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, 2002
or
| | Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission file number 333-34088
INTEGON RE (BARBADOS), LIMITED
(Exact name of registrant as specified in its charter)
Barbados Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Financial Place
Collymore Rock
St. Michael, Barbados, W.I. Not Applicable
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (246) 436-4895
Securities registered pursuant to Section 12(b) of the Act: None
Name of each
Title of each class Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES | | No |X|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class As of March 15, 2003
----- --------------------
Common Stock, no-par value 1,000,000
Participating Stock, no-par value 600
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 28, 2002 was 0.*
* Based on current offering price of $250.00 per share.
TABLE OF CONTENTS
Page
ITEM 1. BUSINESS.............................................................3
ITEM 2. PROPERTIES...........................................................9
ITEM 3. LEGAL PROCEEDINGS....................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..............................................................9
ITEM 6. SELECTED FINANCIAL DATA.............................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................24
ITEM 11. EXECUTIVE COMPENSATION..............................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................25
ITEM 14. CONTROLS AND PROCEDURES.............................................25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....26
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 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
Integon Re (Barbados), Limited (the "Company") was incorporated in Barbados on
January 10, 2000. The Company became registered in Barbados as an insurer on
March 31, 2000 and commenced reinsurance operations on August 1, 2002.
The business of the Company is the assumption of risks under insurance policies,
including primarily automobile and motorcycle insurance policies, sold through
independent insurance agencies and then reinsured by Motors Insurance
Corporation ("MIC"). The Company only assumes risk on policies that are
reinsured by MIC and are attributable to an Integon Account (the "Policies").
The Policies are issued by subsidiaries or affiliates of Integon Corporation
("Integon"), reinsured by MIC, and retroceded to the Company. Shares of the
Company's Participating Stock (the "Shares") are sold to persons or entities
designated by the insurance agency or agencies with respect to which Integon
maintains an Integon Account. A separate series of Shares is created for each
Integon Account, and a separate "Subsidiary Capital Account" is maintained for
each such 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 MIC's
outstanding stock is owned by GMAC Insurance Holdings, Inc., a wholly owned
subsidiary of General Motors Acceptance Corporation which, in turn, is a wholly
owned subsidiary of General Motors. MIC, directly and through its subsidiaries,
offers property and casualty coverages in all 50 states and the District of
Columbia, Canada, Europe, Latin America and Asia Pacific. MIC's A.M. Best
Company's insurance financial rating is currently A + (Superior), one of the
highest possible ratings.
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The Retrocession Agreement
The Company entered into a "quota share" retrocession agreement with MIC (the
"Retrocession Agreement") which became effective as of March 31, 2000. Pursuant
to the Retrocession Agreement, MIC retrocedes to the Company, and the Company is
obligated to assume, a portion (the "Retrocession Percentage") of MIC's risks in
respect of automobile and motorcycle insurance policies reinsured by MIC, to the
extent that such policies are attributable to an Integon Account in respect of
which a series of Shares is issued, outstanding and in good standing (the
"Policies"), and such Policies are issued or renewed on or after the effective
date of the Retrocession Agreement. The Retrocession Percentage, which can be
either 20%, 30%, 40% or 50%, is established for each Integon Account with
respect to which a series of Shares is issued, outstanding and in good standing.
In return for the Company assuming risks retroceded to it by MIC under the
Retrocession Agreement, MIC will pay to the Company an amount equal to the
Retrocession Percentage multiplied by the gross premiums MIC receives with
respect to the retroceded business, after cancellations reduced by (i) a ceding
commission of 26.5% of such premiums, reduced by the amount of certain service
fees paid to MIC, (ii) any related agents' and brokers' commissions, and (iii)
any U.S. premium excise taxes imposed on such premiums. Net settlements between
the Company and MIC will be made quarterly and will fluctuate from quarter to
quarter.
The Retrocession Agreement provides that in the event that the Company redeems
or repurchases a series of Shares, no further risks will be retroceded to the
Company with respect to new or renewal Policies attributable to the Integon
Account related to the redeemed or repurchased Shares that become effective on
or after the effective date of redemption or repurchase. In addition, MIC will
recapture, as of that date, the business retroceded to the Company with respect
to the Integon Account related to such Shares. In consideration of that
recapture, the Company will pay a termination premium to MIC in an amount equal
to the unearned premiums and unpaid losses (discounted under applicable U.S. tax
rules) less deferred acquisition costs (the "Termination Premium") on the
recaptured business. This recapture will relieve the Company of any obligations
in respect of risks retroceded to the Company with respect to the Integon
Account related to the Shares before the date of the repurchase or redemption.
The Retrocession Agreement may be terminated as of the beginning of any month by
either party upon not less than 30 days written notice. Upon termination of the
Retrocession Agreement, no further risks will be retroceded to the Company with
respect to new or renewal Policies that become effective on or after the
effective date of termination, and MIC will recapture the retroceded business as
of that date. In consideration of that recapture, the Company will pay a
Termination Premium to MIC on the recaptured business. Termination of the
Retrocession Agreement will relieve the Company of any obligations in respect of
risks retroceded to the Company before the date that the Reinsurance Agreement
terminated.
