================================================================================
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) September 16, 1997
SUPERIOR BANK FSB (as depositor under the Pooling and Servicing Agreement, dated
as of September 1, 1997, providing for the issuance of AFC Mortgage Loan Asset
Backed Certificates, Series 1997-3)
SUPERIOR BANK FSB
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 333-21485 36-1414142
- ---------------------------- ------------ ----------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
ONE LINCOLN CENTRE
OAKBROOK TERRACE, ILLINOIS 60181
-------------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (630) 916-4000
================================================================================
<PAGE>
-2-
ITEM 5. OTHER EVENTS.
The financial statements of Financial Guaranty Insurance Company ("FGIC")
as of December 31, 1996 and 1995 that are included in this Form 8-K have been
audited by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick LLP to the
inclusion of their audit report on such financial statements in this Form 8-K
and their being named as "experts" in the Prospectus Supplement relating to AFC
Mortgage Loan Asset Backed Certificates, Series 1997-3, is attached hereto as
Exhibit 23.1.
The audited financial statements of FGIC as of December 31, 1996 and 1995
are attached hereto as Exhibit 99.1. The unaudited financial statements of FGIC
as of June 30, 1997 are attached hereto as Exhibit 99.2.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements.
Not applicable.
(b) Pro Forma Financial Information.
Not Applicable.
(c) Exhibits
Item 601(a) of
Regulation S-K
Exhibit No. Exhibit No. Description
- ----------- --------------- -----------
23.1 23 Consent of KPMG Peat Marwick LLP
99.1 99 Audited financial statements of FGIC as of
December 31, 1996 and 1995
99.2 99 Unaudited financial statements of FGIC as
of June 30, 1997
<PAGE>
-3-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERIOR BANK FSB
By: /s/ WILLIAM C. BRACKEN
----------------------------------
Name: William C. Bracken
Title: Senior Vice President
and Chief Financial Officer
Dated: September 16, 1997
<PAGE>
-4-
EXHIBIT INDEX
Exhibit Description
- ------- -----------
23.1 Consent of KPMG Peat Marwick LLP
99.1 Audited financial statements of FGIC as of December 31, 1996 and 1995
99.2 Unaudited financial statements of FGIC as of June 30, 1997
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 17, 1997 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1996 and
1995, and for each of the years in the three-year period ended December 31, 1996
included in the Form 8-K of Superior Bank FSB, and to the reference to our firm
under the heading "Experts" in the Prospectus Supplement.
/s/ KPMG PEAT MARWICK LLP
New York, New York
September 16, 1997
EXHIBIT 99.1
FINANCIAL GUARANTY INSURANCE COMPANY
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Report of Independent Auditors................................. 1
Balance Sheets................................................. 2
Statements of Income........................................... 3
Statements of Stockholder's Equity............................. 4
Statements of Cash Flows....................................... 5
Notes to Financial Statements.................................. 6
<PAGE>
LETTERHEAD OF KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Report of Independent Auditors'
The Board of Directors and Stockholder
Financial Guaranty Insurance Company
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1996 and 1995, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts 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, 1996 and 1995 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
January 17, 1997
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
==================================================================================================================
($ in Thousands, except per share amounts)
<CAPTION>
December 31, December 31,
1996 1995
ASSETS ------------ ------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,190,303 in 1996 and $2,043,453 in 1995) ............. $2,250,549 $2,141,584
Short-term investments, at cost, which approximates market .................. 73,839 91,032
Cash ........................................................................ 860 199
Accrued investment income ................................................... 37,655 37,347
Reinsurance recoverable ..................................................... 7,015 7,672
Prepaid reinsurance premiums ................................................ 167,683 162,087
Deferred policy acquisition costs ........................................... 91,945 94,868
Property and equipment, net of accumulated depreciation
($15,333 in 1996 and $12,861 in 1995) ..................................... 4,696 6,314
Receivable for securities sold .............................................. 379 26,572
Prepaid expenses and other assets ........................................... 19,520 12,627
---------- ----------
Total assets ........................................................... $2,654,141 $2,580,302
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums ........................................................... $ 681,816 $ 727,535
Loss and loss adjustment expenses ........................................... 72,616 77,808
