B&W Draft No. 2
_________________________________________________________________
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): February 20, 1998
CWABS, INC., (as depositor under the Pooling and
Servicing Agreement, to be dated as of February 20, 1998,
providing for the issuance of the CWABS, Inc.,
Countrywide Home Equity Loan Trust 1998-A Revolving Home
Equity Loan Asset Backed Certificates, Series 1998-A).
CWABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 333-37539 95-4596514
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
4500 Park Granada
Calabasas, California 91302
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (818) 225-3240
_________________________________________________________________
Item 5. Other Events.
- ------ ------------
Filing of Certain Materials
- ---------------------------
Pursuant to Rule 424(b)(5) under the Securities Act of 1933,
concurrently with, or subsequent to, the filing of this Current Report on
Form 8-K (the "Form 8-K"), CWABS, Inc. (the "Company") is filing a prospectus
and prospectus supplement with the Securities and Exchange Commission (the
"Commission") relating to its Revolving Home Equity Loan Asset Backed
Certificates, Series 1998-A.
Financial Statements of CapMAC and Consent of KPMG.
- --------------------------------------------------
The audited financial statements of Capital Markets Assurance
Corporation ("CapMac") as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 that are included in
this Form 8-K and the prospectus supplement (the "Audited CapMac Financials")
have been audited by KPMG Peat Marwick LLP ("KPMG"). The consent of KPMG is
attached hereto as Exhibit 23.1. The audited financial statements of CapMAC
are attached hereto as Exhibit 99.1. The unaudited financial statements of
CapMAC as of and for the three and nine month periods ended September 30,
1997 (the "Unaudited CapMAC Financials") that are included in this Form 8-K
and the prospectus supplement are attached hereto as Exhibit 99.2.
Filing of Derived Materials.
- ---------------------------
In connection with the offering of the Certificates, Prudential
Securities Incorporated ("Prudential") and Countrywide Securities Corporation
("Countrywide Securities" and, together with Prudential, the "Underwriters"),
have each prepared certain materials for distribution to potential investors
(the "Prudential Computational Materials" and the "Countrywide Computational
Materials", respectively). Although the Company provided the Underwriters
with certain information regarding the characteristics of the Mortgage Loans
(the "Loans") in the related portfolio, it did not participate in the
preparation of the Computational Materials by either Prudential or
Countrywide Securities. Concurrently with the filing hereof, pursuant to
Rule 311(i) of Regulation S-T, the Company is filing the Prudential
Computational Materials and the Countrywide Computational Materials by paper
filing on Form SE.
For purposes of this Form 8-K, the term Computational Materials shall
mean computer generated tables and/or charts displaying, with respect to the
Certificates, any of the following: yield; average life, duration; expected
maturity; interest rate sensitivity; loss sensitivity; cash flow
characteristics; background information regarding the Loans; the proposed
structure; decrement tables; or similar information (tabular or otherwise) of
a statistical, mathematical, tabular or computational nature. The Prudential
Computational Materials are attached hereto as Exhibit 99.3 and the
Countrywide Computational Materials are attached hereto as Exhibit 99.4.
* Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to them in the prospectus dated February 20, 1998 and the
prospectus supplement dated February 20, 1998, of CWABS, Inc., relating to
its Revolving Home Equity Loan Asset Backed Certificates, Series 1998-A.
Item 7. Financial Statements, Pro Forma Financial
- ------ Information and Exhibits.
-----------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
23.1 Consent of KPMG Peat Marwick LLP
99.1 Audited CapMAC Financials.
99.2 Unaudited CapMAC Financials
99.3 Prudential Computational Materials
99.4 Countrywide Computational Materials
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.
CWABS, INC.
By: /s/ David Walker
David Walker
Vice President
Dated: February 20, 1998
Exhibit Index
-------------
Exhibit Page
- ------- ----
23.1 Consent of KPMG Peat Marwick LLP 7
99.1 Audited CapMAC Financials 8
99.2 Unaudited CapMAC Financials
99.3 Prudential Computational Materials
99.4 Countrywide Computational Materials
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Capital Markets Assurance Corporation:
We consent to the use of our report included in the Form 8-K of CWABS, Inc.
and to the reference to our firm under the section entitled
"Experts" in the Supplement to the Prospectus Supplement for
Countrywide Home Equity Loan Trust 1998-A, Revolving Home Equity
Loan Asset Backed Certificates, Series 1998-A.
