<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
May 21, 1996
-------------------
CHEVY CHASE BANK, F.S.B.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Charter)
United States 333-1682 52-0897004
- ----------------------- ----------- ------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
---------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (301) 986-7000
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. Other Events.
------------
The financial statements of Capital Markets Assurance Corporation as of December
31, 1995 and 1994 that are included in the Prospectus Supplement dated May 21,
1996 (the "Prospectus Supplement") have been audited by KPMG Peat Marwick LLP.
The consent of KPMG Peat Marwick LLP to be named as "experts" in the Prosepctus
Supplement is attached hereto as Exhibit 23.1.
The financial statements of Capital Markets Assurance Corporation as of December
31, 1995 and 1994 are attached hereto as Exhibit 99.1. In addition, the
unaudited financial statements of Capital Markets Assurance Corporation as of
March 31, 1996 are attached hereto as Exhibit 99.2.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
23.1. Consent of KPMG Peat Marwick LLP in connection with the financial
statements of Capital Markets Assurance Corporation.
99.1. Financial statements of Capital Markets Assurance Corporation as of
December 31, 1995 and 1994.
99.2. Unaudited financial statements of Capital Markets Assurance
Corporation as of March 31, 1996.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CHEVY CHASE BANK, F.S.B.
-------------------------
(Registrant)
Date: May 21, 1996 By: /s/ Joel A. Friedman
--------------------------
Name: Joel A. Friedman
Title:Senior Vice President
and Controller
-3-
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Number Description Numbered Page
- -------------- ----------- -------------
23.1. Consent of KPMG Peat Marwick LLP in connection with the
financial statements of Capital Markets Assurance Corporation.
99.1. Financial statements of Capital Markets Assurance Corporation as of
December 31, 1995 and 1994.
99.2. Unaudited financial statements of Capital Markets Assurance Corporation
as of March 31, 1996.
-4-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Capital Markets Assurance Corporation:
We consent to the use of our report included in the Form 8-K of Chevy Chase
Bank, F.S.B., and to the reference to our firm under the heading "Experts" in
the Prospectus Supplement of Chevy Chase Home Loan Trust 1996-1.
Our report dated January 25, 1996, refers to the Company's adoption at December
31, 1993 of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
/s/ KPMG Peat Marwick LLP
New York, New York
May 21, 1996
<PAGE>
EXHIBIT 99.1
<PAGE>
APPENDIX A
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
January 25, 1996
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
December 31 December 31
1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $210,651 at December 31, $ 215,706 172,016
1995 and $178,882 at December 31, 1994)
Short-term investments (at amortized cost which approximates 68,646 2,083
fair value)
Mutual funds at fair value (cost $16,434 at December 31, 1994) - 14,969
----------- -------
Total investments 284,352 189,068
----------- -------
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
----------- -------
TOTAL ASSETS $ 343,133 229,443
=========== =======
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
LIABILITIES:
Unearned premiums $ 45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 -
Deferred income taxes 11,303 3,599
----------- -------
Total liabilities 77,067 46,564
----------- -------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments, 3,286 (5,499)
net of tax
Retained earnings 41,972 26,570
----------- -------
Total stockholder's equity 266,066 182,879
----------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 343,133 229,443
=========== =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Direct premiums written $ 56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
-------- ------- ------
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
-------- ------- ------
Net premiums earned 29,242 23,103 17,483
-------- ------- ------
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
-------- ------- ------
Total revenues 44,769 33,387 29,391
-------- ------- ------
EXPENSES:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
-------- ------- ------
Total expenses 24,152 17,791 15,035
-------- ------- ------
Income before income taxes 20,617 15,596 14,356
-------- ------- ------
INCOME TAXES:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
-------- ------- ------
Total income taxes 5,215 3,708 3,726
-------- ------- ------
NET INCOME $ 15,402 11,888 10,630
======== ======= ======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000 15,000 15,000
-------- ------- -------
Balance at end of period 15,000 15,000 15,000
-------- ------- -------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 - -
-------- ------- -------
Balance at end of period 205,808 146,808 146,808
-------- ------- -------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period (5,499) 3,600 -
Unrealized appreciation (depreciation) on
investments 8,785 (9,099) 3,600
-------- ------- -------
Balance at end of period 3,286 (5,499) 3,600
-------- ------- -------
RETAINED EARNINGS:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
-------- ------- -------
Balance at end of period 41,972 26,570 14,682
-------- ------- -------
TOTAL STOCKHOLDER'S EQUITY $266,066 182,879 180,090
======== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,402 11,888 10,630
