers.
10
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 to operate 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 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
mechanical motor vehicle 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. In 2003, the Company started
paying the Manager a fixed annual fee, payable in quarterly installments. Prior
to 2003, the Company paid 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, 2003, the Company incurred fees payable to
the Manager in the amount of $259,958 compared to $252,358 for the year ended
December 31, 2002.
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 the
services it provides 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 this 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 the prior 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
11
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 until at least December 31, 2016. Until
December 31, 2001, the Company paid an annual licensing fee of $2,500 to obtain
such guarantee. Commencing January 1, 2002, the Company became subject to tax at
a rate of 2% on its taxable income, provided that the amount of such tax does
not exceed $2,500 per annum.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
During the last three fiscal years, we have depended entirely on revenue from
sources located in the United States.
ITEM 2. PROPERTIES
The Company does not own any office space or facilities. Rather, the business
office for the Company is provided by the Manager and is located at One
Financial Place, Collymore Rock, St. Michael, Barbados. The Company believes
that these facilities are adequate for its current and anticipated future needs.
In addition, the Manager supplies all equipment for the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently 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, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for the Shares or the other shares of Common 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.
As of December 31, 2003, there were 365 holders of Shares of record,
representing 206 series of Shares.
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 their 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 March of
2004, April of 2003, March of 2002, and March of 2001, the Company declared
dividends of $8,022,359, $4,930,473, $4,318,225, and $3,083,096, 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.In determining the
amount of dividends to pay, the Board considers the minimum regulatory capital
requirement, possible fluctuations in the value of the Company's investment
portfolio, and the possible adverse development of loss experience to determine
an appropriate minimum capital level. The Board's objective is to maintain
adequate capital to pay losses and expenses, while also being able to pay a
dividend annually. There can be no assurance that dividends will be declared and
paid in the future.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2003,
2002, 2001, 2000 and 1999 have been derived from the Company's audited financial
statements.
Fiscal Year Ended December 31
--------------------------------------------------------------
2003 2002** 2001 2000 1999**
----------- ------------ ----------- ----------- -----------
Premiums
Assumed $38,171,866 $ 45,296,200 $51,131,226 $52,352,900 $67,104,475
=========== ============ =========== =========== ===========
Premiums
Returned $ 0 $ 1,635,656 $ 0 $ 0 $24,934,234
=========== ============ =========== =========== ===========
Premiums Earned $45,407,270 $ 49,812,496 $53,412,569 $54,378,800 $58,471,950
Net Investment
Income 4,377,055 6,368,353 6,150,764 4,808,908 655,755
------------ ------------ ------------ ----------- ------------
Total Income 49,784,325 56,180,849 59,563,333 59,187,708 59,127,705
============ ============ ============ =========== ============
Less Losses
and Expenses 41,100,065 48,855,731 53,832,415 55,509,335 62,662,673
Net Income
(Loss) $ 8,684,260 $ 7,325,118 $ 5,730,918 $ 3,678,373 $(3,534,968)
============ ============ ============ =========== ============
Dividends Per
Common Share* 0 0 0 0 0
Total Assets $106,720,748 $108,379,496 $116,131,055 $118,886,919 $132,504,762
============ ============ ============ ============ ============
Total Policy
Reserves and
Other
Liabilities 79,391,812 87,313,016 93,765,03 397,764,992 117,281,645
============ ============ ============ ============ ============
Stockholders'
Equity 27,328,936 21,066,480 22,366,022 21,121,927 15,223,117
Dividends Paid
on
Participating
Shares 4,930,473 4,318,225 3,083,096 673,134 4,066,464
* 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.
** In 2002 and 1999, MIC recaptured certain insurance business that had been
previously ceded to the Company. See Note 9 to the Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Executive Summary
In Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A), the general financial condition and results of operations for
the Company are discussed. The most important points discussed in the MD&A
report are summarized below.
o The Company's net income for 2003 of $8.7 million represented the
highest in the Company's history. It is an improvement of
approximately 19% over 2002 net income and 52% over 2001 net income.
13
o Dividends of $8.0 million were declared and paid during March 2004.
This dividend represents the highest in the Company's history and
represents the fourth consecutive year that the overall dividend
payout has increased.
o The Company continues to have an adequate margin of solvency. On
December 31, 2003 the margin was $20.1 million.
o Incurred loss ratios have continued to improve in 2003. The incurred
loss ratio for the year ended December 31, 2003 was of 64.7% compared
to 71.6% and 73.4% in 2002 and 2001, respectively. Combined ratios
(incurred losses and expenses divided by earned premiums) have also
continued to improve. The combined ratio of 90.5% in 2003 represents
an improvement over the combined ratio of 98.1% in 2002 and 100.8% in
2001.
o Improved underwriting results and efficiencies in the payment of
claims have allowed the Company to reduce the factor used to calculate
reserves for unpaid losses by 10 percentage points during 2003. This
resulted in a favorable earnings impact for the Company of
approximately $1.1 million.
o The Company's investment in a global equity fund returned to an
unrealized gain position during 2003. At December 31, 2003 this
investment was in a $1.3 million unrealized gain position. This
represents a significant improvement from the unrealized loss position
of this investment at December 31, 2002 of $3.8 million.
o In 2003, the Company recorded a charge of approximately $0.02 million
for securities with an unrealized loss position that was considered
other than temporary. This compares to approximately $0.16 million
written down in 2002 and $0 in 2001.
o In 2003, the Company implemented a Code of Ethics as mandated by the
Sarbanes-Oxley Act of 2002.
o With the approval of MIC, the Company established a trust account to
collateralize amounts recoverable from the Company related to business
ceded to it. The trust account arrangement replaces the letters of
credit that were previously in place between the Company and MIC.
Critical Accounting Policies
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
preparation of our financial statements in conformity with GAAP requires us to
make estimates and assumptions that affect the amounts of assets and liabilities
and disclosures of assets and liabilities reported by us at the date of the
financial statements and the revenues and expenses reported during the reporting
period. As additional information becomes available or actual amounts become
determinable, the recorded estimates may be revised and reflected in operating
results. Actual results could differ from those estimates. Accounts that, in our
judgment, are most critical to the preparation of our financial statements
include policy liabilities and accruals, deferred policy acquisition costs and
valuation of certain investments.
Investments, all of which are available for sale, are comprised of
interest-bearing marketable securities and an investment in an international
equity fund, and are carried at fair value based on quoted market prices and
dealer quotes obtained from an external pricing service. Investments with
original maturities of less than 90 days are classified as cash equivalents.
Unrealized appreciation (depreciation) is included in other comprehensive
income.
Realized gains and losses on the sale of investments and losses from other than
temporary impairment are included as investment income and are calculated based
on amortized costs. To evaluate whether any investments require provision for
other than temporary impairment, the Company evaluated, among other things, the
length of time and the extent that a security's market value was below cost; the
financial strength of the issuer, including any specific events that may
influence the issuer; the Company's intent to hold the investment; the
geographical and industry concentration of securities held; and the security's
rating as determined by an independent rating agency. In
14
addition, the Company evaluated whether the underlying security has demonstrated
an ability to recover from unrealized loss positions in the past.
Reinsurance premiums are based on the Company assuming (after ceding commission)
75% of the original net policy premiums written by the direct insurer prior to
October 1, 2001 and 80% for net policy premiums written by the direct insurer on
and after October 1, 2001. Of these premiums, 75% is retroceded to the Company
when such premiums are written and the remaining 25% is retroceded when such
premiums are earned (net of ceding commissions and excise taxes).
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 charged to expenses on the basis of premiums earned.
The Company received an undertaking from the Barbados Government exempting it
from all local income, profits and capital gains taxes (which expired on
December 31, 2001). Beginning January 1, 2002, the Company is 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 until December 31, 2016.