New York, New York
February 24, 1998
Exhibit 99.1
Audited CapMAC Financials
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. 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 Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
January 29, 1997
ASSETS
------
December 31 December 31
1996 1995
- ----------------------------------------------------------------------------
INVESTMENTS:
Bonds at fair value (amortized cost $294,861 at
December 31, 1996 and $210,651 at December 31, 1995) $ 297,893 215,706
Short-term investments (at amortized cost which
approximates fair value) 16,810 68,646
- ----------------------------------------------------------------------------
Total investments 314,703 284,352
- ----------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ----------------------------------------------------------------------------
Total assets $ 394,315 343,133
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- ----------------------------------------------------------------------------
Total liabilities 104,822 77,067
- ----------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at
December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- ----------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- ----------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 394,315 343,133
- ----------------------------------------------------------------------------
See accompanying notes to financial statements.
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31,1995 December 31, 1994
<S> <C> <C> <C>
REVENUES:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992 ) (11,069)
- ---------------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242 ) (10,490)
- ---------------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- ---------------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- ---------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- ---------------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- ---------------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
INCOME TAXES:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- ---------------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- ---------------------------------------------------------------------------------------------------
Net Income $ 22,076 15,402 11,888
===================================================================================================
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 -
- ---------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
- ---------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS, NET OF TAX:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------
Total stockholder's equity $ 289,493 266,066 182,879
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued expenses
1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- ---------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,500 21,932 18,180
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,473) (80,673) (18,348)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution - 59,000 -
Net cash provided by financing activities - 59,000 -
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- ---------------------------------------------------------------------------------------------------
Cash balance at end of year $ 371 344 85
===================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 4,525 1,450 1,063
===================================================================================================
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company")
is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety
insurance. CapMAC is a wholly owned subsidiary of CapMAC Holdings
Inc. ("Holdings"). CapMAC is licensed in all 50 states in addition
to the District of Columbia, the Commonwealth of Puerto Rico and
the territory of Guam. CapMAC insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S.
and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate,
municipal and other financial obligations written by other major
insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings
Group ("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), and "AAA" by Nippon Investors Service, Inc., a Japanese
rating agency. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or
hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
A) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
B) INVESTMENTS
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value.
Fair value is generally based upon quoted market prices.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of
stockholder's equity until realized. Transfers of securities
between categories are recorded at fair value at the date of
transfer. A decline in the fair value of any available-for-
sale security below cost that is deemed other than temporary
is charged to earnings resulting in the establishment of a new
cost basis for the security.
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term
investments are carried at amortized cost which approximates
fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are
included in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
C) PREMIUM REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
D) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized
over the period in proportion to the related premium earnings.
The actual amount of premium earnings may differ from
projections due to various factors such as renewal or early
termination of insurance contracts or different run-off
patterns of exposure resulting in a corresponding change in
the amortization pattern of the deferred acquisition costs.
E) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
A case basis loss reserve is established for insured
obligations when, in the judgment of management, a default in
the timely payment of debt service is imminent. For defaults
considered temporary, a case basis loss reserve is established
in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the
present value of all remaining defaulted debt service payments
is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
F) DEPRECIATION
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
G) INCOME TAXES
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the period that includes the
enactment date.
3) INSURED PORTFOLIO
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding),
was $19.7 billion and $12.6 billion, respectively, with a weighted
average life of 6.4 years and 6.0 years, respectively. CapMAC's
insured portfolio was broadly diversified by geographic
distribution and type of insured obligations, with no single
insured obligation in excess of statutory single risk limits, after
giving effect to any reinsurance and collateral, which are a
function of CapMAC's statutory qualified capital (the sum of
statutory capital and surplus and mandatory contingency reserve).
At December 31, 1996 and 1995, the statutory qualified capital was
approximately $260 million and $240 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1996 December 31, 1995
_______________ _________________
Type of Obligations Insured ($ in millions) Amount % Amount %
<S> <C> <C> <C> <C>
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- -------------------------------------------------------------------------------
TOTAL $ 19,655 100.0 $ 12,628 100.0
===============================================================================
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively.
At December 31, 1996, approximately 93% of CapMAC's insured
portfolio was comprised of structured asset-backed transactions.
