10-K 1 form10k.txt FORM 10K 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, 2001 Or Transition Report Pursuant to Section 13 or 15(d) of --- The Securities Exchange Act of 1934 Commission file number 33-6534 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Exact name of registrant as specified in its charter) Barbados Not Applicable (State or other jurisdiction (I.R.S. employer identification of incorporation or organization) number) One Financial Place Not Applicable Collymore Rock (Zip Code) St. Michael, Barbados, W.I. (Address of principal executive offices) Registrant's telephone number, including area code (246) 436-4895 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None PAGE 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 2002, was $1,875,000.* Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class As of March 1, 2002 Common Stock, no-par value 2,000 Participating Stock, no-par value 25,000 * Based on current offering price of $75 per share. PAGE 3 PART I Item 1. BUSINESS INTRODUCTION Motors Mechanical Reinsurance Company, Limited (the "Company") was incorporated in Barbados on June 12, 1986. It became registered in Barbados as an insurer on June 30, 1986 and commenced insurance operations on December 11, 1987. The business of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by Motors Insurance Corporation ("MIC") to the extent such policies are attributable to an MIC Mechanical account in respect to which a series of shares is issued and outstanding (the "Policies"). These policies are issued either to General Motors Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and retroceded to the Company. Shares of the Company's Participating Stock (the "Shares") are sold to persons designated by owners of motor vehicle sales franchises (each a "Franchise") with respect to which MIC maintains an MIC Mechanical Account. A separate series is created for Shares relating to each MIC Mechanical Account, and a separate "Subsidiary Capital Account" is maintained for each such series. The profitability of the Company reflects both underwriting and investment experience, which is allocated among the Subsidiary Capital Accounts. THE RETROCESSION The Retroceding Company. MIC, the retroceding company under the Retrocession Agreement described below, is a stock insurance company organized under the laws of Michigan. All of MIC's outstanding stock is owned by GMAC Insurance Holdings, Inc. which, in turn, is a wholly owned subsidiary of GM. MIC, directly and through its subsidiaries, offers property and casualty coverages in all 50 states and the District of Columbia, Canada, Europe, Latin America and in the Asia-Pacific region. MIC consistently has been awarded A.M. Best Company's insurance financial rating of A + (Superior), one of the highest possible ratings. PAGE 4 The Retrocession Agreement -- Principal Agreement. The Company has entered into a "quota share" retrocession agreement (the "Agreement") which became effective as of December 11, 1987. Pursuant to the Agreement, MIC retrocedes to the Company, and the Company is obligated to assume, MIC's risks in respect of policies issued by any MIC subsidiary and reinsured by MIC that cover motor vehicle mechanical service agreements, to the extent that risks under such policies are attributable to an MIC Mechanical Account in respect of which a series of Shares is issued and outstanding. MIC retrocedes 100% of the risk and the Company receives 100% of the original gross premium, reduced by agents' commissions, if any, and cancellations. The Company assumes 75% of the risk with respect to these policies and MIC pays 75% of the net premium at the time the policies are written. The remaining 25% of the risk is ceded to the Company and MIC pays 25% of the net premium as the premiums are earned. The Company pays MIC a ceding commission in an amount equal to (i) 20% of net premium ceded to the Company that is attributable to policies sold on or after October 1, 2001 and (ii) 25% of net premium ceded to the Company that is attributable to policies sold prior to October 1, 2001. Net settlements between the Company and MIC are made quarterly and accordingly, will fluctuate quarter to quarter. The Agreement may be terminated at any time by mutual consent of the parties, or by either party upon 30 days written notice. Upon termination of the Agreement, MIC and the Company will remain bound by their respective obligations under the Agreement with respect to risks retroceded prior to the close of business on the date of termination. However, risks not yet retroceded to the Company under the Agreement shall remain risks of MIC. The Retrocession Agreement -- Supplemental Agreement. MIC from time to time enters into agreements with Franchise owners for which an MIC Mechanical Account is established, pursuant to which MIC, acting for itself and on behalf of certain of its subsidiaries, agrees to cede or retrocede to another insurance company mutually satisfactory to MIC and the respective Franchise owners the unexpired liability on service contracts, insured under the Policies, sold after the date specified in each such agreement. This liability can be ceded or retroceded to dealer-owned companies organized specifically with respect to a particular Franchise or, if a series of Shares is issued which relates to the Franchise, pursuant to an agreement between MIC and the Company (the "Supplemental Retrocession Agreement"). For this purpose, unexpired liability means MIC's liability in respect of the remaining period of coverage under the Policy as of the effective date of the cession. Under the Supplemental Retrocession PAGE 5 Agreement, the unexpired liability with respect to the Policies is assumed on the same basis as risks retroceded to the Company under the principal Retrocession Agreement. Types of Risks Subject to Retrocession. Coverages assumed under the Agreement are limited to service contracts or insurance policies insured or reinsured by MIC that provide indemnification against specific motor vehicle mechanical repairs not covered by manufacturer's new vehicle warranties. Such service contracts or insurance policies often provide additional coverages, such as towing and rental allowances. Coverages with respect to routine vehicle maintenance are not assumed under the Agreement. Loss Reserves. Reserves are balance sheet liabilities representing estimates of amounts needed in the future to pay claims with respect to insured events which have occurred as of the balance sheet dates. For purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserves are established after periodic actuarial reviews, based on judgments of the effects of technological change, manufacturers' warranties, and MIC's historical experience with motor vehicle mechanical service agreements. Consequently, the determination of loss reserves is an estimate and a process inherently subject to a number of highly variable factors. Any adjustments to reserves are reflected in the operating results for the periods in which they become known. The Company's incurred loss ratios (losses incurred as a percentage of net premium earned) on all mechanical business for the years ended December 31, 2001, 2000, and 1999 were 73.4%, 74.9%, and 80.0%, respectively. PAGE 6 The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 2001, 2000 and 1999. Year Ended -------------------------------------------- 12/31/01 12/31/00 12/31/99 Beginning balance in reserves for losses .......................... $ 4,754,710 $ 4,725,239 $ 5,393,818 ----------- ------------ ------------ Add-provision for losses incurred related to: Current claim year ........... 40,529,340 41,579,713 47,211,542 Prior claim years ............ (1,304,766) (877,045) (427,390) ----------- ------------ ------------ Total ............. 39,224,574 40,702,668 46,784,152 ----------- ------------ ------------ Deduct-paid losses attributable to: Current claim ................ 36,590,250 36,837,642 43,514,155 Prior claim years ............ 3,439,444 3,835,555 3,938,576 ----------- ------------ ------------ Total ............. 40,029,694 40,673,197 47,452,731 Ending balance in reserves ...... for losses ...................... $ 3,949,590 $ 4,754,710 $ 4,725,239 =========== ============ ============ As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 2001, 2000, and 1999 decreased by $1,304,766, $877,045, and $427,390, respectively. PAGE 7 The following table analyzes the development of losses and loss adjustment expenses from January 1, 1996 through December 31, 2001.