The liabilities for unpaid losses and loss expenses are actuarially determined
and represent the accumulation of estimates for reported losses and a provision
for losses incurred, but not reported, including claim adjustment expenses. For
purposes of establishing reserves for unpaid losses, the Company relies upon the
advice of MIC. Loss reserve projections are used to estimate loss reporting
patterns, loss payment patterns, and ultimate claim costs. An inherent
assumption in such projections is that historical patterns can be used to
predict future patterns with reasonable accuracy. Because many variables can
affect past and future loss patterns, the effect of changes in such variables on
the results of loss projections must be carefully evaluated. The evaluation of
these factors involves complex, subjective judgments, which may significantly
impact the financial statements. Insurance liabilities are, therefore,
necessarily based on estimates, and the ultimate liability may vary from such
estimates. Establishing reserves is an uncertain process, and it is possible
that actual claims will materially exceed reserves and have a material adverse
effect on our results of operations and financial condition. These estimates are
regularly reviewed by management and adjustments to such estimates are included
in income on a current basis. See Note 4 to the Financial Statements.
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, redemptions of Shares, and
dividends. Premiums generated by the Company's reinsurance business, combined
with investment earnings will continue to be the principal sources of funds for
the Company. The Company believes that such funds will be sufficient to meet its
liquidity requirements in 2004 and in future years to which its reinsurance
liabilities extend. No significant capital expenditures are expected in the
foreseeable future.
In March of 2004, the Board of Directors authorized the payment of dividends
aggregating $8,022,359 to eligible holders of Shares. See "Market for
Registrant's Common Equity and Related Stockholders Matters" for a discussion of
dividends paid and legal restrictions on the payment of dividends.
The Company had unearned premium reserves of $76,246,766 as of December 31,
2003, compared to $83,482,170 as of December 31, 2002. Unearned premium amounts
are attributable to the long-term nature of the vehicle service contracts sold.
Such contracts may extend for up to 84 months from the 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 from the date that the
vehicle is initially placed into service. 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 after such expiration.
Since very little premium is recognized as earned until after the expiration of
the underlying warranty, most of the premium written in any year is recorded as
unearned.
15
The decrease in unearned premium reserves as of December 31, 2003 compared to
December 31, 2002 is primarily attributable to certain series of Shares being
placed into "run-off" and their subsequent redemption after the underlying
policies reach a fully-earned status. When a series of Shares is placed into
run-off, the Company discontinues assuming any additional risk and stops
receiving premiums with respect to mechanical motor vehicle service contracts
that are sold after the date that the series is placed into run-off by the
Franchise(s) with respect to which the series of Shares is issued. When a series
is placed into run-off, the premium that had been previously ceded to the
Company that is attributable to such series of Shares continues to earn out and
the unearned premium reserve decreases. As of December 31, 2003, 93 series of
Shares were in run-off compared to 119 series as of December 31, 2002.
Capital Resources
Capitalization of the Company, as of December 31, 2003, was comprised of paid-in
capital with respect to the Common Stock of $200,000 (compared to $200,000 at
both December 31, 2002 and 2001), paid-in capital with respect to the Shares of
$1,545,000 (compared with $1,747,500 and $1,875,000 as of December 31, 2002 and
2001, respectively), and earnings retained for use in the business of
$23,411,660 (compared with $20,276,888 and $18,521,974 as of December 31, 2002
and 2001, respectively). The reduction in the amount of paid-in capital with
respect to the Shares as of December 31, 2003 compared with December 31, 2002 is
primarily attributable to the redemption of Shares in run-off that have reached
a fully earned status. There were a total of 206 series outstanding at December
31, 2003 compared to 233 and 250 series of Shares outstanding at December 31,
2002 and 2001, respectively. During 2003, the Company issued no new series of
Shares and redeemed 27 series of Shares for a net decrease of 27 series. During
2002, the Company issued 2 new series of Shares and redeemed 19 series of Shares
for a net decrease of 17 series.
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, 2004,
the Company's required minimum net assets computed in accordance with Barbados
law was $5,040,727 compared to total capital and retained earnings computed for
purpose of Barbados law of $25,156,660.
Results of Operations
During the year ended December 31, 2003, the Company had net income of
$8,684,260 compared to $7,325,118 for the year ended December 31, 2002 and
$5,730,918 for the year ended December 31, 2001. The increase in net income in
2003 compared to 2002 is attributable to an improvement in underwriting results
partially offset by a $1,991,298 decrease in investment income. The increase in
net income in 2002 compared to 2001 is also attributable to an improvement in
underwriting results combined with a $217,589 increase in investment income.
The Company had net underwriting income (net income less investment income) of
$4,307,205 in 2003 compared to net underwriting income of $956,765 and a net
underwriting loss of $419,846 in 2002 and 2001, respectively. This gain was
largely due to the absence of the earnings drag due to the earn-out and
redemption of unprofitable series and due to efforts undertaken by the ceding
company to control losses with respect to Shares. During 2003, the Company
earned premiums of $45,407,270 compared to $49,812,496 and $53,412,569 during
2002 and 2001, respectively. Premium income decreased in both 2003 and 2002
compared to the prior year primarily as a result of fewer dealerships writing
vehicle service contracts that are ceded to the Company, which is attributable
to the redemption of additional series of Shares during the years ended December
31, 2003 and 2002, and the placement of certain series of Shares into run-off as
previously discussed. This resulted in the Company assuming less business.
The Company incurred underwriting and administrative expenses during the year
ended December 31, 2003 of $41,100,065 compared with $48,855,731 and $53,832,415
for the years ended December 31, 2002 and 2001, respectively. Expenses in 2003
were comprised of losses paid and provisions for loss reserves, ceding
commissions and excise taxes totaling $40,352,451. Losses incurred in 2003 were
$29,369,232 compared to $35,671,233 and $39,224,574 in 2002 and 2001,
respectively. The incurred loss ratio for the year ended December 31, 2003 was
64.7% compared to 71.6% and 73.4% for the years ended December 31, 2002 and
2001, respectively. These
16
decreases in losses incurred and loss ratios are primarily attributable to the
ongoing efforts by MIC to improve underwriting results and the earn-out and
redemption of Shares, of which some have produced unprofitable business. Despite
efforts by MIC to identify ways to improve underwriting results, there can be no
assurances that the Company will not experience significant adverse underwriting
results in the future and there can be no assurances that MIC would recapture
any business from the Company if the Company does experience significant adverse
underwriting results.
The Company incurred operating expenses during the year ended December 31, 2003
of $747,614 compared to $675,818 and $749,181 for the years ended December 31,
2002 and 2001, respectively. Such amounts do not include expenses reimbursed by
MIC as noted below. The increase in operating expenses for the year ended
December 31, 2003 compared to the year ended December 31, 2002 was primarily
attributable to an increase in legal expenses resulting from non-recurring
projects. The decrease in operating expenses for the year ended December 31,
2002 compared to the year ended December 31, 2001 was primarily attributable to
a decrease in legal fees and a decrease in the costs associated with the Annual
General Meeting of the Shareholders. MIC has agreed to reimburse the Company for
certain costs relating to registering and issuing Shares if such costs cannot be
allocated to the Subsidiary Capital Account for the Common Stock. For the year
ended December 31, 2003, $141,229 of such costs were paid directly by MIC
compared to $90,753 and $106,751 for the years ended December 31, 2002 and 2001,
respectively. The increase in such costs for the year ended December 31, 2003
compared to the year ended December 31, 2002 is largely attributable to an
increase in legal fees associated with stock registration and filings.
Investment income in 2003 was $4,377,055 compared to $6,368,353 and $6,150,764
for the years ended December 31, 2002 and 2001, respectively. The decrease in
investment income during 2003 compared to 2002 is primarily attributable to (i)
lower realized losses on investment securities sold and (ii) a decrease in the
overall size of the investment portfolio (at cost) arising from premiums paid to
the Company as series of Shares in "run-off" reached a fully earned status. The
increase in investment income during 2002 compared to 2001 is primarily
attributable to gains realized on the sale of investment securities, which was
attributable to the positive impact of lower interest rates on the value of the
Company's fixed income securities.
The sale of investment securities for the year ended December 31, 2003 resulted
in realized gains of $904,455, compared to realized gains of $2,099,677 and
$1,632,053 for the years ended December 31, 2002 and 2001, respectively.
