- --------------------------------------------------------------------------------
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 21, 1999
SUPERIOR BANK FSB (as depositor under the Pooling and Servicing Agreement, dated
as of September 1, 1999, providing for the issuance of AFC Mortgage Loan Asset
Backed Notes, Series 1999-3)
Superior Bank FSB
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 333-83597 36-1414142
- ---------------------------- ----------- ----------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
One Lincoln Centre
Oakbrook Terrace, Illinois 60181
- -------------------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code (630) 916-4000
--------------
- --------------------------------------------------------------------------------
<PAGE>
-2-
Item 5. Other Events.
The financial statements of Financial Guaranty Insurance Company
("FGIC") as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998 that are included in this Form
8-K have been audited by KPMG LLP. The consent of KPMG LLP to the inclusion
of their audit report on such financial statements in this Form 8-K and
their being named as "Experts" in the Prospectus Supplement relating to AFC
Mortgage Loan Asset Backed Certificates, Series 1999-3, is attached hereto
as Exhibit 23.1.
The audited financial statements of FGIC as of December 31, 1998 and
December 31, 1997, and for each of the years in the three-year period ended
December 31, 1998 are attached hereto as Exhibit 99.1. The unaudited
interim financial statements of FGIC as of June 30, 1999 are attached
hereto as Exhibit 99.2.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements.
Not applicable.
(b) Pro Forma Financial Information.
Not Applicable.
(c) Exhibits
Item 601(a) of
Regulation S-K
Exhibit No. Exhibit No. Description
- ----------- ----------- -----------
23.1 23 Consent of KPMG LLP
99.1 99 Audited Financial Statements of Financial
Guaranty Insurance Company as of December 31,
1998 and 1997, and for each of the years in
the three-year period ended December 31, 1998
99.2 99 Unaudited Interim Financial Statements of
Financial Guaranty Insurance Company as of
June 30, 1999
<PAGE>
-3-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERIOR BANK F.S.B.
By: /s/ William C. Bracken
----------------------
Name: William C. Bracken
Title: Senior Vice President
and Chief Financial Officer
Dated: September 21, 1999
<PAGE>
-4-
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
23.1 Consent of KPMG LLP
99.1 Audited Financial Statements of Financial
Guaranty Insurance Company as of December 31,
1998 and 1997, and for each of the years in
the three-year period ended December 31, 1998
99.2 Unaudited Interim Financial Statements of
Financial Guaranty Insurance Company as of
June 30, 1999
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 22, 1999 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31, 1998
included in the Form 8-K of Superior Bank FSB (the "Registrant") which is
incorporated herein by reference in the registration statement (No. 333-83597)
and to the reference to our firm under the heading "Experts" in the Prospectus
Supplement of the Registrant.
/s/KPMG LLP
New York, New York
September 21, 1999
FINANCIAL GUARANTY INSURANCE
COMPANY
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Report of Independent Auditors .......................................... 1
Balance Sheets .......................................................... 2
Statements of Income .................................................... 3
Statements of Stockholder's Equity ...................................... 4
Statements of Cash Flows ................................................ 5
Notes to Financial Statements ........................................... 6
<PAGE>
[LETTERHEAD OF KPMG LLP]
345 Park Avenue
New York, New York 10154
Independent Auditors' Report
The Board of Directors and Stockholder
Financial Guaranty Insurance Company
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1998 and 1997, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1998 and 1997 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 22, 1999
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
================================================================================
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,519,490 in 1998 and $2,313,458 in 1997) $2,663,024 $2,443,746
Short-term investments, at cost, which approximates market 30,395 76,039
Cash 318 802
Accrued investment income 40,038 38,927
Reinsurance recoverable 8,115 8,220
Prepaid reinsurance premiums 148,366 154,208
Deferred policy acquisition costs 80,924 86,286
Property and equipment, net of accumulated depreciation
($6,981 in 1998 and $17,346 in 1997) 1,802 3,142
Prepaid expenses and other assets $11,047 21,002
---------- ----------
Total assets $2,984,029 $2,832,372
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 610,182 $ 628,553
Loss and loss adjustment expenses 59,849 76,926
Ceded reinsurance balances payable 3,129 3,932
Accounts payable and accrued expenses 46,764 26,352
Current federal income taxes payable 69,542 19,335
Deferred federal income taxes 122,839 118,522
Payable for securities purchased 6 5,811
---------- ----------
Total liabilities 912,311 879,431
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive income 91,922 83,935
Retained earnings 1,581,285 1,470,495
---------- ----------
Total stockholder's equity 2,071,718 1,952,941
---------- ----------
Total liabilities and stockholder's equity $2,984,029 $2,832,372
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
($ in Thousands)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Gross premiums written $ 112,425 $ 95,995 $ 97,027
Ceded premiums (19,444) (19,780) (29,376)
--------- --------- ---------
Net premiums written 92,981 76,215 67,651
Decrease in net unearned premiums 12,529 39,788 51,314
--------- --------- ---------
Net premiums earned 105,510 116,003 118,965
Net investment income 133,353 127,773 124,635
Net realized gains 29,360 16,700 15,022
--------- --------- ---------
Total revenues 268,223 260,476 258,622
--------- --------- ---------
EXPENSES:
Loss and loss adjustment expenses 3,178 12,539 2,389
Policy acquisition costs 13,870 12,936 16,327
Decrease (Increase) in deferred
policy acquisition costs 5,362 5,659 2,923
Other underwriting expenses 18,539 14,691 12,508
--------- --------- ---------
Total expenses 40,949 45,825 34,147