*/ Because mechanical breakdown claims are generally paid within 90 days of when they are incurred, the liability for unpaid claims incurred in prior years is negligible. Accordingly, the liability for unpaid claims incurred in all prior years has been combined at each year end. PAGE 8 The table shows initial estimated reserves at December 31, 2001, 2000, 1999, 1998, 1997 and 1996 and amounts paid on claims unsettled at each prior period end. Claims are typically processed for payment at the time the claim is reported. Therefore, the recorded claim liability at each year end represents the estimated incurred but not reported claims and claims in the process of payment. The cumulative deficiency or redundancy represents the total change in reserve estimates covering prior years. The policies reinsured by the Company are written for multiple years (up to seven years) and losses do not occur equally over the period for which the policy is written, but tend to be clustered in the later years. Therefore, loss experience for prior years may not be indicative of that for future years. INVESTMENT INCOME A major source of income to an insurance company is income earned on the investment of amounts not currently required for the payment of losses or expenses. The principal funds available for investment by the Company come from accumulated capital and the cumulative excess of premiums collected over losses and operating expenses paid. The Company's investment portfolio consists of U.S. dollar denominated fixed income securities and shares of a U.S. dollar denominated international equity fund. At December 31, 2001 and 2000, 82% and 81%, respectively, of the Company's investment portfolio, based on fair market value, consisted of fixed income securities with the balance of the portfolio consisting of shares of the international equity fund. Effective February 8, 2000, the Company entered into an investment management agreement with BlackRock International, Ltd. ("BlackRock") pursuant to which BlackRock manages the investment and reinvestment of the Company's fixed income portfolio in accordance with the Company's investment guidelines. BlackRock is a subsidiary of BlackRock, Inc., which had approximately $239 billion of assets under management as of December 31, 2001. BlackRock, Inc. manages assets on behalf of more than 2,700 institutions and 300,000 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 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 PAGE 9 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 assets under management on behalf of the foregoing entities and lower on all assets in excess of $50 million. The Company's funds are invested in a manner consistent with investment guidelines that are proposed by the Investment Committee for adoption by the Company's Board of Directors (the "Board"). In February of 2000, the Company began implementing new investment guidelines for its fixed income portfolio. Under these guidelines, the Company is permitted to invest in U.S. Treasury and agency securities, agency and non agency mortgage-backed securities, obligations or domestic and foreign corporations, asset-backed securities, taxable municipal securities and money market instruments. Under the investment guidelines for fixed income securities in effect prior to the implementation of the new investment guidelines, the Company had invested primarily in U.S. dollar-denominated securities issued outside of the United States by non-United States private or governmental issuers, U.S. dollar-denominated certificates of deposit issued by foreign banks and foreign branches of U.S. banks, and, in certain situations, non-U.S. dollar denominated bonds, on a fully currency-hedged basis. The Company's fixed income investment portfolio was completely converted to investments permitted under the new guidelines in the latter half of 2000. In addition to fixed income securities, pursuant to a plan adopted in early 1999, the Company may invest a portion of its investment portfolio in equity securities, provided that the portion of the Company's investment portfolio consisting of equity securities may not exceed 30%, based on fair market value. In June 1999, the Company invested $10 million in equity securities by purchasing shares in the Capital International Fund (the "Fund"), an investment company incorporated under the laws of Luxembourg. The Company invested an additional $6 million in the Fund during November 2000. The market value of the Company's equity portfolio at December 31, 2001 and 2000 was approximately $16.0 million and $17.1 million, respectively. The Fund's investment objective is capital appreciation and it aims to achieve this objective through the continuous management of a diversified portfolio of transferable securities consisting primarily of common stocks, researched and selected on a world-wide basis. Shares are denominated in United States Dollars and are all of the same class PAGE 10 and have like rights and liabilities. Shares are listed on the Luxembourg and the Amsterdam Stock Exchanges. The Fund had $1,318 million in total net assets as of December 31, 2001. The Investment Committee reviews on a regular basis and, where appropriate, recommends for Board approval, revisions to the investment objectives and guidelines for management of the Company's funds. There can be no assurance, however, as to whether a particular investment objective, once adopted, can be achieved or that adverse factors would not cause a decrease in the overall value of the Company's investment portfolio. ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS The Company has established a Subsidiary Capital Account with respect to the Common Stock as a class, and establishes such an account with respect to each series of Shares at the time a series is issued. Subsidiary Capital Accounts are maintained solely for the purpose of the allocations described below, and do not serve any other legal or accounting function. None of the Company's assets are segregated or earmarked with respect to those accounts. The consideration received by the Company upon the issuance of a particular series of Shares and the Common Stock as a class are allocated to the Subsidiary Capital Account for that series or class. Items of income and expense and losses attributable to insurance underwriting activities are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. Investment experience, and other items of income and expense, gains and losses and distributions with respect to the Shares and the Common Stock, are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. For purposes of the following description, items shall be "related" to the Subsidiary Capital Account for the series identified with the MIC Mechanical Account to which such items can be attributed. (1) Allocations with respect to underwriting activities are made as follows: PAGE 11 (a) With respect to premiums ceded by MIC to the Company, 100% to the related Subsidiary Capital Account; provided, however, that an amount equal to 1% of those premiums, net of related ceding commissions, are subtracted from such Subsidiary Capital Account and allocated to the Subsidiary Capital Account for the Common Stock. (b) With respect to any agents' or brokers' commissions, ceding commissions, any ceding commissions or commissions recaptured, unearned premiums, reinsurance premiums ceded, and any United States excise tax, 100% to the related Subsidiary Capital Account. (c) With respect to losses incurred, and any amount of losses recovered through salvage, subrogation, reimbursement or otherwise one hundred percent (100%) shall be allocated to the related Subsidiary Capital Account. For the purpose of this section (1)(c), losses incurred includes both paid and unpaid (reported and unreported) losses. (d) With respect to return premiums, 99% to the related Subsidiary Capital Account and 1% to the Subsidiary Capital Account for the Common Stock. (2) Any expenses or liabilities attributable to day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the number of series issued and outstanding at the end of the fiscal quarter immediately preceding the fiscal quarter in which the expense or liability is incurred, provided, that for purposes of such allocation, series of shares issued at any time during the twelve calendar months preceding the end of the fiscal quarter in which the expense or liability is incurred and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded. (3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed. PAGE 12 (4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses. (5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of the end of the quarter preceding the date on which the expense or liability is incurred. (6) (a) Investment income, net of any direct investment expense, is allocated among the Subsidiary Capital Accounts pro rata based upon the relative Investment Asset Balance (as defined in subparagraph (b) below) of each of those accounts as of the last day of the quarter preceding the quarter for which the investment income is being allocated. For these purposes, net investment income includes realized (but not unrealized) gains and losses. (b) The Investment Asset Balance of each Subsidiary Capital Account is equal to the capital and surplus of each account, increased by: (i) the unearned portions of the written premiums that have been collected by the Company attributable to those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated, net of any applicable commissions and taxes; (ii) the outstanding loss reserves attributable to each of those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated; and (iii) any other outstanding liability that has been charged to the account as of the last day of the quarter preceding the quarter for which the income is being allocated. PAGE 13 (7) (a) If, after the credits and charges described in paragraphs 1-6 above are made to the Subsidiary Capital Accounts there exists a deficit in one or more of the accounts, then each such deficit is allocated to and charged against: (i) first, the Subsidiary Capital Account for the Common Stock to the extent of Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common Stock equal to the portion of the premiums ceded to the Company during the immediately preceding five-year period which was subtracted from the Subsidiary Capital Accounts for the Shares pursuant to paragraph (1)(a) above, net of losses allocated to that account during such period pursuant to the allocation procedure described in this paragraph (7) and net of return premiums allocated to that Account during such period pursuant to the allocation procedure described in paragraph (1)(d) above); (ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon the relative earned premiums allocated to each such account for the quarter for which the allocation is being made, provided, however, that only accounts which have positive balances are taken into account for purposes of this allocation; (iii) then, the remaining Subsidiary Capital Accounts for the Shares with positive balances as of the last day of the quarter for which the allocation is being made, pro rata, based upon such balances; and (iv) then, to the extent necessary, the Subsidiary Capital Account for the Common Stock. (b) If, as a result of an allocation of a deficit as described in subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated in the manner provided in that subparagraph before applying a subsequent subparagraph. (c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a series of Shares had a deficit that was allocated to and charged against the Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital Account for any series of Shares, then at the end of any succeeding quarter for which that account otherwise PAGE 14 would show an account balance greater than zero, the balance is reallocated to the Restricted Earned Surplus until all reductions of that surplus attributable to that Subsidiary Capital Account have been restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro rata based on the relative amount of deficits allocated to such Accounts, until all reductions of such Subsidiary Capital Accounts after January 1, 1995 under paragraph (a) above with respect to the series of shares from which the reallocation is being made, which have not been previously restored, have been restored. Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that account is absorbed by other Subsidiary Capital Accounts, in general, as follows: The amount of such excess losses is charged first to the Restricted Earned Surplus portion of the Subsidiary Capital Account of the Common Stock. Any remaining losses, should the Restricted Earned Surplus be exhausted, is allocated among the Subsidiary Capital Accounts of the other Shares. Any then unabsorbed losses are charged to the Subsidiary Capital Account of the Common Stock. Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital Accounts for the Shares in the manner described above must be restored from the Subsidiary Capital Account that drew the funds if at any time it returns to a positive balance. (8) (a) (a) Dividends, payments upon redemption or liquidation (described below), and any other distributions with respect to the Shares and the Common Stock are allocated to the Subsidiary Capital Account for the class or series with respect to which the dividend, payment or distribution was made. (b) Where all Shares of a series are repurchased by the Company pursuant to its right of first refusal or redeemed in accordance with the Company's procedures for redemption, the Subsidiary Capital Account for that series is terminated as of the last day of the fiscal quarter in which the unearned portion of premiums that have been ceded to the Company and allocated to such Account becomes zero. Subsequent to the effective date of the redemption or repurchase, as the case may be, any positive balance as of the last day of any calendar quarter for the Subsidiary Capital Account of any repurchased or redeemed series of Shares, after application of the provisions of paragraph 7(c) above, will be allocated among the Subsidiary Capital Accounts of the existing series of Shares pro PAGE 15 rata based upon relative earned premium attributable to such Accounts for the calendar quarter then ending and any net deficit will be allocated in accordance with the provisions of paragraph 7(a) above. Using the procedures described above, the Company has allocated items of gain and loss to the Subsidiary Capital Account for each series. Initially each Account had a balance of $7,500 representing the amount paid for the Shares of that series of Shares. During the year ended December 31, 2001, $329,335 of net income from underwriting activities (which excludes administrative expenses) and $749,181 of administrative expenses were allocated among the series of Shares outstanding during the year ended December 31, 2001, and $6,150,764 of net investment income was allocated among such series of Shares and the Common Stock. As of December 31, 2001, 169 series of Shares outstanding had Subsidiary Capital Account balances greater than or equal to $7,500 (ranging from $8,008 to $652,532) and 81 series had Subsidiary Capital Account balances less than $7,500 (ranging from $7,468 to zero). The amounts in the Subsidiary Capital Accounts can fluctuate substantially and therefore, may not be indicative of future accumulated amounts. At December 31, 2001, an aggregate of $5,236,206 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 114 Subsidiary Capital Accounts and remained outstanding at that date, including net deficits of $3,755,251 associated with 58 series of Shares that have been redeemed. As of December 31, 2001, $8,052,563 of aggregate deficits had been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this amount, $7,355,114 could be recovered from deficit accounts should they return to profitability and to the extent that the risk fund is repaid in full. However, there can be no assurances that such deficit accounts will return to profitability or, if they return to profitability, that they will generate sufficient profits to repay any portion of deficits previously allocated to the Subsidiary Capital Account for the other series of Shares. The Subsidiary Capital Account for the Common Stock had, at the time it was established, a balance of approximately $200,000, representing the capital paid in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary Capital Account is not affected directly by underwriting gains and losses attributable to the various Subsidiary Capital Accounts related to series of Shares, but is affected by those gains and losses indirectly to PAGE 16 the extent that one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit, in which case an allocation to the Subsidiary Capital Account for the Common Stock will result, in the manner described above. The allocations of income and expense, gains and losses, and distributions described above are subject to approval by the Board, and when so approved are considered final and conclusive and will be binding on all holders of Shares for all purposes including, without