-------- ------- -------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment 1,357 1,429 902
expenses
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued 472 3,726 1,079
expenses
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
-------- ------- -------
Total adjustments 6,530 6,292 (2,022)
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,932 18,180 8,608
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities of investments 28,803 19,665 106,042
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (80,673) (18,348) (8,624)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution 59,000 - -
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,000 - -
-------- ------- -------
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
-------- ------- -------
CASH BALANCE AT END OF PERIOD $ 344 85 253
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ 1,450 1,063 833
======== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1) BACKGROUND
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guaranty and surety insurance. CapMAC is a wholly-owned
subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed in all 50
states in addition to the District of Columbia, the Commonwealth of Puerto
Rico and the territory of Guam. CapMAC insures structured asset-backed,
corporate, municipal and other financial obligations in the U.S. and
international capital markets. CapMAC also provides financial guaranty
reinsurance for structured asset-backed, corporate, municipal and other
financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by S&P Ratings Group ("S&P"), "AAA" by Duff & Phelps
Credit Rating Co. ("Duff & Phelps"), and "AAA" by Nippon Investors Service,
Inc., a Japanese rating agency. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such
rating agencies.
2) SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements are as follows:
a) BASIS OF PRESENTATION
The accompanying financial statements are prepared on the basis of generally
accepted accounting principles ("GAAP"). Such accounting principles differ
from statutory reporting practices used by insurance companies in reporting to
state regulatory authorities.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Management believes the most significant estimates relate to deferred
acquisition costs, reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual results could differ
from those estimates.
b) INVESTMENTS
At December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, the Company
can classify its debt and marketable equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the securities until maturity. All
other securities not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 and 1994, all of the Company's
securities have been classified as available-for-sale.
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Available-for-sale securities are recorded at fair value. Fair value is based
upon quoted market prices. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are recorded at
fair value at the date of transfer.
A decline in the fair value of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less than
one year at purchase date. Short-term investments are carried at amortized
cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
c) REVENUE RECOGNITION
Premiums which are payable monthly to CapMAC are reflected in income when due,
net of amounts payable to reinsurers. Premiums which are payable quarterly,
semi-annually or annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding policy term.
Premiums that are collected as a single premium at the inception of the policy
and have a term longer than one year are earned, net of amounts payable to
reinsurers, by allocating premium to each bond maturity based on the principal
amount and earning it straight-line over the term of each bond maturity. For
the year ended December 31, 1995, 91% of net premiums earned were attributable
to premiums payable in installments and 9% were attributable to premiums
collected on an upfront basis.
d) DEFERRED ACQUISITION COSTS
Certain costs incurred by CapMAC, which vary with and are primarily related to
the production of new business, are deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance,
rating agency fees and premium taxes. The deferred acquisition costs are
amortized over the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections due to various
factors such as renewal or early termination of insurance contracts or
different run-off patterns of exposure resulting in a corresponding change in
the amortization pattern of the deferred acquisition costs.
e) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a Supplemental
Loss Reserve ("SLR") and a case basis loss reserve. The SLR is established
based on expected levels of defaults resulting from credit failures on
currently insured issues. This SLR is based on estimates of the portion of
earned premiums required to cover those claims.
2
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
A case basis loss reserve is established for insured obligations
when, in the judgement of management, a default in the timely payment of debt
service is imminent. For defaults considered temporary, a case basis loss
reserve is established in an amount equal to the present value of the
anticipated defaulted debt service payments over the expected period of
default. If the default is judged not to be temporary, the present value of
all remaining defaulted debt service payments is recorded as a case basis loss
reserve. Anticipated salvage recoveries are considered in establishing case
basis loss reserves when such amounts are reasonably estimable.