--------- --------- ---------
Income before provision for Federal income taxes 227,274 214,651 224,475
--------- --------- ---------
Federal income tax expense:
Current 41,467 39,133 41,548
Deferred 17 1,715 5,318
--------- --------- ---------
Total Federal income tax expense 41,484 40,848 46,866
--------- --------- ---------
Net income $ 185,790 $ 173,803 $ 177,609
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
=============================================================================================================================
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED
STOCK CAPITAL INCOME EARNINGS TOTAL
------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $15,000 $334,011 $ 62,286 $1,136,584 $1,547,881
Net income -- -- -- 177,609 177,609
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($13,260) -- -- (24,625) -- (24,625)
Change in foreign currency translation adjustment -- -- 1,070 -- 1,070
----------
Total comprehensive income -- -- -- -- 154,054
----------
Dividend paid -- -- -- (17,500) (17,500)
------- -------- -------- ---------- ----------
Balance, December 31, 1996 15,000 334,011 38,731 1,296,692 1,684,435
------- -------- -------- ---------- ----------
Net Income -- -- -- 173,803 173,803
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of ($24,516) -- -- 45,527 -- 45,527
Change in foreign currency translation
adjustment -- -- (323) -- (323)
----------
Total comprehensive income -- -- -- -- 219,007
----------
Capital contribution -- 49,500 -- -- 49,500
------- -------- -------- ---------- ----------
Balance at December 31, 1997 15,000 383,511 83,935 1,470,495 1,952,942
------- -------- -------- ---------- ----------
Net Income -- -- -- 185,790 185,790
Other comprehensive income:
Change in fixed maturity securities
available for sale, net of tax of $4,636 -- -- 8,610 -- 8,610
Change in foreign currency translation
adjustment -- -- (623) -- (623)
----------
Total comprehensive income -- -- -- -- 193,777
----------
Dividend declared -- -- -- (75,000) (75,000)
------- -------- -------- ---------- ----------
Balance at December 31, 1998 $15,000 $383,511 $ 91,922 $1,581,285 $2,071,719
======= ======== ======== ========== ==========
See accompanying notes to financial statements.
</TABLE>
-4-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
================================================================================
($ in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 185,790 $ 173,803 $ 177,609
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (18,371) (53,263) (45,719)
Change in loss and loss adjustment expense reserves (17,077) 4,310 (5,192)
Depreciation of property and equipment 1,399 2,013 2,472
Change in reinsurance recoverable 105 (1,205) 657
Change in prepaid reinsurance premiums 5,842 13,475 (5,596)
Change in foreign currency translation adjustment (958) (497) 1,646
Policy acquisition costs deferred (13,870) (12,936) (16,327)
Amortization of deferred policy acquisition costs 19,232 18,595 19,250
Change in accrued investment income, and prepaid
expenses and other assets 12,847 (2,754) (7,201)
Change in other liabilities 15,606 (36,233) 30,117
Change in deferred income taxes 17 1,715 5,318
Amortization of fixed maturity securities 4,149 2,698 792
Change in current income taxes payable 50,207 (32,681) 720
Net realized gains on investments (29,360) (16,700) (15,022)
--------- --------- ---------
Net cash provided by operating activities 215,558 60,340 143,524
--------- --------- ---------
Investing Activities:
Sales and maturities of fixed maturity securities 607,372 741,604 891,643
Purchases of fixed maturity securities (818,999) (848,843)
Purchases, sales and maturities of short-term
investments, net 45,644 (2,200) 17,193
Purchases of property and equipment, net (59) (459) (854)
--------- --------- ---------
Net cash used in investing activities (166,042) (109,898) (125,363)
--------- --------- ---------
Financing Activities:
Capital Contributions -- 49,500 --
Dividends paid (50,000) -- (17,500)
--------- --------- ---------
Net cash provided by financing activities (50,000) 49,500 (17,500)
--------- --------- ---------
(Decrease) Increase in cash (484) (58) 661
Cash at beginning of year 802 860 199
--------- --------- ---------
Cash at end of year $ 318 $ 802 $ 860
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) BUSINESS
Financial Guaranty Insurance Company (the "Company") is a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"). The Parent is
owned approximately ninety-nine percent by General Electric Capital
Corporation ("GE Capital") and approximately one percent by Sumitomo Marine
and Fire Insurance Company, Ltd. The Company provides financial guaranty
insurance on newly issued municipal bonds and municipal bonds trading in
the secondary market, the latter including bonds held by unit investment
trusts and mutual funds. The Company also insures structured debt issues
outside the municipal market. Approximately 86% of the business written
since inception by the Company has been municipal bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's
insurance policies do not provide for accelerated payment of the principal
of, or interest on, the bond insured in the case of a payment default. If
the issuer of a Company-insured bond defaults on its obligation to pay debt
service, the Company will make scheduled interest and principal payments as
due and is subrogated to the rights of bondholders to the extent of
payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in certain
respects from the accounting practices prescribed or permitted by
regulatory authorities (see Note 3). The prior years financial statements
have been reclassified to conform to the 1998 presentation. Significant
accounting policies are as follows:
INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for
Certain Investments in Debt and Equity Securities." The Statement defines
three categories for classification of debt securities and the related
accounting treatment for each respective category. The Company has
determined that its fixed maturity securities portfolio should be
classified as available-for-sale. Under SFAS 115, securities held as
available-for-sale are recorded at fair value and unrealized holding
gains/losses are recorded as a separate component of stockholder's equity,
net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are
determined on the basis of specific identification.
