================================================================================
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) June 18, 1999
SUPERIOR BANK FSB (as depositor under the Pooling and Servicing Agreement, dated
as of June 1, 1999, providing for the issuance of AFC Mortgage Loan Asset Backed
Certificates, Series 1999-2)
SUPERIOR BANK FSB
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 333-61691 36-1414142
- ---------------------------- ----------- ----------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
ONE LINCOLN CENTRE
Oakbrook Terrace, Illinois 60181
-------------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (630) 916-4000
================================================================================
<PAGE>
-2-
Item 5. Other Events.
The financial statements of Financial Guaranty Insurance
Company ("FGIC") as of December 31, 1998 and 1997, and for each of the
years in the three-year period ended December 31, 1998 that are
included in this Form 8-K have been audited by KPMG LLP. The consent of
KPMG LLP to the inclusion of their audit report on such financial
statements in this Form 8-K and their being named as "Experts" in the
Prospectus Supplement relating to AFC Mortgage Loan Asset Backed
Certificates, Series 1999-2, is attached hereto as Exhibit 23.1.
The audited financial statements of FGIC as of December 31,
1998 and December 31, 1997, and for each of the years in the three-year
period ended December 31, 1998 are attached hereto as Exhibit 99.1. The
unaudited interim financial statements of FGIC as of March 31, 1999 are
attached hereto as Exhibit 99.2.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements.
Not applicable.
(b) Pro Forma Financial Information.
Not Applicable.
(c) Exhibits
Item 601(a) of
Regulation S-K
Exhibit No. Exhibit No. Description
- ----------- ----------- -----------
23.1 23 Consent of KPMG LLP
99.1 99 Audited Financial Statements of FGIC as of
December 31, 1998 and 1997, and for each of
the years in the three-year period ended
December 31, 1998
99.2 99 Unaudited Interim Financial Statements of
FGIC as of March 31, 1999
<PAGE>
-3-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERIOR BANK FSB
By:/s/ WILLIAM C. BRACKEN
----------------------
Name: William C. Bracken
Title: Senior Vice President
and Chief Financial Officer
Dated: June 18, 1999
<PAGE>
-4-
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
23.1 Consent of KPMG LLP
99.1 Audited Financial Statements of Financial Guaranty Insurance Company
as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998
99.2 Unaudited Interim Financial Statements of Financial Guaranty
Insurance Company as of March 31, 1999
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 22, 1999 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31, 1998
included in the Form 8-K of Superior Bank FSB (the "Registrant") which is
incorporated herein by reference in the registration statement (No. 333-61691)
and to the reference to our firm under the heading "Experts" in the Prospectus
Supplement of the Registrant.
/s/KPMG LLP
New York, New York
June 18, 1999
KPMG [LOGO]
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Report of Independent Auditors....................1
Balance Sheets....................................2
Statements of Income..............................3
Statements of Stockholder's Equity................4
Statements of Cash Flows..........................5
Notes to Financial Statements.....................6
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
345 Park Avenue
New York, New York 10154
Independent Auditors' Report
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997 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.
/s/ KPMG PEAT MARWICK LLP
-------------------------
January 22, 1999
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
<CAPTION>
================================================================================
($ in Thousands, except per share amounts)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available-for-sale
(amortized cost of $2,519,490 in 1998 and $2,313,458 in 1997) $2,663,024 $2,443,746
Short-term investments, at cost, which approximates market 30,395 76,039
Cash 318 802
Accrued investment income 40,038 38,927
Reinsurance recoverable 8,115 8,220
Prepaid reinsurance premiums 148,366 154,208
Deferred policy acquisition costs 80,924 86,286
Property and equipment, net of accumulated depreciation
($6,981 in 1998 and $17,346 in 1997) 1,802 3,142
Prepaid expenses and other assets $ 11,047 21,002
---------- ----------
Total assets $2,984,029 $2,832,372
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 610,182 $ 628,553
Loss and loss adjustment expenses 59,849 76,926
Ceded reinsurance balances payable 3,129 3,932
Accounts payable and accrued expenses 46,764 26,352
Current federal income taxes payable 69,542 19,335
Deferred federal income taxes 122,839 118,522
Payable for securities purchased 6 5,811
---------- ----------
Total liabilities 912,311 879,431
---------- ----------
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 383,511 383,511
Accumulated other comprehensive income 91,922 83,935
Retained earnings 1,581,285 1,470,495
---------- ----------
Total stockholder's equity 2,071,718 1,952,941
---------- ----------
Total liabilities and stockholder's equity $2,984,029 $2,832,372
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
<CAPTION>
================================================================================