Under these structures, a pool of assets covering at least 100% of
the principal amount guaranteed under its insurance contract is
sold or pledged to a special purpose bankruptcy remote entity.
CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the
underlying assets. CapMAC, therefore, evaluates all the factors
affecting past and future asset performance by studying historical
data on losses, delinquencies and recoveries of the underlying
assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of
the originator of the assets. Along with the legal structure, an
additional level of first loss protection is also created to
protect against losses due to credit or dilution. This first level
of loss protection is usually available from reserve funds, excess
cash flows, overcollateralization, or recourse to a third party.
The level of first loss protection depends upon the historical
losses and dilution of the underlying assets, but is typically
several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been
included in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
% of % of % of
Revenues Revenues Revenues
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
</TABLE>
4) INVESTMENTS
The amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed securities 20,365 23 153 20,235
- ------------------------------------------------------------------------------------------------------
Total $ 311,671 4,900 1,868 314,703
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities and
agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed securities
8,506 45 6 8,545
- ------------------------------------------------------------------------------------------------------
Total $ 279,297 5,222 167 284,352
======================================================================================================
</TABLE>
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown
below ($ in thousands):
December 31, 1996
<TABLE>
<CAPTION>
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
- ------------------------------------------------------------------------------------------------------
Sub-total 202,235 206,162
- ------------------------------------------------------------------------------------------------------
Mortgage-backed securities 109,436 108,541
- ------------------------------------------------------------------------------------------------------
TOTAL $ 311,671 314,703
======================================================================================================
</TABLE>
ACTUAL MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE
BORROWERS MAY CALL OR PREPAY OBLIGATIONS WITH OR WITHOUT CALL OR
PREPAYMENT PENALTIES.
PROCEEDS FROM SALES OF INVESTMENT SECURITIES WERE APPROXIMATELY
$57.2 MILLION, $49.3 MILLION AND $39.9 MILLION IN 1996, 1995 AND
1994, RESPECTIVELY. GROSS REALIZED CAPITAL GAINS OF $772,000,
$1,320,000 AND $714,000, AND GROSS REALIZED CAPITAL LOSSES OF
$536,000, $19,000 AND $622,000 WERE REALIZED ON THOSE SALES FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, RESPECTIVELY.
INVESTMENTS INCLUDE BONDS HAVING A FAIR VALUE OF APPROXIMATELY
$3,884,000 AND $3,985,000 WHICH ARE ON DEPOSIT AT DECEMBER 31, 1996
AND 1995, RESPECTIVELY, WITH STATE REGULATORS AS REQUIRED BY LAW.
INVESTMENT INCOME IS COMPRISED OF INTEREST AND DIVIDENDS, NET OF
RELATED EXPENSES, AND IS APPLICABLE TO THE FOLLOWING SOURCES:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
$ IN THOUSANDS DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS $ 15,726 11,105 9,193
SHORT-TERM INVESTMENTS 1,534 1,245 484
MUTUAL FUNDS - (162) 579
INVESTMENT EXPENSES (268 ) (235) (184)
- --------------------------------------------------------------------------------------------------
TOTAL $ 16,992 11,953 10,072
==================================================================================================
</TABLE>
The change in unrealized appreciation (depreciation) on available-
for-sale securities is included as a separate component of
stockholder's equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
Net change (1,316) 8,785
- --------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 1,970 3,286
==================================================================================================
</TABLE>
NO SINGLE ISSUER, EXCEPT FOR INVESTMENTS IN U.S. TREASURY AND U.S.
GOVERNMENT AGENCY SECURITIES, EXCEEDS 2% OF STOCKHOLDER'S EQUITY AS
OF DECEMBER 31, 1996 AND 1995, RESPECTIVELY.
5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC
and amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy acquisition
costs) (7,824) (7,203) (4,529)
- --------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 45,380 35,162 24,860
==================================================================================================
</TABLE>
6) EMPLOYEE BENEFITS
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide
various services, including underwriting, reinsurance, marketing,
data processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan
for its employees. The plan is an annual discretionary bonus
award. For the years ended December 31, 1996, 1995 and 1994, the
Company had provided approximately $8,810,000, $7,804,000 and
$5,253,000, respectively, for the plan. CFS also provides health
and welfare benefits to substantially all of its employees. The
Company incurred $551,943, $598,530, and $562,508 of expense for
the years ended December 31, 1996, 1995 and 1994, respectively, for
such plan. The Company also has a defined contribution retirement
plan which allows participants to make voluntary contributions by
salary reduction pursuant to section 401 (k) of the Internal
Revenue Code. The Company provides for the administrative cost for
the 401 (k) plan.