Interest earned for the year ended December 31, 2003 was $3,472,600 compared to
$4,268,676 and $4,518,711 for the years ended December 31, 2002 and 2001,
respectively. Interest earned in 2003 compared to 2002 decreased slightly as a
result of a decrease in interest rates in 2003, the reduction in invested assets
arising from premiums paid to the Company as series in "run-off" reached a fully
earned status, and lower quarterly reinsurance cessions to the Company as
additional accounts were placed into "run-off." Interest earned in 2002 compared
to 2001 decreased as a result of a decrease in interest rates in 2002, a
decrease in premiums paid to the Company as series in "run-off" reached a fully
earned status, and the reduction in invested assets arising from premiums paid
to the Company on quarterly reinsurance cessions as accounts were placed into
"run-off."
Based on market values at December 31, 2003, approximately 21% (2002-14%;
2001-18%) of the Company's investment portfolio was invested in a U.S. dollar
denominated international equity fund and the remaining 79% (2002-86%; 2001-82%)
was invested in U.S. dollar denominated fixed-income securities.
Net unrealized gains on investment securities held at December 31, 2003 were
$2,172,276 compared to unrealized losses at December 31, 2002 of $1,157,908.
This increase resulted primarily from a significant change in the unrealized
position on the Company's equity portfolio, which was largely attributable to
overall positive performance of the equity markets during 2003.
During 2003, the Company recorded a $18,741 impairment loss for its holding of
one fixed income investment and no realized gains or losses for other than
temporary impairment for its equity investments. This compares to $159,632 and
$0 for the years ended December 31, 2002 and 2001, respectively. To determine
whether an amount needed to be recorded for other than temporary impairment for
its fixed income investments held, the Company evaluated, among other things,
the length of time and the extent that the security's market value has been
valued at less than cost; the financial health of the issuer, including any
specific events which may influence the issuer; the Company's intent and ability
to hold the investment; and the security's rating as determined by an
independent rating agency. If an investment's unrealized loss position were to
be determined to be other than temporary in
17
nature, the underlying security's cost basis would be written down to the market
value at the time that the impairment charge was recorded.
To the extent the Fund was in an unrealized loss position during 2003, the
Company's investment in the Fund was reviewed using the applicable criteria
described above and such review also included the following procedures to
determine whether any charge for other than temporary impairment was necessary:
o Reviewed the relationship between the Fund's market value compared to
its historical cost since its purchase. This included examining the
period of time that the Fund was consecutively in an unrecognized loss
position.
o Reviewed the volatility of the Fund to determine if there has been a
demonstrated ability for it to recover from an unrealized loss
position.
o Examined the concentration of the Fund from a geographical, industry,
and individual security standpoint.
As of December 31, 2003, the Company's fixed income portfolio was in an
unrealized gain position of $0.9 million and its equity investment in the Fund
was in an unrealized gain position of $1.3 million or 8% of its historical cost.
No writedown for other than temporary impairment was recorded for the year ended
December 31, 2003, except for the $18,741 noted above.
The fair value of the Company's investments that are in an unrealized loss
position at December 31, 2003 are as follows:
Unrealized
($000s) Unrealized Loss As
Security Type Cost Market Gain (Loss) % of Cost
------------- ---- ------ ----------- ----------
Fixed Income Securities
U.S. Government Agencies & Asset
Backed 16,371.6 16,018.3 (353.3) (2.2)%
U.S. Government 707.0 694.9 (12.1) (1.7)%
State & Municipal 875.3 859.4 (15.9) (1.8)%
Foreign Government and
Agencies 285.9 285.7 (0.2) (0.1)%
Foreign Corporate 174.4 168.8 (5.6) (3.2)%
Corporate 1,689.9 1,667.6 (22.3) (1.3)%
Corporate Asset Backed 4,204.5 4,092.5 (112.0) (2.7)%
--------- --------- -------
Total-Fixed Income Securities $24,308.6 $23,787.2 $(521.4) (2.1)%
========= ========= =======
All of the fixed income securities included in the above table are considered
investment grade and have maturity dates ranging from May 15, 2005 to April 15,
2037. The Company held positions in sixty fixed income securities with an
unrealized loss ranging from approximately $24 to $71,950 (or between 0.0% and
11.0% of cost) at December 31, 2003. Of the above, only one security was in an
unrealized loss position for over 12 consecutive months; however, its unrealized
loss position was $15,349 or 3.7% of its cost at December 31, 2003. This
security was considered to be an "investment grade" security (Aaa) as determined
by an independent rating service. Given these factors, it was not considered
necessary to record a charge for other than temporary impairment on this
security. All of the other securities in an unrealized loss position at December
31, 2003 were in such a position for 12 consecutive months or less.
18
At December 31, 2003, the Company's investments are concentrated in the
following industries:
% of Total
Number of % of Mkt. Mkt. Value
Holdings Value of Fund of Portfolio
-------- ------------- ------------
Equity Securities:
CIF Mutual Fund (1):
Information Technology 35 20.2%
Financial Services 48 18.2%
Health Care 16 14.7%
Consumer Discretionary 32 13.1%
Energy 10 7.7%
Materials 21 7.0%
Industrials 22 5.1%
Telecommunications 13 4.9%
Consumer Staples 16 4.8%
Cash & Equivalents - 3.4%
Utilities 6 0.9%
--- ------
Subtotal - Equity Securities 219 100.0% 21.3%
--- ------
Fixed Income Securities:
U.S. Government Agencies & Asset Backed 60 52.8% 41.5%
Corporate 78 18.0% 14.2%
Corporate Asset Backed 24 15.9% 12.5%
U.S. Government Securities 16 9.6% 7.6%
State & Municipal 5 3.0% 2.3%
Foreign Government and Agencies 1 0.4% 0.3%
Foreign Corporate 2 0.3% 0.2%
Other 1 0.1% 0.1%
--- ------ ------
Subtotal - Fixed Income Securities 187 100.0% 78.7%
--- ------ ------
TOTAL INVESTMENT PORTFOLIO 406 100.0%
=== ======
(1) Represents a mutual fund called the Capital International Fund (the "Fund")
comprised of numerous securities. The Company does not own individual positions
in the securities comprising the Fund. At December 31, 2003 there were 219
different securities comprising the Fund.
The Retrocession Agreements require the Company to establish, to the extent
requested by MIC, letters of credit, trust accounts, or a combination thereof at
the Company's option to permit MIC to obtain full credit for such reinsurance.
In accordance with the terms and conditions of the Retrocession Agreements, MIC
may utilize the letters of credit or the assets deposited into the trust
accounts for any of the following purposes:
o to reimburse MIC for the Company's share of premiums returned for
business retroceded under the Retrocession Agreements on account of
cancellations of such business;
o to reimburse MIC for the Company's share of losses paid by MIC under
the terms and provisions of the business retroceded under the
Retrocession Agreements;
o to fund an account with MIC in an amount at least equal to the Minimum
Funding Requirement (as such term is defined in the Retrocession
Agreements); and
o to pay any other amounts that MIC claims is due under the Retrocession
Agreements.
As of December 31, 2003, the Company had established one trust account and
deposited assets totaling $88,911,501 into such trust account.
19
The Company provided an irrevocable letter of credit to MIC in the amount of
$68,500,000 at December 31, 2002 ($72,350,000 at December 31, 2001) to
collateralize the amounts recoverable from the Company related to the business
ceded to it. Cash equivalents and investments were assigned to collateralize the
letter of credit. At December 31, 2002, the fair value of such assets was
$87,829,960 ($91,365,560 at December 31, 2001).
Reserves for Unpaid Losses
Reserves for unpaid losses are balance sheet liabilities representing estimates
of amounts needed in the future to pay claims under Policies with respect to
insured events, which have occurred as of the balance sheet dates.
For purposes of establishing reserves for unpaid losses, the Company relies upon
the advice of MIC. At December 31, 2003 and 2002, the Company's reserves for
unpaid losses were estimated as a percentage of earned premiums for the
corresponding quarter. This calculation is compared to an acceptable range for
the reserves developed by actuaries of the ceding company. At December 31, 2003,
and 2002, the reserves for unpaid losses were $2,164,872 and $3,650,641,
respectively. At December 31, 2003, the estimated range of reserves for unpaid
losses prepared for the Company by the ceding company's actuaries was as
follows:
Low end of range: $1.9 million
High end of range: $2.8 million
Key assumptions made in determining the actuarial range of reserves for unpaid
losses include the following:
o Loss development factors for the direct business of the ceding company
were utilized due to the larger volume and greater stability.
o The loss development factors were weighted based on the mix of new and
used vehicle business in the latest calendar year.
o Loss development factors were set equal to the weighted 12 month
averages in order to smooth the effects of seasonality, while still
reflecting the reductions due to efficiencies gained in the claims
payment process that have been realized over the past several years.