Reallocation of Insurance Losses; Retention of Insurance Losses by MIC
The Company's Articles of Incorporation provide that losses the Company incurs
on the business the Company reinsures that are attributable to an Integon
Account will be allocated to the Subsidiary Capital Account for the Shares
issued with respect to that Integon Account and therefore will reduce the value
of such Shares. However, in certain situations, losses on the business will not
be allocated in this manner. Under the Company's Articles of Incorporation, to
the extent that the allocation of losses incurred under the Agreement would
result in a "Combined Ratio" for a Subsidiary Capital Account in excess of 108%
for any calendar year, such losses will be reallocated among the other
Subsidiary Capital Accounts ("Unrelated Accounts"), pro rata, based on relative
earned premium. The Combined Ratio for a Subsidiary Capital Account is equal to
the sum of losses incurred, commission expense, ceding fee and U.S. premium
excise taxes divided by earned premium, to the extent that such amounts are
attributable to the business allocated to the Subsidiary Capital Account. In the
event that the Combined Ratio for each Subsidiary Capital Account for each
series of Shares issued and outstanding is 108% after reallocation of losses,
any additional losses will be reallocated to the Subsidiary Capital Account for
the Common Stock. The Agreement provides that MIC will retain losses that would
otherwise be reallocated to an Unrelated Account pursuant to such reallocation
provisions to the extent that the reallocation of losses would increase the
Combined Ratio for the Unrelated Account for any calendar year by more than 5
percentage points.
4
Types of Risks Subject to Retrocession
Risks assumed under the Agreement are limited to insurance policies issued by
subsidiaries or affiliates of Integon and reinsured by MIC. These policies
provide liability, physical damage, and/or other types of insurance coverage
that a consumer may elect.
INVESTMENT INCOME
A major source of income to an insurance company is income earned on the
investment of amounts not currently required to meet losses or expenses. The
principal funds available for investment by the Company will come from
accumulated capital and the cumulative excess of premiums collected over losses
and operating expenses paid.
The Company's funds are invested in a manner consistent with investment
guidelines established by the Board of Directors of the Company (the "Board").
The Company is currently permitted to invest in U.S. Treasury and agency
securities, agency and non-agency mortgage-backed securities, obligations of
domestic and foreign corporations, asset-backed securities, municipal securities
and money market instruments. The Board reviews on a regular basis and, where
appropriate, revises the investment objectives and guidelines for management of
the Company's funds. There can be no assurance, however, as to whether a
particular investment objective, once adopted, can be achieved or that adverse
factors would not cause a decrease in the overall value of the Company's
investment portfolio.
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 had approximately $273 billion of assets
under management as of December 31, 2002. BlackRock, Inc. manages assets on
behalf of institutions and individuals 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 the Company
a management fee calculated as a percentage of the net asset value of the
Company's portfolio managed by BlackRock. 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.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company has established a Subsidiary Capital Account with respect to the
Common Stock as a class, and will establish 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, including any interest earned
on funds while held in the escrow account is allocated to the particular
Subsidiary Capital Account for that series or class. Except as otherwise set
forth below, 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 (collectively, "Capital Stock"), are determined and
allocated to the Subsidiary Capital Accounts as of the end of each quarter.
For purposes of the following discussion, items shall be "related" to the
Subsidiary Capital Account for the series identified with the Integon 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 to the Company, 100% to the related
Subsidiary Capital Account.
5
(b) With respect to any agents' or brokers' commissions, ceding fees and
commissions, commissions recaptured, unearned premiums, reinsurance
premiums ceded, and any United States excise tax, 100% to the related
Subsidiary Capital Account.
(c) With respect to losses incurred and any amount of losses recovered
through salvage, subrogation, reinsurance recoveries, reimbursement or
otherwise, 100% to the related Subsidiary Capital Account.
(d) With respect to return premiums, 100% to the related Subsidiary
Capital Account.
(e) With respect to any recapture premium or termination premium paid by
the Company to MIC upon partial or complete termination of the
Retrocession Agreement, and with respect to any fees, expenses, or
losses recaptured in connection with such termination, 100% shall be
allocated to the related Subsidiary Capital Account.
(f) Notwithstanding the foregoing, for any calendar year for which a
Subsidiary Capital Account has any earned premium, the amount of
losses incurred on the business retroceded to the Company under the
Retrocession Agreement (the "Business") which losses would otherwise
be allocable to the Subsidiary Capital Account in accordance with the
preceding paragraphs for such calendar year shall be allocated, or
reallocated, to other Subsidiary Capital Accounts in accordance with
the terms of this paragraph so as to prevent the Combined Ratio for
such Subsidiary Capital Account for such year from exceeding 108%. Any
losses incurred on the Business that would otherwise be allocable to a
Subsidiary Capital Account for a calendar year and would result in a
Combined Ratio for such Subsidiary Capital Account in excess of 108%
shall be allocated to other Subsidiary Capital Accounts, pro rata,
based upon the relative earned premiums of each Subsidiary Capital
Account for the calendar year; provided, however, that only those
Subsidiary Capital Accounts for Shares that each have a Combined Ratio
of less than 108% for the year without regard to this paragraph will
be taken into account for this purpose. If, as a result of an
allocation of losses incurred on the Business as described in the
preceding sentence, a Combined Ratio in excess of 108% otherwise would
be created in one or more Subsidiary Capital Accounts, then the losses
incurred on the Business above a 108% Combined Ratio will be
reallocated in the manner provided in the preceding sentence until all
losses incurred on the Business for the year have been allocated to
Subsidiary Capital Accounts for the Shares or until each Subsidiary
Capital Account for the Shares has a Combined Ratio for the year of
108%. In the event that the Combined Ratio of each Subsidiary Capital
for the Shares is 108% after the application of the preceding
sentences of this paragraph, the losses incurred on the Business for
the calendar year above a Combined Ratio of 108% will be allocated to
the Subsidiary Capital Account for the Common Stock. No adjustments
will be made to the Subsidiary Capital Accounts rendered for prior
quarters during the calendar year to reflect any allocation of losses
required pursuant to this provision, and any such allocation shall be
taken into account solely through entries to the Subsidiary Capital
Accounts for the final quarter of the calendar year. All allocations
and reallocations pursuant to this paragraph shall be made without
giving effect to any allocations made pursuant to paragraph (g).