Ceded reinsurance balances payable .......................................... 10,561 1,942
Accounts payable and accrued expenses ....................................... 54,165 32,811
Payable to Parent ........................................................... 1,791 1,647
Current federal income taxes payable ........................................ 52,016 51,296
Deferred federal income taxes ............................................... 91,805 99,171
Payable for securities purchased ............................................ 4,937 40,211
---------- ----------
Total liabilities $ 969,707 1,032,421
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding ......................... 15,000 15,000
Additional paid-in capital ................................................. 334,011 334,011
Net unrealized gains on fixed maturity securities available-
for-sale, net of tax ..................................................... 39,160 63,785
Foreign currency translation adjustment, net of tax ........................ (429) (1,499)
Retained earnings .......................................................... 1,296,692 1,136,584
---------- ----------
Total stockholder's equity ......................................... 1,684,434 1,547,881
---------- ----------
Total liabilities and stockholder's equity ......................... $2,654,141 $2,580,302
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
=======================================================================================================================
($ in Thousands)
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Gross premiums written ..................................... $ 97,027 $ 97,288 $161,940
Ceded premiums ............................................ (29,376) (19,319) (46,477)
-------- -------- --------
Net premiums written .................................... 67,651 77,969 115,463
Decrease in net unearned premiums ......................... 51,314 27,309 53,364
-------- -------- --------
Net premiums earned ..................................... 118,965 105,278 168,827
Net investment income ..................................... 124,635 120,398 109,828
Net realized gains ........................................ 15,022 30,762 5,898
-------- -------- --------
Total revenues .......................................... 258,622 256,438 284,553
-------- -------- --------
EXPENSES:
Loss and loss adjustment expenses ......................... 2,389 (8,426) 3,646
Policy acquisition costs .................................. 16,327 13,072 15,060
Decrease (Increase) in Deferred policy acquisition costs . 2,923 (3,940) 3,709
Other underwriting expenses ............................... 12,508 19,100 21,182
-------- -------- --------
Total expenses .......................................... 34,147 19,806 43,597
-------- -------- --------
Income before provision for Federal income taxes .......... 224,475 236,632 240,956
-------- -------- --------
Federal income tax expense:
Current ................................................. 41,548 28,913 43,484
Deferred ................................................ 5,318 19,841 7,741
-------- -------- --------
Total Federal income tax expense ........................ 46,866 48,754 51,225
-------- -------- --------
Net income .............................................. $177,609 $187,878 $189,731
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY
====================================================================================================================================
($ in Thousands)
<CAPTION>
Unrealized
Gains (Losses) on
Additiona Fixed Maturity Foreign
Common Paid-in Securities Available- Currency Retained
Stock Capital For-Sale, Net of Tax Adjustment Earnings
------- ---------- --------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ........................ $15,000 $334,011 $ 90,708 $(2,265) $ 783,975
Net income ...................................... -- -- -- -- 189,731
Change in fixed maturity securities
available for sale, net of tax of ($71,336) ... -- -- (132,481) -- --
Foreign currency translation adjustment ......... -- -- -- 1,044 --
------- -------- --------- ------- ----------
Balance, December 31, 1994 ...................... 15,000 334,011 (41,773) (1,221) 973,706
------- -------- --------- ------- ---------
Net income ...................................... -- -- -- -- 187,878
Dividend paid ................................... -- -- -- -- (25,000)
Change in fixed maturity securities ............. -- -- 105,558 -- --
available for sale, net of tax of $56,839
Foreign currency translation adjustment ......... -- -- -- (278) --
------- -------- --------- ------- ----------
Balance, December 31, 1995 ...................... 15,000 334,011 63,785 (1,499) 1,136,584
------- -------- --------- ------- ----------
Net Income ...................................... -- -- -- -- 177,609
Dividend paid ................................... -- -- -- -- (17,500)
Change in fixed maturity securities available
for sale, net of tax of ($13,260) ............. -- -- (24,625) -- --
Foreign currency translation adjustment ......... -- -- -- 1,070 --
------- -------- --------- -------- ----------
Balance at December 31, 1996 .................... $15,000 $334,011 $ 39,160 $ (429) $1,296,692
======= ======== ========= ======== ==========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
====================================================================================================================================