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gross premiums written $112,425 $ 95,995 $97,027
Ceded premiums (19,444) (19,780) (29,376)
-------- -------- --------
Net premiums written 92,981 76,215 67,651
Decrease in net unearned premiums 12,529 39,788 51,314
-------- -------- --------
Net premiums earned 105,510 116,003 118,965
Net investment income 133,353 127,773 124,635
Net realized gains 29,360 16,700 15,022
-------- -------- --------
Total revenues 268,223 260,476 258,622
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses 3,178 12,539 2,389
Policy acquisition costs 13,870 12,936 16,327
Decrease (Increase) in deferred policy acquisition costs 5,362 5,659 2,923
Other underwriting expenses 18,539 14,691 12,508
-------- -------- --------
Total expenses 40,949 45,825 34,147
-------- -------- --------
Income before provision for Federal income taxes 227,274 214,651 224,475
-------- -------- --------
Federal income tax expense:
Current 41,467 39,133 41,548
Deferred 17 1,715 5,318
-------- -------- --------
Total Federal income tax expense 41,484 40,848 46,866
-------- -------- --------
Net income $185,790 $173,803 $177,609
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
<CAPTION>
================================================================================
($ in Thousands)
ADDITIONAL
COMMON PAID-IN ACCUMULATED OTHER RETAINED
STOCK CAPITAL COMPREHENSIVE INCOME EARNINGS TOTAL
------- ---------- -------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $15,000 $334,011 $62,286 $1,136,584 $1,547,881
Net income -- -- -- 177,609 177,609
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($13,260) -- -- (24,625) -- (24,625)
Change in foreign currency translation adjustment -- -- 1,070 -- 1,070
----------
Total comprehensive income -- -- -- -- 154,054
----------
Dividend paid -- -- -- (17,500) (17,500)
------- -------- ------- ---------- ----------
Balance, December 31, 1996 15,000 334,011 38,731 1,296,692 1,684,435
------- -------- ------- ---------- ----------
Net Income -- -- -- 173,803 173,803
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($24,516) -- -- 45,527 -- 45,527
Change in foreign currency translation adjustment -- -- (323) -- (323)
----------
Total comprehensive income -- -- -- -- 219,007
----------
Capital contribution -- 49,500 -- -- 49,500
------- -------- ------- ---------- ----------
Balance at December 31, 1997 15,000 383,511 83,935 1,470,495 1,952,942
------- -------- ------- ---------- ----------
Net Income -- -- -- 185,790 185,790
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of $4,636 -- -- 8,610 -- 8,610
Change in foreign currency translation adjustment -- -- (623) -- (623)
----------
Total comprehensive income -- -- -- -- 193,777
----------
Dividend declared -- -- -- (75,000) (75,000)
------- -------- ------- ---------- ----------
Balance at December 31, 1998 $15,000 $383,511 $91,922 $1,581,285 $2,071,719
======= ======== ======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
<CAPTION>
================================================================================
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $185,790 $173,803 $ 177,609
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (18,371) (53,263) (45,719)
Change in loss and loss adjustment expense reserves (17,077) 4,310 (5,192)
Depreciation of property and equipment 1,399 2,013 2,472
Change in reinsurance recoverable 105 (1,205) 657
Change in prepaid reinsurance premiums 5,842 13,475 (5,596)
Change in foreign currency translation adjustment (958) (497) 1,646
Policy acquisition costs deferred (13,870) (12,936) (16,327)
Amortization of deferred policy acquisition costs 19,232 18,595 19,250
Change in accrued investment income, and prepaid
expenses and other assets 12,847 (2,754) (7,201)
Change in other liabilities 15,606 (36,233) 30,117
Change in deferred income taxes 17 1,715 5,318
Amortization of fixed maturity securities 4,149 2,698 792
Change in current income taxes payable 50,207 (32,681) 720
Net realized gains on investments (29,360) (16,700) (15,022)
-------- -------- ----------
Net cash provided by operating activities 215,558 60,340 143,524
-------- -------- ----------
Investing Activities:
Sales and maturities of fixed maturity securities 607,372 741,604 891,643
Purchases of fixed maturity securities (818,999) (848,843) (1,033,345)
Purchases, sales and maturities of short-term investments, net 45,644 (2,200) 17,193
Purchases of property and equipment, net (59) (459) (854)
-------- -------- ----------
Net cash used in investing activities (166,042) (109,898) (125,363)
-------- -------- ----------
Financing Activities:
Capital Contributions -- 49,500 --
Dividends paid (50,000) -- (17,500)
-------- -------- ----------
Net cash provided by financing activities (50,000) 49,500 (17,500)
-------- -------- ----------
(Decrease) Increase in cash (484) (58) 661
Cash at beginning of year 802 860 199
-------- -------- ----------
Cash at end of year $ 318 $ 802 $ 860
======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company") is a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"). The Parent is
owned approximately ninety-nine percent by General Electric Capital
Corporation ("GE Capital") and approximately one percent by Sumitomo
Marine and Fire Insurance Company, Ltd. The Company 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 86%
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 1998 presentation.
