------------------------------------------------------------------------------
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): November 29, 2000
LEHMAN ABS CORPORATION, (as depositor under the Pooling and Servicing
Agreement, dated as of December 1, 2000, which forms Sovereign Bank Home
Equity Loan Trust 2000-1)
LEHMAN ABS CORPORATION
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-76627 13-3447441
------------------------------- ------------- -------------------
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation) File Number) Identification No.)
Three World Financial Center
200 Vesey Street
New York, New York 10022
--------------------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
Registrant's telephone number, including area code (212) 526-7000
----- --------
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<PAGE>
ITEM 5. OTHER EVENTS.
---- ------------
The financial statements of Financial Guaranty Insurance Company ("FGIC")
as of December 31, 1999 and 1998, and for each of the years in the three-year
period ended December 31, 1999 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 Sovereign Bank Home Equity
Loan Trust 2000-1, Home Equity Loan Asset-Backed Certificates, Series 2000-1,
is attached hereto as Exhibit 23.1.
The audited financial statements of FGIC as of December 31, 1999 and
December 31, 1998, and for each of the years in the three-year period ended
December 31, 1999 are attached hereto as Exhibit 99.1. The unaudited financial
statements of FGIC as of September 30, 2000 and for the periods ended
September 30, 2000 and September 30, 1999 are attached hereto as Exhibit 99.2.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
---- -----------------------------------------
INFORMATION AND EXHIBITS.
------------------------
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
23.1 Consent of KPMG LLP
99.1 Audited Financial Statements of FGIC as of December 31, 1999 and
1998, and for each of the years in the three-year period ended
December 31, 1999
99.2 Unaudited Financial Statements of FGIC as of September 30, 2000 and
for the periods ending September 30, 2000 and September 30, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LEHMAN ABS CORPORATION
By: /s/ Samir A. Tabet
----------------------------
Name: Samir A. Tabet
Title: Senior Vice-President
Dated: November 29, 2000
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
23.1 Consent of KPMG LLP
99.1 Audited Financial Statements of FGIC as of December 31, 1999
and 1998, and for each of the years in the three-year period
ended December 31, 1999
99.2 Unaudited Financial Statements of FGIC as of September 30, 2000
and for the periods ending September 30, 2000 and September 30,
1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 21, 2000 on the
financial statements of Financial Guaranty Insurance Company as of December
31, 1999 and 1998, and for each of the years in the three-year period ended
December 31, 1999 included in the Form 8-K of Lehman ABS Corporation (the
"Registrant") which is incorporated herein by reference in the registration
statement (No. 333-76627) of the Registrant 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
November 28, 2000
<PAGE>
EXHIBIT 99.1
FINANCIAL GUARANTY INSURANCE COMPANY
==============================================================================
Audited Financial Statements
December 31, 1999
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 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998 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 LLP
January 21, 2000
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
---------------------------------------------------------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
December 31, December 31,
Assets 1999 1998
------------ ------------
<S> <C> <C>
Fixed maturity securities, at fair value
(amortized cost of $2,484,753 in 1999 and $2,519,490 in 1998) $2,412,504 $2,663,024
Short-term investments, at cost, which approximates fair value 114,776 30,395
Cash 924 318
Accrued investment income 38,677 40,038
Reinsurance recoverable 8,118 8,115
Prepaid reinsurance premiums 133,874 148,366
Deferred policy acquisition costs 71,730 80,924
Property and equipment, net of accumulated depreciation
($7,803 in 1999 and $6,981 in 1998) 967 1,802
Prepaid expenses and other assets 16,672 11,047
---------- ----------
Total assets $2,798,242 $2,984,029
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 578,930 $ 610,182
Loss and loss adjustment expenses 45,201 59,849
Ceded reinsurance balances payable 2,310 3,129
Accounts payable and accrued expenses 16,265 46,764
Current federal income taxes payable 62,181 69,542
Deferred federal income taxes 46,346 122,839
Payable for securities purchased 7,894 6
---------- ----------
Total liabilities 759,127 912,311
---------- ----------
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 (46,687) 91,922
Retained earnings 1,687,291 1,581,285
---------- ----------
Total stockholder's equity 2,039,115 2,071,718
---------- ----------
Total liabilities and stockholder's equity $2,798,242 $2,984,029
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Income
---------------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
---------------------------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
<S> <C> <C> <C>
Gross premiums written $112,029 $112,425 $95,995
Ceded premiums (14,988) (19,444) (19,780)
-------- -------- --------