($ in Thousands)
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................... $ 177,609 $ 187,878 $ 189,731
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums ........................................ (45,719) (29,890) (45,927)
Change in loss and loss adjustment expense reserves ................ (5,192) (20,938) 2,648
Depreciation of property and equipment ............................. 2,472 2,348 2,689
Change in reinsurance receivable ................................... 657 6,800 (304)
Change in prepaid reinsurance premiums ............................. (5,596) 2,581 (7,437)
Change in foreign currency translation adjustment .................. 1,646 (427) 1,607
Policy acquisition costs deferred .................................. (16,327) (16,219) (18,306)
Amortization of deferred policy acquisition costs .................. 19,250 12,279 22,015
Change in accrued investment income, and prepaid
expenses and other assets ...................................... (7,201) 2,906 (5,150)
Change in other liabilities ........................................ 30,117 (12,946) 2,577
Change in deferred income taxes .................................... 5,318 19,841 7,741
Amortization of fixed maturity securities .......................... 792 1,922 5,112
Change in current income taxes payable ............................. 720 (30,827) 33,391
Net realized gains on investments .................................. (15,022) (30,762) (5,898)
----------- --------- ---------
Net cash provided by operating activities ............................ 143,524 94,546 184,489
----------- --------- ---------
Investing Activities:
Sales and maturities of fixed maturity securities .................... 891,643 836,103 550,534
Purchases of fixed maturity securities ............................... (1,033,345) (891,108) (721,908)
----------- --------- ---------
Purchases, sales and maturities of short-term investments, net ....... 17,193 (15,358) (11,486)
Purchases of property and equipment, net ............................. (854) (750) (1,290)
----------- --------- ---------
Net cash used in investing activities ................................ (125,363) (71,113) (184,150)
----------- --------- ---------
Financing Activities:
Dividends paid ....................................................... (17,500) (25,000) --
----------- --------- ---------
Net cash provided by financing activities ............................ (17,500) (25,000) --
----------- --------- ---------
Increase (Decrease) in cash .......................................... 661 (1,567) 339
Cash at beginning of year ............................................ 199 1,766 1,427
----------- --------- ---------
Cash at end of year .................................................. $ 860 $ 199 $ 1,766
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 82% of the business
written since inception by the Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1996 presentation. Significant
accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." The Statement defines
three categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's equity,
net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment at
policy inception are earned over the period at risk, based on the total
exposure outstanding at any point in time. Financial guaranty insurance
policies exposure generally declines according to predetermined schedules.
For policies with premiums that are collected periodically, premiums are
reflected in income pro rata over the period covered by the premium
payment.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments
due under insured risks at the balance sheet date for which, in
management's judgment, the likelihood of default is probable. Such reserves
amounted to $72.6 million and $77.8 million at December 31, 1996 and 1995,
respectively. As of December 31, 1996 and 1995, such reserves included
$28.9 million and $28.8 million, respectively, established based on an
evaluation of the insured portfolio in light of current economic conditions
and other relevant factors. Loss and loss adjustment expenses include
amounts discounted at an interest rate of between 6.5 and 6.6 in 1996 and
5.5 % in 1995. The reserve for loss and loss adjustment expenses is
necessarily based upon estimates, however, in management's opinion the
reserves for loss and loss adjustment expenses is adequate. However, actual
results will likely differ from those estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included in
taxable income upon their release from the reserves or upon earlier release
of such amounts from such reserves to cover excess losses as permitted by
insurance regulators. The amounts deducted are allowed as deductions from
taxable income only to the extent that U.S. government non-interest bearing
tax and loss bonds are purchased and held in an amount equal to the tax
benefit attributable to such deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1996 and 1995 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at December
31, 1996 and 1995 was $0.4 million and $1.5 million, respectively, net of
tax, and is reported as a separate component of stockholder's equity.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned 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 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.