(g) With respect to any recovery or offset for losses retained by MIC
pursuant to the terms of the Retrocession Agreement, 100% shall be
allocated to the related Subsidiary Capital Account.
(2) Any expenses or liabilities attributable to the Company's day-to-day
operations, excluding any United States Federal income taxes, are allocated
among all Subsidiary Capital Accounts for the Shares pro rata in accordance
with the relative earned premiums allocated to those accounts for the
fiscal quarter in which the expense or liability is incurred, provided that
for purposes of such allocation, series of Shares issued at any time during
the twelve calendar months preceding the end of the fiscal quarter in which
the expense or liability is incurred and series with respect to which the
unearned premium is zero as of such fiscal quarter end, shall be excluded.
The allocations set forth here will not be made for a period of up to
twelve months after the Company first issues Shares because Integon has
agreed to bear all of the expenses identified in this paragraph for the
period from the date that Shares are first issued (the "Issue Date") until
the last day of the Company's fiscal quarter that immediately precedes the
twelve month anniversary of the Issue Date.
6
(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 Company's taxable income 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 U.S. 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, Integon may undertake to pay such expenses.
(5) Any of the Company's expenses or liabilities 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 amount of capital
and surplus attributable to those accounts as of the end of the quarter
preceding the date on which the expense or liability is incurred, provided
that for purposes of such allocation, Subsidiary Capital Accounts with
balances that are less than zero as of the end of the preceding quarter
shall be excluded.
(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), provided that for purposes of such allocation, Subsidiary
Capital Accounts with Investment Asset Balances that are less than
zero shall be excluded. For purposes of these allocations, 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 sum of the beginning cash balance in a Subsidiary Capital
Account and the ending cash balance (excluding allocation of any
investment income for the quarter then ending) in such account for a
quarter divided by two. The cash balance in a Subsidiary Capital
Account is equal to the sum of the loss reserves, unearned premium
reserves and capital and surplus less deferred expenses.
(7)
(a) Dividends, payments upon redemption or liquidation (described below),
and any other distributions with respect to the Capital Stock are
allocated to the Subsidiary Capital Account for the class or series
with respect to which the dividend, payment or distribution was made.
(b) Where all Shares of a series are redeemed in accordance with our
procedures for redemption, any deficit in the Subsidiary Capital
Account for that series is allocated first to the Subsidiary Capital
Account for the Common Shares and then, any remaining unallocated
deficit is allocated among the Subsidiary Capital Accounts for Shares
with positive balances, pro rata, based upon such balances.
(c) Where all Shares of a series are repurchased by the Company pursuant
to its right of first refusal or redeemed in accordance with our
procedures for redemption, the Subsidiary Capital Account for that
series is terminated and the business previously allocated to the
Subsidiary Capital Account is recaptured by MIC pursuant to the terms
of the Retrocession Agreement.
(8) The Company's Articles of Incorporation also provide that if the Company is
liquidated, any deficit existing in any Subsidiary Capital Account is
allocated first to the Subsidiary Capital Account for the Common Stock and
then, any remaining unallocated deficit is allocated among the Subsidiary
Capital Accounts for Shares with positive balances, pro rata, based upon
such balances.
The allocations of income and expense, gains and losses, and distributions
described above are subject to approval by the Company's Board, and when finally
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 our procedures for redemption.
7
The Company's Board is authorized to interpret and apply the above allocation
provisions and to adopt additional rules and guidelines as the Board deems
appropriate to carry out the intent of these provisions. The Board's
interpretations and any additional rules and guidelines adopted will also be
binding on all shareholders.
Barbados insurance law requires that the Company maintain certain levels of net
assets, which for this purpose are calculated without taking into account
unrealized gains or losses. The Company is currently in compliance with these
requirements. However, in the event that the Company is unable to comply with
such requirements in the future, it has the right to reduce the business related
to a Subsidiary Capital Account by retrocession or any other means to the extent
necessary to permit the Subsidiary Capital Account to meet its pro rata share of
the Company's required capital and surplus.
EMPLOYEES
The Company does not have any full-time employees. Rather, the Company relies on
Aon Insurance Managers (Barbados) Ltd. (the "Manager") to handle its day-to-day
operations. (See "Business of the Company-- Insurance Management Agreement,"
below.) In addition, corporate secretarial services for the Company are provided
by Colybrand Company Services Limited of St. Michael, Barbados. The Company's
Board and the committees thereof, however, remain responsible for the management
of the business and affairs of the Company.
COMPETITION
The business of insuring automobile and motorcycle risks is highly competitive,
with many companies seeking to underwrite automobile and motorcycle insurance.
All of the Company's business is currently derived from its retrocession
agreement with MIC. Under this agreement, the Company reinsures insurance
policies issued by subsidiaries and affiliates of Integon. Accordingly, the
volume of the Company's business is dependent on the ability of those companies
to market insurance products. Integon, through its subsidiaries and affiliates,
competes with both large national writers and smaller regional companies in each
state in which they operate. Some of these competitors have, from time to time,
decreased prices in order to gain market share.
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
automobile insurance policies on a multi-state basis in the United States. Under
the terms of the Management Agreement, the Company is to pay 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. The Company and the Manager agreed that
until the Company became operational, the Company would pay the Manager on an
hourly basis for services performed on behalf of the Company. For the year ended
December 31, 2002, the Company incurred fees payable to the Manager in the
amount of $30,404.
