SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For quarterly period ended September 30, 2002
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Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the transition period from to
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Commission File Number 33-6534
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Motors Mechanical Reinsurance Company, Limited
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(Exact name of registrant as specified in its charter)
Barbados N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Bishops Court Hill, St. Michael, Barbados N/A
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(Address of principal executive offices) (Zip Code)
(246) 436-4895
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
Yes No X
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class As of September 30, 2002
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Common Stock, no par-value 2,000
Participating Stock, no par-value 23,900
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This quarterly report, filed pursuant to Rule 13a-13 of the General Rules
and Regulations under the Securities Exchange Act of 1934, consists of the
following information as specified in Form 10-Q:
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
1. Balance Sheets as of September 30, 2002 and December 31, 2001.
2. Statements of Operations and Retained Earnings for the three
month and nine month periods ended September 30, 2002 and 2001.
3. Statements of Cash Flows for the nine month periods ended
September 30, 2002 and 2001.
In the opinion of Management, the accompanying financial statements reflect
all adjustments, consisting of normal recurring accruals, which are necessary
for a fair presentation of the results for the interim periods presented. The
information furnished for the three and nine month periods ended September 30,
2002 may not be indicative of results for the full year.
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MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
(Expressed in U.S. Dollars)
September 30, December 31,
2002 2001
(unaudited) (audited)
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ASSETS
Investments $ 85,329,872 $ 90,433,369
Cash and cash equivalents 350,954 142,992
Accrued investment income 581,880 789,199
Due from Motors Insurance Corporation 0 1,390,278
Deferred acquisition costs 20,390,025 22,810,217
Advances to Shareholders 395,074 527,500
Prepaid expenses 29,301 37,500
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Total Assets $107,077,106 $116,131,055
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums $ 84,519,002 $89,634,122
Reserves for unpaid losses 3,720,597 3,949,590
Accrued liabilities 80,146 181,321
Due to Motors Insurance Corporation 539,029 0
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Total liabilities 88,858,774 93,765,033
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STOCKHOLDERS' EQUITY
Share Capital
Common Stock-no par value;
Authorized - 2,000 shares;
issued and outstanding -
2,000 shares 200,000 200,000
Participating Stock-no par value;
Authorized - 100,000 shares;
Issued and outstanding -
23,900 shares as of September
30, 2002 and 25,000 shares as
of December 31, 2001 1,792,500 1,875,000
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1,992,500 2,075,000
Retained Earnings 18,563,908 18,521,974
Accumulated other comprehensive
(loss)/income (2,338,076) 1,769,048
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Total Stockholders' Equity 18,218,332 22,366,022
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Total Liabilities and
Stockholders' Equity $107,077,106 $116,131,055
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MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE
MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(Expressed in U.S. Dollars)
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
INCOME
Reinsurance premiums
assumed $10,973,506 $12,044,421 $32,527,494 $37,210,001
Decrease in unearned
premiums 1,515,512 1,333,898 5,115,120 3,012,184
----------- ----------- ----------- -----------
Premiums earned 12,489,018 13,378,319 37,642,614 40,222,185
----------- ----------- ----------- -----------
Investment income
Interest earned 1,010,392 986,456 3,261,568 3,326,622
Realized gains on
investments-net 146,082 460,275 1,709,352 1,197,313
----------- ----------- ----------- -----------
Investment income 1,156,474 1,446,731 4,970,920 4,523,935
----------- ----------- ----------- -----------
TOTAL INCOME 13,645,492 14,825,050 42,613,534 44,746,120
----------- ----------- ----------- -----------
EXPENSES
Acquisition costs 3,101,772 3,478,414 9,495,416 10,458,091
Losses paid 9,246,892 10,255,763 27,646,816 30,487,929
Increase/(decrease) in
reserves for unpaid losses (58,818) 22,327 (228,993) (72,557)
Administrative expenses
Related Parties 49,997 53,247 168,293 171,321
Other 72,815 91,789 315,826 396,025
----------- ----------- ----------- -----------
TOTAL EXPENSES 12,412,658 13,901,540 37,397,358 41,440,809
----------- ----------- ----------- -----------
NET INCOME 1,232,834 923,510 5,216,176 3,305,311
RETAINED EARNINGS,
beginning of period 17,982,346 15,372,731 18,521,974 16,247,004
LESS: DIVIDENDS 0 0 (4,318,225) (3,083,096)
LESS: REDEMPTION OF
PARTICIPATING STOCK (651,272) (187,920) (856,017) (360,898)
----------- ----------- ----------- -----------
RETAINED EARNINGS,
end of period $18,563,908 $16,108,321 $18,563,908 $16,108,321
=========== =========== =========== ===========
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MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001
(Expressed in U.S. Dollars)
Nine Month Periods
Ended September 30,
2001 2002
(unaudited) (unaudited)
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Cash flows from operating activities:
Reinsurance premiums collected $ 35,475,213 $ 36,268,374
Losses and acquisition expenses paid (35,653,515) (39,172,874)
Administrative expenses paid (525,279) (637,122)
Investment income received 3,462,560 3,515,335
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Net cash provided by/(used in) operating