limitation, any redemption of Shares pursuant to the Company's procedures for redemption. Barbados insurance law requires that the Company maintain certain levels of net assets, calculated without regard to unrealized gains or losses. The Company is currently in compliance with these requirements. However, in the event that the Company is unable to comply with such requirements in the future, it has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. EMPLOYEES The Company does not have any full-time employees. Rather, the Company relies on Aon Insurance Managers (Barbados), Ltd. (the "Manager") to handle its day-to-day operations. (See "Business of the Company -- Insurance Management Agreement," below.) In addition, corporate secretarial services for the Company are provided by Colybrand Company Services Limited of St. Michael, Barbados. The Company's Board of Directors and the committees thereof, however, remain responsible for the establishment and implementation of policy decisions. COMPETITION The insurance business is extremely competitive. MIC management believes that at present, MIC and its subsidiaries are, as a group, one of the largest mechanical repair insurers of new GM vehicles in the United States. There are other major companies offering similar coverage. Because the insurance business of the Company is limited to the assumption of certain motor vehicle mechanical service agreement reinsurance business ceded by MIC, the profitability of the Company depends to a large degree on the success experienced by MIC and its affiliates in competing with those other insurers. PAGE 17 Many commercial insurance groups are seeking to capture additional mechanical insurance business by offering to assist automobile dealers in the formation of their own dealer-owned reinsurance companies. MIC has assisted in the establishment of such companies for a number of qualified dealers. However, MIC believes that participation in the Company represents a practical alternative for dealers who do not have the available capital, insurance management expertise or time for the personal involvement necessary for their own reinsurance company. INSURANCE MANAGEMENT AGREEMENT The Company has entered into an Insurance Management Agreement (the "Management Agreement") with the Manager, pursuant to which the Manager collects and disburses funds on behalf of the Company, provides accounting, clerical, telephone, facsimile, information management and other services for the Company, and advises and consults with the Company in regard to all aspects of the Company's retrocession activities. The current Management Agreement is for a continuous term subject to termination by either party upon 90 days advance written notice. Pursuant to the Management Agreement, the Manager has undertaken to maintain an office in Barbados to perform its duties. Further, during the term of the Management Agreement and generally for a period of one year thereafter, the Manager has agreed not to provide management or accounting services for any other company which, by the nature of its operations, is offering, insuring or reinsuring motor vehicle mechanical service agreements or extended warranty or related coverages on a multi-state basis in the United States or Canada with respect to motor vehicles sold by franchised GM dealerships. Under the terms of the Management Agreement, the Company pays the Manager a fixed annual fee plus a monthly variable fee based on the number of outstanding series of Shares at each calendar month end. For the year ended December 31, 2001, the Company incurred fees payable to the Manager in the amount of $255,338. The Manager is responsible for the payment of the salaries of its officers and employees and all office and staff overhead and other costs attributable to its services on the Company's behalf. However, out-of-pocket expenses, such as telephone, facsimile, postage, courier delivery, travel and other items are borne by the Company on an expense reimbursement basis. PAGE 18 The Manager performs services similar to those performed for the Company for several other entities. The Manager has thirteen employees. In addition, the Manager may draw upon the resources of its affiliates as needed to provide the services contemplated under the Management Agreement. No employee of the Manager devotes all of his or her time to the business of the Company. However, the Manager is obligated to devote all employee time necessary to ensure the performance of the Manager's duties under the Management Agreement. The Manager is subject to the control and direction of the Board. The Manager has served in that capacity since 1986. The Manager was incorporated in Barbados in 1984, and is an affiliate of the Aon Group of Companies ("Aon"), an international insurance brokerage and insurance consulting firm. Aon, through its subsidiaries, offers and insures motor vehicle mechanical service agreements, extended warranty and related coverages with respect to vehicles sold by automobile dealerships in the United States. Under the terms of the Management Agreement, the Manager will treat all information concerning the business of the Company as confidential and will not disclose such information to Aon or any Aon affiliate without consent of the Company. BARBADOS REGULATION AND TAXES The Company's business is subject to regulation under the Barbados Exempt Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal requirements of the Exempt Insurance Act require the Company to maintain its principal office in Barbados, appoint various professional advisors, and to meet certain capitalization and annual reporting requirements with respect to its operating activities and solvency requirements. Under the Exempt Insurance Act, no income tax, capital gains tax or other direct tax or impost is levied in Barbados on the results of the Company's operations (except as noted below), or on transfers of securities or assets of the Company to any person who is not a resident of Barbados. The Company has received a guarantee from the Minister of Finance of Barbados that such benefits and exemptions will be available for a period ending December 31, 2016. Until December 31, 2001, the Company paid an annual licencing fee of $2,500 to obtain such guarantee. Thereafter, the Company is subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum. PAGE 19 Item 2. PROPERTIES The Company neither owns nor maintains any office space or facilities. Rather, the business office for the Company is provided by the Manager and is located at 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 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, 2001. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no public market for the Shares or the other shares in the Common Stock of the Company, and none is expected to develop. Transfer of the Shares is restricted by the terms of a Stock Purchase Agreement and requires approval by the Supervisor of Insurance in Barbados. (b) All of the outstanding Common Stock of the Company is held by MIC. As of March 1, 2002, there were 448 holders of Shares of record, representing 250 series of Shares. (c) Under the Articles of Incorporation, the holders of Shares are entitled to receive minimum dividends equal to their pro-rata share of 20% of net income attributable to the associated Subsidiary Capital Account provided (i) the Company meets the Barbados regulatory requirements without regard to any letter of credit or guarantee, and (ii) the related Subsidiary Capital Account would also meet those requirements after giving effect to the dividend. In March of 2002, March of 2001, and May of 2000, the Company declared dividends of $4,318,225, $3,083,096 and $673,134, respectively. These dividends were declared as a varying percentage of earned surplus attributable to PAGE 20 each series of Shares with the percentage applicable depending on the amount of earned surplus attributable to such series. (d) The Board considers the minimum regulatory capital requirement, a provision for fluctuations in the value of the Company's investment portfolio and a provision for adverse development of loss experience to determine an appropriate minimum capital level and therefore the amount of dividends to be paid. The Board's objective is to maintain adequate capital to provide capacity for growth in premium so that dividends may be paid annually. There can be no assurance that a prior dividend amount will be paid in the future. PAGE 21 Item 6. SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from the Company's audited financial statements.

