<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 13, 1996
Advanta Mortgage Loan Trust 1996-2
(Exact name of registrant as specified in its charter)
New York 33-95006 Application Pending
(State or Other Jurisdiction of (Commission File (I.R.S. Employer
Incorporation) Number) Identification No.)
c/o Advanta Mortgage Conduit
Services, Inc. 92127
Attention: Milton Riseman
16875 West Bernardo Drive (Zip Code)
San Diego, California
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (619) 674-1800
500 Office Center Drive, Suite 400, Ft. Washington, Pennsylvania 19043
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events
Filing of Financial Guaranty Insurance Company
Financials and Consent of Experts
In connection with the offering of Advanta Mortgage Loan Trust
1996-2, Mortgage Loan Asset-Backed Certificates, Series 1996-2, described in a
Prospectus Supplement dated as of May 13, 1996, the December 31, 1995 and 1994
financial statements of Financial Guaranty Insurance Company have been audited
by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick LLP to be named as
"experts" in the Prospectus Supplement is attached hereto as Exhibit 23.4.
The December 31, 1995 and 1994 financial statements of
Financial Guaranty Insurance Company are attached hereto as Exhibit 99.3.
The March 31, 1996 unaudited financial statements of Financial
Guaranty Insurance Company are attached hereto as Exhibit 99.4.
Item 7. Financial Statements and Exhibits
(c) Exhibits
The following are filed herewith. The exhibit numbers
correspond with Item 601(b) of Regulation S-K.
Exhibit No. Description
- ----------- -----------
23.4 Consent of KPMG Peat Marwick LLP with respect to
inclusion of the December 31, 1995 and 1994 financial
statements of Financial Guaranty Insurance Company.
99.3 Financial Guaranty Insurance Company December 31,
1995 and 1994 financial statements.
99.4 Financial Guaranty Insurance Company March 31, 1996
unaudited financial statements.
2
<PAGE>
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 hereunto duly authorized.
ADVANTA MORTGAGE LOAN TRUST 1996-2
By: Advanta Mortgage Conduit Services, Inc., as Sponsor
By: /s Mark Casale
------------------------
Name: Mark Casale
Title: Vice-President
Dated: May 13, 1996
3
<PAGE>
Exhibit Index
Description of Exhibit
Exhibit No. Description
23.4 Consent of KPMG Peat Marwick LLP with respect to
inclusion of the December 31, 1995 and 1994 financial
statements of Financial Guaranty Insurance Company.
99.3 Financial Guaranty Insurance Company December 31,
1995 and 1994 financial statements.
99.4 Financial Guaranty Insurance Company March 31, 1996
unaudited financial statements.
4
Exhibit 23.4
<PAGE>
APPENDIX A
Audited Financial Statements
Fnancial Guaranty Insurance Company
Years ended December 31, 1995 and 1994
with Report of Independent Auditors
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- --------------------------------------------------------------------------------
Audited Financial Statements
December 31, 1995
Report of Independent Auditors.................................. A-1
Balance Sheets.................................................. A-2
Statements of Income............................................ A-3
Statements of Stockholder's Equity.............................. A-4
Statements of Cash Flows........................................ A-5
Notes to Financial Statements................................... A-6
<PAGE>
[Logo]KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1995 and 1994 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG PEAT MARWICK LLP
January 19, 1996
A-1
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
- -------------------------------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $ 2,141,584 $ 1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
----------- -----------
Total assets $ 2,580,302 $ 2,298,210
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
----------- -----------
Total liabilities 1,032,421 1,018,487
----------- -----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
----------- -----------
Total stockholder's equity 1,547,881 1,279,723
----------- -----------
Total liabilities and stockholder's equity $ 2,580,302 $ 2,298,210
=========== ===========
</TABLE>
See accompanying notes to financial statements.