Net premiums written 97,041 92,981 76,215
Decrease in net unearned premiums 16,759 12,529 39,788
------- ------- ------
Net premiums earned 113,800 105,510 116,003
Net investment income 134,994 133,353 127,773
Net realized gains 32,878 29,360 16,700
------- ------- -------
Total revenues 281,672 268,223 260,476
------- ------- -------
Expenses:
Loss and loss adjustment expenses (11,185) 3,178 12,539
Policy acquisition costs 7,198 13,870 12,936
Decrease in deferred policy acquisition costs 9,194 5,362 5,659
Other underwriting expenses 18,467 18,539 14,691
-------- ------- -------
Total expenses 23,674 40,949 45,825
-------- ------- -------
Income before provision for Federal income taxes 257,998 227,274 214,651
-------- ------- -------
Federal income tax expense:
Current 53,849 41,467 39,133
Deferred (1,857) 17 1,715
--------- -------- --------
Total Federal income tax expense 51,992 41,484 40,848
-------- -------- --------
Net income $206,006 $185,790 $173,803
======== ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
-----------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-In Accumulated Other
Common Stock Capital Comprehensive Income
------------ ---------- --------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $15,000 $334,011 $ 38,731
Net income - - -
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($13,260) - - 45,527
Change in foreign currency translation adjustment - - (323)
Total comprehensive income - - -
Capital contribution - 49,500 -
-------- --------- --------
Balance, December 31, 1997 15,000 383,511 83,935
-------- --------- --------
Net Income - - -
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($24,516) - - 8,610
Change in foreign currency translation adjustment - - (623)
Total comprehensive income - - -
Dividend declared - - -
-------- ---------- ----------
Balance at December 31, 1998 15,000 383,511 91,922
-------- --------- --------
Net Income - - -
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax benefit of $75,524 - - (140,259)
Change in foreign currency translation adjustment - - 1,650
Total comprehensive income - - -
Dividend declared - - -
-------- --------- --------
Balance at December 31, 1999 $15,000 $383,511 $(46,687)
======== ========= =========
[Table Continued]
Retained
Earnings Total
------------ ----------
<S> <C> <C>
Balance, January 1, 1997 $ 1,296,692 $1,684,434
Net income 173,803 173,803
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($13,260) - 45,527
Change in foreign currency translation adjustment - (323)
----------
Total comprehensive income - 219,007
--------
Capital contribution - 49,500
--------------- -----------
Balance, December 31, 1997 1,470,495 1,952,941
--------- ---------
Net Income 185,790 185,790
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($24,516) - 8,610
Change in foreign currency translation adjustment - (623)
------------
Total comprehensive income - 193,777
---------
Dividend declared (75,000) (75,000)
----------- -------------
Balance at December 31, 1998 1,581,285 2,071,718
--------- ----------
Net Income
Other comprehensive income: 206,006 206,006
Change in fixed maturity securities
available for sale, net of tax benefit of $75,524
Change in foreign currency translation adjustment - (140,259)
- 1,650
Total comprehensive income ------------
- 67,397
Dividend declared ------------
(100,000) (100,000)
Balance at December 31, 1999 ------------ --------------
$1,687,291 $2,039,115
========== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Cash Flows
----------------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $206,006 $185,790 $173,803
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (31,252) (18,371) (53,263)
Change in loss and loss adjustment expense reserves (14,648) (17,077) 4,310
Depreciation of property and equipment 835 1,399 2,013
Change in reinsurance recoverable (3) 105 (1,205)
Change in prepaid reinsurance premiums 14,492 5,842 13,475
Change in foreign currency translation adjustment 2,538 (958) (497)
Policy acquisition costs deferred (7,198) (13,870) (12,936)
Amortization of deferred policy acquisition costs 16,392 19,232 18,595
Change in accrued investment income, and prepaid
expenses and other assets (4,264) 12,847 (2,754)
Change in other liabilities (6,318) 15,606 (36,233)
Deferred income taxes 1,857 17 1,715
Amortization of fixed maturity securities 4,674 4,149 2,698
Change in current income taxes payable (7,361) 50,207 (32,681)
Net realized gains on investments (32,878) (29,360) (16,700)
-------- --------- ---------
Net cash provided by operating activities 142,872 215,558 60,340
------- -------- --------
Investing Activities:
Sales and maturities of fixed maturity securities 881,268 607,372 741,604
Purchases of fixed maturity securities (814,153) (818,999) (848,843)
Purchases, sales and maturities of short-term investments, net (84,381) 45,644 (2,200)
Purchases of property and equipment, net - (59) (459)
--------- -------- --------
Net cash used in investing activities (17,266) (166,042) (109,898)
--------- --------- ---------
Financing Activities:
Capital Contributions - - 49,500
Dividends paid (125,000) (50,000) -
--------- --------- --------------
Net cash used in financing activities (125,000) (50,000) 49,500
--------- -------- --------
(Decrease) Increase in cash 606 (484) (58)
Cash at beginning of year 318 802 860
-------- ------- ----------
Cash at end of year $ 924 $ 318 $ 802
======== ======= =========
See accompanying notes to financial statements.