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
8
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 Company's Board.
The Manager was incorporated in Barbados in 1984, and is an affiliate of the Aon
Group of Companies ("Aon"), an international insurance brokerage and insurance
consulting firm. Aon, through its subsidiaries, offers and insures motor vehicle
mechanical service agreements, extended warranty and related coverages with
respect to vehicles sold by automobile dealerships in the United States. Under
the terms of the Management Agreement, the Manager will treat all information
concerning the business of the Company as confidential and will not disclose
such information to Aon or any Aon affiliate without consent of the Company.
BARBADOS REGULATION AND TAXES
The Company's business is subject to regulation under the Barbados Exempt
Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal
requirements of the Exempt Insurance Act require the Company to maintain its
principal office in Barbados, appoint various professional advisors, and to meet
certain capitalization and annual reporting requirements with respect to its
operating activities and solvency requirements.
Under the Exempt Insurance Act, no income tax, capital gains tax or other direct
tax or impost is levied in Barbados on the results of the Company's operations
(except as noted below), or on transfers of securities or assets of the Company
to any person who is not a resident of Barbados. The Company has received a
guarantee from the Minister of Finance of Barbados that such benefits and
exemptions will be available until at least December 31, 2029. Until December
31, 2014 the Company will be required to pay an annual licensing fee, which is
currently $2,500, to obtain such guarantee. Thereafter, the Company will be
subject to tax at a rate of 2% on its taxable income provided that the amount of
such tax will not exceed $2,500 per annum.
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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is no public market for the Shares or the shares of the Capital Stock
of the Company, and none is expected to develop. Transfer of the Shares is
restricted by the terms of a Stock Purchase Agreement and requires approval
by the Supervisor of Insurance in Barbados.
9
(b) All of the Common Stock of the Company is held by Integon. As of March 15,
2003, 600 Shares had been issued, with 6 holders of Shares, representing 6
series of Shares.
(c) Under the Articles of Incorporation, the holders of Shares are entitled to
receive minimum dividends equal to their pro-rata share of 20% of net
income attributable to 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. As of March 15, 2003, the Company has not declared any
dividends.
(d) In determining the amount of dividends to pay, the Board considers the
minimum regulatory capital requirement, fluctuations in the value of the
Company's investment portfolio and adverse development of loss experience
to determine an appropriate minimum capital level. The Board's objective is
to maintain adequate capital to provide capacity for growth in premium so
that dividends may be paid annually. There can be no assurance that any
dividends will be paid in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2002 and
December 31, 2001, and the period from March 20, 2000 (date of incorporation) to
December 31, 2000 have been derived from the Company's audited financial
statements.
December 31,
---------------------------------------------
2002 2001 2000
Interest $ 9,357 $ 32,595 $ 43,667
----------- ----------- -----------
Net Income $ 23,409 $ 32,595 $ 43,667
=========== =========== ===========
Total Assets $ 1,722,546 $ 1,076,262 $ 1,043,667
Shareholders' Equity 1,249,671 1,076,262 1,043,667
Dividends Paid 0 0 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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,
valuation of certain investments and deferred taxes.
The liability for losses and loss expenses represents the accumulation of
estimates for reported losses and a provision for losses incurred but not
reported. For purposes of establishing loss reserves, the Company relies upon
the advice of Integon. 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
10
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.
Insurance premiums are earned over the terms of the policies. The portion of
premiums written applicable to the unexpired term of policies is recorded as
unearned premiums.
Commissions paid to independent agents writing policies are deferred and
amortized over the term of the related policies on the same basis as premiums
are earned.
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 lesser than
the amounts provided. Any such differences when they become known are recognised
in current operations and can potentially be significant to the financial
statements.
The Company has received an undertaking from the Barbados Government exempting
it from all local income, profits and gains taxes for a period of fifteen (15)
years from the date of incorporation. Thereafter, for a further fifteen (15)
years, the Company will be subject to tax at a rate of 2% on its taxable income,
but the amount of such tax will not exceed $2,500 per annum.
Liquidity
The Company was incorporated on March 20, 2000 and commenced operations on
August 1, 2002. The Company's liquidity requirements are related to payment of
insurance losses, administrative expenses, and dividends. Premiums generated by
the Company's reinsurance business, combined with investment earnings plus
proceeds from the sale of the Company's Shares, are its principal sources of
funds. The Company believes that such funds will be sufficient to meet its
liquidity requirements in 2003 and in future years to which its reinsurance
liabilities will extend. No significant capital expenditures are expected during
the next few years.
The Company had unearned premium reserves of $398,793 as of December 31, 2002,
compared to $0 as of December 31, 2001. Unearned premium amounts are
attributable to the difference in timing between premiums assumed and premiums
earned. Premiums are earned over the term of a policy, usually six or twelve
months. The increase in unearned premiums reserves reflects that we commenced
our reinsurance operations on August 1, 2002.
Capital Resources
The Company's capitalization on December 31, 2002, 2001, and 2000 consisted of
paid-in capital with respect to the Common Stock of $1,000,000, and earnings
retained for use in its business in the amount of $99,671 and $76,262 and
43,667, respectively. The Company's capitalization also includes paid-in capital
with respect to the Participating Shares of $$150,000 (compared with $0 as of
December 31, 2001 and 2000). The increase in the amount of pain-in capital with
respect to the Participating Shares is attributable to the issuance of six
series of Participating Shares. Barbados insurance law requires that the Company
maintain a minimum capitalization of $125,000 and, in addition, that the
recorded value of the Company's assets exceed its liabilities by: (a) $125,000
where the Company's earned premium in the preceding financial year did not
exceed $750,000; (b) an amount equal to 20% of the Company's earned premium for
the preceding financial year, where such income exceeded $750,000 but did not
exceed $5,000,000; and (c) an amount equal to the aggregate of $1,000,000 and
10% of the amount by which the Company's earned premium for the preceding
financial year exceeded $5,000,000. 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. Currently, the
Company's net assets are not less than the amount mandated by Barbados law.