A-2
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Income
- ---------------------------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
---------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914)
--------- --------- ---------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
--------- --------- ---------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
--------- --------- ---------
Total revenues 256,438 284,553 301,595
--------- --------- ---------
Expenses:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
--------- --------- ---------
Total expenses 19,806 43,597 87,022
--------- --------- ---------
Income before provision for Federal income taxes 236,632 240,956 214,573
--------- --------- ---------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
--------- --------- ---------
Total Federal income tax expense 48,754 51,225 52,221
--------- --------- ---------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
--------- --------- ---------
Net cumulative effect of change in
accounting principle -- -- 3,008
--------- --------- ---------
Net income $ 187,878 $ 189,731 $ 165,360
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
A-3
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
- ----------------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
Net Unrealized
Gains (Losses) on
Additional Fixed Maturity Foreign
Common Paid-in Securities Available- Currency Retained
Stock Capital For-Sale, Net of Tax Adjustment Earnings
----- ------- -------------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $ 324,639 $ 7,267 $(1,597) $ 618,615
Net income -- -- -- -- 165,360
Capital contribution -- 21,872 -- -- --
Adjustment to common stock par value 12,500 (12,500) -- -- --
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) -- -- (1,325) -- --
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 -- -- 84,766 -- --
Foreign currency translation adjustment -- -- -- (668) --
------- --------- --------- ------- -----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income -- -- -- -- 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) -- -- (132,481) -- --
Foreign currency translation adjustment -- -- -- 1,044 --
------- --------- --------- ------- -----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income -- -- -- -- 187,878
Dividend paid -- -- -- -- (25,000)
Unrealized gains on fixed maturity securities
available for sale, net of tax of $56,839 -- -- 105,558 -- --
Foreign currency translation adjustment -- -- -- (278) --
------- --------- --------- ------- -----------
Balance, December 31, 1995 $15,000 $ 334,011 $ 63,785 $(1,499) $ 1,136,584
======= ========= ========= ======= ===========
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $ 187,878 $ 189,731 $ 165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax -- -- (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
--------- --------- -----------
Net cash provided by operating activities 94,546 184,489 277,448
--------- --------- -----------
Investing Activities:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- --------- -----------
Net cash used in investing activities (71,113) (184,150) (298,335)
--------- --------- -----------
Financing Activities:
Dividends paid (25,000) -- --
Capital contribution -- -- 21,872
--------- --------- -----------
Net cash provided by financing activities (25,000) -- 21,872
--------- --------- -----------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
--------- --------- -----------
Cash at end of year $ 199 $ 1,766 $ 1,427
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Business
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 88% of the business
written since inception by the Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related accounting
treatment for each respective category. The Company has determined that its
fixed maturity securities portfolio should be classified as
available-for-sale. Under SFAS 115, securities held as available-for-sale
are recorded at fair value and unrealized holding gains/losses are recorded
as a separate component of stockholder's equity, net of applicable income
taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
A-6
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
Premium Revenue Recognition
Premiums are earned over the period at risk in proportion to the amount of
coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related unearned
premiums, net of premium credits allowed against the premiums charged for
insurance of refunding issues and applicable acquisition costs, are earned
immediately. Unearned premiums represent the portion of premiums written
related to coverage yet to be provided on policies in force.
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments
due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such reserves
amounted to $77.8 million and $98.7 million at December 31, 1995 and 1994,
respectively. As of December 31, 1995 and 1994, such reserves included
$28.8 million and $71.0 million, respectively, established based on an
evaluation of the insured portfolio in light of current economic conditions
and other relevant factors. Loss and loss adjustment expenses include
amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in 1994.
The reserve for loss and loss adjustment expenses is necessarily based upon
estimates, however, in management's opinion the reserves for loss and loss
adjustment expenses is adequate. However, actual results will likely differ
from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included in
taxable income upon their release from the reserves or upon earlier release
of such amounts from such reserves to cover excess losses as permitted by
insurance regulators. The amounts deducted are allowed as deductions from
taxable income only to the extent that U.S. government non-interest bearing
tax and loss bonds are purchased and held in an amount equal to the tax
benefit attributable to such deductions.
A-7
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1995 and 1994 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at December
31, 1995 and 1994 was $1.5 million and $1.2 million, respectively, net of
tax, and is reported as a separate component of stockholder's equity.
(3) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related
risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the
financial reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax
payments; and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as
available-for-sale under GAAP.
A-8
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity presented on a GAAP basis to the corresponding amounts
reported on a statutory-basis for the periods indicated below (in thousands):
Years Ended December 31,
-----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- -------------------------
Net Stockholder's Net Stockholder's Net Stockholder's
Income Equity Income Equity Income Equity
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $ 187,878 $ 1,547,881 $ 189,731 $ 1,279,723 $ 165,360 $ 1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve -- (386,564) -- (328,073) -- (252,542)
Non-admitted assets -- (5,731) -- (7,566) -- (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax -- (63,785) -- 41,773 -- (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance -- -- -- (266) -- --
Contingency reserve tax deduction (see Note 2) -- 78,196 -- 55,496 -- 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 -- 9,716
--------- ----------- --------- ----------- --------- -----------
Statutory-basis amount $ 166,906 $ 1,001,521 $ 179,348 $ 893,734 $ 185,145 $ 777,097
========= =========== ========= =========== ========= ===========
</TABLE>
A-9
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(4) Investments
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
---- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 -- $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 -- -- 91,032
---------- -------- ------ ----------
Total $2,134,485 $100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1995, by contractual maturity date, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair 1995 Cost Value
Amortized Fair
1995 Cost Value
---- ----------- -----------
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
----------- -----------
Total $ 2,134,485 $ 2,232,616
=========== ===========
A-10
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1994 Cost Gains Losses Value
---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
----------- -------- --------- -----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 -- -- 75,674
----------- -------- --------- -----------
Total $ 2,029,851 $ 26,217 $ (90,484) $ 1,965,584
=========== ======== ========= ===========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed maturity
securities available-for-sale carried at fair value were $836.1 million, $550.5
million, and $789.0 million, respectively. For 1995, 1994 and 1993 gross gains
of $36.3 million, $18.2 million and $36.1 million respectively, and gross losses
of $5.5 million, $12.3 million and $1.0 million respectively, were realized on
such sales.