Significant accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with 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.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment
at policy inception are earned over the period at risk, based on the
total exposure outstanding at any point in time. Financial guaranty
insurance policies exposure generally declines according to
predetermined schedules. For policies with premiums that are collected
periodically, premiums are reflected in income pro rata over the period
covered by the premium payment.
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 includes amounts 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 $59.8 million and $76.9 million at December 31,
1998 and 1997, respectively. As of December 31, 1998 and 1997, such
reserves included $39.6 million and $35.1 million, respectively,
established based on an evaluation of the insured portfolio in light of
current economic conditions and other relevant factors. As of December
31, 1998 and 1997, case-basis loss and loss adjustment expense reserves
were $20.2 million and $41.8 million, respectively. Loss and loss
adjustment expenses include amounts discounted at an interest rate
between 5.0% and 5.1% in 1998 and between 5.9% and 6.0% in 1997. The
discount rate used is based upon the risk free rate for the average
maturity of the applicable bond sector. 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.
-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, 1998 and 1997 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation loss at December 31, 1998 and 1997 was $1.4
million and $0.7 million, respectively, net of tax, and is reported as
a separate component of stockholder's equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB Statement 130, "Reporting Comprehensive Income", was
issued to establish standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement. The Company
implemented this Statement in 1998.
In June 1998, FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued to establish
comprehensive accounting and reporting standards effective as of the
beginning of the first quarter of the fiscal year beginning after June
15, 1999 (thus for calendar year-end entities, this Standard is
effective January 1, 2000). This Standard not only defines derivative
instruments and hedging activities, but also requires that they be
recorded on the statement of financial position at fair value, and
depending upon if the instrument is a derivative or qualifies as a
specific type of hedge, changes in fair value may be recorded either in
the statement of earnings or other comprehensive income. Management is
assessing the impact of this Standard on the Company and does not
anticipate the impact to be significant.
(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 directly in proportion to the scheduled
principal and interest payments rather than in proportion to
the total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
-8-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(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.
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
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):
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
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 $185,790 $2,071,718 $173,803 $1,952,941 $177,609 $1,684,434
Premium revenue recognition (13,946) (195,155) (4,924) (181,209) (9,358) (176,285)
Deferral of acquisition costs 5,362 (80,924) 5,659 (86,286) 2,923 (91,945)
Contingency reserve -- (627,257) -- (540,677) -- (460,973)
Contingency reserve tax deduction
(see Note 2) -- 74,059 -- 95,185 -- 85,176
Non-admitted assets -- (1,502) -- (2,593) -- (3,879)
Case basis loss reserves 1,945 73 1,377 (1,872) (3,197) (3,249)
Portfolio loss reserves 3,900 32,900 5,000 29,000 -- 24,000
Deferral of income taxes 17 72,521 1,715 72,260 5,317 70,719
Unrealized (gains) on fixed maturity
securities held at fair value,
net of tax -- (93,297) -- (84,687) -- (39,160)
Recognition of profit commission 1,338 (6,050) (1,203) (7,388) (441) (6,185)
Unauthorized reinsurance -- (39) -- -- -- --
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 253 11,169 313 10,916 313 10,603
-------- ---------- -------- ---------- -------- ----------
Statutory-basis amount $184,659 $1,258,215 $181,740 $1,255,590 $173,166 $1,093,256
======== ========== ======== ========== ======== ==========
</TABLE>
-10-
<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 $3.1 million as of December 31, 1998 and 1997,
respectively, were on deposit with various regulatory authorities as
required by law.