11
Results of Operation
For the year ended December 31, 2002, the Company had net income of $23,409,
down from $32,595 in 2001. The decrease in net income is attributable to reduced
investment income due to lower interest rates prevailing during the year ended
December 31, 2002 compared to the prior period, partially offset by underwriting
gains. During 2002, the first year of the Company's reinsurance operations, the
Company earned premiums of $213,536, incurred losses of $121,624, and incurred
other expenses of $77,859 for an underwriting gain of $14,052. The incurred loss
ratio for the year was 57%. Total premiums assumed by the Company were $612,329.
Under the terms of the Stock Purchase Agreement between Integon Corporation and
the Company, Integon has agreed to bear (i) all organizational expenses and
liabilities of the Company, (ii) expenses attributable to the registration of
the Shares and initial compliance with federal and state securities and
insurance laws, and (iii) all operational expenses and liabilities attributable
to the Company's day-to day operations for the first year after Shares are first
issued. As of December 31, 2002, the total amount of such expenses borne by
Integon has totaled $681,092.
Reserves for Unpaid Losses
Loss reserves 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 loss reserves, the Company relies upon the advice
of Integon. Loss reserves are established after periodic actuarial reviews,
based on historical claim experience, industry statistics and other factors.
Consequently, the determination of loss reserves is an estimate and a process
inherently subject to a number of highly variable factors. Consequently,
ultimate losses could exceed loss reserves and cause us to have to adjust our
loss reserves. Any adjustments to reserves are reflected in the operating
results for the periods in which they become known.
The Company's incurred loss ratios (losses incurred as a percentage of net
premium earned) on all business for the year ended December 31, 2002 was 57%. At
December 31, 2002, the reserves for unpaid losses was $74,082.
Recently Issued Accounting Standards
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between Statement 146 and Issue 94-3
relates to Statement 146's requirements for recognition of a liability for a
cost associated with an exit or disposal activity. Statement 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit costs
as generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in Issue 94-3. This Statement
also established that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of this statement did not have a material impact on our
results of operations or financial position.
FASB Interpretation No. 45, "Guarantor Accounting," will significantly change
current practice in the accounting for, and disclosure of, guarantees. Most
guarantees are to be recognized and initially measured at fair value, which is a
change from current practice. In addition, guarantors will be required to make
significant new disclosures, even when the likelihood of the guarantor making
payments under the guarantee is remote. In general, the Interpretation applies
to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
guaranteed party. The Interpretation's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of this statement did not have a material impact
on our results of operations or financial position.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of December 31, 2002, all of the Company's assets were in the form of U.S.
dollar cash deposits and accordingly, the Company's exposure to risk of loss
from changes in exchange rates, interest rates or equity prices was not
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
1. Independent Auditors' Report 14
2. Balance Sheets, December 31, 2002 and 2001 15
3. Statements of Operations and Retained
Earnings for the years ended December
31, 2002, 2001 and 2000 16
4. Statement of Changes in Stockholders'
Equity for the years ended December
31, 2002, 2001 and 2000 17
5. Statements of Cash Flows for the years
ended December 31, 2002, 2001 and
2000 18
6. Notes to Financial Statements 19
13
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
INTEGON RE (BARBADOS), LIMITED
One Financial Place
Collymore Rock
St. Michael, Barbados
We have audited the accompanying balance sheets of Integon Re (Barbados),
Limited (the "Company") as of December 31, 2002 and 2001 and the related
statements of operations and retained earnings, changes in shareholders' equity
and cash flows for each of the two years in the period ended December 31, 2002
and for the period March 20, 2000 (commencement of operations) to December 31,
2000. 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 that 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, these financial statements present fairly, in all material
respects, the financial position of Integon Re (Barbados), Limited as of
December 31, 2002 and 2001 and the results of its operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2002 and for the period March 20, 2000 (commencement of
operations) to December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
CHARTERED ACCOUNTANTS
Deloitte & Touche LLP
Bridgetown, Barbados
March 4, 2003
14
INTEGON RE (BARBADOS), LIMITED
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(Expressed in United States dollars)
Note 2002 2001
---- ---- ----
ASSETS
- ------
Cash and cash equivalents $1,261,920 $1,012,372
Due from shareholder (Note 3) 3 97,784 63,804
Due from Motors Insurance Corporation (Note 3) 3 221,477 -
Deferred acquisition costs 140,982 -
Accrued interest 383 86
---------- ----------
Total assets 1,722,546 1,076,262
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Unearned premium 4 398,793 -
Reserves for unpaid losses 5 74,082 -
---------- ----------
472,875 -
---------- ----------
STOCKHOLDERS' EQUITY
Share capital 6
Common shares - no par value;
Authorized - an unlimited number of shares;
Issued and outstanding 1,000,000 shares at
December 31, 2002 and 2001 1,000,000 1,000,000
Participating shares - no par value;
Authorized - 30,000 shares
Issued and Outstanding - no shares at
December 31, 2001 and 600 at December 31, 2002 150,000 -
---------- ----------
1,150,000 1,000,000
Retained earnings 99,671 76,262
---------- ----------
1,249,671 1,076,262
---------- ----------
Total Shareholder's Equity $1,722,546 $1,076,262
========== ==========
See accompanying notes to the financial statements.