-6-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PREMIUM REVENUE RECOGNITION
Premiums for policies where premiums are collected in a single payment at
policy inception are earned over the period at risk, based on the total
exposure outstanding at any point in time. Financial guaranty insurance
policies exposure generally declines according to predetermined schedules.
For policies with premiums that are collected periodically, premiums are
reflected in income pro rata over the period covered by the premium
payment.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees
involved in underwriting, marketing and policy issuance functions, rating
agency fees, state premium taxes and certain other underwriting expenses,
offset by ceding commission income on premiums ceded to reinsurers (see
Note 6). Net acquisition costs are deferred and amortized over the period
in which the related premiums are earned. Anticipated loss and loss
adjustment expenses are considered in determining the recoverability of
acquisition costs.
LOSS AND LOSS ADJUSTMENT EXPENSES
Provision for loss and loss adjustment expenses includes amounts equal to
the present value of unpaid principal and interest and other payments due
under insured risks at the balance sheet date for which, in management's
judgment, the likelihood of default is probable. Such reserves amounted to
$59.8 million and $76.9 million at December 31, 1998 and 1997,
respectively. As of December 31, 1998 and 1997, such reserves included
$39.6 million and $35.1 million, respectively, established based on an
evaluation of the insured portfolio in light of current economic conditions
and other relevant factors. As of December 31, 1998 and 1997, case-basis
loss and loss adjustment expense reserves were $20.2 million and $41.8
million, respectively. Loss and loss adjustment expenses include amounts
discounted at an interest rate between 5.0% and 5.1% in 1998 and between
5.9% and 6.0% in 1997. The discount rate used is based upon the risk free
rate for the average maturity of the applicable bond sector. The reserve
for loss and loss adjustment expenses is necessarily based upon estimates,
however, in management's opinion the reserves for loss and loss adjustment
expenses is adequate. However, actual results will likely differ from those
estimates.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred compensation.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory
contingency reserves (see Note 3). The amounts deducted must be included in
taxable income upon their release from the reserves or upon earlier release
of such amounts from such reserves to cover excess losses as permitted by
insurance regulators. The amounts deducted are allowed as deductions from
taxable income only to the extent that U.S. government non-interest bearing
tax and loss bonds are purchased and held in an amount equal to the tax
benefit attributable to such deductions.
-7-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income
over their estimated service lives. Office furniture and equipment are
depreciated straight-line over five years. Leasehold improvements are
amortized over their estimated service life or over the life of the lease,
whichever is shorter. Computer equipment and software are depreciated over
three years. Maintenance and repairs are charged to expense as incurred.
FOREIGN CURRENCY TRANSLATION
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing
at December 31, 1998 and 1997 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at December
31, 1998 and 1997 was $1.4 million and $0.7 million, respectively, net of
tax, and is reported as a separate component of stockholder's equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB Statement 130, "Reporting Comprehensive Income", was
issued to establish standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
This Statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in that financial statement. The
Company implemented this Statement in 1998.
In June 1998, FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued to establish comprehensive
accounting and reporting standards effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999 (thus for
calendar year-end entities, this Standard is effective January 1, 2000).
This Standard not only defines derivative instruments and hedging
activities, but also requires that they be recorded on the statement of
financial position at fair value, and depending upon if the instrument is a
derivative or qualifies as a specific type of hedge, changes in fair value
may be recorded either in the statement of earnings or other comprehensive
income. Management is assessing the impact of this Standard on the Company
and does not anticipate the impact to be significant.
(3) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by
state insurance regulatory authorities. The following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
-8-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the
financial reporting and the tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax
payments; and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as
available-for-sale under GAAP.