<TABLE>
<CAPTION>
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):
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1998 COST GAINS LOSSES VALUE
----------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 75,595 $ 1,294 $ 2 $ 76,887
Obligations of states and political
subdivisions 2,367,682 142,777 4,112 2,506,347
Debt securities issued by foreign
governments 38,520 3,182 -- 41,702
Other 37,693 416 21 38,088
---------- ---------- ------- ----------
Investments available-for-sale 2,519,490 147,669 4,135 2,663,024
Short-term investments 30,395 -- -- 30,395
---------- ---------- ------- ----------
Total $2,549,885 $ 147,669 $ 4,135 $2,693,419
========== ========== ======= ==========
</TABLE>
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
The amortized cost and fair values of short-term investments and of investments
in fixed maturity securities available-for-sale at December 31, 1998, 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.
<CAPTION>
AMORTIZED FAIR
1998 COST VALUE
---------------------------------------- ---------- ----------
<S> <C> <C>
Due in one year or less $ 32,677 $ 32,693
Due after one year through five years 110,268 113,985
Due after five years through ten years 711,111 752,903
Due after ten years through twenty years 1,537,253 1,635,363
Due after twenty years 158,576 158,475
---------- ----------
Total $2,549,885 $2,693,419
========== ==========
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1997 COST GAINS LOSSES VALUE
----------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 11,539 $ 185 $ -- $ 11,724
Obligations of states and political
subdivisions 2,272,225 130,183 655 2,401,753
Debt securities issued by foreign
governments 29,694 603 28 30,269
---------- --------- ------ ----------
Investments available-for-sale 2,313,458 130,971 683 2,443,746
Short-term investments 76,039 -- -- 76,039
---------- --------- ------ ----------
Total $2,389,497 $130,971 $ 683 $2,519,785
========== ======== ====== ==========
</TABLE>
In 1998, 1997 and 1996, proceeds from sales and maturities of investments in
fixed maturity securities available-for-sale carried at fair value were $607.3
million, $741.6 million, and $891.6 million, respectively. For 1998, 1997 and
1996 gross gains of $29.6 million, $19.1 million and $19.8 million respectively,
and gross losses of $0.2 million, $2.4 million and $4.8 million respectively,
were realized on such sales.
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
Net investment income of the Company is derived from the following sources (in
thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income from fixed maturity securities $129,942 $122,372 $119,290
Income from short-term investments 4,421 6,366 6,423
-------- ---------- --------
Total investment income 134,363 128,738 125,713
Investment expenses 1,010 965 1,078
-------- -------- --------
Net investment income $133,353 $127,773 $124,635
======== ======== ========
</TABLE>
As of December 31, 1998, the Company did not have more than 3% of its
investment portfolio concentrated in a single issuer or industry.
(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 also has a separate tax sharing
agreement with its Parent. Under this agreement the Company can utilize
its Parent's net operating loss to offset taxable income on a
stand-alone basis. The Company's effective federal corporate tax rate
(18.3 percent in 1998, 19.0 percent in 1997 and 20.8 percent in 1996)
is less than the corporate tax rate on ordinary income of 35 percent in
1998, 1997 and 1996, primarily due to tax exempt interest on municipal
investments.
<TABLE>
Federal income tax expense relating to operations of the Company for
1998, 1997 and 1996 is comprised of the following (in thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current tax expense $41,467 $39,133 $41,548
Deferred tax expense 17 1,715 5,318
------- ------- -------
Federal income tax expense $41,484 $40,848 $46,866
======= ======= =======
</TABLE>
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $ 79,546 $ 75,128 $ 78,566
Tax effect of:
Tax-exempt interest (35,660) (34,508) (32,609)
Original issue discount (2,511) -- --
Other, net (109) 228 909
-------- -------- --------
Provision for income taxes $ 41,484 $ 40,848 $ 46,866
======== ======== ========
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31,
1998 and 1997 are presented below (in thousands):
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss reserves $ 12,364 $ 10,999
Deferred compensation 2,230 2,242
Tax over book capital gains 3,464 2,996
Other 3,579 2,260
-------- --------
Total gross deferred tax assets 21,637 18,497
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 50,237 45,601
Deferred acquisition costs 28,323 30,200
Premium revenue recognition 44,935 40,103
Rate differential on tax and loss bonds 9,454 9,454
Other 11,527 11,661
-------- --------
Total gross deferred tax liabilities 144,476 137,019
-------- --------
Net deferred tax liability $122,839 $118,522
======== ========
</TABLE>
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, 1998 and 1997. The
Company anticipates that the related deferred tax asset will be
realized based on future profitable business.