Such efficiencies resulted in the quicker payment of claims, resulting
in fewer open claims at a given point in time.
Reserves for unpaid losses are established after periodic actuarial reviews,
based on judgments of the effects of technological change, manufacturers'
warranties, and MIC's historical experience with mechanical motor vehicle
service agreements. Consequently, the determination of reserves for unpaid
losses is an estimate and a process inherently subject to a number of highly
variable factors. Ultimate losses could develop higher than expected, resulting
in an adjustment of reserves. Any adjustments to reserves for unpaid losses are
reflected in the operating results for the periods in which they become known.
The Company utilizes a percentage of earned premiums for the corresponding
quarter to estimate reserves for unpaid losses. The factor utilized is
influenced by, among other things, underwriting results and the ability of
eligible participants to submit claim payments without requiring the
pre-approval by an adjuster. As of December 31, 2003 as a result of improved
underwriting results and the ability of eligible participants to have claims
paid without the pre-approval of an adjuster, the factor used to estimate
reserves for unpaid losses was reduced. The factor change resulted in a
favorable earnings impact of $1,082,794 in 2003.
There have been no other changes to the key assumptions made to estimate the
reserves for unpaid losses, including new events that occurred since the last
reporting date (December 31, 2002).The Company's incurred loss ratios (losses
incurred as a percentage of net premium earned) on all business for the calendar
years ended December 31, 2003, 2002 and 2001 were 64.7%, 71.6%, and 73.4%,
respectively.
20
The following table sets forth an analysis of changes in the reserves for unpaid
losses for the years ended December 31, 2003, 2002 and 2001.
Year Ended
-----------------------------------
12/31/03 12/31/02 12/31/01
-------- -------- --------
Beginning balance in
reserves for unpaid losses $3,650,641 $3,949,590 $4,754,710
---------- ---------- ---------
Add-provision for losses
incurred related to:
Current claim year...... 30,798,600 36,929,150 40,529,340
Prior claim years....... (1,429,368) (1,347,207) (1,304,766)
---------- ---------- ---------
Total............ 29,369,232 35,581,943 39,224,574
---------- ---------- ---------
Deduct-paid losses
attributable to:
Current claim year...... 28,776,299 33,288,213 36,590,250
Prior claim years....... 2,078,702 2,592,679 3,439,444
---------- ---------- ---------
Total............ 30,855,001 35,880,892 40,029,694
Ending balance in reserves
for unpaid losses......... $2,164,872 $3,650,641 3,949,590
========== ========== =========
As a result of change in estimates of losses incurred in prior years, the
provisions for losses incurred in 2003, 2002 and 2001 decreased by $1,429,368,
$1,347,207, and $1,304,766, respectively. The decreases are largely due to the
efficiencies realized in the claims payment processes previously discussed and
due to the decreasing number of policies in force as a result of fewer Shares
outstanding.
The following table sets forth the development of losses and loss adjustment
expenses from January 1, 1999 through December 31, 2003.
Year Ended
--------------------------------------------------------
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- --------
Liability for unpaid
claims and claims
adjustment expense... $4,725,239 $4,754,710 $3,949,590 $3,650,641 $2,164,872
---------- ---------- ---------- ---------- ----------
Paid (cumulative) in
subsequent year(s)... 3,835,555 3,439,444 2,592,679 2,078,702
Estimated unpaid
liability as of
year end*............ 12,639 10,500 9,704 142,571
--------- ---------- ---------- ----------
Cumulative Redundancy $ 877,045 $1,304,766 $1,347,207 $1,429,368
========= ========== ========== ==========
* Vehicle Service Contract claims are generally paid within 90 days of when they
are incurred. Accordingly, the liability for unpaid claims incurred in all prior
years has been combined at each year end.
The table above shows initial estimated reserves at December 31, 2003, 2002,
2001, 2000 and 1999 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
seven years) and losses do not occur equally over the period for which the
Policies are 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.
21
Recently Issued Accounting Standards SFAS 150 - In May 2003, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, which provides standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The Statement is effective for financial
instruments entered into or modified after May 31, 2003 and for pre-existing
instruments as of the beginning of the first interim period beginning after June
15, 2003. We do not believe the adoption of SFAS 150 will have a material impact
on the Company's financial condition or results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and certain
equity security prices. Market risk is inherent to all financial instruments.
Active management of market risk is integral to the Company's operations. The
Company seeks to manage its exposure to market risk generally by monitoring the
character of investments that are purchased or sold.
The Company does not hold derivative instruments.
The following analyses are based on sensitivity analysis tests that assume
instantaneous, parallel shifts in exchange rates, interest rates, and interest
rate yield curves. As with any similar analysis, there are shortcomings inherent
to the sensitivity analyses presented here. In reality, changes are rarely
instantaneous or parallel. Although certain assets may have similar maturities
or periods to repricing, they may not react correspondingly to changes in market
interest rates. Also, the interest rates on certain types of assets may
fluctuate with changes in market interest rates, while interest rates on other
types of assets may lag behind changes in market rates. The Company does not
hold any financial instruments for trading purposes.
Interest Rate Risk
The Company has exposure to economic losses due to interest rate risk arising
from changes in the level or volatility of interest rates and attempts to
mitigate that exposure through active portfolio management. The Company's
investment guidelines do not permit the use of derivatives in managing interest
rate risk. As of December 31, 2003 and 2002, the net fair value asset exposure
to interest rate risk was approximately $65.8 million and $66.1 million,
respectively. As of both December 31, 2003 and 2002, the potential loss in fair
value resulting from a hypothetical 10% increase in interest rates would be
approximately $0.9 million and $0.9 million, respectively. Conversely, the
potential gain in fair value resulting from a hypothetical 10% decrease in
interest rates would be approximately $0.9 at both December 31, 2003 and 2002.
Foreign Exchange Risk
Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will impact the value of financial instruments. At
December 31, 2003 and 2002, 100% of investments were denominated in U.S.
dollars.
Equity Price Risk
Equity price risk results from changes in the level or volatility of equity
prices which affect the value of equity securities. At December 31, 2003 and
December 31, 2002, the Company had approximately 21% and 14%, respectively, of
its portfolio invested in an international equity fund. As of December 31, 2003
and 2002, the net fair value asset exposure to equity price risk was
approximately $17.8 million and $12.6 million, respectively, and the potential
gain in fair value resulting from a hypothetical 10% increase in the underlying
equity prices would be approximately $1.8 million and $1.3 million,
respectively. Conversely, the potential loss in fair value resulting from a
hypothetical 10% decrease in the underlying equity prices would be approximately
$1.8 million and $1.3 million at December 31, 2003 and 2002, respectively.