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of
certain deferred compensation. On December 7, 1995, the RSU's were
converted to cash in the amount of approximately $3.7 million, and
such officers agreed to defer receipt of such cash amount in
exchange for receiving the same number of new shares of restricted
stock of Holdings as the number of RSU's such officers previously
held. During 1995 and 1994, the expense was $1.3 million and $0.1
million, respectively. During 1996, Holdings assumed the liability
of $3.7 million less the related deferred tax asset of $1.1 million
as capital contribution. The cash amount is held by Holdings and
invested in accordance with certain guidelines. Such amount,
including the investment earnings thereon, will be paid to each
officer upon the occurrence of certain events but no later than
December 2000.
7) EMPLOYEE STOCK OWNERSHIP PLAN
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to
provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the "ESOP
Trust"). Compensation expense related to the ESOP and allocated to
CapMAC was approximately $2,764,000, $2,087,000 and $2,086,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a
case basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance
agreement of $0.2 million and a reduction in the SLR of $2.5
million. The portion of such claims and expenses not covered under
the quota share agreement is being funded through payments to
CapMAC from the Lureco Trust Account (see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and
loss adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
Case basis loss reserve:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net balance at January 1 $ 620 - -
Incurred related to:
Current year - 2,473 -
Prior years - - -
- --------------------------------------------------------------------------------
Total incurred - 2,473 -
- --------------------------------------------------------------------------------
Paid related to:
Current year - 1,853 -
Prior years 309 - -
- --------------------------------------------------------------------------------
Total paid 309 1,853 -
- --------------------------------------------------------------------------------
Net balance at December 31 311 620 -
Reinsurance recoverable - 69 -
Gross balance at December 31 311 689 -
- --------------------------------------------------------------------------------
Supplemental loss reserve
Balance at January 1 5,859 5,191 3,762
- --------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve - (2,473) -
- --------------------------------------------------------------------------------
Balance at December 31 10,674 5,859 5,191
- --------------------------------------------------------------------------------
Total reserve for losses and loss adjustment
expenses $ 10,985 6,548 5,191
================================================================================
</TABLE>
9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return.
The Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal
income tax liability.
Total income tax expense differed from the amount computed by
applying the U.S. Federal income tax rate of 35% in 1996 and 1995
and 34% in 1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Expected tax expense computed at
the statutory rate $ 10,738 35.0 $7,216 35.0 $5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 8,603 28.0 $5,215 25.3 $3,708 23.8
=================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred Federal income tax liability
are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
<S> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
- ------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,689 3,853
- ------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
- -----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 17,828 15,156
- -----------------------------------------------------------------------------------------------------
Net deferred tax liability $ 15,139 11,303
=====================================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully
realized in the future.
10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State
of New York and other states in which it is licensed to conduct
business. Generally, New York insurance laws require that
dividends be paid from earned surplus and restrict the amount of
dividends in any year that may be paid without obtaining approval
for such dividends from the Superintendent of Insurance to the
lower of (i) net investment income as defined or (ii) 10% of
statutory surplus as of December 31 of the preceding year. No
dividends were paid by CapMAC to Holdings during the years ended
December 31, 1996, 1995 and 1994. No dividends could be paid
during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus
differs from stockholder's equity determined under GAAP
principally due to the mandatory contingency reserve required for
statutory accounting purposes and differences in accounting for
investments, deferred acquisition costs, SLR and deferred taxes
provided under GAAP. Statutory net income was $18,737,000,
$9,000,000 and $4,543,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Statutory net income differs from net
income determined under GAAP principally due to deferred
acquisition costs, SLR and deferred income taxes.