Total federal income tax payments during 1998, 1997 and 1996 were
$(8.7) million, $71.8 million, and $33.9 million, respectively.
-14-
<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 $37.0 million that can be drawn on in the event of default.
Net premiums earned are presented net of ceded earned premiums of $25.3
million, $33.3 million and $23.7 million for the years ended December
31, 1998, 1997 and 1996, respectively. Loss and loss adjustment
expenses incurred are presented net of ceded losses of $0.9 million,
$0.2 million and $(0.8) million for the years ended December 31, 1998,
1997 and 1996, respectively.
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
<TABLE>
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at January 1, $76,926 $72,616 $77,808
Less reinsurance recoverable (8,220) (7,015) (7,672)
------- ------- -------
Net balance at January 1, 68,706 65,601 70,136
Incurred related to:
Current year 568 1,047 --
Prior years (1,290) 6,492 2,389
Portfolio reserves 3,900 5,000 --
------- ------- -------
Total Incurred 3,178 12,539 2,389
------- ------- -------
Paid related to:
Current year -- 1,047) --
Prior years (20,150) (8,387) (6,924)
------- ------- -------
Total Paid (20,150) (9,434) (6,924)
------- ------- -------
Net balance at December 31, 51,734 68,706 65,601
Plus reinsurance recoverable 8,115 8,220 7,015
------- ------- -------
Balance at December 31, $59,849 $76,926 $72,616
======= ======= =======
</TABLE>
The changes in incurred portfolio and case reserves principally relates
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.
-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, $4.9
million and $8.1 million in expenses were incurred in 1998, 1997 and
1996, 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 $0.5 million in 1998, $0.5 million
in 1997, and $0.6 million in 1996. As of December 31, 1998, par
outstanding on these deals before reinsurance was $109.4 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross
premiums written) in 1998, 1997 and 1996.
(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 $2.2 million, $5.0 million and $4.5
million in 1998, 1997 and 1996, 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 $66.4 million in 1998 and 1997, 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, 1998 and 1997, the amount
of the Company's surplus available for dividends was approximately
$50.8 million and $124.6 million, respectively.
During 1998, 1997 and 1996, the Company paid dividends of $75.0, $0.0
million and $17.5 million, respectively.
(11) CAPITAL CONTRIBUTION
During 1997, the Parent made a capital contribution of $49.5 million to
the Company.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(12) 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.
<TABLE>
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows (in thousands):
<CAPTION>
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 318 $ 318 $ 802 $ 802
Short-term investments 30,395 30,395 $ 76,039 $ 76,039
Fixed maturity securities $2,663,024 $2,663,024 $2,443,746 $2,443,746
</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 $379.1 million and $419.0 million compared to
a carrying value of $432.6 million as of December 31, 1998 and between
$355.7 million and $382.6 million compared to a carrying value of
$456.8 million as of December 31, 1997.
-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, 1998, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $131.2
billion, net of reinsurance of $35.4 billion. The Company's insured
portfolio as of December 31, 1998 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, 1998, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
Municipal:
General obligation $ 69,684.2
Special revenue 42,453.6
Industrial revenue 465.3
Non-municipal 18,598.5
-----------
Total $ 131,201.6
===========
The Company's gross and net exposure outstanding was $295,860.8 million
and $229,750.6 million, respectively, as of December 31, 1998.
As of December 31, 1998, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
CEDED
PRINCIPAL
OUTSTANDING
-----------
Reinsurer:
Capital Re $ 14,615.1
Enhance Re 9,539.1
Other 11,220.1
-----------
Total $ 35,374.3
===========
-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, 1998 by state, net of reinsurance, was as
follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
California $ 14,945.0
Pennsylvania 12,140.1
Florida 11,577.8
New York 11,397.1
Illinois 8,189.6
Texas 6,689.5
Michigan 5,406.8
New Jersey 4,773.0
Arizona 3,678.7
Ohio 3,470.2
----------
Sub-total 82,267.8
Other states 48,662.4
International 271.4
----------
Total $131,201.6
==========
(13) COMMITMENTS
Total rent expense was $2.6 million, $2.4 million and $2.8 million in
1998, 1997 and 1996, respectively. For each of the next five years and
in the aggregate as of December 31, 1998, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
YEAR AMOUNT
------------------------------------ ------
1999 $2,909
2000 2,909
2001 2,911
2002
2003 --
------
Total minimum future rental payments $8,729
======
(14) YEAR 2000 READINESS DISCLOSURE (UNAUDITED)
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects
on companies and entities throughout the world. FGIC recognizes the
seriousness of the Year 2000 issue and has developed an action plan to
mitigate Year 2000 issues in their information systems, products,
facilities and suppliers. The action plan has been reviewed by senior
management at the Company and GE Capital Services internal audit staff.