Management believes that the current level of reserves is adequate to cover
the estimated liability for claims and the related adjustment expenses with
respect to financial guaranties issued by CapMAC. The establishment of the
appropriate level of loss reserves is an inherently uncertain process
involving numerous estimates and subjective judgments by management, and
therefore there can be no assurance that losses in CapMAC's insured portfolio
will not exceed the loss reserves.
f) DEPRECIATION
Leasehold improvements, furniture and fixtures are being depreciated over the
lease term or useful life, whichever is shorter, using the straight-line
method.
g) INCOME TAXES
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
h) RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
3
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3) INSURED PORTFOLIO
At December 31, 1995 and 1994, the principal amount of financial obligations
insured by CapMAC was $16.9 billion and $11.6 billion, respectively, and net
of reinsurance (net principal outstanding), was $12.6 billion and $9.4
billion, respectively, with a weighted average life of 6.0 years and 5.0
years, respectively. CapMAC's insured portfolio was broadly diversified by
geographic distribution and type of insured obligations, with no single
insured obligation in excess of statutory single risk limits, after giving
effect to any reinsurance and collateral, which are a function of CapMAC's
statutory qualified capital (the sum of statutory capital and surplus and
mandatory contingency reserve). At December 31, 1995 and 1994, the statutory
qualified capital was approximately $240 million and $170 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1995 December 31, 1994
----------------- -----------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $ 6,959 55.1 $4,740 50.4
Trade and other corporate
obligations 4,912 38.9 4,039 43.0
Municipal/government obligations 757 6.0 618 6.6
------- ----- ------ -----
TOTAL $12,628 100.0 $9,397 100.0
======= ===== ====== =====
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures, a
pool of assets covering at least 100% of the principal amount guaranteed under
its insurance contract is sold or pledged to a special purpose bankruptcy
remote entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying assets.
CapMAC, therefore, evaluates all the factors affecting past and future asset
performance by studying historical data on losses, delinquencies and
recoveries of the underlying assets. Each transaction is reviewed to ensure
that an appropriate legal structure is used to protect against the bankruptcy
risk of the originator of the assets. Along with the legal structure, an
additional level of first loss protection is also created to protect against
losses due to credit or dilution. This first level of loss protection is
usually available from reserve funds, excess cash flows,
overcollateralization, or recourse to a third party. The level of first loss
protection depends upon the historical losses and dilution of the underlying
assets, but is typically several times the normal historical loss experience
for the underlying type of assets.
During 1995, the Company sold without recourse its interest in potential cash
flows from transactions included in its insured portfolio and recognized
$2,200,000 of income which has been included in other income in the
accompanying financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
- ---------------------- --------------------------- ---------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
- ---------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
</TABLE>
4
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4) INVESTMENTS
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995 and
1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C><C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
- ----------------------------------------------------------------------------------------
Mortgage-backed securities of 100,628 313 79 100,862
U.S. government instrumentalities
and agencies
- ----------------------------------------------------------------------------------------
Obligations of states, municipalities 166,010 4,809 82 170,737
and political subdivisions
- ----------------------------------------------------------------------------------------
Corporate and asset-backed 8,506 45 6 8,545
securities
- ----------------------------------------------------------------------------------------
TOTAL $ 279,297 5,222 167 284,352
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS $ 4,295 - 153 4,142
- ----------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES OF U.S. 40,973 - 2,986 37,987
GOVERNMENT INSTRUMENTALITIES AND
AGENCIES
- ----------------------------------------------------------------------------------------
OBLIGATIONS OF STATES, MUNICIPALITIES 128,856 364 3,994 125,226
AND POLITICAL SUBDIVISIONS
- ----------------------------------------------------------------------------------------
CORPORATE AND ASSET-BACKED 6,841 15 112 6,744
SECURITIES
- ----------------------------------------------------------------------------------------
MUTUAL FUNDS 16,434 - 1,465 14,969
- ----------------------------------------------------------------------------------------
TOTAL $ 197,399 379 8,710 189,068
- ----------------------------------------------------------------------------------------
</TABLE>
THE COMPANY'S INVESTMENT IN MUTUAL FUNDS IN 1994 REPRESENTS AN INVESTMENT IN
AN OPEN-END MANAGEMENT INVESTMENT COMPANY WHICH INVESTS PRIMARILY IN
INVESTMENT-GRADE FIXED-INCOME SECURITIES DENOMINATED IN FOREIGN AND UNITED
STATES CURRENCIES.