*/ Information as to earnings per share is not provided inasmuch as the results for each series of stock will vary with the underwriting experience attributable to each Subsidiary Capital Account established with respect to that series. See Note 2 to the Financial Statements. **/ In 1999, MIC recaptured certain insurance business that had been previously ceded to the Company. See Note 9 to the Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The liability for losses and loss expenses represents the accumulation of estimates for reported losses and a provision for losses incurred but not reported, including claim adjustment expenses. For PAGE 22 purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserve projections are used to estimate loss reporting patterns, loss payment patterns and ultimate claim costs. An inherent assumption in such projections is that historical patterns can be used to predict future patterns with reasonable accuracy. Because many variables can affect past and future loss patterns, the effect of changes in such variables on the results of loss projections must be carefully evaluated. The evaluation of these factors involves complex, subjective judgments, which may significantly impact the financial statements. Insurance liabilities are, therefore, necessarily based on estimates, and the ultimate liability may vary from such estimates. These estimates are regularly reviewed by management and adjustments to such are included in income on a current basis. See Note 4 to the Financial Statements. Liquidity The Company expects to generate sufficient funds from operations to cover current liquidity needs. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of Shares, will continue to be the principal sources of funds for the Company. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2002 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected in the foreseeable future. On March 5, 2002, the Board of Directors authorized the payment of dividends aggregating $4,318,225 to eligible holders of Shares. See "Market for Registrant's Common Equity and Related Stockholders Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends. The Company had unearned premium reserves of $89,634,122 as of December 31, 2001, compared to $91,915,465 as of December 31, 2000. Unearned premium amounts are attributable to the long-term nature of the contracts sold. Such contracts may extend for up to 84 months from the date of issue. In addition, the risk of loss to the Company under the contract arises primarily after the underlying manufacturer's warranty expires. For new vehicles, the warranty generally covers 36 months or 36,000 miles from the date that the vehicle is initially placed into service. For used vehicles, the applicable warranty period depends on the unexpired portion of the original manufacturer's warranty at the time of purchase of the vehicle. Because the Company has limited exposure to risk of loss prior to PAGE 23 expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned. The decrease in unearned premium reserves as of December 31, 2001 compared to December 31, 2000 is primarily attributable to the Company placing certain series of Shares in "run-off." When a series of Shares is placed in run-off, the Company discontinues assuming any risk or receiving any premiums with respect to automotive mechanical service contracts that are sold, after the date that the series is placed in run-off, by the Franchise(s) with respect to which the series of Shares is issued. When a series is placed in run-off, the premium that had been previously ceded to the Company that is attributable to such series of Shares continues to earn out and the unearned premium reserve decreases. As of December 31, 2001, 132 series of Shares were in run-off compared to 129 series as of December 31, 2000. Capital Resources Capitalization of the Company, as of December 31, 2001, was comprised of paid-in capital with respect to the Common Stock of $200,000 (compared to $200,000 at both December 31, 2000 and 1999), paid-in capital with respect to the Shares of $1,875,000 (compared with $1,942,500 and $1,995,000 as of December 31, 2000 and 1999, respectively), and earnings retained for use in the business of $18,521,974 (compared with $16,247,004 and $13,190,576 as of December 31, 2000 and 1999, respectively). The reduction in the amount of paid-in capital with respect to the Shares as of December 31, 2001 compared with December 31, 2000 is primarily attributable to redemption of Shares with nil unearned premiums. There were a total of 250 series outstanding at December 31, 2001 compared to 259 and 266 series of Shares outstanding at December 31, 2000 and 1999, respectively. During 2001, the Company issued 1 new series of Shares and redeemed 10 series of Shares for a net decrease of 9 series. During 2000, the Company issued 1 new series of Shares and redeemed 8 series for a net decrease of 7 series. Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary PAGE 24 Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 2002, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,841,257 compared to total capital and retained earnings computed for purpose of Barbados law of $20,596,974. Results of Operations During the year ended December 31, 2001, the Company had net income of $5,730,918 compared to net income of $3,678,373 for the year ended December 31, 2000 and a net loss of $3,534,968 for the year ended December 31, 1999. The increase in net income in 2001 compared to 2000 is attributable to a $710,689 improvement in underwriting results combined with a $1,341,856 increase in investment income. The increase in net income in 2000 compared to 1999 is attributable to a $3,060,188 improvement in underwriting results combined with a $4,153,153 increase in investment income. The Company had a net underwriting loss of $419,846 in 2001 compared to net underwriting losses of $1,130,535 and $4,190,723 in 2000 and 1999, respectively. During 2001, the Company earned premiums of $53,412,569 compared to $54,378,800 and $58,471,950 during 2000 and 1999, respectively. Premium income decreased in both 2001 and 2000 compared to the prior year as a result of (i) the redemption of additional series of Shares during the years ended December 31, 2001 and 2000, (ii) the placement of certain series of Shares in run-off as discussed above, and (iii) the Recapture as discussed below. The Company incurred losses and administrative expenses during the year ended December 31, 2001 of $53,832,415 compared with $55,509,335 and $62,662,673 for the years ended December 31, 2000 and 1999, respectively. Expenses in 2001 were comprised of losses paid and provisions for losses incurred of $39,224,574, ceding commissions and excise taxes of $13,858,660 and operating expenses of $749,181. Losses incurred in 2000 and 1999 were $40,702,668 and $46,784,152, respectively. The loss ratio for the year ended December 31, 2001 was 73.4% compared to 74.9% and 80.0% for the years ended December 31, 2000 and 1999, respectively. These decreases in losses incurred and loss ratios are primarily attributable to the Recapture and the ongoing efforts by MIC to improve underwriting results with respect to series of Shares that have produced unprofitable business. PAGE 25 During 1999, as a result of its adverse underwriting results, the Company, working with MIC, took steps to improve its underwriting performance. During 1999, the Company's Board of Directors voted to redeem 37 series of Shares that had consistently experienced adverse underwriting results and which the Board determined were unlikely to experience favorable underwriting results in the future (the "Redemption"). Because the Subsidiary Capital Accounts for these series each had a balance of zero, the redemption price for the Shares was zero. In addition to the Redemption, MIC agreed to commute the unearned premium and all unpaid losses as of the end of the second quarter of 1999 that were attributable to 37 series of Shares that