For a discussion of the Company's investment in the Fund, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
22
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
Independent Auditors' Report 24
Balance Sheets December 31, 2003 and 2002 25
Statements of Operations and Retained Earnings for
the years ended December 31, 2003, 2002 and 2001 26
Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001 27
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 30
Notes to the Financial Statements 32
23
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
One Financial Place
Collymore Rock
St. Michael, Barbados
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance
Company, Limited (the "Company") as of December 31, 2003 and 2002, and the
related statements of operations and retained earnings, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2003 (expressed in United States dollars). 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, 2003 and 2002, and the results of its operations,
changes in stockholders' equity and its cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
CHARTERED ACCOUNTANTS
/s/ Deloitte & Touche LLP
Bridgetown, Barbados
February 17, 2004
24
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(Expressed in United States dollars)
Notes 2003 2002
----- ---- ----
ASSETS
Investments
Debt securities $65,807,414 $74,393,966
Equity securities 17,782,758 12,597,450
Total Investments 3,7 83,590,172 86,991,416
Cash and cash equivalents 7 4,999,219 257,303
Accrued investment income 502,869 572,241
Deferred acquisition costs 17,148,979 19,810,917
Advances to stockholders 479,509 323,206
Due from Motors Insurance Corporation - 379,634
Prepayments - 44,779
----------- -----------
Total Assets 106,720,748 108,379,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums 76,246,766 83,482,170
Reserves for unpaid losses 4 2,164,872 3,650,641
Accrued liabilities 174,456 180,205
Due to Motors Insurance Corporation 805,718 -
----------- -----------
Total Liabilities 79,391,812 87,313,016
----------- -----------
COMMITMENTS AND CONTINGENCIES 7 - -
----------- -----------
STOCKHOLDERS' EQUITY 5
Share capital
- - Common stock - no par value;
Authorized - 2,000 shares;
Issued and outstanding - 2,000 shares 200,000 200,000
- - Participating stock - no par value;
Authorized - 100,000 shares;
Issued and outstanding -
20,600 shares at December 31, 2003 and
23,300 shares at December 31, 2002 1,545,000 1,747,500
------------ ------------
Total share capital 1,745,000 1,947,500
Retained earnings 8 23,411,660 20,276,888
Accumulated other comprehensive
income/(loss) 2,172,276 (1,157,908)
------------ ------------
Total Stockholders' Equity 27,328,936 21,066,480
------------ ------------
Total Liabilities and Stockholders' Equity $106,720,748 $108,379,496
============ ============
The accompanying notes form an integral part of these financial statements.
25
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Expressed in United States dollars)
Years Ended December 31,
--------------------------------------
Notes 2003 2002 2001
----- ---- ---- ----
INCOME
Reinsurance premiums assumed 6 $38,171,866 $45,296,200 $51,131,226
Recapture of unearned 9 - (1,635,656) -
reinsurance premiums
Decrease in unearned premiums 7,235,404 6,151,952 2,281,343
----------- ----------- -----------
Premiums earned 45,407,270 49,812,496 53,412,569
----------- ----------- -----------
Investment Income
Interest earned 3,472,600 4,268,676 4,518,711
Realized gains on investments - net 904,455 2,099,677 1,632,053
----------- ----------- -----------
Investment income 4,377,055 6,368,353 6,150,764
----------- ----------- -----------
TOTAL INCOME 49,784,325 56,180,849 59,563,333
----------- ----------- -----------
EXPENSES
Acquisition costs 10,983,219 12,508,680 13,858,660
Losses paid 30,855,001 35,970,182 40,029,694
Decrease in reserves for unpaid losses (1,485,769) (298,949) (805,120)
Administrative expenses
Related parties 277,310 273,361 273,592
Other 470,304 402,457 475,589
----------- ----------- -----------
TOTAL EXPENSES 41,100,065 48,855,731 53,832,415
----------- ----------- -----------
NET INCOME 8,684,260 7,325,118 5,730,918
RETAINED EARNINGS, beginning of year 20,276,888 20,276,888 16,247,004
LESS: DIVIDENDS (4,930,473) (4,318,225) (3,083,096)
DEDUCT SURPLUS AMOUNTS ON (619,015) (1,251,979) (372,852)
----------- ----------- -----------
REDEMPTION OF PARTICIPATING STOCK
RETAINED EARNINGS, end of year $23,411,660 $20,276,888 $18,521,974
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
26
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Expressed in United States dollars)
December 31, 2003
---------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholders' Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income/(Loss) Stock Stock
------ ------ -------- ------------- ----- -----
Balance at December 31, 2002 $21,066,480 $ - $20,276,888 $(1,157,908) $200,000 $1,747,500
Comprehensive income:
Net income 8,684,260 8,684,260 8,684,260 - - -
Other comprehensive income,
net of tax:
Unrealized gains on securities,
net of reclassification 3,330,184 3,330,184 - 3,330,184 - -
-----------
Comprehensive income - $12,014,444 - - - -
===========
Dividends declared and paid
on participating stock (4,930,473) (4,930,473) - - -
Participating stock:
Redeemed (821,515) (619,015) - - (202,500)
----------- ----------- ---------- -------- ----------
Balance at December 31, 2003 $27,328,936 $23,411,660 $2,172,276 $200,000 $1,545,000
=========== =========== ========== ======== ==========
Disclosure of reclassification amount
Unrealized holding gains arising 4,234,639
during period
Less: reclassification adjustment (904,455)
----------
for gains included in net income
Net unrealized gains on securities $3,330,184
==========
The accompanying notes form an integral part of these financial statements.
27
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Continued)
(Expressed in United States dollars)
December 31, 2002
---------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholders' Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income/(Loss) Stock Stock
------ ------ -------- ------------- ----- -----
Balance at December 31, 2001 $22,366,022 $ - $18,521,974 $1,769,048 $200,000 $1,875,000
Comprehensive income:
Net income 7,325,118 7,325,118 7,325,118 - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification (2,926,956) (2,926,956) - (2,926,956) - -
-----------
Comprehensive income - $4,398,162 - - - -
==========
Dividends declared and paid
on participating stock (4,318,225) (4,318,225) - - -
Participating stock:
Issued 15,000 - - - 15,000
Redeemed (1,394,479) (1,251,979) - - (142,500)
----------- ----------- ----------- -------- ----------
Balance at December 31, 2002 $21,066,480 $20,276,888 $(1,157,908) $200,000 $1,747,500
=========== =========== =========== ======== ==========
Disclosure of reclassification amount
Unrealized holding losses arising
during period (5,026,633)
Add: reclassification adjustment
for gains included in net income 2,099,677
------------
Net unrealized loss on securities $ (2,926,956)
============
The accompanying notes form an integral part of these financial statements.
28
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (CONTINUED)
(Expressed in United States dollars)
December 31, 2001
---------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholders' Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income/(Loss) Stock Stock
------ ------ -------- ------------- ----- -----
Balance at December 31, 2000 $21,121,927 $ - $16,247,004 $2,732,423 $200,000 $1,942,500
Comprehensive income:
Net income 5,730,918 5,730,918 5,730,918 - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification (963,375) (963,375) - (963,375) - -
----------
Comprehensive income - $4,767,543 - - - -
==========
Dividends declared and paid
on participating stock (3,083,096) (3,083,096) - - -
Participating stock:
Issued 7,500 - - - 7,500
Redeemed (447,852) (372,852) - - (75,000)
----------- ----------- ---------- -------- ----------
Balance at December 31, 2001 $22,366,022 $18,521,974 $1,769,048 $200,000 $1,875,000
=========== =========== ========== ======== ==========
Disclosure of reclassification amount
Unrealized holding losses arising
during period (2,595,428)
Add: reclassification adjustment
for gains included in net income 1,632,053
----------
Net unrealized loss on securities $ (963,375)
==========
The accompanying notes form an integral part of these financial statements.
29
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Expressed in United States dollars)
Years Ended December 31,
---------------------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Reinsurance premiums collected $ 41,506,759 $ 48,171,023 $48,312,795
Reinsurance premiums returned - (1,635,656) -
Losses and acquisition expenses paid (41,275,347) (47,168,004) (52,571,957)
Administrative expenses paid (740,662) (667,237) (791,054)
Investment income received 3,523,574 4,497,215 4,623,433
Advances to stockholders (156,303) - -
------------ ------------ -----------
Net cash provided by/(used in) operating activities 2,858,021 3,197,341 (426,783)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments (350,633,775) (248,329,909) (71,853,926)
Sales and maturities of investments 358,269,658 250,944,583 74,210,913
------------ ------------ -----------
Net cash provided by investing activities 7,635,883 2,614,674 2,356,987
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of participating stock - 15,000 7,500
Redemption of participating stock (821,515) (1,394,479) (447,851)
Dividends paid (4,930,473) (4,318,225) (3,083,096)
------------ ------------ -----------
Net cash used in financing activities (5,751,988) (5,697,704) (3,523,447)
------------ ------------ -----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 4,741,916 114,311 (1,593,243)
CASH AND CASH EQUIVALENTS,
beginning of year 257,303 142,992 1,736,235
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $4,999,219 $257,303 $142,992
============ ============ ===========
30
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Continued)
(Expressed in United States dollars)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY/(USED IN) OPERATING
ACTIVITIES:
Years Ended December 31,
------------------------------------------
2003 2002 2001
---- ---- ----
Net income $8,684,260 $7,325,118 $5,730,918
Realized gains on investments - net (904,455) (2,099,677) (1,632,053)
Change in:
Accrued investment income 69,372 216,958 114,535
Deferred acquisition costs 2,661,938 2,999,300 1,087,804
Advances to shareholders (156,303) 204,294 (337,500)
Prepayments 44,779 (7,279) (250)
Unearned premiums (7,235,404) (6,151,952) (2,281,343)
Reserves for unpaid losses (1,485,769) (298,949) (805,120)
Accrued liabilities (5,749) (1,116) 55,368
Due from/to Motors Insurance Corporation 1,185,352 1,010,644 (2,359,142)
------------ ---------- -----------
NET CASH PROVIDED BY/(USED IN) OPERATING
ACTIVITIES $ 2,858,021 $3,197,341 $ (426,783)
============ ========== ===========
The accompanying notes form an integral part of these financial statements.