-8-
<PAGE>
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):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------- -----------------------
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 ................................ $177,609 $1,684,434 $187,878 $1,547,881 $189,731 $1,279,723
Premium revenue recognition ...................... (9,358) (176,285) (22,555) (166,927) (4,970) (144,372)
Deferral of acquisition costs .................... 2,923 (91,945) (3,940) (94,868) 3,709 (90,928)
Contingency reserve .............................. -- (460,973) -- (386,564) -- (328,073)
Non-admitted assets .............................. -- (3,879) -- (5,731) -- (7,566)
Case basis loss reserves ......................... (3,197) (3,249) 4,048 (52) (3,340) (4,100)
Portfolio loss reserves .......................... -- 24,000 (22,100) 24,000 (11,050) 46,100
Deferral of income taxes (benefits) .............. 5,317 70,719 19,842 64,825 7,741 45,134
Unrealized gains (losses) on fixed
maturity securities held at fair
value, net of tax .............................. -- (39,160) -- (63,785) -- 41,773
Recognition of profit commission ................. (441) (6,185) 3,096 (5,744) (2,410) (8,840)
Provision for unauthorized reinsurance ........... -- -- -- - -- (266)
Contingency reserve tax deduction (see Note 2) ... -- 85,176 -- 78,196 -- 55,496
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) ........................... 313 10,603 637 10,290 (63) 9,653
-------- ---------- -------- ----------- --------- ----------
Statutory-basis amount ........................... $173,166 $1,093,256 $166,906 $1,001,521 $179,348 $ 893,734
======== ========== ======== ========== ======== ==========
</TABLE>
-9-
<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, 1996 and 1995, 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
1996 Cost Gains Losses Value
---- ---------- ---------- ------------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ............ $ 57,987 $ 373 $ 1 $ 58,359
Obligations of states and political
subdivisions ......................... 2,098,486 65,254 4,854 2,158,886
Debt securities issued by foreign
governments .......................... 33,830 -- 526 33,304
---------- ------- ------ ----------
Investments available-for-sale ........ 2,190,303 65,627 5,381 2,250,549
Short-term investments ................ 73,839 -- -- 73,839
---------- ------- ------ ----------
Total ................................. $2,264,142 $65,627 $5,381 $2,324,388
========== ======= ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1996, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
1996 Cost Value
- ---- --------- ----------
Due in one year or less ........................ $ 110,783 $ 110,888
Due after one year through five years .......... 92,279 92,951
Due after five years through ten years ......... 337,495 349,524
Due after ten years through twenty years ....... 1,650,945 1,696,623
Due after twenty years ......................... 72,640 74,402
---------- ----------
Total .......................................... $2,264,142 $2,324,388
========== ==========
-10-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1995 Cost Gains Losses Value
- ---- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ........ $ 71,182 $ 1,696 -- $ 72,878
Obligations of states and political
subdivisions ..................... 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments ...................... 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale .... 2,043,453 100,306 2,175 2,141,584
Short-term investments ............ 91,032 -- -- 91,032
---------- -------- ------ ----------
Total ............................. $2,134,485 $100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
In 1996, 1995 and 1994, proceeds from sales and maturities of investments in
fixed maturity securities available-for-sale carried at fair value were $891.6
million, $836.1 million, and $550.5 million, respectively. For 1996, 1995 and
1994 gross gains of $19.8 million, $36.3 million and $18.2 million respectively,
and gross losses of $15.0 million, $5.5 million and $12.3 million respectively,
were realized on such sales.
Net investment income of the Company is derived from the following sources (in
thousands):
Year Ended December 31,
-------------------------------
1996 1995 1994
------ ------ -----
Income from fixed maturity securities ...... 119,290 $112,684 $108,519
Income from short-term investments ......... 6,423 8,450 2,479
-------- -------- --------
Total investment income .................... 125,713 121,134 110,998
Investment expenses ........................ 1,078 736 1,170
-------- -------- --------
Net investment income ...................... $124,635 $120,398 $109,828
======== ======== ========
As of December 31, 1996, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the
Parent based upon their respective contributions to consolidated net
income. The Company's effective federal corporate tax rate (20.8 percent in
1996, 20.6 percent in 1995 and 21.3 percent in 1994) is less than the
corporate tax rate on ordinary income of 35 percent in 1996, 1995 and 1994.