Our progress is closely monitored by GE Capital's Year 2000 Program
Management Office.
-19-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The action plan is divided into four phases: (1) define/measure -
identify and inventory possible sources of Year 2000 issues; (2)
analyze - determine the nature and extent of Year 2000 issues and
develop project plans to address those issues; (3) improve - execute
project plans and perform a majority of the testing; and (4) control -
complete testing, continue monitoring readiness and complete necessary
contingency plans.
The action plan includes solutions which are appropriate to the
specific situations. Some systems have been upgraded to new systems (or
to new releases of existing systems) which are Year 2000 ready.
Remediation of FGIC's applications is complete. Year 2000 system
testing is currently in progress; we expect to be completed mid-1999.
The cost of addressing such matters will not have a material impact on
the business, operations, or financial condition of the Company.
Business operations are also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utilities, communications,
transportation and other services. The likelihood and effects of
failures in infrastructure systems and in the supply chain cannot be
estimated. However, with respect to operations under its direct
control, management does not expect, in view of its Year 2000 action
plan, that occurrences of Year 2000 failures will have a material
adverse effect on the financial position, results of operations or
liquidity.
We are in the process of updating our Business Contingency and Disaster
Recovery Plans, as appropriate. We expect these plans to be completed
and tested by mid-1999.
(15) COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income". This statement was implemented retroactively by
the Company in 1998. the statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. Accumulated other comprehensive income of the Company
consists of net unrealized gains on investment securities and foreign
currency translation adjustments.
<TABLE>
The following are components of other comprehensive income (in
thousands) for the years ended December 31, 1998, 1997 and 1996:
<CAPTION>
1998
-----------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $ 42,606 $(14,912) $ 27,694
Less: reclassification adjustment for
gains realized in net income (29,360) 10,276 (19,084)
-------- -------- --------
Other comprehensive income $ 13,246 $ (4,636) $ 8,610
======== ======== ========
-20-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<CAPTION>
1997
-----------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $ 86,742 $(30,360) $ 56,382
Less: reclassification adjustment for
gains realized in net income (16,700) 5,845 (10,855)
-------- -------- --------
Other comprehensive income $ 70,042 $(24,515) $ 45,527
======== ======== ========
<CAPTION>
1996
-----------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $(22,863) $ 8,002 $(14,861)
Less: reclassification adjustment for
gains realized in net income (15,022) 5,258 (9,764)
-------- -------- --------
Other comprehensive income $(37,885) $ 13,260 $(24,625)
======== ======== ========
</TABLE>
-21-
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
MARCH 31, 1999
Balance Sheets............................................................ 1
Statements of Income...................................................... 2
Statements of Cash Flows.................................................. 3
Notes to Unaudited Interim Financial Statements........................... 4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
====================================================================================================================
($ in Thousands)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,511,780 in 1999 and $2,519,490 in 1998) $2,611,055 $2,663,024
Short-term investments, at cost, which approximates market 72,610 30,395
Cash 412 318
Accrued investment income 38,532 40,038
Reinsurance receivable 8,242 8,115
Deferred policy acquisition costs 79,497 80,924
Property, plant and equipment net of
accumulated depreciation of $7,303 in 1999 and $6,981 in 1998 1,480 1,802
Prepaid reinsurance premiums 148,540 148,366
Prepaid expenses and other assets 19,040 11,047
---------- ----------
Total assets $2,979,408 $2,984,029
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $608,562 $610,182
Losses and loss adjustment expenses 60,001 59,849
Ceded reinsurance payable 2,997 3,129
Accounts payable and accrued expenses 46,522 46,764
Current federal income taxes payable 82,630 69,542
Deferred federal income taxes payable 108,390 122,839
Payable for securities purchased -- 6
---------- ----------
Total liabilities 909,102 912,311
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at March 31,
1999 and at December 31, 1998: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive income, net of tax 64,375 91,922
Retained earnings 1,607,420 1,581,285
---------- ----------