31
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Expressed in United States 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.
As of December 2002, all of the common stock of the Company is owned
by GMAC Insurance Holdings, Inc. ("GMACI"). Prior to that date, all of
the common stock of the Company was owned by Motors Insurance
Corporation ("MIC"), a wholly-owned subsidiary of GMACI. GMACI (the
"common stockholder") is an indirect wholly-owned subsidiary of
General Motors Corporation. The principal activity of the Company is
the assumption of mechanical motor vehicle 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
in the United States of America
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Premium Income and Acquisition Costs
Reinsurance premiums are based on the Company assuming (after ceding
commission) 75% of the original net policy premiums written by the
direct insurer prior to October 1, 2001 and 80% for net policy
premiums written by the direct insurer, on and after October 1, 2001.
Of these net reinsurance premiums, 75% is retroceded to the Company
when written and the remaining 25% when such premiums are earned (net
of ceding commissions and excise taxes).
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 charged to expense on the
basis of premiums earned.
Investments
Investments, all of which are available for sale, are comprised of
interest-bearing marketable securities, and an investment in an
international equity fund (the "Fund"), which are carried at fair
value based on quoted market prices and dealer quotes obtained from an
external pricing service. Unrealized appreciation/(depreciation) is
included in accumulated other comprehensive income/(loss).
32
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments (continued)
Realized gains and losses on the sale of investments and losses from
other than temporary impairment are included as investment income and
are calculated based on amortized costs. To determine the amounts
recorded as other than temporary impairment for its fixed income
investments held, the Company evaluated, among other things, the
length of time and the extent that the security's market value has
been valued at less than cost; the financial health of the issuer,
including any specific events, which may influence the issuer; the
Company's intent to hold the investment; and the security's rating as
determined by an independent rating agency. If an investment's
unrealized loss position was determined to be other than temporary in
nature, the underlying security's cost basis was written down to the
market value at the time that the impairment charge was recorded. The
Company's investment in the Fund was reviewed using the applicable
criteria described above and such review also included the following
procedures to determine whether any charge for other than temporary
impairment was necessary:
1. Reviewed the relationship between the Fund's market value
compared to its historical cost since its purchase. This
included examining the period of time that the Fund was
consecutively in an unrecognized loss position.
2. Reviewed the volatility of the Fund to determine if there has
been a demonstrated ability for it to recover from an unrealized
loss position.
3. Examined the concentration of the Fund from a geographical,
industry, and individual security standpoint.
Reserves for Unpaid Losses
The Company provides for unsettled, reported losses based on estimates
of the final settlement, with an experience factor added to provide
for losses incurred, but not reported. The final settlement may be
greater or less than the amounts provided. Any such differences, when
they become known, are recognized in current operations and can
potentially be significant to the financial statements.
Taxation
The Company received an undertaking from the Barbados Government
exempting it from all local income, profits and capital gains taxes,
which expired on December 31, 2001. Beginning January 1, 2002, the
Company is 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
until December 31, 2016.
Stockholders who are United States residents are taxed in the United
States on their share of the Company's income on an imputed 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).
33
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities and equities
are as follows:
Gross Gross
Unrealized Unrealized
Cost Appreciation Depreciation Fair Value
---- ------------ ------------ ----------
December 31, 2003:
Governments and their agencies $42,773,065 $ 613,471 $(381,371) $43,005,165
Corporations 21,688,554 722,752 (139,997) 22,271,309
Supranationals 497,900 33,040 - 530,940
----------- ---------- ----------- -----------
Sub-total debt securities 64,959,519 1,369,263 (521,368) 65,807,414
Capital International Fund 16,458,377 1,324,381 - 17,782,758
----------- ---------- ----------- -----------
Total $81,417,896 $2,693,644 $(521,368) $83,590,172
=========== ========== =========== ===========
December 31, 2002:
Governments and their agencies $46,895,064 $1,486,701 $(6,610) $48,375,155
Corporations 24,387,615 1,121,565 (26,394) 25,482,786
Supranationals 497,900 38,125 - 536,025
----------- ---------- ----------- -----------
Sub-total debt securities 71,780,579 2,646,391 (33,004) 74,393,966
Capital International Fund 16,368,745 - (3,771,295) 12,597,450
----------- ---------- ----------- -----------
Total $88,149,324 $2,646,391 $(3,804,299) $86,991,416
=========== ========== =========== ===========
The cost and fair value of debt securities at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call the underlying security or prepayment obligations with or without
call or prepayment penalties.
Cost Fair Value
---- ----------
Due within one year $ 50,148 $ 50,360
Due after five years through ten years 27,399,123 27,942,835
Due after ten years through thirty years 18,749,477 18,746,659
------------- -------------
$ 64,959,519 $ 65,807,414
============= =============
In 2003, gross gains of $1,211,346 and gross losses of $306,891 were
realized. In 2002, gross gains of $3,516,788 and gross losses of
$1,417,111 were realized. In 2001, gross gains of $2,067,143 and gross
losses of $435,090 were realized. For the years ended December 31,
2003, 2002 and 2001 of the realized loss recorded, $18,741, $159,632
and $0, respectively were recorded for investments whose losses were
determined to be other than temporary.
34
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 3. INVESTMENTS (CONTINUED)
The fair value and unrealized losses on the investments at December 31, 2003 are
as follows:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Fair value Losses Fair value Losses Fair value Losses
Government and
their agencies $17,572,574 $381,371 $ - $ - $17,572,574 $381,371
Corporations 5,812,528 124,648 402,104 15,349 6,214,632 139,997
----------- -------- -------- ------- ----------- --------
$23,385,102 $506,019 $402,104 $15,349 $23,787,206 $521,368
=========== ======== ======== ======= =========== ========
The following summarizes net unrealized appreciation (depreciation) on
investments:
Balance at December 31, 2001 $1,769,048
Net depreciation (2,926,956)
----------
Balance at December 31, 2002 (1,157,908)
Net appreciation 3,330,184
----------
Balance at December 31, 2003 $2,172,276
==========
At December 31, 2003, the investment portfolio is comprised of
approximately 79% (2002 - 86%) in diverse debt securities, which do
not result in any concentration of credit risk and 21% (2002 - 14%) in
the Fund based on market value. At December 31, 2003 and 2002, 100% of
the Company's investments are denominated in United States dollars.
Note 4. RESERVES FOR UNPAID LOSSES
The following table sets forth an analysis of changes in the reserves
for unpaid losses for the years ended December 31, 2003, 2002 and
2001:
2003 2002 2001
---- ---- ----
Beginning balance in reserves
for unpaid losses $3,650,641 $3,949,590 $4,754,710
---------- ---------- -----------
Add/(deduct) provision for losses
incurred related to:
Current claim year 30,798,600 36,929,150 40,529,340
Prior claim years (1,429,368) (1,347,207) (1,304,766)
---------- ---------- -----------
Total 29,369,232 35,581,943 39,224,574
---------- ---------- -----------
Deduct paid losses attributable to:
Current claim year 28,776,299 33,288,213 36,590,250
Prior claim years 2,078,702 2,592,679 3,439,444
---------- ---------- -----------
Total 30,855,001 35,880,892 40,029,694
---------- ---------- -----------
Ending balance in reserves
for unpaid losses $2,164,872 $3,650,641 $ 3,949,590
========== ========== ===========
35
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 4. RESERVES FOR UNPAID LOSSES (CONTINUED)
As a result, of change in estimates of losses incurred in prior years,
the provisions for losses incurred in 2003, 2002, and 2001 decreased
by $1,429,368, $1,347,207, and $1,304,766, respectively.