Federal income tax expense relating to operations of the Company for 1996,
1995 and 1994 is comprised of the following (in thousands):
Year Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Current tax expense .................. $41,548 $28,913 $43,484
Deferred tax expense ................. 5,318 19,841 7,741
------- ------- -------
Federal income tax expense ........... $46,866 $48,754 $51,225
======= ======= =======
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate ...... $ 78,566 $ 82,821 $ 84,334
Tax effect of:
Tax-exempt interest ...................... (32,609) (30,630) (30,089)
Other, net ............................... 909 (3,437) (3,020)
-------- -------- --------
Provision for income taxes ................. $ 46,866 $ 48,754 $ 51,225
======== ======== ========
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1996
and 1995 are presented below (in thousands):
1996 1995
-------- --------
Deferred tax assets:
Loss reserves ................................... $ 9,249 $ 8,382
Deferred compensation ........................... 2,531 5,735
Tax over book capital gains ..................... 2,144 1,069
Other ........................................... 2,601 3,248
-------- --------
Total gross deferred tax assets ...................... 16,525 18,434
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale ................ 21,086 34,346
Deferred acquisition costs ...................... 32,181 33,204
Premium revenue recognition ..................... 37,159 32,791
Rate differential on tax and loss bonds ......... 9,454 9,454
Other ........................................... 8,450 7,810
-------- --------
Total gross deferred tax liabilities ................. 108,330 117,605
-------- --------
Net deferred tax liability ........................... $ 91,805 $ 99,171
======== ========
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, 1996 and 1995. The
Company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1996, 1995 and 1994 were $33.9
million, $59.8 million, and $10.1 million, respectively.
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $32.9 million that can be drawn on in the event of
default.
Net premiums earned are presented net of ceded earned premiums of $23.7
million, $21.9 million and $39.0 million for the years ended December 31,
1996, 1995 and 1994, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $(0.8) million, $1.1 million
and $0.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Balance at January 1, ................ $ 77,808 $ 98,746 $ 96,098
Less reinsurance recoverable ...... (7,672) 14,472 14,168
-------- -------- --------
Net balance at January 1, ............ 70,136 84,274 81,930
Incurred related to:
Current year ......................... -- 26,681 15,133
Prior years .......................... 2,389 (1,207) (437)
Portfolio reserves ................... -- (33,900) (11,050)
-------- -------- --------
Total Incurred ....................... 2,389 (8,426) 3,646
-------- -------- --------
Paid related to:
Current year ......................... -- (197) (382)
Prior years .......................... (6,924) (5,515) (920)
-------- -------- --------
Total Paid ........................... (6,924) (5,712) (1,302)
-------- -------- --------
Net balance at December 31, .......... 65,601 70,136 84,274
Plus reinsurance recoverable ...... 7,015 7,672 14,472
-------- -------- --------
Balance at December 31, .............. $ 72,616 $ 77,808 $ 98,746
======== ======== ========
The changes in incurred portfolio and case reserves principally relates to
business written in prior years. The changes are based upon an evaluation
of the insured portfolio in light of current economic conditions and other
relevant factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $8.1 million, $3.2 million and $3.2 million in
expenses were incurred in 1996, 1995 and 1994, 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 $0.6 million in 1996, $1.3 million in 1995, and $2.5
million in 1994.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1996, 1995 and 1994.
(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 $4.5 million, $7.5 million and $12.2 million in 1996, 1995 and
1994, 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 1996 and 1995, 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, 1996 and 1995, the amount of the Company's surplus
available for dividends was approximately $91.8 million and $100.2 million,
respectively.