</TABLE>
<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). Significant accounting policies are
as follows:
Investments
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.
<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 and maintenance costs are considered in determining
the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses includes 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 $45.2 million and $59.8 million at
December 31, 1999 and 1998, respectively. As of December 31, 1999 and
1998, such reserves included $32.7 million and $39.6 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, 1999 and 1998, discounted case-basis loss and loss
adjustment expense reserves were $12.5 million and $20.2 million,
respectively. Loss and loss adjustment expenses include amounts
discounted at an approximate interest rate of 6.6% in 1999 and 5.0% in
1998. The amount of the discount as of December 31, 1999 and 1998 was
$8.7 million and $8.9 million, respectively. 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.
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
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.
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, 1999 and 1998 and revenues and expenses
are translated at average monthly exchange rates. The cumulative
translation gain/(loss) at December 31, 1999 and 1998 was $0.3 million
and $(1.4) million, respectively, net of tax, and is reported in the
statement of stockholder's equity.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
requirements for SFAS No. 133 were delayed by SFAS No. 137, "Deferral of
the Effective Date of FASB Statement No. 133," and are now effective for
financial statements for periods beginning after June 15, 2000. SFAS No.
133 establishes standards for accounting and reporting for derivative
instruments and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The Company is
currently evaluating the impact of SFAS No. 133 but does not expect it to
have a material impact on the Company.
(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 NAIC has approved the
codification project effective January 1, 2001. The Company is currently
assessing the impact of the NAIC codification on its statutory financial
statements. 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;
<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.
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
4) Investments
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.2 million as of December 31, 1999 and 1998, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1999 Cost Gains Losses Value
---- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 44,592 $ 2 $2,163 $ 42,431
Obligations of states and political
subdivisions 2,336,563 12,916 81,062 2,268,417
Debt securities issued by foreign
governments 41,043 604 373 41,274
Other 62,555 112 2,285 60,382
---------- --------- -------- ----------
Investments available-for-sale 2,484,753 13,634 85,883 2,412,504
Short-term investments 114,776 - - 114,776
---------- --------- -------- ----------
Total $2,599,529 $13,634 $85,883 $2,527,280
========== ========= ======== ==========
</TABLE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1999, 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.
<TABLE>
<CAPTION>
Amortized Fair
1999 Cost Value
---- ------------ -----------
<S> <C> <C>
Due in one year or less $ 138,289 $ 138,268
Due after one year through five years 122,715 123,151
Due after five years through ten years 652,777 646,212
Due after ten years through twenty years 1,459,655 1,411,749
Due after twenty years 226,093 207,900
------------ ------------ ------
Total $2,599,529 $2,527,280
========== ==========
</TABLE>
<TABLE>
<CAPTION>
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>
In 1999, 1998 and 1997, proceeds from sales and maturities of investments
in fixed maturity securities available-for-sale carried at fair value
were $881.3 million, $607.3 million, and $741.6 million, respectively.
For 1999, 1998 and 1997 gross gains of $35.1 million, $29.6 million, and
$19.1 million respectively, and gross losses of $2.2 million, $0.2
million, and $2.4 million respectively, were realized on such sales.
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
Net investment income of the Company is derived from the following
sources (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income from fixed maturity securities $130,402 $129,942 $122,372
Income from short-term investments 5,564 4,421 6,366
-------- -------- --------
Total investment income 135,966 134,363 128,738
Investment expenses 972 1,010 965
-------- -------- --------
Net investment income $134,994 $133,353 $127,773
======== ======== ========
</TABLE>
As of December 31, 1999, 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 (20.1 percent in 1999,
18.3 percent in 1998, and 19.0 percent in 1997) 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.