the Board voted to redeem (the "Recapture"). In exchange for assuming these unearned premium and unpaid loss reserves, the Company paid $19,660,649 to MIC during the first quarter of 2000, which amount represented the unearned premium and unpaid losses as of June 30, 1999 that were attributable to the commuted business (after offset by the 25% ceding commission and 1% federal excise taxes previously paid by the Company with respect to the recaptured business). If MIC had not recaptured this business from the Company, the Company would likely have experienced larger underwriting losses and higher loss ratios for the years ended December 31, 2001, 2000 and 1999. Notwithstanding the Redemption and the Recapture, there can be no assurances that the Company will not experience significant adverse underwriting results in the future and there can be no assurances that MIC would recapture additional business from the Company if the Company does experience significant adverse underwriting results. The Company incurred operating expenses during the year ended December 31, 2001 of $749,181 compared to $663,358 and $671,587 for the years ended December 31, 2000 and 1999, respectively. Such amounts do not include expenses paid directly by MIC. The increase in operating expenses for the year ended December 31, 2001 compared to the year ended December 31, 2000 is largely attributable to special reviews of certain operations of the Manager that were performed by the Company's auditors and increased legal fees. MIC has agreed to pay directly certain costs relating to registering and issuing shares if such costs cannot be allocated to the Subsidiary Capital Account for the Common Stock. For the year ended December 31, 2001, $106,751 of such costs were paid directly by MIC compared to $98,992 and $141,697 for the years ended December 31, 2000 and 1999, respectively. The PAGE 26 decrease in such costs for the year ended December 31, 2000 compared to the year ended December 31, 1999 is largely attributable to the costs associated with the Redemption and Recapture during 1999. Investment income in 2001 was $6,150,764 compared to $4,808,908 and $655,755 for the years ended December 31, 2000 and 1999, respectively. The increase in investment income during 2001 compared to 2000 arose primarily as a result of significant gains realized on the sale of investment securities which was attributable to the positive impact of lower interest rates on the value of the Company's fixed income securities. Likewise, the increases in investment income during 2000 compared to 1999 arose primarily as a result of reduced realized losses on sale of investment securities which was also attributable to the positive impact of lower interest rates on the value of the Company's fixed income securities. The sale of investment securities for the year ended December 31, 2001 resulted in realized gains of $1,632,053, compared to realized losses of $313,531 and $5,255,474 for the years ended December 31, 2000 and 1999, respectively. Interest earned for the year ended December 31, 2001 was $4,518,711 compared to $5,122,439 and $5,911,229 for the years ended December 31, 2000 and 1999, respectively. Interest earned in 2001 compared to 2000, and in 2000 compared to 1999, decreased primarily as a result of the combination of (i) repayment during the first quarter of 2000 of premiums paid to MIC with respect to the Recapture, which represented approximately 20% of the invested assets of the Company, (ii) the movement of investment funds into the equity fund, and (iii) lower interest rates in 2001. Unrealized gains on investment securities held at December 31, 2001 were $1,769,048 compared to unrealized gains at December 31, 2000 of $2,732,423. The decrease in unrealized gains as of December 31, 2001 compared to December 31, 2000 resulted primarily from a significant change in the unrealized position on the Company's equity portfolio which was largely attributable to overall negative performance of the equity markets during 2001. At December 31, 2001 approximately 18% (2000-19%) of the Company's investment portfolio was invested in a U.S. dollar denominated international equity fund and the remaining 82% (2000 - 81%) was invested in U.S. dollar denominated fixed-income securities (in each case, based on fair market value). PAGE 27 Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 2001, the Company had furnished such a letter of credit in the amount of $72,350,000. 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 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. Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB issued SFAS No. 138 which amends SFAS No. 133 and delayed implementation of SFAS 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company adopted this standard on January 1, 2001. The impact of the adoption of this standard did not have a potential impact on the Company's financial position or results of operation. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and certain equity security prices. Market risk is inherent to all financial instruments. Active management of market risk is integral to the Company's operations which seeks to manage its exposure to market risk generally by monitoring the character of investments that are purchased or sold. PAGE 28 A discussion of the Company's accounting policies for derivative instruments is included in Note 3 to the Financial Statements included herein. The following analyses are based on sensitivity analysis tests that assume instantaneous, parallel shifts in exchange rates, interest rates, and interest rate yield curves. There are shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, changes are rarely instantaneous or parallel. Although certain assets may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. The Company does not hold any financial instruments for trading purposes. Interest Rate Risk The Company has exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates and attempts to mitigate that exposure through active portfolio management. The Company's investment guidelines do not permit the use of derivatives in managing interest rate risk. As of December 31, 2001 and 2000, the net fair value asset exposure to interest rate risk was approximately $74.4 million and $75.0 million, respectively. As of both December 31, 2001 and 2000, the potential loss in fair value resulting from a hypothetical 10% increase in interest rates would be approximately $1.5 million. Foreign Exchange Risk Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. At December 31, 2001 and 2000, 100% of investments were denominated in U.S. dollars. Equity Price Risk Equity price risk results from changes in the level or volatility of equity prices which affect the value of equity securities. At December 31, 2001 and December 31, 2000, the Company had approximately 18% and 19%, respectively, of its portfolio invested in an international equity fund. As of December 31, 2001 and 2000, the net fair value asset exposure to equity price risk was approximately $16.0 million and $17.1 million, respectively, and the potential gain in fair value resulting from a hypothetical 10% increase in the underlying equity prices would be approximately $1.6 million and $1.7 million, respectively. PAGE 29 Overall Limitations and Forward-Looking Statements The Company has developed fair value estimates by utilization of available market information or other appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair market value amounts. In addition, the above discussion and the estimated amounts generated from the sensitivity analyses referred to above include forward-looking statements of market risk which assume, for analytical purposes, that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted previously are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should be considered projections of future events or losses. PAGE 30 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page 1. Independent Auditors' Report 31 2. Balance Sheets, December 31, 2001 and 2000 32 3. Statements of Operations and Retained Earnings for the years ended December 31, 2001, 2000 and 1999 33 4. Statement of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 34-35 5. Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 36 6. Notes to Financial Statements 37-44 PAGE 31 INDEPENDENT AUDITORS' REPORT To the Stockholders of MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED One Financial Place Collymore Rock St. Michael, Barbados We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited (the "company") as of December 31, 2001 and 2000 and the related statements of operations and retained earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Motors Mechanical Reinsurance Company, Limited as of December 31, 2001 and 2000 and the results of its operations, changes in stockholders' equity and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. CHARTERED ACCOUNTANTS Bridgetown, Barbados February 15, 2002 PAGE 32 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (Expressed in United States Dollars)