Total stockholder's equity 2,070,306 2,071,718
---------- ----------
Total liabilities and stockholder's equity $2,979,408 $2,984,029
========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
($ in Thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
(UNAUDITED)
REVENUES:
Gross premiums written $ 28,333 $ 19,831
Ceded premiums (5,657) (2,144)
-------- --------
Net premiums written 22,676 17,687
Decrease in net unearned premiums 1,794 12,655
-------- --------
Net premiums earned 24,470 30,342
Net investment income 33,869 32,785
Net realized gains 17,464 13,083
-------- --------
Total revenues 75,803 76,210
-------- --------
EXPENSES:
Losses and loss adjustment expenses 639 3,921
Policy acquisition costs 5,359 5,447
Other underwriting expenses 5,197 5,101
-------- --------
Total expenses 11,195 14,469
-------- --------
Income before provision for federal income taxes 64,608 61,741
Provision for federal income taxes 13,473 13,975
-------- --------
Net income $ 51,135 $ 47,766
======== ========
See accompanying notes to unaudited interim financial statements
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
================================================================================
($ in Thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------------- ------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 51,135 $ 47,766
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 385 211
Amortization of fixed maturity securities 1,055 895
Policy acquisition costs deferred (3,932) (4,996)
Amortization of deferred policy acquisition costs 5,359 5,447
Depreciation of fixed assets 323 365
Change in reinsurance receivable (127) (341)
Change in prepaid reinsurance premiums (174) 5,281
Foreign currency translation adjustment 1,880 (215)
Change in accrued investment income, prepaid
expenses and other assets (6,487) 6,920
Change in unearned premiums (1,620) (17,880)
Change in losses and loss adjustment expense reserves 152 3,306
Change in other liabilities (374) (7,095)
Change in current income taxes payable 13,088 35,961
Net realized gains on investments (17,464) (13,083)
--------- ---------
Net cash provided by operating activities 43,199 62,542
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities 278,495 209,199
Purchases of fixed maturity securities (254,385) (231,426)
Sales or maturities (purchases) of short-term
investments, net (42,215) (40,240)
--------- ---------
Net cash used for investing activities (18,105) (62,467)
--------- ---------
FINANCING ACTIVITIES:
Dividends paid (25,000) --
--------- ---------
Net cash provided by financing activities (25,000) --
--------- ---------
Increase in cash 94 75
Cash at beginning of period 318 802
--------- ---------
Cash at end of period $ 412 $ 877
========= =========
See accompanying notes to unaudited interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
March 31, 1999 and 1998
(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, 1999 and
1998, (b) the financial position at March 31, 1999 and December 31,
1998, and (c) cash flows for the three months ended March 31, 1999 and
1998.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1998
audited financial statements.
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 directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time;
(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.
-4-
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
GAAP basis amount $51,135 $2,070,306 $47,766 $1,986,327
Premium revenue recognition (4,274) (199,429) (619) (181,828)
Deferral of acquisition costs 1,427 (79,497) 451 (85,835)
Contingency reserve -- (637,755) -- (555,538)
Non-admitted assets -- (1,179) -- (2,313)
Case-basis losses incurred (419) (346) 188 (1,684)
Portfolio loss reserves 1,000 33,900 1,400 30,400
Deferral of income tax 384 73,562 211 72,272
Unrealized gains on fixed maturity securities
held at fair value, net of taxes -- (64,528) -- (70,446)
Profit commission 368 (5,683) (133) (7,522)
Provision for unauthorized reinsurance -- (37) -- --
Contingency reserve tax deduction -- 74,059 -- 72,409
Allocation of tax benefits due to Parent's
net operating loss to the Company 78 11,247 42 10,958
------- ---------- ------- ----------
Statutory basis amount $49,699 $1,274,620 $49,306 $1,267,200
======= ========== ======= ==========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(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 $66.4 million in
1999.
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 1999 is approximately $127.5 million.
The Company declared a $25.0 million dividend during the first
quarter of 1999.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (20.9 percent
and 22.6 percent for the three months ended March 31, 1999 and
1998, respectively) is less than the statutory corporate tax rate
(35 percent in 1999 and 1998) 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", 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 $5.5 million and $7.4 million,
respectively, for the three months ended March 31, 1999 and 1998.