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
The following is a reconciliation of federal income taxes computed at
the statutory rate and the provision for federal income taxes (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------- -------- ----------
<S> <C> <C> <C>
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $90,299 $79,546 $75,128
Tax effect of:
Tax-exempt interest (34,914) (35,660) (34,508)
Original issue discount - (2,511) -
Other, net (3,393) 109 228
-------- ------- -------
Provision for income taxes $51,992 $41,484 $40,848
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the net deferred tax liability or asset at
December 31, 1999 and 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available for sale $25,287 -
Loss reserves 9,914 12,364
Deferred compensation 2,274 2,230
Tax over book capital gains 4,754 3,464
Other 3,189 3,579
------- --------
Total gross deferred tax assets 45,418 21,637
-------- ---------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale - 50,237
Deferred acquisition costs 25,106 28,323
Premium revenue recognition 45,350 44,935
Rate differential on tax and loss bonds 9,454 9,454
Tax exempt bond discount 6,593 5,746
Other 5,261 5,781
------- ---------
Total gross deferred tax liabilities 91,764 144,476
------- --------
Net deferred tax liability $46,346 $122,839
======= ========
</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, 1999 and 1998. The
Company anticipates that the related deferred tax asset will be realized
based on future profitable business.
Total federal income tax payments during 1999, 1998 and 1997 were $60.4
million, $(8.7) million, and $71.8 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 $59.8 million that can be drawn on in the event of
default.
Net premiums earned are presented net of ceded earned premiums of $29.5
million, $25.3 million and $33.3 million for the years ended December 31,
1999, 1998 and 1997, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $0.2 million, $0.9 million
and $0.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
In accordance with an amendment to an existing reinsurance agreement, the
Company received additional ceding commission income of $6.2 million from
the reinsurer. In addition, the Company bought back $14.4 million of
ceded premium from the reinsurer and subsequently ceded the risk to a
different reinsurer.
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1, $59,849 $76,926 $72,616
Less reinsurance recoverable (8,115) (8,220) (7,015)
------- -------- ---------
Net balance at January 1, 51,734 68,706 65,601
Incurred related to:
Current year 2,407 568 1,047
Prior years (6,592) (1,290) 6,492
Portfolio reserves (7,000) 3,900 5,000
------- ------- -----
Total Incurred (11,185) 3,178 12,539
-------- ------- ------
Paid related to:
Current year - - (1,047)
Prior years (3,466) (20,150) (8,387)
-------- -------- -------
Total Paid (3,466) (20,150) (9,434)
-------- -------- -------
Net balance at December 31, 37,083 51,734 68,706
Plus reinsurance recoverable 8,118 8,115 8,220
------- ------- -------
Balance at December 31, $45,201 $59,849 $76,926
======= ======= =======
</TABLE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
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. Due to improvements on specific
credits, items were removed from the credit watchlist causing a reduction
in the portfolio loss reserves.
(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 $2.6 million, $3.2 million and $4.9
million in expenses were incurred in 1999, 1998 and 1997, 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 $0.4 million in 1999, $0.5 million in 1998, and
$0.5 million in 1997. As of December 31, 1999, par outstanding on these
deals before reinsurance was $83.7 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 1999, 1998 and 1997.
(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 $2.6 million, $2.2 million and $5.0 million in 1999,
1998 and 1997, 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 1999 and 1998, 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, 1999 and 1998, the amount of
the Company's surplus available for dividends was approximately $127.2
million and $124.6 million, respectively, without prior approval.
During 1999, and 1998, the Company declared dividends of $100.0 million,
and $75.0 million, respectively.
(11) Capital Contribution
During 1997, the Parent made a capital contribution of $49.5 million to
the Company.
<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.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial Assets $ 924 $ 924 $ 318 $ 318
Cash On hand and in demand accounts $ 114,776 $ 114,776 $ 30,395 $ 30,395
Short-term investments $2,412,504 $2,412,504 $2,663,024 $2,663,024
------------------ ----------------
</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 $335.3 million and $364.1 million compared to a carrying value of
$410.4 million as of December 31, 1999 and between $379.1 million and
$419.0 million compared to a carrying value of $432.6 million as of
December 31, 1998.