-9-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
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,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
-------- ------------- -------- ------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $185,790 $2,071,718 $173,803 $1,952,941 $177,609 $ 1,684,434
Premium revenue recognition (13,946) (195,155) (4,924) (181,209) (9,358) (176,285)
Deferral of acquisition costs 5,362 (80,924) 5,659 (86,286) 2,923 (91,945)
Contingency reserve -- (627,257) -- (540,677) -- (460,973)
Contingency reserve tax deduction (see Note 2) -- 74,059 -- 95,185 -- 85,176
Non-admitted assets -- (1,502) -- (2,593) -- (3,879)
Case basis loss reserves 1,945 73 1,377 (1,872) (3,197) (3,249)
Portfolio loss reserves 3,900 32,900 5,000 29,000 -- 24,000
Deferral of income taxes 17 72,521 1,715 72,260 5,317 70,719
Unrealized (gains) on fixed maturity
securities held at fair value, net of tax -- (93,297) -- (84,687) -- (39,160)
Recognition of profit commission 1,338 (6,050) (1,203) (7,388) (441) (6,185)
Unauthorized reinsurance -- (39) -- -- -- --
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 253 11,169 313 10,916 313 10,603
-------- ---------- -------- ---------- -------- -----------
Statutory-basis amount $184,659 $1,258,215 $181,740 $1,255,590 $173,166 $ 1,093,256
======== ========== ======== ========== ======== ===========
</TABLE>
-10-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4) INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.1 million as of December 31, 1998 and 1997, respectively,
were on deposit with various regulatory authorities as required by law.
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
1998 COST GAINS LOSSES VALUE
---- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government corporations and $ 75,595 $ 1,294 $ 2 $ 76,887
agencies
Obligations of states and
political subdivisions 2,367,682 142,777 4,112 2,506,347
Debt securities issued by
foreign governments 38,520 3,182 -- 41,702
Other 37,693 416 21 38,088
---------- -------- ------ ----------
Investments available-for-sale 2,519,490 147,669 4,135 2,663,024
Short-term investments 30,395 -- -- 30,395
---------- -------- ------ ----------
Total $2,549,885 $147,669 $4,135 $2,693,419
========== ======== ====== ==========
</TABLE>
-11-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1998, by contractual maturity date, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
1998 COST VALUE
---- ---------- ----------
Due in one year or less $ 32,677 $ 32,693
Due after one year through five years 110,268 113,985
Due after five years through ten years 711,111 752,903
Due after ten years through twenty years 1,537,253 1,635,363
Due after twenty years 158,576 158,475
---------- ----------
Total $2,549,885 $2,693,419
========== ==========
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1997 COST GAINS LOSSES VALUE
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 11,539 $ 185 $-- $ 11,724
Obligations of states and
political subdivisions 2,272,225 130,183 655 2,401,753
Debt securities issued by
foreign governments 29,694 603 28 30,269
Investments available-for-sale 2,313,458 130,971 683 2,443,746
Short-term investments 76,039 -- -- 76,039
---------- -------- ---- ----------
Total $2,389,497 $130,971 $683 $2,519,785
========== ======== ==== ==========
</TABLE>
In 1998, 1997 and 1996, proceeds from sales and maturities of investments
in fixed maturity securities available-for-sale carried at fair value were
$607.3 million, $741.6 million, and $891.6 million, respectively. For 1998,
1997 and 1996 gross gains of $29.6 million, $19.1 million and $19.8 million
respectively, and gross losses of $0.2 million, $2.4 million and $4.8
million respectively, were realized on such sales.
-12-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
Net investment income of the Company is derived from the following sources
(in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
Income from fixed maturity securities $129,942 $122,372 $119,290
Income from short-term investments 4,421 6,366 6,423
-------- -------- --------
Total investment income 134,363 128,738 125,713
Investment expenses 1,010 965 1,078
-------- -------- --------
Net investment income $133,353 $127,773 $124,635
======== ======== ========
As of December 31, 1998, the Company did not have more than 3% of its
investment portfolio concentrated in a single issuer or industry.
(5) INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ("GE Capital"). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the
Parent based upon their respective contributions to consolidated net
income. The Company also has a separate tax sharing agreement with its
Parent. Under this agreement the Company can utilize its Parent's net
operating loss to offset taxable income on a stand-alone basis. The
Company's effective federal corporate tax rate (18.3 percent in 1998, 19.0
percent in 1997 and 20.8 percent in 1996) is less than the corporate tax
rate on ordinary income of 35 percent in 1998, 1997 and 1996, primarily due
to tax exempt interest on municipal investments.
Federal income tax expense relating to operations of the Company for 1998,
1997 and 1996 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
Current tax expense $41,467 $39,133 $41,548
Deferred tax expense 17 1,715 5,318
------- ------- -------
Federal income tax expense $41,484 $40,848 $46,866
======= ======= =======
-13-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $ 79,546 $ 75,128 $ 78,566
Tax effect of:
Tax-exempt interest (35,660) (34,508) (32,609)
Original issue discount (2,511) -- --
Other, net (109) 228 909
-------- -------- --------
Provision for income taxes $ 41,484 $ 40,848 $ 46,866
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1998
and 1997 are presented below (in thousands):
1998 1997
-------- --------
Deferred tax assets:
Loss reserves $ 12,364 $ 10,999
Deferred compensation 2,230 2,242
Tax over book capital gains 3,464 2,996
Other 3,579 2,260
-------- --------
Total gross deferred tax assets 21,637 18,497
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 50,237 45,601
Deferred acquisition costs 28,323 30,200
Premium revenue recognition 44,935 40,103
Rate differential on tax and loss bonds 9,454 9,454
Other 11,527 11,661
-------- --------
Total gross deferred tax liabilities 144,476 137,019
-------- --------
Net deferred tax liability $122,839 $118,522
======== ========
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it will
realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1998 and 1997. The
Company anticipates that the related deferred tax asset will be realized
based on future profitable business.