During 1996 and 1995, the Company paid dividends of $17.5 million and $25.0
million, respectively. No dividends were paid during 1994.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
(11) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities Purchased:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Fair Carrying Fair
amount Value amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts .... $ 860 $ 860 $ 199 $ 199
Short-term investments .............. $ 3,839 $ 73,839 $ 91,032 $ 91,032
Fixed maturity securities ........... $2,250,549 $2,250,549 $2,141,584 $2,141,584
</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 $358.7million and $387.4 million
compared to a carrying value of $487.8 million as of December 31, 1996 and
between $412.8 million and $456.2 million compared to a carrying value of
$540.6 million as of December 31, 1995.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The
Company has established and maintains its own underwriting standards that
are based on those aspects of credit that the Company deems important for
the particular category of obligations considered for insurance. Credit
criteria include economic and social trends, debt management, financial
management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1996, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $104.4 billion, net
of reinsurance of $30.8 billion. The Company's insured portfolio as of
December 31, 1996 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, 1996, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
-----------
Municipal:
General obligation ............................... $ 50,213.1
Special revenue .................................. 33,037.8
Industrial revenue ............................... 366.5
Non-municipal .................................... 20,776.2
----------
Total .............................................. $104,393.6
==========
The Company's net exposure outstanding is $188,646.00 million as of
December 31, 1996.
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1996 by state, net of reinsurance, was as
follows (in millions):
Net
Principal
Outstanding
-----------
California ........................................ $ 11,251.7
Florida ........................................... 9,838.4
Pennsylvania ...................................... 9,325.3
New York .......................................... 8,184.5
Illinois .......................................... 6,721.2
Texas ............................................. 5,799.1
New Jersey ........................................ 4,465.3
Michigan .......................................... 4,166.6
Arizona ........................................... 2,808.9
Ohio .............................................. 2,616.0
----------
Sub-total ......................................... 65,177.0
Other states and International .................... 39,216.6
----------
Total ............................................. $104,393.6
==========
(12) COMMITMENTS
Total rent expense was $2.8 million, $2.2 million and $2.6 million in
1996, 1995 and 1994, respectively. For each of the next five years and
in the aggregate as of December 31, 1996, the minimum future rental
payments under noncancellable operating leases having remaining terms
in excess of one year approximate (in thousands):
Year Amount
---- ------
1997 .............................................. $ 2,909
1998 .............................................. 2,909
1999 .............................................. 2,909
2000 .............................................. 2,909
2001 .............................................. 2,911
-------
Total minimum future rental payments ............. $14,547
=======
-19-
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1997
Balance Sheets............................................................. 1
Statements of Income....................................................... 2
Statements of Cash Flows................................................... 3
Notes to Unaudited Interim Financial Statements............................ 4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEET
==========================================================================================================================
($ in Thousands)
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,188,078 in 1997 and $2,190,303 in 1996) .................................. $2,262,206 $2,250,549
Short-term investments, at cost, which approximates market ..................... 86,702 73,839
Cash ........................................................................... 2,191 860
Accrued investment income ...................................................... 37,205 37,655
Reinsurance receivable ......................................................... 7,077 7,015
Deferred policy acquisition costs .............................................. 91,399 91,945
Property, plant and equipment net of
accumulated depreciation of $16,600 in 1997 and $15,333 in 1996 ............. 3,913 4,696
Prepaid reinsurance premiums ................................................... 165,706 167,683
Prepaid expenses and other assets .............................................. 33,176 19,899
---------- ----------
Total assets ....................................................... $2,689,575 $2,654,141
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums .............................................................. $ 655,857 $ 681,816
Losses and loss adjustment expenses ............................................ 70,116 72,616
Ceded reinsurance payable ...................................................... 2,533 10,561
Accounts payable and accrued expenses .......................................... 38,305 54,165
Due to parent .................................................................. - 1,791
Current federal income taxes payable ........................................... 24,808 52,016
Deferred federal income taxes payable .......................................... 98,777 91,805
Payable for securities purchased ............................................... 15,941 4,937
---------- ----------
Total liabilities .................................................. 906,337 969,707
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
1997 and at December 31, 1996: 10,000 shares authorized,
issued and outstanding ....................................................... 15,000 15,000
Additional paid-in capital ..................................................... 334,011 334,011