5
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENTS IN DEBT SECURITIES
AT DECEMBER 31, 1995 BY CONTRACTUAL MATURITY ARE SHOWN BELOW ($ IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- --------------------------------------------------------------
AMORTIZED ESTIMATED
SECURITIES AVAILABLE-FOR-SALE COST FAIR VALUE
- --------------------------------------------------------------
<S> <C> <C>
LESS THAN ONE YEAR TO MATURITY $ 5,569 5,572
ONE TO FIVE YEARS TO MATURITY 37,630 38,553
FIVE TO TEN YEARS TO MATURITY 99,567 102,264
GREATER THAN TEN YEARS TO MATURITY 35,903 37,101
SUB-TOTAL 178,669 183,490
MORTGAGE-BACKED SECURITIES 100,628 100,862
---------- -------
TOTAL $ 279,297 284,352
========== =======
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities were approximately $49 million,
$40 million and $24 million in 1995, 1994 and 1993, respectively. Gross
realized capital gains of $1,320,000, $714,000 and $1,621,000, and gross
realized capital losses of $19,000, $622,000 and $77,000 were realized on
those sales for the years ended December 31, 1995, 1994 and 1993,
respectively.
Investments include bonds having a fair value of approximately $3,985,000 and
$3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on deposit
at December 31, 1995 and 1994, respectively, with state regulators as required
by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ In Thousands December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $11,105 9,193 7,803
Short-term investments 1,245 484 572
Mutual funds (162) 579 1,801
Investment expenses (235) (184) (166)
------- ------ ------
Total $11,953 10,072 10,010
======= ====== ======
</TABLE>
6
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as
shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $(5,499) 3,600
Change in unrealized appreciation (depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
Net change 8,785 (9,099)
------- -------
BALANCE AT END OF PERIOD $ 3,286 (5,499)
======= =======
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S. government
agency securities, exceeds 10% of stockholder's equity as of December 31,
1995.
5) DEFERRED ACQUISITION COSTS
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amortization (policy
acquisition costs) (7,203) (4,529) (2,663)
------- ------ ------
BALANCE AT END OF PERIOD $35,162 24,860 15,249
======= ====== ======
</TABLE>
6) EMPLOYEE BENEFITS
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly-owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to provide
various services, including underwriting, reinsurance, data processing and
other services to CapMAC in connection with the operation of CapMAC's
insurance business. CapMAC pays CFS an arm's length fee for providing such
services, but not in excess of CFS's cost for such services. CFS incurred, on
behalf of CapMAC, total compensation expenses, excluding bonuses, of
$13,484,000, $11,081,000 and $9,789,000 in 1995, 1994 and 1993, respectively.
CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k) plan to
cover substantially all of its employees. CapMAC reimburses CFS for all out-
of-pocket expenses incurred by CFS in providing services to CapMAC, including
awards given under the incentive compensation plan and benefits provided under
the health and welfare plan. For the years ended December 31, 1995, 1994 and
1993, the Company had provided approximately $7,804,000, $5,253,000 and
$3,528,000, respectively, for the annual discretionary bonus plan.
