10-Q 1 form10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON. D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange --- Act of 1934 For quarterly period ended September 30, 2002 ----------------------------- Transition report pursuant to Section 13 or 15(d) of the Securities ---- Exchange Act of 1934 For the transition period from to -------- -------- Commission File Number 33-6534 ---------------- Motors Mechanical Reinsurance Company, Limited --------------------------------------------------------- (Exact name of registrant as specified in its charter) Barbados N/A ---------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Bishops Court Hill, St. Michael, Barbados N/A ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (246) 436-4895 ----------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class As of September 30, 2002 ----- ------------------------ Common Stock, no par-value 2,000 Participating Stock, no par-value 23,900 -2- This quarterly report, filed pursuant to Rule 13a-13 of the General Rules and Regulations under the Securities Exchange Act of 1934, consists of the following information as specified in Form 10-Q: Part 1. FINANCIAL INFORMATION Item 1. Financial Statements 1. Balance Sheets as of September 30, 2002 and December 31, 2001. 2. Statements of Operations and Retained Earnings for the three month and nine month periods ended September 30, 2002 and 2001. 3. Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2001. In the opinion of Management, the accompanying financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results for the interim periods presented. The information furnished for the three and nine month periods ended September 30, 2002 may not be indicative of results for the full year. -3- MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS (Expressed in U.S. Dollars) September 30, December 31, 2002 2001 (unaudited) (audited) ------------- ------------ ASSETS Investments $ 85,329,872 $ 90,433,369 Cash and cash equivalents 350,954 142,992 Accrued investment income 581,880 789,199 Due from Motors Insurance Corporation 0 1,390,278 Deferred acquisition costs 20,390,025 22,810,217 Advances to Shareholders 395,074 527,500 Prepaid expenses 29,301 37,500 ------------- ------------ Total Assets $107,077,106 $116,131,055 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums $ 84,519,002 $89,634,122 Reserves for unpaid losses 3,720,597 3,949,590 Accrued liabilities 80,146 181,321 Due to Motors Insurance Corporation 539,029 0 ------------- ------------ Total liabilities 88,858,774 93,765,033 ------------- ------------ STOCKHOLDERS' EQUITY Share Capital Common Stock-no par value; Authorized - 2,000 shares; issued and outstanding - 2,000 shares 200,000 200,000 Participating Stock-no par value; Authorized - 100,000 shares; Issued and outstanding - 23,900 shares as of September 30, 2002 and 25,000 shares as of December 31, 2001 1,792,500 1,875,000 ------------- ------------ 1,992,500 2,075,000 Retained Earnings 18,563,908 18,521,974 Accumulated other comprehensive (loss)/income (2,338,076) 1,769,048 ------------- ------------ Total Stockholders' Equity 18,218,332 22,366,022 ------------- ------------ Total Liabilities and Stockholders' Equity $107,077,106 $116,131,055 ============= ============ -4- MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 (Expressed in U.S. Dollars)

-5- MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 (Expressed in U.S. Dollars)