Net unrealized gains on fixed maturity securities available
for sale, net of tax ........................................................ 48,183 39,160
Foreign currency translation adjustment ........................................ (676) (429)
Retained earnings .............................................................. 1,386,720 1,296,692
---------- ----------
Total stockholder's equity ......................................... 1,783,238 1,684,434
---------- ----------
Total liabilities and stockholder's equity ......................... $2,689,575 $2,654,141
========== ==========
</TABLE>
See accompanying notes to interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF INCOME
================================================================================
($ in Thousands)
Six Months
Ended June 30,
---------------------
1997 1996
-------- --------
(Unaudited)
REVENUES:
Gross premiums written ............................. $ 46,339 $ 45,481
Ceded premiums ..................................... (11,668) (6,643)
--------- ---------
Net premiums written ............................... 34,671 38,838
Decrease in net unearned premiums .................. 23,982 23,353
--------- ---------
Net premiums earned ................................ 58,653 62,191
Net investment income .............................. 63,518 61,513
Net realized gains ................................. 9,127 8,348
--------- ---------
Total revenues ................................. 131,298 132,052
--------- ---------
Expenses:
Losses and loss adjustment expenses ................ 1,063 (2,702)
Policy acquisition costs ........................... 7,525 9,637
Other underwriting expenses ........................ 7,949 7,561
--------- ---------
Total expenses ................................. 16,537 14,496
--------- ---------
Income before provision for federal income taxes 114,761 117,556
Provision for federal income taxes ................. 24,733 25,071
--------- ---------
Net income .................................... $ 90,028 $ 92,485
========= =========
See accompanying notes to interim financial statements
-2-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENT OF CASH FLOW
==========================================================================================================
($ in Thousands)
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ..................................................................... $ 90,028 $ 92,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes ......................................... 1,586 2,400
Amortization of fixed maturity securities ................................... 671 398
Policy acquisition costs deferred ........................................... (6,979) (8,565)
Amortization of deferred policy acquisition costs ........................... 7,525 10,333
Depreciation of fixed assets ................................................ 1,267 1,233
Change in reinsurance receivable ............................................ (62) 314
Change in prepaid reinsurance premiums ...................................... 1,977 6,033
Foreign currency translation adjustment ..................................... (380) (1,226)
Change in accrued investment income, prepaid
expenses and other assets ................................................ 4,090 (12,116)
Change in unearned premiums ................................................. (25,959) (29,386)
Change in losses and loss adjustment expense reserves ....................... (2,500) (6,774)
Change in other liabilities ................................................. (25,679) 4,678
Change in current income taxes payable ...................................... (27,208) 15,781
Net realized gains on investments ........................................... (9,127) (8,348)
--------- ---------
Net cash provided by operating activities ...................................... 9,250 67,240
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities ............................... 425,102 406,676
Purchases of fixed maturity securities ......................................... (419,674) (429,529)
Sales or maturities (purchases) of short-term investments, net ................. (12,863) (42,800)
Purchases of property and equipment, net ....................................... (484) (492)
--------- ---------
Net cash used for investing activities ......................................... (7,919) (66,145)
Increase in cash ................................................................ 1,331 1,095
Cash at beginning of period .................................................... 860 199
--------- ---------
Cash at end of period .......................................................... $ 2,191 $ 1,294
========= =========
</TABLE>
See accompanying notes to interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1997 and 1996
(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 six months
ended June 30, 1997 and 1996, (b) the financial position at
June 30, 1997 and December 31, 1996, and (c) cash flows for
the six months ended June 30, 1997 and 1996.
These interim financial statements should be read in
conjunction with the financial statements and related notes
included in the 1996 audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP,
which differs in certain respects from accounting practices
prescribed or permitted by state insurance regulatory
authorities. The following are the significant ways in which
statutory basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the
scheduled principal and interest payments rather than
in proportion to the total exposure outstanding at any
point in time;
(b) policy acquisition costs are charged to current
operations as incurred rather than as related premiums
are earned;
(c) a contingency reserve is computed on the basis of
statutory requirements for the security of all
policyholders, regardless of whether loss contingencies
actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP, if recoverable;
(e) federal income taxes are only provided with respect to
taxable income for which income taxes are currently
payable, while under GAAP taxes are also provided for
differences between the financial reporting and tax
bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as
admitted assets, while under GAAP they are recorded as
federal income tax payments; and
(g) all fixed income investments are carried at amortized
cost, rather than at fair value for securities
classified as "Available for Sale" under GAAP.