7
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
On June 25, 1992, certain officers of CapMAC were granted 182,633 restricted
stock units ("RSU") at $13.33 a share in respect of certain deferred
compensation. On December 7, 1995, the RSU's were converted to cash in the
amount of approximately $3.7 million, and such officers agreed to defer
receipt of such cash amount in exchange for receiving the same number of new
shares of restricted stock of Holdings as the number of RSU's such officers
previously held. The cash amount will be held by Holdings and invested in
accordance with certain guidelines. Such amount, including the investment
earnings thereon, will be paid to each officer upon the occurrence of certain
events but no later than December, 2000.
7) EMPLOYEE STOCK OWNERSHIP PLAN
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan ("ESOP")
to provide its employees the opportunity to obtain beneficial interests in
the stock of Holdings through a trust (the "ESOP Trust"). The ESOP Trust
purchased 750,000 shares at $13.33 per share of Holdings' stock. The ESOP
Trust financed its purchase of common stock with a loan from Holdings in the
amount of $10 million. The ESOP loan is evidenced by a promissory note
delivered to Holdings. An amount representing unearned employee compensation,
equivalent in value to the unpaid balance of the ESOP loan, is recorded as a
deduction from stockholder's equity (unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to the
participants and held in trust for the employees based upon the ratio of the
current year's principal and interest payment to the sum of principal and
interest payments estimated over the life of the loan. As of December 31,
1995 approximately 262,800 shares were allocated to the participants.
Compensation expense related to the ESOP was approximately $2,087,000,
$2,086,000 and $1,652,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
8) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses consists of a case basis
loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guaranty policy. Based
on its current estimate, the Company expects the aggregate amount of claims
and related expenses not to exceed $2.7 million, although no assurance can be
given that such claims and related expenses will not exceed that amount. Such
loss amount was covered through a recovery under a quota share reinsurance
agreement of $0.2 million and a reduction in the SLR of $2.5 million. The
portion of such claims and expenses not covered under the quota share
agreement is being funded through payments to CapMAC from the Lureco Trust
Account (see note 12).
8
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
<TABLE>
<CAPTION>
CASE BASIS LOSS RESERVE:
<S> <C>
Net balance at January 1, 1995 $ -
-------
INCURRED RELATED TO:
Current year 2,473
Prior years -
-------
Total incurred 2,473
-------
PAID INCURRED TO:
Current year 1,853
Prior years -
-------
Total paid 1,853
-------
Balance at December 31, 1995 620
-------
Reinsurance recoverable 69
-------
Supplemental loss reserve 5,859
-------
TOTAL $ 6,548
=======
</TABLE>
9) INCOME TAXES
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's annual
Federal income tax liability is determined by computing its pro rata share of
the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 7,216 35.0 $ 5,303 34.0 $4,881 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
------- ----- ------- ----- ------- ----
TOTAL INCOME TAX EXPENSE $ 5,215 25.3 $ 3,708 23.8 $ 3,726 26.0
======= ===== ======= ===== ======= ====
</TABLE>
9
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
THE TAX EFFECTS OF TEMPORARY DIFFERENCES THAT GIVE RISE TO SIGNIFICANT
PORTIONS OF THE DEFERRED FEDERAL INCOME TAX LIABILITY ARE AS FOLLOWS:
<TABLE>
<CAPTION>
$ IN THOUSANDS DECEMBER 31, 1995 DECEMBER 31, 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Unrealized capital losses on investments $ - (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
-------- ------
Total gross deferred tax assets (3,853) (5,992)
-------- ------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 -
Deferred capital gains on investments 654 726
Other, net 426 412
Total gross deferred tax liabilities 15,156 9,591
-------- ------
NET DEFERRED TAX LIABILITY $ 11,303 3,599
======== ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
that the deferred tax assets will be fully realized in the future.
10) INSURANCE REGULATORY RESTRICTIONS
CapMAC is subject to insurance regulatory requirements of the State of New
York and other states in which it is licensed to conduct business. Generally,
New York insurance laws require that dividends be paid from earned surplus and
restrict the amount of dividends in any year that may be paid without
obtaining approval for such dividends from the Superintendent of Insurance to
the lower of (i) net investment income as defined or (ii) 10% of statutory
surplus as of December 31 of the preceding year. No dividends were paid by
CapMAC to Holdings during the years ended December 31, 1995, 1994 and 1993.