Total federal income tax payments during 1998, 1997 and 1996 were $(8.7)
million, $71.8 million, and $33.9 million, respectively.
-14-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(6) REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a
facultative basis. This process serves to limit the Company's exposure on
risks underwritten. In the event that any or all of the reinsuring
companies were unable to meet their obligations, the Company would be
liable for such defaulted amounts. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral under reinsurance agreements in the form of
letters of credit and trust agreements in various amounts with various
reinsurers totaling $37.0 million that can be drawn on in the event of
default.
Net premiums earned are presented net of ceded earned premiums of $25.3
million, $33.3 million and $23.7 million for the years ended December 31,
1998, 1997 and 1996, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $0.9 million, $0.2 million
and $(0.8) million for the years ended December 31, 1998, 1997 and 1996,
respectively.
(7) LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Balance at January 1, $ 76,926 $ 72,616 $ 77,808
Less reinsurance recoverable (8,220) (7,015) (7,672)
-------- -------- --------
Net balance at January 1, 68,706 65,601 70,136
Incurred related to:
Current year 568 1,047 --
Prior years (1,290) 6,492 2,389
Portfolio reserves 3,900 5,000 --
-------- -------- --------
Total Incurred 3,178 12,539 2,389
-------- -------- --------
Paid related to:
Current year -- (1,047) --
Prior years (20,150) (8,387) (6,924)
-------- -------- --------
Total Paid (20,150) (9,434) (6,924)
-------- -------- --------
Net balance at December 31, 51,734 68,706 65,601
Plus reinsurance recoverable 8,115 8,220 7,015
-------- -------- --------
Balance at December 31, $ 59,849 $ 76,926 $ 72,616
======== ======== ========
The changes in incurred portfolio and case reserves principally relates to
business written in prior years. The changes are based upon an evaluation
of the insured portfolio in light of current economic conditions and other
relevant factors.
-15-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(8) RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the management
of the Company's investment portfolio; and telecommunication service
charges. Approximately $3.2 million, $4.9 million and $8.1 million in
expenses were incurred in 1998, 1997 and 1996, respectively, related to
such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first
loss protection in the event of default. Gross premiums written on these
issues amounted to $0.5 million in 1998, $0.5 million in 1997, and $0.6
million in 1996. As of December 31, 1998, par outstanding on these deals
before reinsurance was $109.4 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1998, 1997 and 1996.
(9) COMPENSATION PLANS
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans.
Expenses incurred by the Company under compensation plans and bonuses
amounted to $2.2 million, $5.0 million and $4.5 million in 1998, 1997 and
1996, respectively, before deduction for related tax benefits.
(10) DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus
after such dividend may not be less than the minimum required paid-in
capital, which was $66.4 million in 1998 and 1997, and (b) dividends may
not exceed the lesser of 10 percent of its surplus or 100 percent of
adjusted net investment income, as defined by New York insurance law, for
the 12 month period ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State Insurance Department.
At December 31, 1998 and 1997, the amount of the Company's surplus
available for dividends was approximately $50.8 million and $124.6 million,
respectively.
During 1998, 1997 and 1996, the Company paid dividends of $75.0, $0.0
million and $17.5 million, respectively.
(11) CAPITAL CONTRIBUTION
During 1997, the Parent made a capital contribution of $49.5 million to the
Company.
-16-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
(12) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, if available. If a quoted market price is
not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost, which
approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities Purchased:
The carrying amounts of these items approximate their fair values.
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts $ 318 $ 318 $ 802 $ 802
Short-term investments 30,395 30,395 $ 76,039 $ 76,039
Fixed maturity securities $2,663,024 $2,663,024 $2,443,746 $2,443,746
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated
fair values of these guaranties are based on amounts currently charged to
enter into similar agreements (net of applicable ceding commissions),
discounted cash flows considering contractual revenues to be received
adjusted for expected prepayments, the present value of future obligations
and estimated losses, and current interest rates. The estimated fair values
of such financial guaranties range between $379.1 million and $419.0
million compared to a carrying value of $432.6 million as of December 31,
1998 and between $355.7 million and $382.6 million compared to a carrying
value of $456.8 million as of December 31, 1997.
-17-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
CONCENTRATIONS OF CREDIT RISK
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The
Company has established and maintains its own underwriting standards that
are based on those aspects of credit that the Company deems important for
the particular category of obligations considered for insurance. Credit
criteria include economic and social trends, debt management, financial
management and legal and administrative factors, the adequacy of
anticipated cash flows, including the historical and expected performance
of assets pledged for payment of securities under varying economic
scenarios and underlying levels of protection such as insurance or
overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the
obligation insured by a party of acceptable credit quality obligated to
make payment prior to any payment by the Company. The types and extent of
collateral pledged varies, but may include residential and commercial
mortgages, corporate debt, government debt and consumer receivables.