The accompanying notes form an integral part of these financial statements. APPROVED ON BEHALF OF THE BOARD ............................... Director PAGE 33 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars)

The accompanying notes form an integral part of these financial statements. PAGE 34 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars)

The accompanying notes form an integral part of these financial statements. PAGE 35 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED) (Expressed in United States Dollars)

The accompanying notes form an integral part of these financial statements. PAGE 36 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars)

The accompanying notes form an integral part of these financial statements. PAGE 37 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 1. OPERATIONS The Company is incorporated under the laws of Barbados and is a licensed insurer under the Exempt Insurance Act, 1983 and amendments thereto. All of the common stock of the Company is owned by Motors Insurance Corporation (`MIC'), a member of the GMAC Insurance Group. MIC (the "Common Shareholder") is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC. Note 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements are stated in United States dollars and prepared in conformity with accounting principles generally accepted within the United States of America. Reclassifications Certain amounts from 2000 have been reclassified to conform with 2001 classifications. 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 those estimates. Premium Income and Acquisition Costs Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer prior to October 1, 2001 and 80% for policy premiums written by the direct insurer, on and after October, 2001. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned. Premiums are written on the basis of quarterly cessions and earned relative to anticipated loss exposures. Acquisition costs, consisting of ceding commissions and excise taxes, are taken into income on the basis of premiums earned. Investments Investments, all of which are available for sale, are comprised of interest-bearing marketable securities, and an investment in an international equity fund, which are carried at fair value based on quoted market prices and dealer quotes obtained from an external pricing service. Investments with PAGE 38 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) original maturities of less than 90 days are classified as cash equivalents. Unrealized appreciation (depreciation) is included in accumulated other comprehensive income. Realized gains and losses on the sale of investments are included as investment income and are calculated based on amortized costs. PAGE 39 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loss Reserves The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred, but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations and can potentially be significant to the financial statements. Derivatives In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB issued SFAS No. 138 which amends SFAS No. 133 and delayed implementation of SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualified for hedge accounting. The Company adopted this accounting standard on January 1, 2001 as required. Adoption did not have a material impact on the financial position or result of operations of the Company. Taxation The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period of fifteen years expiring December 31, 2001. Thereafter, and until December 31, 2016 the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum. Stockholders who are United States residents are taxed in the United States on their share of the Company's income on a deemed distribution basis. Earnings Per Share No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8). PAGE 40 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 3. INVESTMENTS The cost and fair value of investments in debt securities and equities are as follows:

The cost and fair value of debt securities at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call on prepay obligations with or without call or prepayment penalties.

PAGE 41 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 3. INVESTMENTS (CONTINUED) In 2001, gross gains of $2,067,143 and gross losses of $435,090 were realized. In 2000, gross gains of $1,735,049 and gross losses of $2,048,580 were realized. In 1999 gross gains of $1,571,947 and gross losses of $6,827,421 were realised. The following summarizes net unrealized appreciation (depreciation) on investments: Balance, December 31, 1998 $ 334,059 Net depreciation (496,518) ---------- Balance, December 31, 1999 $ (162,459) Net appreciation 2,894,882 ---------- Balance at December 31, 2000 $2,732,423 Net depreciation (963,375) ---------- Balance at December 31, 2001 $1,769,048 ========== The investment portfolio is comprised of approximately 82% in diverse debt securities which do not result in any concentration of credit risk and 18% in an international equity fund. At December 31, 2001 and 2000 100% of the Company's investments are denominated in United States dollars. Note 4. RESERVES FOR UNPAID LOSSES The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 2001, 2000 and 1999:

As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 2001, 2000 and 1999 decreased by $1,304,766, $877,045 and $427,390 respectively. PAGE 42 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 5. STOCKHOLDERS' EQUITY All of the Company's Common Stock is held by MIC. During each of the years 2001 and 2000, 1 additional series of 100 shares of Participating Stock was issued. In addition, during 2001 the Board of Directors (the "Board") redeemed ten series of 100 shares which had been previously placed in run off and had reached fully earned position during 2001. During 2000 the Board redeemed eight series of 100 shares, which had been previously placed in run off, of which seven series had reached a fully earned position during 2000. During 1999 the Board of Directors also redeemed 37 series of 100 shares for nil value, and thereafter, MIC recaptured the unearned premium and loss reserves for those series (see Note 9). In the years ended December 31, 2001, 2000 and 1999 costs in the amount of $106,751, $98,992, and $141,696 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses. The Common Stockholder is entitled to elect five directors, at least one of whom must be a resident of Barbados. The Common Stockholder has no right to vote with respect to liquidation of the Company. The Common Stockholder generally has the sole right to vote on matters not specifically reserved to Participating Stock. The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board of Directors provided that the director representing holders of the Participating Stock votes in favour of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock. From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 