No dividends could be paid during these periods because CapMAC had negative
earned surplus. Statutory surplus at December 31, 1995 and 1994 was
approximately $195,018,000 and $139,739,000, respectively. Statutory surplus
differs from stockholder's equity determined under GAAP principally due to
the mandatory contingency reserve required for statutory accounting purposes
and differences in accounting for investments, deferred acquisition costs, SLR
and deferred taxes provided under GAAP. Statutory net income was $9,000,000,
$4,543,000 and $4,528,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Statutory net income differs from net income determined
under GAAP principally due to deferred acquisition costs, SLR and deferred
income taxes.
10
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11) COMMITMENTS AND CONTINGENCIES
On January 1, 1988, the Company assumed from Citibank, N.A. the obligations of
a sublease agreement for space occupied in New York. On November 21, 1993,
the sublease was terminated and a new lease was negotiated which expires on
November 20, 2008. CapMAC has a lease agreement for its London office
beginning October 1, 1992 and expiring October 1, 2002. As of December 31,
1995, future minimum payments under the lease agreements are as follows:
$ in thousands Payment
--------------------------------------
1996 $ 2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
----------
TOTAL $ 47,878
==========
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility (the
"Liquidity Facility") provided by a consortium of banks, headed by Bank of
Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and Moody's,
respectively. Under the Liquidity Facility, CapMAC will be able, subject to
satisfying certain conditions, to borrow funds from time to time in order to
enable it to fund any claim payments or payments made in settlement or
mitigation of claim payments under its insurance contracts. For the years
ended December 31, 1995, 1994 and 1993, no draws had been made under the
Liquidity Facility.
12) REINSURANCE
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily designed
to minimize losses from large risks and protect the capital and surplus of
CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------
1995 1994 1993
-------------------- ------------------ ------------------
$ in thousands Written Earned Written Earned Written Earned
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
---------- ------ ------- ------ ------ ------
NET PREMIUMS $ 41,484 29,242 33,593 23,103 21,308 17,483
========== ====== ======= ====== ====== ======
</TABLE>
11
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of
insurers for financial statement purposes to treat reinsured risks as though
they were risks for which the ceding insurer was only contingently liable. A
contingent liability exists with respect to the aforementioned reinsurance
arrangements which may become a liability of CapMAC in the event the
reinsurers are unable to meet obligations assumed by them under the
reinsurance contracts. At December 31, 1995 and 1994, CapMAC had ceded loss
reserves of $69,000 and $0, respectively and had ceded unearned premiums of
$13,171,000 and $5,551,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco Treaty")
with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a European-based
reinsurer. The agreement is renewable annually at the Company's option,
subject to satisfying certain conditions. The agreement reinsured and
indemnified the Company for any loss incurred by CapMAC during the agreement
period up to the limits of the agreement. The Lureco Treaty provides that the
annual reinsurance premium payable by CapMAC to Lureco, after deduction of the
reinsurer's fee payable to Lureco, be deposited in a trust account (the
"Lureco Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not been
applied against claims are contractually due to CapMAC at the termination of
the treaty.