Net investment income of the Company is derived from the following sources (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Income from fixed maturity securities $ 112,684 $ 108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
--------- --------- ---------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
--------- --------- ---------
Net investment income $ 120,398 $ 109,828 $ 99,920
========= ========= =========
</TABLE>
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
A-11
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(5) Income Taxes
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the
Parent based upon their respective contributions to consolidated net
income. The Company's effective federal corporate tax rate (20.6 percent in
1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the
corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the Company
for 1995, 1994 and 1993 is comprised of the following (in thousands):
Year Ended December 31,
------------------------------------------
1995 1994 1993
-------- -------- --------
Current tax expense $ 28,913 $ 43,484 $ 59,505
Deferred tax expense 19,841 7,741 (7,284)
-------- -------- --------
Federal income tax expense $ 48,754 $ 51,225 $ 52,221
======== ======== ========
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $ 82,821 $ 84,334 $ 75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
-------- -------- --------
Provision for income taxes $ 48,754 $ 51,225 $ 52,221
======== ======== ========
</TABLE>
A-12
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994 are
presented below (in thousands):
1995 1994
-------- -------
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale -- $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
-------- -------
Total gross deferred tax assets 18,434 52,439
-------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 --
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
-------- -------
Total gross deferred tax liabilities 117,605 75,079
-------- -------
Net deferred tax liability $ 99,171 $22,640
======== =======
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1995 and 1994. The
company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 million, respectively.
A-13
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(6) Reinsurance
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $33.7 million that can be drawn on in the event of
default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To reflect
the adoption of EITF 93-6 in the accompanying financial statements, an
initial adjustment of $4.6 million, before applicable income taxes, has
been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $1.1 million, $0.3 million
and $9.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
A-14
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
Year Ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
Balance at January 1, $ 98,746 $ 96,098 $ 44,834
Less reinsurance recoverable 14,472 14,168 5,128
-------- -------- --------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 --
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- --------
Total Incurred (8,426) 3,646 42,894
-------- -------- --------
Paid related to:
Current year (197) (382) --
Prior years (5,515) (920) (670)
-------- -------- --------
Total Paid (5,712) (1,302) (670)
-------- -------- --------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- --------
Balance at December 31, $ 77,808 $ 98,746 $ 96,098
======== ======== ========
The changes in incurred portfolio reserves principally relate to business
written in prior years. The changes are based upon an evaluation of the
insured portfolio in light of current economic conditions and other
relevant factors.
A-15
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(8) Related Party Transactions
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $3.2 million, $3.2 million and $1.0 million in
expenses were incurred in 1995, 1994 and 1993, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first
loss protection in the event of default. Gross premiums written on these
issues amounted to $1.3 million in 1995, $2.5 million in 1994, and $3.3
million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(9) Compensation Plans
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans.
Expenses incurred by the Company under compensation plans and bonuses
amounted to $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and
1993, respectively, before deduction for related tax benefits.
(10) Dividends
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus
after such dividend may not be less than the minimum required paid-in
capital, which was $2.1 million in 1995 and 1994, and (b) dividends may not
exceed the lesser of 10 percent of its surplus or 100 percent of adjusted
net investment income, as defined by New York insurance law, for the 12
month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
At December 31, 1995 and 1994, the amount of the Company's surplus
available for dividends was approximately $100.2 million and $89.3 million,
respectively.
During 1995, the company paid dividends of $25 million. No dividends were
paid during 1994 or 1993.