APPROVED ON BEHALF OF THE BOARD
/s/ Peter R. P. Evelyn
----------------------
Director
15
INTEGON RE (BARBADOS), LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
2002 2001 2000
---- ---- ----
INCOME
Reinsurance premiums assumed $612,329 $ - $ -
Increase in unearned premiums (398,793) - -
---------- ---------- ---------
Premiums earned 213,536 - -
---------- ---------- ---------
Investment income 9,357 32,595 43,667
---------- ---------- ---------
TOTAL INCOME 222,892 32,595 43,667
---------- ---------- ---------
EXPENSES
Acquisition and other underwriting 77,859 - -
Losses 121,624 - -
---------- ---------- ---------
199,483 - -
---------- ---------- ---------
NET INCOME for the year/period 23,409 32,595 43,667
RETAINED EARNINGS, beginning of year/period 76,262 43,667 -
---------- ---------- ---------
RETAINED EARNINGS, end of year/period $99,671 $76,262 $43,667
========== ========== =========
See accompanying notes to the financial statements.
16
INTEGON RE (BARBADOS), LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
Total
Shareholders' Retained Common Participating
Equity Earnings Shares Shares
------------- --------- ---------- -------------
BALANCE,
at December 31, 2000 $1,043,667 $43,667 $1,000,000 $ -
Net income for the year 32,595 32,595 - -
---------- --------- ---------- ---------
BALANCE,
at December 31, 2001 1,076,262 76,262 1,000,000 -
Participating shares issued 150,000 - - 150,000
Net Income for the year 23,409 23,409 - -
---------- --------- ---------- ---------
BALANCE,
at December 31, 2002 $1,249,671 $99,671 $1,000,000 $150,000
========== ========= ========== =========
See accompanying notes to the financial statements.
17
INTEGON RE (BARBADOS), LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Reinsurance premiums collected $ 124,469 $ - $ -
Interest income received 9,059 32,999 43,177
Expenses paid and recoverable (33,980) (26,128) (37,676)
------------ ----------- -----------
Net cash provided by operating activities 99,548 6,871 5,501
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares - - 1,000,000
Issuance of participating shares 150,000 - -
------------ ----------- -----------
Net cash received from financing activities 150,000 - 1,000,000
------------ ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 249,548 6,871 1,005,501
CASH AND CASH EQUIVALENTS,
beginning of year/period 1,015,372 1,005,501 -
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of year/period $ 1,264,920 $1,012,372 $1,005,501
============ =========== ===========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $23,409 $32,595 $43,667
Changes in:
Accrued interest (296) 404 (490)
Due from shareholder (33,980) (26,128) (37,676)
Due from Motors Insurance Corporation (221,477) - -
Deferred acquisition costs (140,982) - -
Unearned premiums 398,793 - -
Reserves for unpaid losses 74,082 - -
------------ ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 99,549 $ 6,871 $ 5,501
============ =========== ===========
See accompanying notes to the financial statements.
18
INTEGON RE (BARBADOS), LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
Note 1. NATURE OF BUSINESS
The Company was incorporated on January 10, 2000 under the Laws of
Barbados and is licensed under the Barbados Exempt Insurance Act. The
Company's principal activity is the assumption of risks with respect
to property and casualty insurance policies (primarily automobile and
motorcycle) sold to consumers in the United States through independent
insurance agencies. The policies are reinsured by Motors Insurance
Corporation (MIC) and attributable to MIC subsidiary accounts in
respect of which shares of participating stock are issued and
outstanding. All premiums received were assumed by MIC. The Company
commenced its reinsurance operations in the third quarter ending
September 30, 2002.
All of the common shares of the Company are owned by Integon
Corporation (Integon). Integon is an indirect wholly-owned subsidiary
of General Motors Corporation.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements are stated in United States dollars and
prepared in conformity with accounting principles generally accepted
in the United States of America.
Revenue and Income Recognition
Insurance premiums are earned over the terms of the policies. The
portion of premiums written applicable to the unexpired terms of
policies is recorded as unearned premiums.
Deferred Acquisition Costs
Commissions paid to independent agents writing policies are deferred
and amortized over the terms of the related policies on the same basis
as premiums are earned.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and 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 these estimates.
19
INTEGON RE (BARBADOS), LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
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 lesser than the amounts provided. Any such differences when
they become known are recognised in current operations and can
potentially be significant to the financial statements.
Taxation
The Company has received an undertaking from the Barbados Government
exempting it from all local income, profits and gains taxes for a
period of fifteen (15) years from the date of incorporation.
Thereafter, for a further fifteen (15) years, the Company will be
subject to tax at a rate of 2% on its taxable income, but the amount
of such tax will not exceed $2,500 per annum.
Note 3. RELATED PARTY TRANSACTIONS
Total costs incurred on the formation of the Company and other
operating expenses were paid by Integon Corporation and totaled
$681,092 (2002 - $176,224, 2001-$104,493 and 2000-$400,375). The
Company is not obligated to repay these amounts to Integon
Corporation. The amount due from Motor Insurance Corporation relates
to premiums ceded to the Company.
Note 4. UNEARNED PREMIUMS
Activity in the unearned premiums is summarized below:
2002 2001
---- ----
Balance at January 1, $ - $ -
Assumed premiums 612,328 -
Revenue earned (213,535) -
----------- ---------
Balance at December 31, $398,793 $ -
=========== =========
20
INTEGON RE (BARBADOS), LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
Note 5. 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, 2002 and 2001.