The premium deposit amounts in the Lureco Trust Account have been reflected as
assets by CapMAC during the term of the agreement. Premiums in excess of the
deposit amounts have been recorded as ceded premiums in the statements of
income. In the 1994 policy year, the agreement provided $5 million of loss
coverage in excess of the premium deposit amounts of $2 million retained in
the Lureco Trust Account. No losses were applied against the Lureco Trust
Account or ceded to the Lureco Treaty in 1994. The agreement was renewed for
the 1995 policy year and provides $5 million of loss coverage in excess of the
premium deposit amount of $4.5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200% of the
net premiums earned up to $4 million for any one agreement year. In September
1995, a claim of approximately $2.5 million on an insurance policy was applied
against the Lureco Trust Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts, on
June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the
"Stop-loss Agreement") with Winterthur Swiss Insurance Company ("Winterthur")
which is rated "AAA" by S&P and "Aaa" by Moody's. At the same time, CapMAC and
Winterthur also entered into a Quota Share Reinsurance Agreement (the
"Winterthur Quota Share Agreement") pursuant to which Winterthur had the right
to reinsure on a quota share basis 10% of each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years and was
renewable for successive one-year periods. In April 1995, Winterthur notified
CapMAC that it was canceling the Winterthur Stop-loss Agreement and the
Winterthur Quota Share Agreement effective June 30, 1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss Reinsurance
Agreement with Mitsui Marine (the "Mitsui Stop-loss Agreement"). Under the
Mitsui Stop-loss Agreement, Mitsui
12
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Marine would be required to pay any losses in excess of $100 million in the
aggregate incurred by CapMAC during the term of the Mitsui Stop-loss Agreement
on the insurance policies in effect on December 1, 1995 and written during the
one-year period thereafter, up to an aggregate limit payable under the Mitsui
Stop-loss Agreement of $50 million. The Mitsui Stop-loss Agreement has a term
of seven years and is subject to early termination by CapMAC in certain
circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC will reassume the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC will
reassume approximately $1.4 billion of principal insured by Winterthur as of
December 31, 1995. In connection with the commutation, Winterthur will return
the unearned premiums as of December 31, 1995, net of ceding commission and
federal excise tax. Such amount is expected to total approximately $2.0
million.
13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1995 and 1994. SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
December 31, 199 December 31, 1994
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Investments $ 284,352 284,352 189,068 189,068
OFF-BALANCE-SHEET INSTRUMENTS:
Financial Guarantees Outstanding $ - 147,840 - 93,494
Ceding Commission $ - 44,352 - 28,048
- -------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments summarized above:
INVESTMENTS
The fair values of fixed maturities and mutual funds are based upon quoted
market prices. The fair value of short-term investments approximates
amortized cost.
13
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FINANCIAL GUARANTEES OUTSTANDING
The fair value of financial guarantees outstanding consists of (1) the current
unearned premium reserve, net of prepaid reinsurance and (2) the fair value of
installment revenue which is derived by calculating the present value of the
estimated future cash inflow to CapMAC of policies in force having installment
premiums, net of amounts payable to reinsurers, at a discount rate of 7% at
December 31, 1995 and 1994. The amount calculated is equivalent to the
consideration that would be paid under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a third
party under reinsurance and other agreements. Ceding commission represents
the expected amount that would be paid to CapMAC to compensate CapMAC for
originating and servicing the insurance contracts. In constructing estimated
future cash inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant
historical experience. For revolving programs, assumptions are made regarding
program utilization based on discussions with program users. The amount of
installment premium actually realized by the Company could be reduced in the
future due to factors such as early termination of insurance contracts,
accelerated prepayments of underlying obligations or lower than anticipated
utilization of insured structured programs, such as commercial paper conduits.
Although increases in future installment revenue due to renewals of existing
insurance contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there can be
no assurance that future circumstances might not cause a net reduction in
installment revenue, resulting in lower revenues.
14) CAPITALIZATION
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized,
issued and outstanding shares at December 31, 1995 and 1994 were 15,000,000 at
$1.00 per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale of
shares in connection with an Initial Public Offering and private placements
were contributed to CapMAC.