A-16
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(11) Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities Purchased:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Carrying Fair Carrying Fair
amount Value amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 199 $ 199 $ 1,766 $ 1,766
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,141,584 2,141,584 1,889,910 1,889,910
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated
fair values of these guaranties are based on amounts currently charged to
enter into similar agreements (net of applicable ceding commissions),
discounted cash flows considering contractual revenues to be received
adjusted for expected prepayments, the present value of future obligations
and estimated losses, and current interest rates. The estimated fair values
of such financial guaranties range between $412.8 million and $456.2
million compared to a carrying value of $540.6 million as of December 31,
1995 and between $518.1 million and $565.9 million compared to a carrying
value of $585.1 million as of December 31, 1994.
A-17
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The
Company has established and maintains its own underwriting standards that
are based on those aspects of credit that the Company deems important for
the particular category of obligations considered for insurance. Credit
criteria include economic and social trends, debt management, financial
management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1995, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $98.7 billion, net
of reinsurance of $20.7 billion. The Company's insured portfolio as of
December 31, 1995 was broadly diversified by geography and bond market
sector with no single debt issuer representing more than 1% of the
Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1995, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
-----------
Municipal:
General obligation $ 43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
----------
Total $ 98,660.3
==========
A-18
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1995 by state, net of reinsurance, was as
follows (in millions):
Net
Principal
Outstanding
-----------
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
----------
Sub-total 59,518.2
Other states and International 39,142.1
----------
Total $ 98,660.3
==========
(12) Commitments
Total rent expense was $2.2 million, $2.6 million and $2.4 million in
1995, 1994 and 1993, respectively. For each of the next five years and
in the aggregate as of December 31, 1995, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
Year Amount
---- ------
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
--------
Total minimum future rental payments $ 16,844
========
A-19
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX B
Unaudited Interim Financial Statements
Financial Guaranty Insurance Company
March 31, 1996
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- --------------------------------------------------------------------------------
Unaudited Interim Financial Statements
March 31, 1996
Balance Sheets ..................................................... B-1
Statements of Income................................................ B-2
Statements of Cash Flows............................................ B-3
Notes to Unaudited Interim Financial Statements..................... B-4
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
- ------------------------------------------------------------------------------------------------
($ in Thousands)
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,087,432 in 1996 and $2,043,453 in 1995) $ 2,121,620 $ 2,141,584
Short-term investments, at cost, which
approximates market 101,133 91,032
Cash 820 199
Accrued investment income 32,934 37,347
Reinsurance receivable 7,548 7,672
Deferred policy acquisition costs 92,336 94,868
Property, plant and equipment net of
accumulated depreciation of $13,473 in
1996 and $12,861 in 1995 6,083 6,314
Prepaid reinsurance premiums 160,690 162,088
Prepaid expenses and other assets 28,484 39,198
----------- -----------
Total assets $ 2,551,648 $ 2,580,302
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 709,119 $ 727,535
Losses and loss adjustment expenses 74,803 77,808
Ceded reinsurance payable 2,008 1,942
Accounts payable and accrued expenses 34,305 32,811
Due to parent -- 1,647
Current federal income taxes payable 63,725 51,296
Deferred federal income taxes payable 77,281 99,171
Payable for securities purchased 36,927 40,211
----------- -----------
Total liabilities 998,168 1,032,421
----------- -----------
Stockholder's Equity:
Common stock, par value $1.500 per share at March 31,
1996 and at December 31, 1995: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available
for sale, net of tax 22,222 63,785
Foreign currency translation adjustment (2,291) (1,499)
Retained earnings 1,184,538 1,136,584
----------- -----------
Total stockholder's equity 1,553,480 1,547,881
----------- -----------
Total liabilities and stockholder's equity $ 2,551,648 $ 2,580,302
=========== ===========
</TABLE>
See accompanying notes to interim financial statements
B-1
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
- --------------------------------------------------------------------------------
($ in Thousands)
Three Months Ended March 31,
1996 1995
--------- ---------
(Unaudited)
Revenues:
Gross premiums written $ 21,277 $ 15,214
Ceded premiums (3,300) (1,853)
-------- --------
Net premiums written 17,977 13,361
Decrease in net unearned premiums 17,018 13,789
-------- --------
Net premiums earned 34,995 27,150
Net investment income 31,063 28,168
Net realized gains 5,074 15,937
-------- --------
Total revenues 71,132 71,255
-------- --------
Expenses:
Losses and loss adjustment expenses (1,165) 1,540