(6) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
statement No. 130, "Reporting Comprehensive Income", which
requires enterprises to disclose comprehensive income and its
components. Comprehensive income encompasses all changes in
shareholders' equity (except those arising from transactions with
shareholders) and includes net income, net unrealized capital
gains or losses on available-for-sale securities and foreign
currency translation adjustments, net of taxes. This new standard
only changes the presentation of certain information in the
financial statements and does not affect the Company's financial
position or results of operations. The following is a
reconciliation of comprehensive income:
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
March 31, 1999 and 1998
(Unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 1998
-------- --------
Net income $ 51,135 $ 47,766
Other comprehensive income:
Change in unrealized investment gains,
net of taxes (28,769) (14,241)
Change in foreign exchange gains,
net of taxes 1,221 (140)
-------- --------
Comprehensive income $ 23,587 $ 33,385
======== ========
(7) YEAR 2000 READINESS DISCLOSURE
The inability of business processes to continue to function
correctly after the beginning of the Year 2000 could have serious
adverse effects on companies and entities throughout the world.
FGIC recognizes the seriousness of the Year 2000 issue and has
developed an action plan to mitigate Year 2000 issues in their
information systems, products, facilities and suppliers. The
action plan has been reviewed by senior management at the Company
and GE Capital Services internal audit staff. Our progress is
closely monitored by GE Capital's Year 2000 Program Management
Office.
The action plan is divided into four phases: (1) define/measure -
identify and inventory possible sources of Year 2000 issues; (2)
analyze - determine the nature and extent of Year 2000 issues and
develop project plans to address those issues; (3) improve -
execute project plans and perform a majority of the testing; and
(4) control - complete testing, continue monitoring readiness and
complete necessary contingency plans.
The action plan includes solutions which are appropriate to the
specific situations. Some systems have been upgraded to new
systems (or to new releases of existing systems) which are Year
2000 ready. Remediation of FGIC's applications is complete. Year
2000 system testing is currently in progress; we expect to be
completed mid-1999. The cost of addressing such matters will not
have a material impact on the business, operations, or financial
condition of the Company.
Business operations are also dependent on the Year 2000 readiness
of infrastructure suppliers in areas such as utilities,
communications, transportation and other services. The likelihood
and effects of failures in infrastructure systems and in the
supply chain cannot be estimated. However, with respect to
operations under its direct control, management does not expect,
in view of its Year 2000 action plan, that occurrences of Year
2000 failures will have a material adverse effect on the
financial position, results of operations or liquidity.
We are in the process of updating our Business Contingency and
Disaster Recovery Plans, as appropriate. We expect these plans to
be completed and tested by mid-1999.
-7-
<PAGE>
EXHIBIT A
APPROVED FINANCIAL INFORMATION
AS OF MARCH 31, 1999
As of March 31, 1999, December 31, 1998, and December 31, 1997, the Certificate
Insurer had written directly or assumed through reinsurance, guaranties of
approximately $276.6 billion, $268.1 billion, and $230.2 billion par value of
securities, respectively (of which approximately 86 percent, 86 percent and 86
percent, respectively constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.28 billion, $2.25 billion and
$2.14 billion, respectively. As of March 31, 1999, the Certificate Insurer had
reinsured approximately 22 percent of the risks it had written, 30 percent
through quota share reinsurance, 20 percent through excess of loss reinsurance,
and 50 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate Insurer as
of December 31, 1997, December 31, 1998, and March 31, 1999, respectively, on
the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since March
31, 1999.
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------- ------------- -------------
1997 1998 1999
------------- ------------- -------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Unearned Premiums $ 629 $ 610 $ 609
Other Liabilities 250 302 300
Stockholder's Equity (1)
Common Stock 15 15 15
Additional Paid-in Capital 384 384 384
Accumulated Other Comprehensive
Income 84 92 64
Retained Earnings 1,470 1,581 1,607
------ ------ ------
Total Stockholder's Equity 1,953 2,072 2,070
------ ------ ------
Total Liabilities and
Stockholder's Equity $2,832 $2,984 $2,979
====== ====== ======
</TABLE>
- ------------------
(1) Components of Stockholder's Equity have been restated for all periods
presented to reflect "Accumulated Other Comprehensive Income" in accordance
with the Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" adopted by the Certificate Insurer effective January
1, 1998. As this new standard only requires additional information in the
financial statements, it does not affect the Certificate Insurer's
financial position or results of operations.
For further financial information concerning the Certificate Insurer, see the
audited financial statements and the unaudited interim financial statements of
the Certificate Insurer included as Appendix A and Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory statements
filed by the Certificate Insurer with the State of New York Insurance Department
are available upon request to Financial Guaranty Insurance Company, 115
Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