As of December 31, 1999 and 1998, the net present value of future
premiums was $55.7 million and $49.5 million, respectively.
<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, 1999, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $137.4
billion, net of reinsurance of $36.3 billion. The Company's insured
portfolio as of December 31, 1999 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, 1999, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
Municipal:
General obligation $77,780.2
Special revenue 45,531.2
Industrial revenue 471.5
Non-municipal 13,575.3
----------
Total $137,358.2
==========
As of December 31, 1999, the composition of principal exposure ceded
to reinsurers was as follows (in millions):
Ceded
Principal
Outstanding
Reinsurer:
Capital Re $12,267.6
Enhance Re 8,921.9
Other 15,148.5
---------
Total $36,338.0
=========
The Company's gross and net exposure outstanding, which includes
principal and interest, was $305,682.7 million and $237,682.2
million, respectively, as of December 31, 1999.
<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, 1999 by state, net of reinsurance, was as
follows (in millions): Net Principal Outstanding
California $15,453.9
New York 13,081.7
Pennsylvania 12,829.8
Florida 12,548.5
Illinois 10,142.0
Texas 6,331.0
Michigan 5,912.3
New Jersey 5,120.4
Ohio 3,838.8
Arizona 3,665.6
----------
Sub-total 88,924.0
Other states 48,015.1
International 419.1
----------
Total $137,358.2
==========
(13) Commitments
Total rent expense was $2.6 million, $2.6 million and $2.4 million in
1999, 1998 and 1997, respectively. For each of the next two years and in
the aggregate as of December 31, 1999, the minimum future rental payments
under noncancellable operating leases having remaining terms in excess of
one year approximate (in thousands):
Year Amount
2000 $2,909
2001 2,911
------
Total minimum future rental payments $5,820
======
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
------------------------------------------------------------------------------
(14) Comprehensive Income
Comprehensive income 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.
The following are the reclassification adjustments (in thousands) for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
Before Tax Tax Net of Tax
Amount Benefit Amount
---------- ------- ------------
<S> <C> <C> <C>
Unrealized holding losses arising
during the period $(182,905) $64,017 $(118,888)
Less: reclassification adjustment for
gains realized in net income (32,878) 11,507 (21,371)
---------- -------- ----------
Unrealized losses on investments $(215,783) $75,524 $(140,259)
========== ======= ==========
1998
--------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- ------- ------------
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)
--------- --------- ---------
Unrealized gains on investments $13,246 $ (4,636) $ 8,610
========= ========== ========
1997
--------------------------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- ------- ------------
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)
--------- -------- --------
Unrealized gains on investments $70,042 $(24,515) $45,527
========== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
-----------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of net income and stockholder's equity presented on a GAAP basis to the
corresponding amounts reported on a statutory-basis for the periods indicated below (in thousands):
Years Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ -------------------------- --------------------------
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 $206,006 $2,039,115 $185,790 $2,071,718 $173,803 $1,952,941
Premium revenue recognition 596 (194,559) (13,946) (195,155) (4,924) (181,209)
Deferral of acquisition costs 9,194 (71,730) 5,362 (80,924) 5,659 (86,286)
Contingency reserve - (721,427) - (627,257) - (540,677)
Contingency reserve tax deduction (see Note 2) - 74,059 - 74,059 - 95,185
Non-admitted assets - (806) - (1,502) - (2,593)
Case basis loss reserves (1,294) (1,221) 1,945 73 1,377 (1,872)
Portfolio loss reserves (7,000) 25,900 3,900 32,900 5,000 29,000
Deferral of income taxes (1,857) 71,551 17 72,521 1,715 72,260
Unrealized (gains) on fixed maturity
securities held at fair value, net of tax - 46,962 - (93,297) - (84,687)
Recognition of profit commission (1,092) (7,143) 1,338 (6,050) (1,203) (7,388)
Unauthorized reinsurance - (87) - (39) - -
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) (76) 11,093 253 11,169 313 10,916
--------- ---------- -------- ---------- --------- ----------
Statutory-basis amount $204,477 $1,271,707 $184,659 $1,258,216 $181,740 $1,255,590
======== ========== ======== ========== ======== ==========
</TABLE>
<PAGE>
Exhibit 99.2
FINANCIAL GUARANTY INSURANCE COMPANY
==============================================================================
Unaudited Interim Financial Statements
September 30, 2000
Balance Sheets....................................................... 1
Statements of Income................................................. 2
Statements of Cash Flows............................................. 3
Notes to Unaudited Interim Financial Statements...................... 4