11) COMMITMENTS AND CONTINGENCIES
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December
31, 1996, future minimum payments under the lease agreements are as
follows:
$ in thousands Payment
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
-------------------------------------------------------------------
TOTAL $ 40,251
===================================================================
Rent expense, commercial rent taxes and electricity for the years
ended December 31, 1996, 1995 and 1994 amounted to $1,618,000,
$1,939,000 and $2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in
September 1999. The Liquidity Facility is provided by a consortium
of banks, headed by Bank of Montreal, as agent, which is rated "A-
1+" and "P-1" by S&P and Moody's, respectively. Under the
Liquidity Facility, CapMAC will be able, subject to satisfying
certain conditions, to borrow funds from time to time in order to
enable it to fund any claim payments or payments made in settlement
or mitigation of claim payments under its insurance contracts.
There have been no draws under the Liquidity Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A.,
an insurance subsidiary to be established in Paris, France. This
investment is anticipated to be made in 1997.
12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under
various treaty and facultative reinsurance contracts, both on a pro
rata and excess of loss basis, primarily designed to minimize
losses from large risks and protect the capital and surplus of
CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------------------- ------------------- ---------------------
$ in thousands Written Earned Written Earned Written Earned
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
- --------------------------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
==================================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability
exists with respect to the aforementioned reinsurance arrangements,
which may become a liability of CapMAC in the event the reinsurers
are unable to meet obligations assumed by them under the
reinsurance contracts. At December 31, 1996 and 1995, CapMAC had
ceded loss reserves of $0 and $69,000, respectively, and had ceded
unearned premiums of $18,489,000 and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A.
("Lureco"), a European-based reinsurer. The agreement is renewable
annually at the Company's option, subject to satisfying certain
conditions. The agreement reinsured and indemnified the Company
for any loss incurred by CapMAC during the agreement period up to
the limits of the agreement. The Lureco Treaty provides that the
annual reinsurance premium payable by CapMAC to Lureco, after
deduction of the reinsurer's fee payable to Lureco, be deposited in
a trust account (the "Lureco Trust Account") to be applied by
CapMAC, at its option, to offset losses and loss expenses incurred
by CapMAC in connection with incurred claims. Amounts on deposit
in the Lureco Trust Account which have not been applied against
claims are contractually due to CapMAC at the termination of the
treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as
ceded premiums in the statements of income. For the 1996 policy
year, the agreement provides $7 million of loss coverage in excess
of the premium deposit amount of $5 million retained in the Lureco
Trust Account. Additional coverage is provided for losses incurred
in excess of 200% of the net premiums earned up to $4 million for
any one agreement year. In September 1995, a claim of
approximately $2.5 million on an insurance policy was applied
against the Lureco Trust Account.
In addition to its capital (including statutory contingency
reserves), CapMAC has other reinsurance available to pay claims
under its insurance contracts. Effective November 30, 1995, CapMAC
entered into a Stop-loss Reinsurance Agreement with Mitsui Marine
and Fire Insurance Co. (the "Mitsui Stop-loss Agreement"). Under
the Mitsui Stop-loss Agreement, Mitsui Marine and Fire Insurance
Co. ("Mitsui") will be required to pay any losses in excess of $100
million in the aggregate incurred by CapMAC during the term of the
Mitsui Stop-loss Agreement on the insurance policies in effect on
December 1, 1995 and written during the one-year period thereafter,
up to an aggregate limit payable under the Mitsui Stop-loss
Agreement of $50 million. The Mitsui Stop-loss Agreement has a
term of seven years and is subject to early termination by CapMAC
in certain circumstances. Effective January 1, 1997 the stop-loss
reinsurance coverage increased to $75 million in excess of incurred
losses of $150 million increasing annually based on increases in
CapMAC's statutory qualified capital. The new stop-loss
reinsurance is provided by Mitsui, AXA Re Finance S.A. ("AXA Re")
and Munchener Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota
share basis 10% of each policy written by CapMAC. As a result,
CapMAC reassumed approximately $1.4 billion of principal insured by
Winterthur on January 1, 1996. In connection with the commutation,
Winterthur returned $2.0 million of unearned premiums, net of
ceding commission and Federal excise tax.
13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated
fair values of the Company's financial instruments at December 31,
1996 and 1995. The fair value amounts were determined by the
Company using independent market information when available, and
appropriate valuation methodologies when market information was not
available. Such valuation methodologies require significant
judgment and are not necessarily indicative of the amount the
Company could recognize in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Available-for-sale securities $ 314,703 314,703 284,352 284,352
- ------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS:
Financial guarantees outstanding $ - 219,989 - 147,840
Less: ceding commission - 65,997 - 44,352
- ------------------------------------------------------------------------------------------------------
Net financial guarantees outstanding $ - 153,992 103,488
======================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments summarized above:
AVAILABLE-FOR-SALE SECURITIES
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates
amortized cost.