As of December 31, 1998, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $131.2 billion, net
of reinsurance of $35.4 billion. The Company's insured portfolio as of
December 31, 1998 was broadly diversified by geography and bond market
sector with no single debt issuer representing more than 1% of the
Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1998, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
Municipal:
General obligation $ 69,684.2
Special revenue 42,453.6
Industrial revenue 465.3
Non-municipal 18,598.5
----------
Total $131,201.6
==========
The Company's gross and net exposure outstanding was $295,860.8 million and
$229,750.6 million, respectively, as of December 31, 1998.
As of December 31, 1998, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
CEDED
PRINCIPAL
OUTSTANDING
-----------
Reinsurer:
Capital Re $14,615.1
Enhance Re 9,539.1
Other 11,220.1
---------
Total $35,374.3
=========
-18-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1998 by state, net of reinsurance, was as
follows (in millions):
NET
PRINCIPAL
OUTSTANDING
-----------
California $ 14,945.0
Pennsylvania 12,140.1
Florida 11,577.8
New York 11,397.1
Illinois 8,189.6
Texas 6,689.5
Michigan 5,406.8
New Jersey 4,773.0
Arizona 3,678.7
Ohio 3,470.2
----------
Sub-total 82,267.8
Other states 48,662.4
International 271.4
----------
Total $131,201.6
==========
(13) COMMITMENTS
Total rent expense was $2.6 million, $2.4 million and $2.8 million in 1998,
1997 and 1996, respectively. For each of the next five years and in the
aggregate as of December 31, 1998, the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one
year approximate (in thousands):
YEAR AMOUNT
---- ------
1999 $2,909
2000 2,909
2001 2,911
2002
2003 --
Total minimum future rental payments $8,729
(14) YEAR 2000 READINESS DISCLOSURE (UNAUDITED)
The inability of business processes to continue to function correctly after
the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. FGIC recognizes the
seriousness of the Year 2000 issue and has developed an action plan to
mitigate Year 2000 issues in their information systems, products,
facilities and suppliers. The action plan has been reviewed by senior
management at the Company and GE Capital Services internal audit staff. Our
progress is closely monitored by GE Capital's Year 2000 Program Management
Office.
-19-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
The action plan is divided into four phases: (1) define/measure - identify
and inventory possible sources of Year 2000 issues; (2) analyze - determine
the nature and extent of Year 2000 issues and develop project plans to
address those issues; (3) improve - execute project plans and perform a
majority of the testing; and (4) control - complete testing, continue
monitoring readiness and complete necessary contingency plans.
The action plan includes solutions which are appropriate to the specific
situations. Some systems have been upgraded to new systems (or to new
releases of existing systems) which are Year 2000 ready. Remediation of
FGIC's applications is complete. Year 2000 system testing is currently in
progress; we expect to be completed mid-1999. The cost of addressing such
matters will not have a material impact on the business, operations, or
financial condition of the Company.
Business operations are also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utilities, communications,
transportation and other services. The likelihood and effects of failures
in infrastructure systems and in the supply chain cannot be estimated.
However, with respect to operations under its direct control, management
does not expect, in view of its Year 2000 action plan, that occurrences of
Year 2000 failures will have a material adverse effect on the financial
position, results of operations or liquidity.
We are in the process of updating our Business Contingency and Disaster
Recovery Plans, as appropriate. We expect these plans to be completed and
tested by mid-1999.
(15) COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income". This statement was implemented retroactively by the
Company in 1998. the statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. Accumulated other
comprehensive income of the Company consists of net unrealized gains on
investment securities and foreign currency translation adjustments.