Policy acquisition costs 6,790 2,647
Other underwriting expenses 4,207 4,600
-------- --------
Total expenses 9,832 8,787
-------- --------
Income before provision for federal
income taxes 61,300 62,468
Provision for federal income taxes 13,346 14,579
-------- --------
Net income $ 47,954 $ 47,889
======== ========
See accompanying notes to interim financial statements
B-2
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Cashflow
- -------------------------------------------------------------------------------------------
($ in Thousands)
Three Months Ended March 31,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 47,954 $ 47,889
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 917 5,758
Amortization of fixed maturity securities 41 701
Policy acquisition costs deferred (4,258) (5,486)
Amortization of deferred policy acquisition costs 6,790 2,843
Depreciation of fixed assets 612 578
Change in reinsurance receivable 124 (145)
Change in prepaid reinsurance premiums 1,398 3,310
Foreign currency translation adjustment (1,218) 798
Change in accrued investment income, prepaid
expenses and other assets 15,127 10,492
Change in unearned premiums (18,416) (17,099)
Change in losses and loss adjustment expense reserves (3,005) 1,499
Change in other liabilities (552) (10,193)
Change in current income taxes payable 12,429 (13,879)
Net realized gains on investments (5,074) (15,937)
--------- ---------
Net cash provided by operating activities 52,869 11,129
--------- ---------
Investing activities:
Sales or maturities of fixed maturity securities 199,015 352,152
Purchases of fixed maturity securities (240,781) (157,921)
Sales or maturities (purchases) of short-term investments, net (10,101) (206,680)
Purchases of property and equipment, net (381) (78)
--------- ---------
Net cash used for investing activities (52,248) (12,527)
--------- ---------
Increase (decrease) in cash 621 (1,398)
Cash at beginning of period 199 1,766
--------- ---------
Cash at end of period $ 820 $ 368
========= =========
</TABLE>
See accompanying notes to interim financial statements
B-3
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
March 31, 1996 and 1995
(Unaudited)
(1) Basis of Presentation
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments
necessary, in the opinion of management, for a fair statement of (a)
results of operations for the three months ended March 31, 1996 and
1995, (b) the financial position at March 31, 1996 and December 31,
1995, and (c) cash flows for the three months ended March 31, 1996 and
1995.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1995
audited financial statements. The 1995 financial statements have been
reclassified to conform to the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect 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.
(2) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory basis accounting practices
differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related
risk rather than in proportion to the coverage provided;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the
financial reporting and tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax
payments; and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as "Available
for Sale" under GAAP.
B-4
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Notes to Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
Three Months Ended March 31,
------------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
GAAP basis amount $ 47,954 $ 1,553,480 $ 47,889 $ 1,377,005
Premium revenue recognition (1,933) (168,861) (6,189) (150,561)
Deferral of acquisition costs 2,532 (92,336) (2,643) (93,571)
Contingency reserve -- (403,087) -- (334,950)
Non-admitted assets -- (5,283) -- (6,970)
Case-basis losses incurred and salvage
recoverable (1,750) (1,798) 1,096 (3,004)
Portfolio loss reserves -- 24,000 -- 46,100
Deferral of income tax 917 65,315 5,758 51,170
Unrealized gains on fixed maturity
securities held at fair value, net of -- (22,222) -- (7,101)
taxes
Profit commission 782 (4,965) 5,756 (3,084)
Contingency reserve tax deduction -- 78,196 -- 78,196
Provision for unauthorized reinsurance -- -- -- (266)
Allocation of tax benefits due to Parent's
net operating loss to the Company (55) 10,236 130 9,784
-------- ----------- -------- -----------
Statutory basis amount $ 48,447 $ 1,032,675 $ 51,797 $ 962,748
======== =========== -------- ===========
</TABLE>
B-5
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
March 31, 1996 and 1995
(Unaudited)
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $2,100,000 in 1996.
o Dividends may not exceed the lesser of 10 percent of its surplus
or 100 percent of adjusted net investment income, as defined
therein, for the twelve month period ending on the preceding
December 31, without the prior approval of the Superintendent of
the New York State Insurance Department.
The amount of the Company's surplus available for dividends during
1996 is approximately $100.2 million.
(4) Income Taxes
The Company's effective Federal corporate tax rate (21.8 percent and
23.3 percent for the three months ended March 31, 1996 and 1995,
respectively) is less than the statutory corporate tax rate (35
percent in 1996 and 1995) on ordinary income due to permanent
differences between financial and taxable income, principally
tax-exempt interest.
(5) Reinsurance
In accordance with Statement of Financial Accounting Standards No. 113
("SFAS 113"), "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", adopted in 1993, the
Company reports assets and liabilities relating to reinsured contracts
gross of the effects of reinsurance. Net premiums earned are shown net
of premiums ceded of $7.3 million and $4.9 million, respectively, for
the three months ended March 31, 1996 and 1995.
B-6