-4 -
<PAGE>
<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:
Six Months Ended June 30,
--------------------------------------------------
1997 1996
---------------------- ------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
GAAP basis amount .................................................... $90,028 $1,783,238 $92,485 $1,570,310
Premium revenue recognition .......................................... (2,158) (178,443) (4,061) (170,988)
Deferral of acquisition costs ........................................ 545 (91,399) 1,768 (93,100)
Contingency reserve .................................................. -- (489,210) -- (415,603)
Non-admitted assets .................................................. -- (3,369) -- (4,837)
Case-basis losses incurred ........................................... (355) (3,604) (3,394) (3,446)
Portfolio loss reserves .............................................. -- 24,000 -- 24,000
Deferral of income tax ............................................... 1,586 72,173 2,400 66,796
Unrealized gains on fixed maturity
securities held at fair value, net of taxes........................ -- (48,183) -- 5,472
Profit commission .................................................... (266) (6,452) 1,273 (4,471)
Contingency reserve tax deduction .................................... -- 95,185 -- 85,176
Allocation of tax benefits due to Parent's
net operating loss to the Company ................................. 156 10,759 (4) 10,287
------- ---------- ------- ----------
Statutory basis amount ............................................... $89,536 $1,164,695 $90,467 $1,069,596
======= ========== ======= ==========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1997 and 1996
(Unaudited)
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million
in 1996.
o Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month period
ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State
Insurance Department.
The amount of the Company's surplus available for dividends
during 1997 is approximately $116.5 million.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (21.6
percent and 21.3 percent for the three months ended June 30,
1997 and 1996, respectively) is less than the statutory
corporate tax rate (35 percent in 1997 and 1996) on ordinary
income due to permanent differences between financial and
taxable income, principally tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards
No. 113 ("SFAS 113"), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts",
the Company reports assets and liabilities relating to
reinsured contracts gross of the effects of reinsurance. Net
premiums earned are shown net of premiums ceded of $13.6
million and $12.7 million, respectively, for the six months
ended June 30, 1997 and 1996.
- 6 -
<PAGE>
EXHIBIT A
APPROVED FINANCIAL INFORMATION
As of June 30, 1997
As of June 30, 1997, December 31, 1996 and 1995 the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$215.3 billion, $205.0 billion and $180.0 billion par value of securities,
respectively (of which approximately 85 percent, 82 percent and 88 percent
constituted guaranties of municipal bonds), for which it had collected gross
premiums of approximately $2.09 billion, $2.05 billion and $1.95 billion,
respectively. As of June 30, 1997, the Certificate Insurer had reinsured
approximately 30 percent of the risks it had written, 26 percent through quota
share reinsurance, 27 percent through excess of loss reinsurance, and 48 percent
through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1995, December 31, 1996, and June 30, 1997,
respectively, on the basis of generally accepted accounting principles. No
material adverse change in the capitalization of the Certificate Insurer has
occurred since June 30, 1997.
December 31,
---------------- June 30,
1995 1996 1997
------ ------ ------
(in Millions)
Unearned Premiums ............................. $ 728 $ 682 $ 656
Other Liabilities ............................. 304 288 250
Stockholder's Equity
Common Stock ............................... 15 15 15
Additional Paid-in Capital ................. 334 334 334
Unrealized gains ........................... 64 39 48
Foreign currency translation adjustment .... (2) (1) (1)
Retained Earnings .......................... 1,137 1,297 1,387
------ ------ ------
Total Stockholder's Equity .................... 1,548 1,684 1,783
------ ------ ------
Total Liabilities and
Stockholder's Equity ........................ $2,580 $2,654 $2,689
====== ====== ======
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer included as Appendix
A and the unaudited interim financial statements of the Certificate Insurer
included as Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the New York Insurance
Department are available upon request to Financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