2002 2001
Beginning balance of reserves for losses $ - $ -
-------- -------
Add provision for losses incurred related to:
Current claim year 121,624 -
-------- -------
Total 121,624 -
-------- -------
Deduct paid losses attributable to:
Current claim year 47,842 -
-------- -------
Ending balance in reserves for losses $74,082 $ -
======== =======
Note 6. SHAREHOLDERS' CAPITAL
All of the common shares of the Company are owned by Integon
Corporation (Integon).
The Company is authorized to issue an unlimited number of shares of
one class without par value to be designated common shares and 30,000
shares of one class without par value to be designated participating
shares. During 2002, the Company issued 600 shares to six individuals
for $150,000.
During the year 2002, the Company issued six series of 100
Participating Shares each for aggregate consideration of $150,000 as
compared to nil for the year ended December 31, 2001.
The holder of the common shares shall be entitled to elect five
directors of the Company, one of whom must be a resident citizen in
Barbados. The holders of the participating shares shall be entitled to
elect one director of the Company.
Note 7. SIGNIFICANT AGREEMENTS
Retrocession Agreement
Motors Insurance Corporation (MIC) and the Company are related
parties. All of the common shares of the Company are owned by Integon.
Integon and MIC are both wholly owned subsidiaries of GMAC Insurance
Holdings, Inc., which is a wholly owned subsidiary of General Motors
Acceptance Corporation (GMAC).
Under the Retrocession Agreement, MIC retrocedes to the Company, a
portion (the "Retrocession Percentage") of MIC's risk in respect of
certain property and casualty insurance policies that are reinsured by
MIC. The amount of the Company's liability for any loss paid on a
policy is equal to the Retrocession Percentage multiplied by the
amount of the loss. The Retrocession Percentage, which can
21
INTEGON RE (BARBADOS), LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
be either 20%, 30%, 40% or 50%, is established for each Integon
account with respect to which a series of participating shares are
issued, outstanding and in good standing. In return for the Company
assuming the risk retroceded to the Company by MIC under the
Retrocession Agreement, MIC pays the Company an amount equal to the
Retrocession Percentage multiplied by the gross premiums MIC receives
with respect to the retroceded business, after cancellations, reduced
by:
(i) a ceding commission which is equal to the amount of such
premiums multiplied by 26.5%, reduced by the amount of
certain service fees paid to MIC;
(ii) any related agents' or brokers' commissions; and
(iii) any U.S. premium excise tax imposed on such premiums.
The Retrocession Agreement may be terminated as of the beginning of
any month by either party upon not less than 30 days written notice.
Generally, liquidation of the Company requires approval by at least
75% of the participating shares issued and outstanding.
The Company believes that the Retrocession Agreement contains terms
that are no less favorable to the Company than would be obtained in an
arms-length transaction. The Retrocession Agreement provides that
business will be ceded to the company by MIC on a proportional basis
subject to a ceding commission of 26.5% which the Company believes is
commercially reasonable.
The components of the ceding fee are the following:
(iv) 3.5% for premium taxes;
(v) 11.9% for loss adjustment expenses;
(vi) 10.0% for other operating expenses;
(vii) 1.1% for cash flow adjustments.
Investment Management Agreement
The Company has entered into an investment management agreement with
BlackRock International, Ltd. ("BlackRock"). The management agreement
provides that BlackRock will charge a management fee calculated as a
percentage of the net asset value of the Company's portfolio managed
by BlackRock with the applicable percentage based on the aggregate
amount of assets managed by BlackRock on behalf of the Company and
certain other related entities. The applicable percentage is tiered on
the first $50 million of aggregate assets under management and lower
on all assets in excess of $50 million.
Insurance Management Agreement
The Company has entered into an Insurance Management Agreement (the
"Management Agreement") with Aon Insurance Managers (Barbados) Ltd.
(the "Manager").
22
INTEGON RE (BARBADOS), LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND
FOR THE PERIOD MARCH 20, 2000 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 2000
(Expressed in United States dollars)
Note 7. SIGNIFICANT AGREEMENTS (CONTINUED)
Under the Management Agreement, the Manager collects and disburses
funds on the Company's behalf, provides accounting, clerical,
telephone, facsimile, information management and other services for
the Company and advises and consults with the Company about all
aspects of the Company's reinsurance activities. Under the terms of
the Management Agreement, the Company will pay the Manager a fixed
annual fee of $70,000 and a variable monthly fee of approximately $44
per series of Shares outstanding. The Manager is responsible for the
payment of the salaries of its officers and employees and all office
and staff overhead and other costs attributable to its services on the
Company's behalf. However, the Company will pay all out-of-pocket
expenses, such as telephone, facsimile, postage, travel and other
items on an expense reimbursement basis. The Management Agreement may
be terminated by either party upon 90 days advance written notice.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our current officers and directors:
POSITION WITH US (AND OTHER
NAME AGE EMPLOYMENT DURING PAST FIVE YEARS)
Gary Y. Kusumi................. 56 Chairman and Chief Executive Officer, President and Director
(Director, Integon, March 1998; President Windsor Insurance,
1996-1998; President Leader National Insurance, 1993-1996).
Bernard J. Buselmeier.......... 47 Vice-President and Director (Executive Vice-President and Chief
Financial Officer, Integon, April 1998; Vice-President and
Treasurer, MIC, 1993-1998, Treasurer, MIC 1989-1993).
Kenneth J. Jakubowski.......... 46 Vice-President and Director (Vice-President, Integon, May 1997;
Assistant Treasurer, Alexander & Alexander 1992-1997).
Peter R. P. Evelyn............. 61 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm,
1987).
Ronald W. Jones................ 50 Vice-President, Finance (Managing Director, Aon Insurance Managers
(Barbados) Ltd. (previously Alexander Insurance Managers), 1987).