14
<PAGE>
EXHIBIT 99.2
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
March 31, 1996 December 31, 1995
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS:
Bonds at fair value (amortized cost $258,874 at March 31, 1996
and $210,651 at December 31, 1995) $ 259,226 215,706
Short-term investments (at amortized cost which approximates fair
value) 28,636 68,646
----------- -----------
Total investments 287,862 284,352
----------- -----------
Cash 389 344
Accrued investment income 3,356 3,136
Deferred acquisition costs 37,559 35,162
Premiums receivable 3,463 3,540
Prepaid reinsurance 13,379 13,171
Other assets 3,477 3,428
----------- -----------
TOTAL ASSETS $ 349,485 343,133
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
LIABILITIES:
Unearned premiums $ 50,266 45,767
Reserve for losses and loss adjustment expenses 7,261 6,548
Ceded reinsurance 2,773 2,469
Accounts payable and other accrued expenses 7,288 10,844
Current income taxes 260 136
Deferred income taxes 11,657 11,303
----------- -----------
Total liabilities 79,505 77,067
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 229 3,286
Retained earnings 46,276 41,972
----------- -----------
Total stockholder's equity 269,980 266,066
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 349,485 343,133
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Direct premiums written $ 14,155 16,838
Assumed premiums written 874 154
Ceded premiums written (1,910) (3,093)
----------- -----------
Net premiums written 13,119 13,899
Increase in unearned premiums (4,291) (6,798)
----------- -----------
Net premiums earned 8,828 7,101
Net investment income 3,877 2,637
Net realized capital gains 149 65
Other income 54 12
----------- -----------
Total revenues 12,908 9,815
----------- -----------
EXPENSES:
Losses and loss adjustment expenses 1,075 696
Underwriting and operating expenses 3,978 3,738
Policy acquisition costs 2,064 1,725
----------- -----------
Total expenses 7,117 6,159
----------- -----------
Income before income taxes 5,791 3,656
----------- -----------
INCOME TAXES:
Current federal income tax 664 320
Deferred federal income tax 823 519
----------- -----------
Total income taxes 1,487 839
----------- -----------
NET INCOME $ 4,304 2,817
=========== ===========
</TABLE>
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
- ------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 15,000
-------------
Balance at end of period 15,000
-------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period 205,808
Capital contribution 2,667
-------------
Balance at end of period 208,475
-------------
UNREALIZED (DEPRECIATION) APPRECIATION
ON INVESTMENTS, NET OF TAX:
Balance at beginning of period 3,286
Unrealized depreciation on investments (3,057)
-------------
Balance at end of period 229
-------------
RETAINED EARNINGS:
Balance at beginning of period 41,972
Net income 4,304
-------------
Balance at end of period 46,276
-------------
TOTAL STOCKHOLDER'S EQUITY $ 269,980
=============
</TABLE>
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,304 2,817
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES:
Reserve for losses and loss adjustment expenses 713 696
Unearned premiums 4,499 8,075
Deferred acquisition costs (2,397) (2,662)
Premiums receivable 77 (3,241)
Accrued investment income (220) 400
Income taxes payable 947 839
Net realized capital gains (149) (65)
Accounts payable and other accrued expenses 287 4,364
Prepaid reinsurance (208) (1,277)
Other, net 89 1,355
----------- -----------
Total adjustments 3,638 8,484
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,942 11,301
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (87,335) (18,235)
Proceeds from sale of investments 6,158 4,072
Proceeds from maturities of investments 73,280 3,391
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,897) (10,772)
----------- -----------
Net increase in cash 45 529
Cash balance at beginning of period 344 85
----------- -----------
CASH BALANCE AT END OF PERIOD $ 389 614
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 525 -
=========== ===========
</TABLE>
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1996
1. BACKGROUND
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of financial
guaranty and surety insurance. CapMAC is a wholly owned subsidiary of CapMAC
Holdings Inc. ("Holdings"). CapMAC is licensed in all 50 states in addition to
the District of Columbia, the Commonwealth of Puerto Rico and the territory of
Guam. CapMAC insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets. CapMAC
also provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other major
insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors Service,
Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit Rating Co., and
Nippon Investors Service, Inc., a Japanese rating agency. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
2. BASIS OF PRESENTATION
CapMAC's unaudited interim financial statements have been prepared on the basis
of generally accepted accounting principles and, in the opinion of management,
reflect all adjustments necessary for a fair presentation of CapMAC's financial
condition, results of operations and cash flows for the periods presented. The
results of operations for the three months ended March 31, 1996 may not be
indicative of the results that may be expected for the full year ending December
31, 1996. These financial statements and notes should be read in conjunction
with the financial statements and notes included in the audited financial
statements of CapMAC as of December 31, 1995 and 1994, and for each of the years
in the three-year period ended December 31, 1995.
3. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the current
period presentation.