2001 and 2000, there were no funds held in escrow. Note 6. REINSURANCE PREMIUMS Under the provisions of the retrocession agreement, the Company will assume future additional premiums of $29,878,041 ($30,638,488 at December 31, 2000) relating to premiums written by Motors Insurance Corporation but unearned at the respective period ends. The amounts will be received as the premiums are earned, net of related acquisition costs. Note 7. LETTER OF CREDIT The Company has provided an irrevocable letter of credit to MIC, in the amount of $72,350,000 ($76,050,500 at December 31, 2000) to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and investments are assigned to collateralize the letter of credit. PAGE 43 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 8. RETAINED EARNINGS Items of income or loss and premiums and expenses attributable to insurance underwriting activities are determined as of the end of each calendar quarter and are allocated to the Participating Stockholders' capital accounts. An amount equal to 1 percent of assumed premiums is allocated to the capital account of the Common Stockholder. Such allocations accumulate as restricted retained earnings and may be used to advance capital to any Participating Stockholders who incur a deficit in their capital accounts. Any such advances are repayable out of future profitable operations of the respective Participating Stockholder. Amounts allocated to the Common Stockholder, net of advances to Participating Stockholders, are presented in the table below as "net transfers". Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of Participating Stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such share's pro-rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part. Barbados law requires that the Company maintain a minimum margin of solvency based generally on the amount of premiums earned in the preceding year. At January 1, 2002, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $5,841,257. Retained earnings applicable to the Common and Participating Stockholders are comprised of the following:

PAGE 44 MOTORS MECHANICAL REINSURANE COMPANY, LIMITED NOTES TO THE FINANIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Expressed in United States Dollars) Note 9. RECAPTURE OF UNEARNED REINSURANCE PREMIUMS During 1999, the Company entered into a recapture agreement with MIC for 37 series of Participating Shares. Under the agreement MIC recaptured premium of $24,934,234, which represents unearned premiums and an amount equal to $1,209,316 for losses incurred, but unpaid in respect to the recapture business as of June 30, 1999. Additionally, MIC has paid the Company a recapture commission of $6,482,901 which represents the deferred portion of the ceding commission previously paid by the Company. PAGE 45 PART III Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Five of the current directors of the Company were elected by MIC through its ownership of the Common Stock at the Annual Shareholders' Meeting held on May 9, 2001 and one director was elected by the holders of the Shares at such meeting. The directors and officers of the Company are as follows:

The directors and officers named above serve in those capacities until the next 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, which receives management fees and compensation for financial and administrative services. Mr. Evelyn serves as the Company's Barbados counsel; and Mr. Boyce is affiliated with Colybrand Company Services Limited, St. Michael, Barbados, which receives compensation for corporate secretarial services provided to the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MIC owns all of the issued and outstanding shares of the Common Stock of the Company, which consists of 2,000 shares. J. Theodore Linhart, a director, owns 100 shares of Participating Stock. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item 11, EXECUTIVE COMPENSATION. PAGE 47 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Document List (1) Financial Statements The following are included in Item 8: (i) Independent Auditors' Report. (ii) Balance Sheets, December 31, 2001 and 2000. (iii) Statements of Operations and Retained Earnings for the years ended December 31, 2001, 2000 and 1999. (iv) Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. (v) Statement of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999. (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 14(c): 3(a) Restated Articles of Incorporation and amendments thereto filed by reference to Exhibit 3(I) to Quarterly Report on Form 10Q File No. 33-6534 for the quarterly period ended June 30, 1996. 3(b) By-laws of the Company dated June 6, 1986 filed by reference to Exhibit 3(b) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 4 Specimen Participating Stock Certificate filed by reference to Exhibit 4 of Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(a) Form of Principal Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(a) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 10(b) Form of Supplemental Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(b) of the Registration Statement on Form S-1, File No. 33-6534 dated June 18, 1986. PAGE 48 10(c) Specimen Stock Purchase Agreement filed by reference to Exhibit 10(c) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated May 22, 1987. 10(d) Amended and Restated Stock Purchase Agreement between Registrant and Motors Insurance Corporation filed by reference to Exhibit 10(d) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(e) Insurance Management Agreement between Registrant and Aon (formerly Alexander) Insurance Managers (Barbados) Ltd., effective January 1, 1996 filed by reference to Exhibit 10(e) to Annual Report on Form 10K, File No. 33-6534 for the year ended December 31, 1996. 10(f) Investment Management Agreement between Registrant and BlackRock International, Ltd. 20(a) Proxy solicitation materials sent to shareholders in connection with annual meeting held on April 22, 1999, filed by reference to Exhibit 20(b) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1996. 28(c) Certificate of Barbados Residency filed by reference to Exhibit 28(c) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(a) Certification Form filed by reference to Exhibit 28(a) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 99(b) Guarantee issued by the Minister of Finance of Barbados filed by reference to Exhibit 99(b) to Amendment No. 2 to Registration Statement on Form S-2, File No. 33-60105, dated April 23, 1996. (b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended December 31, 2001 have been filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant) By s/Ronald W. Jones Ronald W. Jones Vice-President, Finance Date: March 15, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date s/ William B. Noll Chairman, Chief Executive March 27, 2002 William B. Noll Officer, President and Director PAGE 49 s/ Thomas D. Callahan Executive Vice-President and March 25, 2012 Thomas D. Callahan Director s/ John J. Dunn, Jr. Vice-President and March 25, 2002 John J. Dunn, Jr. Director s/ Robert E. Capstack Vice-President and March 22, 2002 Robert E. Capstack Director Director J. Theodore Linhart s/ Peter R. P. Evelyn Director March 25, 2002 Peter R. P. Evelyn s/ Ronald W. Jones Vice-President March 15, 2002 Ronald W. Jones Finance, Principal Financial and Accounting Officer SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT No annual report with respect to 2000 was distributed to shareholders. The proxy solicitation materials that were sent to shareholders in connection with the Registrant's annual meeting held May 9th, 2001 have been previously filed with the Commission. The Registrant does not intend to send an annual report with respect to 2001 to shareholders and the Registrant has not sent proxy solicitation materials with respect to the Registrant's annual meeting to be held May 8, 2002, as of the filing of this report.

MOTORS MECHANICAL REINSURANCE CO LTD 10-K