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
---------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
September 30, December 31,
2000 1999
--------------- ------------
<S> <C> <C>
Assets (Unaudited)
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,254,334 in 2000 and $2,484,753 in 1999) $2,219,960 $2,412,504
Short-term investments, at cost, which approximates fair value 189,700 114,776
Cash 478 924
Accrued investment income 34,572 38,677
Reinsurance receivable 9,398 8,118
Deferred policy acquisition costs 71,967 71,730
Property, plant and equipment net of
accumulated depreciation of $7,940 in 2000 and $7,803 in 1999 702 967
Prepaid reinsurance premiums 134,395 133,874
Receivable for Securities Sold 124,359 10
Prepaid expenses and other assets 13,522 16,662
---------- ----------
Total assets $2,799,053 $2,798,242
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $581,221 $578,930
Losses and loss adjustment expenses 47,013 45,201
Ceded reinsurance payable 2,525 2,310
Accounts payable and accrued expenses 11,996 16,265
Current federal income taxes payable 56,562 62,181
Deferred federal income taxes payable 61,705 46,346
Payable for securities purchased 89,866 7,894
--------- ---------
Total liabilities 850,888 759,127
--------- ---------
Stockholder's Equity:
Common stock, par value $1,500 per share at September 30,
2000 and at December 31, 1999: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive loss, net of tax (20,687) (46,687)
Retained earnings 1,570,341 1,687,291
---------- ----------
Total stockholder's equity 1,948,165 2,039,115
---------- -----------
Total liabilities and stockholder's equity $2,799,053 $2,798,242
========== ==========
See accompanying notes to unaudited interim financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements Of Income
--------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
Nine Months Ended September 30,
2000 1999
-------------------------------
(Unaudited)
<S> <C> <C>
Revenues:
Gross premiums written $77,729 $ 75,398
Ceded premiums (14,744) (13,086)
---------- ----------
Net premiums written 62,985 62,312
(Increase)/Decrease in net unearned premiums (1,770) 29,090
--------- ---------
Net premiums earned 61,215 91,402
Net investment income 103,273 101,187
Net realized gains 18,780 25,186
-------- --------
Total revenues 183,268 217,775
-------- -------
Expenses:
Losses and loss adjustment expenses 3,087 (4,386)
Policy acquisition costs 8,320 15,032
Other underwriting expenses 11,635 13,471
--------- ------
Total expenses 23,042 24,117
--------- --------
Income before provision for federal income taxes 160,226 193,658
Provision for federal income taxes 27,176 38,894
--------- --------
Net income $133,050 $154,764
========= ========
See accompanying notes to unaudited interim financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements Of Cash Flows
--------------------------------------------------------------------------------------------------------------------------
($ in Thousands)
Nine Months Ended September 30,
2000 1999
-------------------------------
(Unaudited)
Operating activities:
<S> <C> <C>
Net income $133,050 $154,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred federal income taxes 1,359 533
Amortization of fixed maturity securities 3,731 3,195
Policy acquisition costs deferred (8,557) (10,496)
Amortization of deferred policy acquisition costs 8,320 15,032
Depreciation of property, plant and equipment 265 740
Change in reinsurance receivable (1,280) (1,927)
Change in prepaid reinsurance premiums (521) 10,192
Foreign currency translation adjustment 2,125 1,891
Change in accrued investment income, prepaid
expenses and other assets 7,245 (2,474)
Change in unearned premiums 2,291 (39,282)
Change in losses and loss adjustment expense 1,812 (5,845)
Change in ceded reinsurance payable, accounts payable
and accrued expenses (4,045) (6,170)
Change in current federal income taxes payable (5,619) (7,175)
Net realized gains (18,780) (25,186)
--------- --------
Net cash provided by operating activities 121,387 87,792
------- -------
Investing activities:
Sales or maturities of fixed maturity securities 717,451 662,901
Purchases of fixed maturity securities (514,360) (590,689)
Purchases of short-term investments, net (74,924) (84,900)
-------- --------
Net cash used for investing activities 128,167 (12,688)
--------- --------
Financing activities:
Dividends paid (250,000) (75,000)
--------- --------
Net cash used for financing activities (250,000) (75,000)
--------- --------
(Decrease)/Increase in cash (446) 104
Cash at beginning of period 924 318
--------- --------
Cash at end of period $ 478 $ 422
======== =======
See accompanying notes to unaudited interim financial statements
</TABLE>
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
------------------------------------------------------------------------------
September 30, 2000 and 1999
(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 nine
months ended September 30, 2000 and 1999, (b) the financial
position at September 30, 2000 and December 31, 1999, and
(c) cash flows for the nine months ended September 30, 2000
and 1999.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1999 audited financial statements.