The Company utilizes a percentage of earned premiums for the
corresponding quarter to estimate reserves for unpaid losses. The
factor utilized is influenced by, among other things, underwriting
performances and the ability of eligible participants to submit claim
payments without requiring the pre-approval by an adjuster. As a
result of improved underwriting performance and the utilization of
those types of claim processes, the factor used in estimating reserves
for unpaid losses at December 31, 2003 was 10 percentage points (or
33%) lower than that used at December 31, 2002 and 2001. During 2003,
the factor was lowered by 5 percentage points in both the 2nd and 4th
quarters. The factor changes resulted in a favorable earnings impact
of $1,082,794 in 2003.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by GMAC Insurance Holdings,
Inc. Prior to December 2002, the Company's Common Stock was owned by
MIC.
During year 2003, no additional series of 100 shares of Participating
Stock were issued as compared to two series of 100 shares for the year
ended December 31, 2002. In addition, during 2003 the Board of
Directors ("the Board") redeemed twenty-seven series of 100 shares
which had been previously placed in run-off (of which eleven had
reached a fully earned position during 2003 and sixteen were redeemed
for nil value). During 2002, the Board redeemed eighteen series of 100
shares of all which had been previously placed in run-off and had
reached fully earned position. In addition, the Board redeemed one
series of 100 shares for $230,538, which represented the balance in
the capital and surplus account at July 1, 2002. Also, MIC recaptured
the unearned premiums and loss reserves for this series (see Note 9).
In the years ended, December 31, 2003, 2002, and 2001 costs in the
amount of $141,229, $90,753 and $106,751, respectively, were incurred
in the sale of Participating Stock. MIC reimburses the Company
directly for these expenses. Such reimbursements are deducted from the
gross administrative expenses of the Company.
The Common Stockholder is entitled to elect five directors, at least
one of whom must be a resident of Barbados. The Common Stockholder has
no right to vote with respect to liquidation of the Company. The
Common Stockholder 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 of
Directors, 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, 2003 and 2002, there were no funds held in escrow.
36
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the Company will
assume future additional premiums of $25,415,589 ($27,827,390 at
December 31, 2002) 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. COLLATERALIZED RESERVES
On December 22, 2003, the Company entered a trust agreement with MIC,
which requires assets to be held in a regulated trust account to
collateralize the amounts recoverable from the Company related to the
business ceded to it. The amount required at December 31, 2003 was
$62,025,054 ($0 at December 31, 2002). Cash equivalents and
investments are deposited in the trust account. At December 31, 2003
the fair value of such assets was $88,911,501 ($0 at December 31,
2002).
The Company provided an irrevocable letter of credit to MIC in the
amount of $68,500,000 at December 31, 2002 ($72,350,000 at December
31, 2001) to collateralize the amounts recoverable from the Company
related to the business ceded to it. Cash equivalents and investments
were assigned to collateralize the letter of credit. At December 31,
2002, the fair value of such assets was $87,820,960 ($91,365,560 at
December 31, 2001).
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'
subsidiary capital accounts.
An amount equal to one percent of assumed premiums 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 subsidiary
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.
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, provided:
i) the Company meets Barbados' regulatory requirement without regard
to any letter of credit or guarantee; and
ii) the related subsidiary capital account meets those requirements
after giving effect to the dividend.
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, 2004, the Company's required minimum
margin of solvency computed in accordance with Barbados law was
$5,040,727.
37
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (CONTINUED)
(Expressed in United States dollars)
Note 8. RETAINED EARNINGS (CONTINUED)
Retained earnings applicable to the Common and Participating
Stockholders are comprised of the following:
Common Participating Total
------ ------------- -----
Balance, December 31, 2000 $25,951 $16,221,053 $16,247,004
Net income for the year 19,868 5,711,050 5,730,918
Dividend paid - (3,083,096) (3,083,096)
Redemption of Participating Stock - (372,852) (372,852)
------- ----------- -----------
Balance, December 31, 2001 45,819 18,476,155 18,521,974
Net income for the year 17,511 7,307,607 7,325,118
Dividend paid - (4,318,225) (4,318,225)
Redemption of Participating Stock - (1,251,979) (1,251,979)
------- ----------- -----------
Balance at December 31, 2002 63,330 20,213,558 20,276,888
Net income for the year 13,381 8,670,879 8,684,260
Dividend paid - (4,930,473) (4,930,473)
Redemption of Participating Stock - (619,015) (619,015)
------- ----------- -----------
Balance at December 31, 2003 $76,711 $23,334,949 $23,411,660
======= =========== ===========
Note 9. RECAPTURE OF UNEARNED REINSURANCE PREMIUMS
During 2002, the Company entered a recapture agreement with MIC for
one series of Participating Stock. Under the agreement MIC recaptured
premiums of $1,635,656, which represents unearned premiums and an
amount equal to $57,426 for losses incurred, but unpaid with respect
to the recaptured business as of June 30, 2002. Additionally, MIC has
paid the Company a recapture commission of $391,954 and a refund of
U.S. Federal Excise Tax of $16,357, which represents the deferred
portion of the ceding commissions and taxes previously paid by the
Company. Upon recapturing these shares, such amounts were transferred
into another mechanical service contract reinsurance company that
assumes business from MIC.
Note 10. SUBSEQUENT EVENT
On March 3, 2004 the Company's Board of Directors declared a dividend
in the amount of $8,022,359 to eligible Participating Stockholders on
record as of December 31, 2003.
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, the Company's Chief Executive Officer (Principal Executive
Officer), and the Company's Principal Financial Officer evaluated, with the
participation of the Company's management and GMACI's management, the
effectiveness of the Company's disclosure controls and procedures. Based on the
evaluation, which disclosed no significant deficiencies or material weaknesses,
the Company's Chief Executive and Principal Financial Officers each concluded
that the Company's disclosure controls and procedures were effective as of the
end of the period covered by this report. There were no changes in the Company's
internal control over financial reporting that occurred during the period
covered by this report that could have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART III
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 May
14, 2003. One director was elected by the holders of the Shares at such meeting.
The directors and officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
AND OTHER EMPLOYMENT (DURING
PAST FIVE YEARS)
Thomas D. Callahan 51 Chairman, Chief Executive Officer,
President and Director (Senior Vice
President, MIC, 1998 to present;
Vice-President, MIC, 1994-1998)
Mr. Callahan became President in May of 2003
and Director in 1999.
William B. Noll 61 Executive Vice-President and Director
(President, GMAC Insurance Holdings, Inc.,
1997 to present; President, Motors
Insurance Corporation ("MIC"), 1999 to
present; Executive Vice-President & Chief
Financial Officer, MIC, 1993-1999)
Mr. Noll became Executive Vice-President in
May of 2003 and Director in 1995.
John J. Dunn, Jr. 45 Vice-President and Director (Treasurer,
GMAC Insurance Holdings, Inc., 1997 to
present; Vice-President - Finance, 1998 to
present; Treasurer of MIC, 1998-March 2004)
Mr. Dunn became Vice-President and Director in
1996.
39
NAME AGE POSITION WITH THE COMPANY
AND OTHER EMPLOYMENT (DURING
PAST FIVE YEARS)
Robert E. Capstack 63 Vice-President and Director (Section
Manager,
MIC, 1994 to present; Vice-President, GMAC
Securities Corporation, 1999)
Mr. Capstack became Vice-President and
Director in April of 1999.
Peter R. P. Evelyn 62 Director (Attorney, 2002 to present;
Partner, Evelyn, Gittens & Farmer, a
Barbados law firm (1986-2002))
Mr. Evelyn became a Director in 1986.
Harvey J. Koning 62 Director (President, Grand Oldsmobile
Center, Inc., Grand Rapids, Michigan, 1983)
Mr. Koning became a Director in 2002.