Michael R. Boyce............... 63 Secretary (Principal, Colybrand Company Services, Limited, Barbados,
1993; previously principal, Price Waterhouse, Eastern Caribbean).
Mitchell F. White.............. 36 Director (Vice President and Chief Marketing Officer, Integon,
October 1999; Vice President, Atlanta Casualty Group 1996-1999).
The directors and officers named above will serve in those capacities until the
annual meeting of shareholders scheduled for May 2003. Prior to such meeting,
the directors named above may, but are not obligated to, select an
24
additional director from among the holders of Shares. Thereafter, all directors
will serve until the annual meeting of shareholders following their election.
ITEM 11. EXECUTIVE COMPENSATION
No director or officer of the Company is compensated directly for services as
such. However, each director and officer of the Company is reimbursed for
expenses incurred for attendance at Board, committee, and shareholder meetings.
In addition, Mr. Jones is an officer of the Manager. The Manager receives
management fees and compensation for financial and administrative services that
it provides to the Company. Mr. Evelyn is a member of the law firm of Evelyn,
Gittens & Farmer, which serves as the Company's Barbados counsel; and Mr. Boyce
is affiliated with Colybrand Company Services Limited, St. Michael, Barbados,
which receives compensation for corporate secretarial services provided to the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain Beneficial Owners
- ---------------------------------------------------------------------------------------------
Name And Address Of Amount And Nature Of
Title Of Class Beneficial Owner Beneficial Ownership Percent Of Class
- ---------------------------------------------------------------------------------------------
Common Stock Integon Corporation 1,000,000 shares 100%
500 West Fifth Street
Winston-Salem, NC 27152
- ---------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See ITEM 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and ITEM 11,
EXECUTIVE COMPENSATION.
ITEM 14. 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 the 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 that evaluation, which disclosed no significant
deficiencies or material weakness, the Company's Chief Executive Officer and
Chief Financial Officer concluded that he 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.
25
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, 2002 and 2001.
(iii) Statements of Income and Retained Earnings for the
years ended December 31, 2002 and December 31, 2001
and the period from March 20, 2000 to December 31,
2000.
(iv) Statements of Cash Flows for the years ended December
31, 2002 and December 31, 2001 and the period March
20, 2000 to December 31, 2000.
(v) Statement of Changes in Shareholders' Equity for the
years ended December 31, 2002 and December 31, 2001
and the period from March 20, 2000 to December 31,
2000.
(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) Articles of Incorporation.*
3(b) By-Laws.
4 Instruments defining rights of security holders. See
Exhibits 3(a), 3(b) and 10(c).
10(a) Retrocession Agreement between Motors Insurance Corporation
and Registrant.*
10(c) Specimen Stock Purchase Agreement.*
26
10(d) Stock Purchase Agreement between Registrant and Integon
Corporation.*
10(e) Insurance Management Agreement between Registrant and Aon
Insurance Managers (Barbados) Ltd.*
10(f) Investment Management Agreement between Registrant and
BlackRock International, Ltd.*
99(a) Certification of Gary Y. Kusumi pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99(b) Certification of Ronald W. Jones pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99(c) Guarantee issued by the Minister of Finance of Barbados.
* Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-1, File No. 333-34088.
(b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended
December 31, 2002 have been filed.
27
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.
INTEGON RE (Barbados), LIMITED
(Registrant)
By: /s/Ronald W. Jones
----------------------------
Ronald W. Jones
Vice-President, Finance
Date: March 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Signature Title Date
- --------- ----- ----
/s/Gary Y. Kusumi Chairman, Chief Executive Officer, March 31, 2003
- ------------------------- President and Director
Gary Y. Kusumi
Executive Vice-President and Director
- -------------------------
Bernard J. Buselmeier
/s/Kenneth J. Jakubowski Vice-President and Director March 31, 2003
- -------------------------
Kenneth J. Jakubowski
/s/Peter R. P. Evelyn Director March 31, 2003
- -------------------------
Peter R. P. Evelyn
/s/Ronald W. Jones Vice-President Finance, Principal March 31, 2003
- -------------------------- Financial and Accounting Officer
Ronald W. Jones
/s/Mitchell F. White Director March 31, 2003
- --------------------------
Mitchell F. White
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
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
No annual report with respect to 2001 was distributed to shareholders.
No proxy solicitation materials were sent to shareholders prior to the filing of
this report. The Registrant does not intend to send an annual report with
respect to 2002 to shareholders and the Registrant has not sent proxy
solicitation materials with respect to the Registrant's annual meeting to be
held May 19, 2003, as of the filing of this report.
CERTIFICATIONS
I, Gary Y. Kusumi, Chief Executive Officer of Integon Re (Barbados), Limited,
certify that:
1. I have reviewed this annual report on Form 10-K of Integon Re (Barbados),
Limited;
2. Based on my knowledge, this annual 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 annual 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 annual 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
consolidate subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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 annual report out 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 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
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
annual 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 correction actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/Gary Y. Kusumi
------------------------------
Gary Y. Kusumi
Chairman, Chief Executive Officer,
President and Director
I, Ronald W. Jones, Principal Financial Officer of Integon Re (Barbados),
Limited, certify that:
1. I have reviewed this annual report on Form 10-K of Integon Re (Barbados),
Limited;
2. Based on my knowledge, this annual 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 annual 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 annual 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
consolidate subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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 annual report out 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 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
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
annual 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 correction actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/Ronald W. Jones
-----------------------------
Ronald W. Jones
Vice President, Finance and
Principal Financial Officer