The following are components of other comprehensive income (in thousands)
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
---------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- --------- ----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $ 42,606 $(14,912) $ 27,694
Less: reclassification adjustment for
gains realized in net income (29,360) 10,276 (19,084)
-------- -------- --------
Other comprehensive income $ 13,246 $ (4,636) $ 8,610
======== ======== ========
</TABLE>
-20-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
1997
---------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- -------- -----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $ 86,742 $(30,360) $ 56,382
Less: reclassification adjustment for
gains realized in net income (16,700) 5,845 (10,855)
-------- -------- --------
Other comprehensive income $ 70,042 $(24,515) $ 45,527
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
Before Tax Tax Net of Tax
Amount Expense Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding losses arising
during the period $(22,863) $ 8,002 $(14,861)
Less: reclassification adjustment for
gains realized in net income (15,022) 5,258 (9,764)
-------- ------- --------
Other comprehensive income $(37,885) $13,260 $(24,625)
======== ======= ========
</TABLE>
-21-
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
UNAUDITED INTERIM FINANCIAL STATEMENTS
JUNE 30, 1999
Balance Sheets..................................................... 1
Statements of Income............................................... 2
Statements of Cash Flows........................................... 3
Notes to Unaudited Interim Financial Statements.................... 4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL GUARANTY INSURANCE
COMPANY BALANCE SHEETS
==============================================================================================
($ in Thousands)
JUNE 30, DECEMBER 31,
1999 1998
----------- ----------
ASSETS (UNAUDITED)
<S> <C> <C>
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,431,049 in 1999 and $2,519,490 in 1998) $ 2,429,203 $2,663,024
Short-term investments, at cost, which approximates fair value 165,841 30,395
Cash 682 318
Accrued investment income 38,726 40,038
Reinsurance receivable 8,159 8,115
Deferred policy acquisition costs 78,242 80,924
Property, plant and equipment net of
accumulated depreciation of $7,303 in 1999 and $6,981 in 1998 1,157 1,802
Prepaid reinsurance premiums 146,734 148,366
Prepaid expenses and other assets 9,586 11,047
----------- ----------
Total assets $ 2,878,330 $2,984,029
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 605,147 $ 610,182
Losses and loss adjustment expenses 54,989 59,849
Ceded reinsurance payable 1,980 3,129
Accounts payable and accrued expenses 45,311 46,764
Current federal income taxes payable 68,610 69,542
Deferred federal income taxes payable 73,935 122,839
Payable for securities purchased -- 6
----------- ----------
Total liabilities 849,972 912,311
----------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
1999 and at December 31, 1998: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive income, net of tax (1,380) 91,922
Retained earnings 1,631,227 1,581,285
----------- ----------
Total stockholder's equity 2,028,358 2,071,718
----------- ----------
Total liabilities and stockholder's equity $ 2,878,330 $2,984,029
=========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
-1-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF INCOME
================================================================================
($ in Thousands)
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- ---------
(UNAUDITED)
REVENUES:
Gross premiums written $ 56,974 $ 46,221
Ceded premiums (11,151) (4,818)
--------- ---------
Net premiums written 45,823 41,403
Decrease in net unearned premiums 3,402 16,654
--------- ---------
Net premiums earned 49,225 58,057
Net investment income 67,416 66,023
Net realized gains 25,019 25,773
--------- ---------
Total revenues 141,660 149,853
--------- ---------
EXPENSES:
Losses and loss adjustment expenses (2,683) 3,381
Policy acquisition costs 8,996 10,576
Other underwriting expenses 9,640 9,426
--------- ---------
Total expenses 15,953 23,383
--------- ---------
Income before provision for
federal income taxes 125,707 126,470
Provision for federal income taxes 25,765 28,589
--------- ---------
Net income $ 99,942 $ 97,881
========= =========
See accompanying notes to unaudited interim financial statements
-2-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY STATEMENTS OF CASH FLOWS
================================================================================
($ in Thousands)
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- ---------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 99,942 $ 97,881
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 1,308 663
Amortization of fixed maturity securities 1,830 1,886
Policy acquisition costs deferred (6,314) (8,515)
Amortization of deferred policy acquisition costs 8,996 10,576
Depreciation of fixed assets 645 732
Change in reinsurance receivable (44) 639
Change in prepaid reinsurance premiums 1,632 7,630
Foreign currency translation adjustment 1,838 382
Change in accrued investment income, prepaid
expenses and other assets 2,773 13,719
Change in unearned premiums (5,035) (24,228)
Change in losses and loss adjustment
expense reserves (4,860) (15,756)
Change in other liabilities (2,602) 13,289
Change in current income taxes payable (932) 29,779
Net realized gains on investments (25,019) (25,773)
--------- ---------
Net cash provided by operating activities 74,158 102,904
--------- ---------
INVESTING ACTIVITIES:
Sales or maturities of fixed maturity securities 581,563 431,647
Purchases of fixed maturity securities (469,911) (535,726)
Sales or maturities (purchases) of short-term
investments, net (135,446) 1,441
--------- ---------
Net cash used for investing activities (23,794) (102,638)
--------- ---------
FINANCING ACTIVITIES:
Dividends paid (50,000) --
--------- ---------
Net cash provided by financing activities (50,000) --
--------- ---------
Increase in cash 364 266
Cash at beginning of period 318 802
--------- ---------
Cash at end of period $ 682 $ 1,068
========= =========
See accompanying notes to unaudited interim financial statements
-3-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1999 and 1998
(Unaudited)
(1) BASIS OF PRESENTATION
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments
necessary, in the opinion of management, for a fair statement of (a)
results of operations for the six months ended June 30, 1999 and 1998,
(b) the financial position at June 30, 1999 and December 31, 1998, and
(c) cash flows for the six months ended June 30, 1999 and 1998.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1998
audited financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The following are
the significant ways in which statutory basis accounting practices
differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to the
total exposure outstanding at any point in time;
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of
whether loss contingencies actually exist, whereas under GAAP, a
reserve is established based on an ultimate estimate of exposure;
(d) certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP,
if recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under
GAAP taxes are also provided for differences between the
financial reporting and tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax
payments; and
(g) all fixed income investments are carried at amortized cost,
rather than at fair value for securities classified as "Available
for Sale" under GAAP.