Ronald W. Jones 51 Vice-President, Finance, Principal
Financial Officer and Principal Accounting
Officer (Deputy Chairman, Aon Insurance
Managers (Barbados), Ltd. (1986 to present))
Mr. Jones has served as Vice-President,
Finance since 1987.
Michael B. Boyce 64 Secretary (Principal, Colybrand Company
Services, Limited, Barbados, 1993 to
present; previously Principal, Price
Waterhouse, Eastern Caribbean)
Mr. Boyce was elected Secretary in 1994. Mr.
Boyce served previously as our Assistant
Secretary.
The directors and officers named above serve in those capacities until the next
annual meeting of shareholders following their election.
Audit Committee and Audit Committee Financial Expert
The Company does not have a separate Audit Committee. In accordance with Section
3(a)(58)(B) of the Exchange Act, the entire Board of Directors of the Company
acts as the Audit Committee. The Board of Directors does not have an audit
committee financial expert because the Board of Directors has not determined
whether any member of its Board of Directors qualifies as an audit committee
financial expert, as such term is defined by Item 401(h) of Regulation S-K of
the Exchange Act. At a meeting in May 2004, the Board of Directors intends to
determine whether any member of the Board of Directors qualifies as an audit
committee financial expert.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to
all employees, executive officers and directors. Upon request, the Company will
provide to any person, without charge, a copy of the Code of Business Conduct
and Ethics. Requests should be made in writing and addressed to Ronald W. Jones,
Vice President, Motors Mechanical Reinsurance Company, Limited, One Financial
Place, Collymore Rock, St. Michael, Barbados, W.I. In addition, the Company has
filed the Code of Business Conduct and Ethics as an exhibit to this Annual
Report on Form 10-K for the year ended December 31, 2003.
40
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. The Manager receives
management fees and compensation for financial and administrative services that
it provides to the Company. Mr. Evelyn 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
Name And Address Of Amount And Nature Of
Title Of Class Beneficial Owner Beneficial Ownership Percent Of Class
-------------- ---------------- -------------------- ----------------
Common Stock GMAC Insurance 2,000 shares 100%
Holdings, Inc.
300 Galleria
Officentre
Suite 200
Southfield, MI 48034
Participating Harvey J. Koning 100 shares 0.5%
Stock
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See ITEM 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and ITEM 11,
EXECUTIVE COMPENSATION.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the fiscal years ended December 31, 2003
and 2002 for professional services rendered by Deloitte & Touche LLP ("D&T") for
the audit of the Company's annual financial statements and review of the
financial statements included in the Company's Form 10-K or for services that
are normally provided by D&T in connection with statutory and regulatory filings
or engagements totaled $57,277 and $46,114 respectively.
Audit-Related Fees
The aggregate fees billed for each of the fiscal years ended December 31, 2003
and 2002 for audit-related services totaled $4,400 and $0, respectively. The
audit-related services performed by D&T in 2003 consisted primarily of providing
advice with respect to the Sarbanes-Oxley Act of 2002 and reviewing filings that
the Company makes with the U.S. Securities and Exchange Commission.
Tax Fees
No aggregate fees were billed in each of the last two years for professional
services rendered by D&T for tax compliance, tax advice and tax planning.
All Other Fees
No aggregate fees were billed in each of the last two years for products and
services provided by D&T other than those reported above.
41
Audit Committee Pre-Approval Policies and Procedures
The Company's Board of Directors acts as the Company's Audit Committee. All
services to be performed for the Company by D&T must be preapproved by the Board
of Directors or a designated member of the Board of Directors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Document List
(1) Financial Statements
The following are included in Item 8:
(i) Independent Auditors' Report.
(ii) Balance Sheets, December 31, 2003 and 2002
(iii) Statements of Operations and Retained Earnings for the
years ended December 31, 2003, 2002 and 2001
(iv) Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
(v) Statements of Changes in Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001
(vi) Notes to Financial Statements.
(2) Financial Statement Schedules: Schedules are omitted because of
the absence of the conditions under which they are required or
because the information required is presented in the financial
statements or related notes.
(3) Exhibits: The following exhibits are included in response to Item
15(c):
3(a) Restated Articles of Incorporation and amendments thereto
filed by reference to Exhibit 3(I) to Quarterly Report on
Form 10-Q, File No. 033-06534, for the quarterly period
ended June 30, 1996.
3(b) By-laws of the Company, as amended, filed by reference to
Exhibit 3(b) to Annual Report on Form 10-K, File No.
033-06534, for the year ended December 31, 2002.
4 Specimen Participating Stock Certificate filed by
reference to Exhibit 4 of Amendment No. 1 to Registration
Statement on Form S-1, File No. 033-06534, dated February
12, 1987.
42
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. 033-06534, dated June 18, 1986.
10(b) Amendment to Principal Retrocession Agreement between
Motors Insurance Corporation and Registrant.*
10(c) 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. 033-06534, dated June 18, 1986.
10(d) Amendment to Supplemental Retrocession Agreement between
Motors Insurance Corporation and Registrant.*
10(e) Specimen Stock Purchase Agreement filed by reference to
Exhibit 10(c) to Amendment No. 2 to Registration Statement
on Form S-1, File No. 033-06534, dated May 22, 1987.
10(f) 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 10-K, File No. 033-06534,
for the year ended December 31, 1996.
10(g) Investment Management Agreement between Registrant and
BlackRock International, Ltd. filed by reference to
Exhibit 10(f) to Annual Report on Form 10-K, File No.
033-06534, for the year ended December 31, 2000.
14 Code of Ethics.*
31(a) Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer.*
31(b) Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer.*
32(a) Section 1350 Certification of Principal Executive
Officer.*
32(b) Section 1350 Certification of Principal Financial
Officer.*
99(a) Certification Form filed by reference to Exhibit 28(a) to
Amendment No. 2 to Registration Statement on Form S-1,
File No. 033-06534, 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. 033-060105,
dated April 23, 1996.
* Filed as an Exhibit herewith.
(b) Reports on Form 8-K. No reports on Form 8-K for the year ended
December 31, 2003 have been filed.
43
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 30, 2004
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 and on the dates indicated.
Signature Title Date
/s/ Thomas D. Callahan Chairman, Chief Executive March 30, 2004
- -----------------------
Thomas D. Callahan Officer, President and
Director
/s/ William B. Noll Executive Vice-President and March 30, 2004
- -----------------------
William B. Noll Director
/s/ John J. Dunn, Jr. Vice-President and March 30, 2004
- -----------------------
John J. Dunn, Jr. Director
/s/ Robert E. Capstack Vice-President and March 30, 2004
- -----------------------
Robert E. Capstack Director
/s/ Harvey J. Koning Director March 30, 2004
- -----------------------
Harvey J. Koning
Director March 30, 2004
- -----------------------
Peter R. P. Evelyn
/s/ Ronald W. Jones Vice-President Finance, March 30, 2004
- -----------------------
Ronald W. Jones Principal Financial and
Accounting Officer
Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Securities Exchange Act of 1934, as amended, by the
registrant which have not registered securities pursuant to Section 12 of the
Act.
No annual report with respect to 2002 was distributed to shareholders. The
proxy solicitation materials that were sent to shareholders in connection with
the Registrant's annual meeting held May 14, 2003 have been previously filed
with the Commission. The Registrant does not intend to send an annual report
with respect to 2003 to shareholders and the Registrant has not sent, and does
not intend to send, proxy solicitation materials with respect to the
Registrant's annual meeting to be held May 12, 2004.
EXHIBIT INDEX
Description of Document Exhibit No.
- ----------------------- -----------
Amendment to Principal Retrocession Agreement between Motors
Insurance Corporation and Registrant. 10(b)
Amendment to Supplemental Retrocession Agreement between
Motors Insurance Corporation and Registrant. 10(d)
Code of Ethics 14
Rule 13a-14a/15d-14a Certification of the Principal 31(a)
Executive Officer of the Registrant
Rule 13a-14a/15d-14a Certification of the Principal 31(b)
Financial Officer of the Registrant
Section 1350 Certification of Principal Executive Officer of 32(a)
the Registrant
Section 1350 Certification of Principal Financial Officer of 32(b)
the Registrant