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1)
the current unearned premium reserve, net of prepaid reinsurance
and (2) the fair value of installment revenue which is derived by
calculating the present value of the estimated future cash inflow
to CapMAC of policies in force having installment premiums, net of
amounts payable to reinsurers, at a discount rate of 7% at December
31, 1996 and 1995. The amount calculated is assumed to be
equivalent to the consideration that would be paid by CapMAC under
market conditions prevailing at the reporting dates to transfer
CapMAC's financial guarantee business to a third party under
reinsurance and other agreements. Ceding commission represents the
expected amount that would be paid to CapMAC to compensate CapMAC
for originating and servicing the insurance contracts. In
constructing estimated future cash inflows, management makes
assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical
experience. For revolving programs, assumptions are made regarding
program utilization based on discussions with program users. The
amount of future installment revenue actually realized by the
Company could be reduced in the future due to factors such as early
termination of insurance contracts, accelerated prepayments of
underlying obligations or lower than anticipated utilization of
insured structured programs, such as commercial paper conduits.
Although increases in future installment revenue earnings due to
renewals of existing insurance contracts historically have been
greater than reductions in future installment revenue due to
factors such as those described above, there can be no assurance
that future circumstances might not cause a material net reduction
in the future installment revenue.
14) CAPITALIZATION
In 1995, $59.0 million of the proceeds received by Holdings from
the sale of shares in connection with an initial public offering
and private placements were contributed to CapMAC.
Exhibit 99.2
Unaudited CapMAC Financials
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
September 30, 1997 December 31, 1996
(Unaudited)
- -------------------------------------------------------------------------------
INVESTMENTS:
Bonds at fair value (amortized cost $323,043
at September 30, 1997 and $294,861 at
December 31, 1996) $ 328,035 297,893
Short-term investments (at amortized cost
which approximates fair value) 21,119 16,810
- ------------------------------------------------------------------------------
Total investments 349,154 314,703
- ------------------------------------------------------------------------------
Cash 999 371
Accrued investment income 3,998 3,807
Deferred acquisition costs 51,137 45,380
Premiums receivable 7,132 5,141
Prepaid reinsurance 23,348 18,489
Other assets 5,666 6,424
- ------------------------------------------------------------------------------
Total assets $ 441,434 394,315
==============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums $ 76,023 68,262
Reserve for losses and loss adjustment
expenses 15,389 10,985
Ceded reinsurance 5,653 1,738
Accounts payable and other accrued expenses 14,270 8,019
Current income taxes 626 679
Deferred income taxes 17,383 15,139
- ------------------------------------------------------------------------------
Total liabilities 129,344 104,822
- ------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY:
Common stock - $1.00 par value per share;
15,000,000 shares are authorized, issued
and outstanding at September 30, 1997 and
December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments,
net of tax 3,251 1,970
Retained earnings 85,440 64,048
Cumulative translation adjustment, net of tax (76) -
- ------------------------------------------------------------------------------
Total stockholder's equity 312,090 289,493
- ------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 441,434 394,315
==============================================================================
See accompanying notes to consolidated financial statements.