-4 -
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
The following is a reconciliation of the net income and stockholder's equity of
Financial Guaranty prepared on a GAAP basis to the corresponding amounts
reported on a statutory basis for the periods indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
1999 1998
------------------------- ------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
GAAP basis amount $ 99,942 $ 2,028,358 $ 97,881 $ 2,005,404
Premium revenue recognition (8,326) (203,481) (6,709) (187,918)
Deferral of acquisition costs 2,682 (78,242) 2,061 (84,225)
Contingency reserve -- (648,106) -- (567,350)
Non-admitted assets -- (933) -- (2,090)
Case-basis losses incurred (989) (916) 1,286 (586)
Portfolio loss reserves 1,000 33,900 1,400 30,400
Deferral of income tax 1,308 74,509 663 73,633
Unrealized gains on fixed maturity
securities held at fair value, net -- 1,200 -- (64,021)
of taxes
Profit commission 13 (6,038) 1,754 (5,635)
Provision for unauthorized reinsurance -- (38) -- --
Contingency reserve tax deduction -- 74,059 -- 74,059
Allocation of tax benefits due to
Parent's net operating loss to the 156 11,325 106 11,022
-------- ----------- -------- -----------
Company
Statutory basis amount $ 95,786 $ 1,285,597 $ 98,442 $ 1,282,693
======== =========== ======== ===========
</TABLE>
-5-
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
(3) DIVIDENDS
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million in
1999.
o Dividends may not exceed the lesser of 10 percent of its surplus
or 100 percent of adjusted net investment income, as defined
therein, for the twelve month period ending on the preceding
December 31, without the prior approval of the Superintendent of
the New York State Insurance Department.
The amount of the Company's surplus available for dividends during
1999 is approximately $128.6 million before dividends declared.
The Company declared $50.0 million in dividends during the first half
of 1999.
(4) INCOME TAXES
The Company's effective Federal corporate tax rate (20.5 percent and
22.6 percent for the six months ended June 30, 1999 and 1998,
respectively) is less than the statutory corporate tax rate (35
percent in 1999 and 1998) on ordinary income due to permanent
differences between financial and taxable income, principally
tax-exempt interest.
(5) REINSURANCE
In accordance with Statement of Financial Accounting Standards No. 113
("SFAS 113"), "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", the Company reports
assets and liabilities relating to reinsured contracts gross of the
effects of reinsurance. Net premiums earned are shown net of premiums
ceded of $12.8 million and $12.4 million, respectively, for the six
months ended June 30, 1999 and 1998.
(6) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
statement No. 130, "Reporting Comprehensive Income", which requires
enterprises to disclose comprehensive income and its components.
Comprehensive income encompasses all changes in shareholders' equity
(except those arising from transactions with shareholders) and
includes net income, net unrealized capital gains or losses on
available-for-sale securities and foreign currency translation
adjustments, net of taxes. This new standard only changes the
presentation of certain information in the financial statements and
does not affect the Company's financial position or results of
operations. The following is a reconciliation of comprehensive income:
- 6 -
<PAGE>
FINANCIAL GUARANTY INSURANCE
COMPANY NOTES TO FINANCIAL STATEMENTS
================================================================================
June 30, 1999 and 1998
(Unaudited)
FOR THE SIX MONTHS
ENDED JUNE 30,
1999 1998
-------- --------
Net income $ 99,942 $ 97,881
Other comprehensive income:
Change in unrealized investment gains,
net of taxes (94,497) (20,666)
Change in foreign exchange gains,
net of taxes 1,195 248
-------- --------
Comprehensive income $ 6,640 $ 77,463
======== ========
(7) YEAR 2000 READINESS DISCLOSURE
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse
effects on companies and entities throughout the world. FGIC
recognizes the seriousness of the Year 2000 issue and has developed an
action plan to mitigate Year 2000 issues in their information systems,
products, facilities and suppliers. The action plan has been reviewed
by senior management at FGIC and GE Capital Services internal audit
staff. Our progress is closely monitored by GE Capital's Year 2000
Program Management Office.
The action plan is divided into four phases: (1) define/measure -
identify and inventory possible sources of Year 2000 issues; (2)
analyze - determine the nature and extent of Year 2000 issues and
develop project plans to address those issues; (3) improve - execute
project plans and perform a majority of the testing; and (4) control -
complete testing, continue monitoring readiness and complete necessary
contingency plans.
The action plan includes solutions which are appropriate to the
specific situations. Currently, Year 2000 system remediation and
testing is complete for all of FGIC's internal systems. We do not
expect the cost of addressing such matters to have a material impact
on the business, operations, or financial condition of the Company.
Business operations are also dependent on the Year 2000 readiness of
infrastructure suppliers in areas such as utilities, communications,
transportation and other services. The likelihood and effects of
failures in infrastructure systems and in the supply chain cannot be
estimated. However, with respect to operations under its direct
control, management does not expect, in view of its Year 2000 action
plan, that occurrences of Year 2000 failures will have a material
adverse effect on the financial position, results of operations or
liquidity.
- 7 -