activities 2,758,979 (26,287)
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Cash flows from investing activities:
Purchases of investments (194,300,178) (48,094,300)
Sales and maturities of investments 197,005,902 50,030,677
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Net cash provided by investing
activities 2,705,724 1,936,377
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Cash flows from financing activities:
Proceeds from issuance of
Participating Stock 15,000 7,500
Redemption of Participating Stock (953,516) (428,398)
Dividends paid (4,318,225) (3,083,096)
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Net cash used in financing activities (5,256,741) (3,503,994)
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Increase/(decrease) in cash and cash
equivalents 207,962 (1,593,904)
Cash and cash equivalents,
beginning of period 142,992 1,736,235
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Cash and cash equivalents, end of period $ 350,954 $ 142,331
============== =============
Reconciliation of net income to net cash
provided by/(used in) operating
activities:
Net income 5,216,176 3,305,311
Realized gains on investments (1,709,352) (1,197,313)
Change in:
Accrued investment income 207,319 201,713
Due to Motors Insurance Corporation 1,929,307 293,792
Deferred acquisition costs 2,420,192 783,168
Advances to shareholders 132,426 (337,500)
Prepaid expenses 8,199 (875)
Unearned premiums (5,115,120) (3,012,185)
Reserves for unpaid losses (228,993) (72,557)
Accrued liabilities (101,175) 10,159
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Net cash provided by/(used in) operating
activities $ 2,758,979 $ (26,287)
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Item 2. Management's Discussion And Analysis of Financial Condition And Results
of Operations
Critical Accounting Policies. During the quarter ended September 30, 2002,
Motors Mechanical Reinsurance Company, Limited (the "Company") had no change in
its critical accounting policies as previously disclosed within the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Liquidity. It is anticipated that the Company will generate sufficient funds
from operations to meet current liquidity needs. Premiums generated by the
Company's reinsurance business combined with investment earnings plus proceeds
from the sale of Participating Shares will continue to be the principal sources
of funds for investment by the Company. Such funds will be available to meet the
Company's liquidity requirements. No capital expenditures are expected in the
foreseeable future.
On March 5, 2002, the Board of Directors authorized the payment of dividends to
eligible holders of Participating Shares aggregating $4,318,225.
Capital Resources. During the quarter ended September 30, 2002, 2 new series of
Participating Shares were issued and 7 series were redeemed, bringing the total
number of series issued and outstanding to 239 as of the end of the quarter. As
of September 30, 2002, the share capital of the Company was $1,992,500 (compared
with $2,075,000 as of December 31, 2001) comprised of paid in capital with
respect to the Common Stock of $200,000 and paid in capital with respect to
Participating Shares of $1,792,500 (compared with paid in capital with respect
to Common Stock of $200,000 and paid in capital with respect to Participating
Shares of $1,875,000 as of December 31, 2001). In addition, the Company had
retained earnings in the amount of $18,563,908 as of September 30, 2002 compared
with $18,521,974 as of December 31, 2001. The net increase in retained earnings
is primarily attributable to investment income earned during the nine months
ended September 30, 2002 mostly offset by the dividend payment on March 5, 2002
as noted above and redemptions of Participating Stock.
Results of Operations. During the quarter ended September 30, 2002, the Company
had net income of $1,232,834, compared with net income of $923,510 for the
comparable period in 2001. For the nine month period ended September 30, 2002,
the Company had net income of $5,216,176 compared with net income of $3,305,311
for the comparable period in 2001. As discussed below, the increases in net
income for the quarter and nine month periods ended September 30, 2002 compared
to the comparable periods of 2001 were primarily a result of improvements in the
underwriting performance of the Company as reflected by the reductions in loss
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ratios for the periods in question as noted below. The increase in net income
for the nine month period ended September 30, 2002 compared to the comparable
period of 2001 was also in part attributable to increased investment income and
a decrease in losses paid.
Premiums earned decreased to $12,489,018 during the quarter ended September 30,
2002 compared to $13,378,319 for the comparable period in 2001. Expenses
incurred during the quarter ended September 30, 2002 were $12,412,658 compared
to $13,901,540 for the comparable period in 2001. The Company experienced net
underwriting income for the quarter ended September 30, 2002 of $76,360,
compared to an underwriting loss of $523,221 for the comparable period in 2001.
The ratio of losses incurred to premiums earned for the quarter under review was
74%, compared to 77% for the comparable period in 2001.
For the nine month period ended September 30, 2002, the Company had earned
premiums of $37,642,614, compared to $40,222,185 for the comparable period of
2001. Expenses incurred during the nine month period ended September 30, 2002
were $37,397,358, compared to $41,440,809 for the comparable period in 2001. The
net underwriting income for the Company was $245,256 for the nine month period
ended September 30, 2002, compared to an underwriting loss of $1,218,624 for the
comparable period in 2001. The loss ratio for the nine month period ended
September 30, 2002 was 73%, compared to 76% for the comparable period in 2001.
Other than as noted above there were no material items to report for the nine
months ended September 30, 2002.