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 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.
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Notes to Financial Statements
--------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the net income and stockholder's equity of Financial Guaranty prepared on a GAAP
basis to the corresponding amounts reported on a statutory basis for the periods indicated below:
Nine Months Ended September 30,
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
---------- ------------ ------- -------------
<S> <C> <C> <C> <C>
GAAP basis amount $133,050 $1,948,165 $154,764 $2,038,827
Premium revenue recognition (9,908) (204,467) (4,836) (199,991)
Deferral of acquisition costs (237) (71,967) 4,536 (76,388)
Contingency reserve - (747,059) - (665,383)
Contingency reserve tax deduction - 74,059 - 74,059
Non-admitted assets - (636) - (632)
Case-basis losses incurred 440 (781) (1,091) (1,018)
Portfolio loss reserves 2,800 28,700 1,000 33,900
Deferral of income tax 1,359 73,654 533 73,479
Unrealized losses on fixed maturity securities
held at fair value, net of taxes - -
22,343 20,585
Profit commission 27 (7,116) (457) (6,508)
Provision for unauthorized reinsurers - (87) - (88)
Allocation of tax benefits due to Parent's net
operating loss to the Company
219 11,312 235 11,404
-------- ---------- -------- ----------
Statutory basis amount $127,750 $1,126,120 $154,684 $1,302,246
======== ========== ======== ==========
</TABLE>
<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 2000.
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 State
of New York Insurance Department.
The amount of the Company's surplus available for dividends during
2000 is approximately $112.6 million.
The Company declared dividends of $50 million and $75 million during
the first nine months of 2000 and 1999 respectively. In addition, an
extraordinary dividend of $200 million (approved by New York State
Insurance Department) was paid during the first nine months of 2000.
(4) Income Taxes
The Company's effective Federal corporate tax rate (17.0 percent and
20.1 percent for the nine months ended September 30, 2000 and 1999,
respectively) is less than the statutory corporate tax rate (35
percent in 2000 and 1999) on ordinary income due to permanent
differences between financial and taxable income, principally
tax-exempt interest.
(5) Reinsurance
Net premiums earned are shown net of premiums ceded of $14.2 million
and $23.8 million, respectively, for the nine months ended September
30, 2000 and 1999.
(6) Comprehensive Income
Comprehensive income encompasses all changes in stockholders' equity
(except those arising from transactions with stockholders) and
includes net income, net unrealized capital gains or losses on
available-for-sale securities (net of taxes) and foreign currency
translation adjustments, net of taxes. The following is a
reconciliation of comprehensive income:
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
-----------------------------------------------------------------------------
September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
---- -----
<S> <C> <C>
Net income $133,050 $154,764
Other comprehensive income:
Change in unrealized investment gains/
(losses) net of taxes of $13,256 in 2000
and ($61,321) in 1999 24,619 (113,882)
Change in foreign exchange gains,
net of taxes of $743 in 2000 and
$622 in 1999 1,381 1,229
---------- --------
Comprehensive income $159,050 $ 42,111
======== ========
</TABLE>
(7) Current Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
activities, effective for Financial Guaranty Insurance Company on
January 1, 2001. Upon adoption, all derivative instruments
(including certain derivative instruments embedded in other
contracts) will be recognized in the balance sheet at their fair
values; changes in such fair values must be recognized immediately
in earnings unless specific hedging criteria are met. Management
estimates that at September 30, 2000, the effects on its financial
statements of adopting SFAS 133, as amended, will be immaterial.
However, the transition effect as of January 1, 2001, cannot be
estimated at this time because it is subject to the following
unknown variables as of that date: (1) actual derivatives and
related hedged positions, (2) market values of derivatives and
hedged positions, and (3) further interpretation of SFAS 133 by the
FASB.