-6- Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations Critical Accounting Policies. During the quarter ended September 30, 2002, Motors Mechanical Reinsurance Company, Limited (the "Company") had no change in its critical accounting policies as previously disclosed within the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Liquidity. It is anticipated that the Company will generate sufficient funds from operations to meet current liquidity needs. Premiums generated by the Company's reinsurance business combined with investment earnings plus proceeds from the sale of Participating Shares will continue to be the principal sources of funds for investment by the Company. Such funds will be available to meet the Company's liquidity requirements. No capital expenditures are expected in the foreseeable future. On March 5, 2002, the Board of Directors authorized the payment of dividends to eligible holders of Participating Shares aggregating $4,318,225. Capital Resources. During the quarter ended September 30, 2002, 2 new series of Participating Shares were issued and 7 series were redeemed, bringing the total number of series issued and outstanding to 239 as of the end of the quarter. As of September 30, 2002, the share capital of the Company was $1,992,500 (compared with $2,075,000 as of December 31, 2001) comprised of paid in capital with respect to the Common Stock of $200,000 and paid in capital with respect to Participating Shares of $1,792,500 (compared with paid in capital with respect to Common Stock of $200,000 and paid in capital with respect to Participating Shares of $1,875,000 as of December 31, 2001). In addition, the Company had retained earnings in the amount of $18,563,908 as of September 30, 2002 compared with $18,521,974 as of December 31, 2001. The net increase in retained earnings is primarily attributable to investment income earned during the nine months ended September 30, 2002 mostly offset by the dividend payment on March 5, 2002 as noted above and redemptions of Participating Stock. Results of Operations. During the quarter ended September 30, 2002, the Company had net income of $1,232,834, compared with net income of $923,510 for the comparable period in 2001. For the nine month period ended September 30, 2002, the Company had net income of $5,216,176 compared with net income of $3,305,311 for the comparable period in 2001. As discussed below, the increases in net income for the quarter and nine month periods ended September 30, 2002 compared to the comparable periods of 2001 were primarily a result of improvements in the underwriting performance of the Company as reflected by the reductions in loss -7- ratios for the periods in question as noted below. The increase in net income for the nine month period ended September 30, 2002 compared to the comparable period of 2001 was also in part attributable to increased investment income and a decrease in losses paid. Premiums earned decreased to $12,489,018 during the quarter ended September 30, 2002 compared to $13,378,319 for the comparable period in 2001. Expenses incurred during the quarter ended September 30, 2002 were $12,412,658 compared to $13,901,540 for the comparable period in 2001. The Company experienced net underwriting income for the quarter ended September 30, 2002 of $76,360, compared to an underwriting loss of $523,221 for the comparable period in 2001. The ratio of losses incurred to premiums earned for the quarter under review was 74%, compared to 77% for the comparable period in 2001. For the nine month period ended September 30, 2002, the Company had earned premiums of $37,642,614, compared to $40,222,185 for the comparable period of 2001. Expenses incurred during the nine month period ended September 30, 2002 were $37,397,358, compared to $41,440,809 for the comparable period in 2001. The net underwriting income for the Company was $245,256 for the nine month period ended September 30, 2002, compared to an underwriting loss of $1,218,624 for the comparable period in 2001. The loss ratio for the nine month period ended September 30, 2002 was 73%, compared to 76% for the comparable period in 2001. Other than as noted above there were no material items to report for the nine months ended September 30, 2002. The decreases in earned premium and expenses for the quarter and nine month periods ended September 30, 2002, compared to the comparable periods of 2001, were in large part attributable to the fact that the number of Participating Shares has been declining over that period and an increasing number of policies reinsured by the Company are reaching a fully earned position. The fluctuations in loss ratios for the quarter and nine month periods ended September 30, 2002 compared to the comparable periods of 2001 are expected for the type of business underwritten, as well as the ongoing efforts by Motors Insurance Corporation, the ceding company, to improve underwriting results with respect to series of Participating Shares. The Company's loss ratios for the first nine months of 2002 have continued to reflect an improvement in performance by comparison to 2001. Investment income for the quarter ended September 30, 2002 was $1,156,474, compared to $1,446,731 for the comparable period of 2001. Investment income for the nine month period ended September 30, 2002 was $4,970,920, compared to $4,523,935 for the comparable period of 2001. Investment income is derived solely -8- from the Company's investments in fixed income securities, equities and short term cash and cash equivalents. During the quarter ended September 30, 2002, the Company realized gains on the sale of investment securities of $146,082, compared to realized gains of $460,275 during the comparable period of 2001. During the nine month period ended September 30, 2002, the Company realized gains on the sale of investment securities of $1,709,352, compared to realized gains of $1,197,313 during the comparable period of 2001. The Company realized gains on the sale of investment securities during the quarter and the nine month period ended September 30, 2002 and September 30, 2001 as a result of sales of fixed income securities, the value of which had increased as a result of decreases in market interest rates. Net realized gains on investments for the three and nine month periods ended September 30, 2002 include a provision of $159,632 for the permanent write down of fixed income securities with losses in value determined to be other than temporary. Also, during the nine month period ended September 30, 2002, the cash flows from purchases and sales of investments increased significantly from the comparable period of 2001 due to increased activity by the investment manager in buying and selling securities, particularly during the quarter ended June 30, 2002, in the Company's fixed income portfolio to realize gains resulting from increased market values. The increased activity in purchases and sales of investments does not constitute a change in the underlying nature of the Company's investment policy. Investments continue to be held and accounted for as "available for sale". Any increases in trading activity are the result of management's decision to take advantage of favorable market conditions. The unrealized loss on investments was $2,338,076 at September 30, 2002, compared to an unrealized gain of $1,769,048 at December 31, 2001. This decrease is mainly due to decreases in the market value of the Company's investment in an international equity fund. As at September 30, 2002 the international equity fund had an unrealized loss position of $5,106,791, compared to an unrealized loss of $259,422 at December 31, 2001. The Company's fixed income portfolio had a net unrealized gain of $2,768,715 at September 30, 2002, compared to a net unrealized gain of $2,028,470 at December 31, 2001 and this increase has arisen mainly as a result of the effect of falling interest rates over the period. As a result of adverse developments in international equity markets, the Company continues to experience a decline in the value of its equity portfolio. In the event of continued volatility in equity markets, the Company's unrealized loss position could increase in the future. At September 30, 2002 the -9- decline in the value of the Company's investment in the international equity fund is considered to be temporary in nature and no provision for losses considered to be other than temporary, has been made. During October 2002 the fund recorded an approximate 10% increase in value. Management will continue to monitor the value of the Company's investment in the fund in order to determine in the future if losses in value, which could be considered other than temporary, have occurred. For the quarter ended September 30, 2002 the Company had interest income of $1,010,392, compared to $986,456 for the comparable period of 2001. For the nine month period ended September 30, 2002, the Company had interest income of $3,261,568, compared to $3,326,622 for the comparable period of 2001. -10- Forward Looking Statements. The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon the Company's current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and executed, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the date of this report, the Company's Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the Company's management, the effectiveness of the Company's disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weakness, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (b) No reports on Form 8-K were filed during the quarter for which this report is filed. -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant) By: s/Ronald W. Jones ---------------------------- Ronald W. Jones Vice President, Finance Signing on behalf of the Registrant, and Principal Financial Officer Dated: November 13, 2002 -12- CERTIFICATIONS I, William B. Noll, Chairman, Chief Executive Officer, President and Director of Motors Mechanical Reinsurance Company, Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Motors Mechanical Reinsurance Company, Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data -13- and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: Nov. 13, 2002 s/ William B. Noll --------------------- ----------------------- William B. Noll Chairman, Chief Executive Officer, President and Director -14- I, Ronald W. Jones, Vice-President, Finance and Principal Financial Officer of Motors Mechanical Reinsurance Company, Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Motors Mechanical Reinsurance Company, Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and -15- b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: Nov. 13, 2002 s/ Ronald W. Jones ---------------------- --------------------------- Ronald W. Jones Vice-President, Finance and Principal Financial Officer -16-

MOTORS MECHANICAL REINSURANCE CO LTD 10-Q