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Direct premiums written $ 22,345 17,206 57,525 49,983
Assumed premiums written 225 8 1,141 1,032
Ceded premiums written (7,428) (4,129) (18,049) (11,142)
- ---------------------------------------------------------------------------------------------------
Net premiums written 15,142 13,085 40,617 39,873
Increase in unearned premiums (1,663) (3,042) (2,903) (11,014)
- ---------------------------------------------------------------------------------------------------
Net premiums earned 13,479 10,043 37,714 28,859
Net investment income 4,958 4,307 14,344 12,296
Net realized capital gains (loss) - (57) 2,549 111
Other income 51 25 139 104
- ---------------------------------------------------------------------------------------------------
Total revenues 18,488 14,318 54,746 41,370
- ---------------------------------------------------------------------------------------------------
EXPENSES:
Losses and loss adjustment expenses 1,528 1,248 4,404 3,432
Underwriting and operating expenses 4,430 3,780 13,309 11,142
Policy acquisition costs 2,372 2,126 7,425 6,249
- ---------------------------------------------------------------------------------------------------
Total expenses 8,330 7,154 25,138 20,823
- ---------------------------------------------------------------------------------------------------
Income before income taxes 10,158 7,164 29,608 20,547
- ---------------------------------------------------------------------------------------------------
INCOME TAXES:
Current income tax 2,502 1,027 6,652 3,008
Deferred income tax 172 718 1,564 2,689
- ---------------------------------------------------------------------------------------------------
Total income taxes 2,674 1,745 8,216 5,697
- ---------------------------------------------------------------------------------------------------
Net Income $ 7,484 5,419 21,392 14,850
===================================================================================================
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30, 1997
COMMON STOCK:
Balance at beginning of period $ 15,000
Balance at end of period 15,000
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 208,475
- -------------------------------------------------------------------------
Balance at end of period 208,475
UNREALIZED APPRECIATION ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 1,970
Unrealized appreciation on investments 1,281
Balance at end of period 3,251
RETAINED EARNINGS:
Balance at beginning of period 64,048
Net income 21,392
Balance at end of period 85,440
CUMULATIVE TRANSLATION ADJUSTMENT, NET OF TAX:
Balance at beginning of period -
Translation adjustment (76)
- -------------------------------------------------------------------------
Balance at end of period (76)
- -------------------------------------------------------------------------
Total stockholder's equity $ 312,090
=========================================================================
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 21,392 14,850
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 4,404 3,054
Unearned premiums, net 7,761 15,643
Deferred acquisition costs (5,757) (7,188)
Premiums receivable (1,991) (528)
Accrued investment income (191) (468)
Income taxes payable 1,511 2,341
Net realized capital gains (2,549) (111)
Accounts payable and other accrued expenses 6,251 5,445
Prepaid reinsurance (4,859) (4,630)
Other, net 5,089 (381)
- ----------------------------------------------------------------------------
Total adjustments 9,669 13,177
- ----------------------------------------------------------------------------
Net cash provided by operating activities 31,061 28,027
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (137,369) (154,308)
Proceeds from sales of investments 74,768 35,388
Proceeds from maturities of investments 32,168 91,063
- ---------------------------------------------------------------------------
Net cash used in investing activities (30,433) (27,857)
- ---------------------------------------------------------------------------
Net increase in cash 628 170
Cash balance at beginning of period 371 344
- ---------------------------------------------------------------------------
Cash balance at end of period $ 999 514
===========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Income taxes paid $ 6,550 3,225
Tax and loss bonds purchased $ 155 131
===========================================================================
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New York-
domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). In
early 1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A.,
an insurance subsidiary to be established in Paris, France. CapMAC
Assurance, S.A., is licensed to write financial guarantee insurance
in the European Union member states.
CapMAC is licensed in all 50 states in addition to the District of
Columbia, the Commonwealth of Puerto Rico and the territory of
Guam. CapMAC insures structured asset-backed, corporate, municipal
and other financial obligations in the U.S. and international
capital markets. CapMAC also provides financial guaranty
reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance
companies.
CapMAC's claims-paying ability is rated triple-A by Moody's
Investors Service, Inc., Standard & Poor's Ratings Services, Duff &
Phelps Credit Rating Co., and Nippon Investors Service, Inc., a
Japanese rating agency. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or
hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
2. BASIS OF PRESENTATION
CapMAC's consolidated unaudited interim financial statements have
been prepared on the basis of generally accepted accounting
principles and, in the opinion of management, reflect all
adjustments necessary for a fair presentation of the CapMAC's
financial condition, results of operations and cash flows for the
periods presented. The results of operations for the nine months
ended September 30, 1997 may not be indicative of the results that
may be expected for the full year ending December 31, 1997. These
consolidated financial statements and notes should be read in
conjunction with the financial statements and notes included in the
audited financial statements of CapMAC as of December 31, 1996 and
1995, and for each of the years in the three-year period ended
December 31, 1996.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to
the current period presentation.
Exhibit 99.3
Prudential Computational Materials
In accordance with Rule 311(i) of Regulation S-T, the Prudential
Computational Materials are being filed on paper pursuant to Form SE.
Exhibit 99.4
Countrywide Computational Materials
In accordance with Rule 311(i) of Regulation S-T, the Countrywide
Computational Materials are being filed on paper pursuant to Form SE.