The decreases in earned premium and expenses for the quarter and nine month
periods ended September 30, 2002, compared to the comparable periods of 2001,
were in large part attributable to the fact that the number of Participating
Shares has been declining over that period and an increasing number of policies
reinsured by the Company are reaching a fully earned position.
The fluctuations in loss ratios for the quarter and nine month periods ended
September 30, 2002 compared to the comparable periods of 2001 are expected for
the type of business underwritten, as well as the ongoing efforts by Motors
Insurance Corporation, the ceding company, to improve underwriting results with
respect to series of Participating Shares. The Company's loss ratios for the
first nine months of 2002 have continued to reflect an improvement in
performance by comparison to 2001.
Investment income for the quarter ended September 30, 2002 was $1,156,474,
compared to $1,446,731 for the comparable period of 2001. Investment income for
the nine month period ended September 30, 2002 was $4,970,920, compared to
$4,523,935 for the comparable period of 2001. Investment income is derived
solely
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from the Company's investments in fixed income securities, equities and
short term cash and cash equivalents. During the quarter ended September 30,
2002, the Company realized gains on the sale of investment securities of
$146,082, compared to realized gains of $460,275 during the comparable period of
2001. During the nine month period ended September 30, 2002, the Company
realized gains on the sale of investment securities of $1,709,352, compared to
realized gains of $1,197,313 during the comparable period of 2001. The Company
realized gains on the sale of investment securities during the quarter and the
nine month period ended September 30, 2002 and September 30, 2001 as a result of
sales of fixed income securities, the value of which had increased as a result
of decreases in market interest rates.
Net realized gains on investments for the three and nine month periods ended
September 30, 2002 include a provision of $159,632 for the permanent write down
of fixed income securities with losses in value determined to be other than
temporary.
Also, during the nine month period ended September 30, 2002, the cash flows from
purchases and sales of investments increased significantly from the comparable
period of 2001 due to increased activity by the investment manager in buying and
selling securities, particularly during the quarter ended June 30, 2002, in the
Company's fixed income portfolio to realize gains resulting from increased
market values. The increased activity in purchases and sales of investments does
not constitute a change in the underlying nature of the Company's investment
policy. Investments continue to be held and accounted for as "available for
sale". Any increases in trading activity are the result of management's decision
to take advantage of favorable market conditions.
The unrealized loss on investments was $2,338,076 at September 30, 2002,
compared to an unrealized gain of $1,769,048 at December 31, 2001. This decrease
is mainly due to decreases in the market value of the Company's investment in an
international equity fund. As at September 30, 2002 the international equity
fund had an unrealized loss position of $5,106,791, compared to an unrealized
loss of $259,422 at December 31, 2001. The Company's fixed income portfolio had
a net unrealized gain of $2,768,715 at September 30, 2002, compared to a net
unrealized gain of $2,028,470 at December 31, 2001 and this increase has arisen
mainly as a result of the effect of falling interest rates over the period.
As a result of adverse developments in international equity markets, the Company
continues to experience a decline in the value of its equity portfolio. In the
event of continued volatility in equity markets, the Company's unrealized loss
position could increase in the future. At September 30, 2002 the
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decline in the value of the Company's investment in the international equity
fund is considered to be temporary in nature and no provision for losses
considered to be other than temporary, has been made. During October 2002 the
fund recorded an approximate 10% increase in value. Management will continue to
monitor the value of the Company's investment in the fund in order to determine
in the future if losses in value, which could be considered other than
temporary, have occurred.
For the quarter ended September 30, 2002 the Company had interest income of
$1,010,392, compared to $986,456 for the comparable period of 2001. For the nine
month period ended September 30, 2002, the Company had interest income of
$3,261,568, compared to $3,326,622 for the comparable period of 2001.
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Forward Looking Statements. The foregoing Management Discussion and Analysis
contains various forward looking statements within the meaning of applicable
federal securities laws and are based upon the Company's current expectations
and assumptions concerning future events, which are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those anticipated.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and executed, can provide only
reasonable assurance of achieving the desired control objectives. Within 90 days
prior to the date of this report, the Company's Chief Executive Officer and
Chief Financial Officer evaluated, with the participation of the Company's
management, the effectiveness of the Company's disclosure controls and
procedures. Based on the evaluation, which disclosed no significant deficiencies
or material weakness, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant)
By: s/Ronald W. Jones
----------------------------
Ronald W. Jones
Vice President, Finance
Signing on behalf of
the Registrant, and
Principal Financial Officer
Dated: November 13, 2002
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CERTIFICATIONS
I, William B. Noll, Chairman, Chief Executive Officer, President and Director of
Motors Mechanical Reinsurance Company, Limited, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Motors Mechanical
Reinsurance Company, Limited;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data
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and have identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: Nov. 13, 2002 s/ William B. Noll
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William B. Noll
Chairman, Chief Executive
Officer, President and Director
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I, Ronald W. Jones, Vice-President, Finance and Principal Financial Officer of
Motors Mechanical Reinsurance Company, Limited, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Motors Mechanical
Reinsurance Company, Limited;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
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b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: Nov. 13, 2002 s/ Ronald W. Jones
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Ronald W. Jones
Vice-President, Finance and
Principal Financial Officer
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