SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report(Date of earliest event reported): May 15, 1996
Onyx Acceptance Grantor Trust 1996-1
--------------------------------------------------------------------------
(Issuer with respect to Certificates)
Onyx Acceptance Financial Corporation
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(Exact Name of Registrant as Specified in Its Charter)
(Commission File No.) (I.R.S. Employer
33-99608 Identification No.)
33-0639768
(State or other Jurisdiction of Incorporation)
Delaware
Onyx Acceptance Financial Corporation
8001 Irvine Center Drive, Suite 500 Irvine, Ca. 92718
714 753-1191
Item 5. Other Events.
On behalf of the Onyx Acceptance Grantor Trust 1996-1, (the"Trust"), a
trust created pursuant to the Pooling and Servicing Agreement dated as of
January 1, 1996 with Onyx Acceptance Financial Corporation as registrant and
seller and Onyx Acceptance Corporation as servicer, and Bankers Trust Company
of New York, as trustee, the registrant has caused to be filed with the
Commission, the May 1996 monthly Distribution Date Statement with respect to
the Trust. This Distribution Date Statement is filed pursuant to and in
accordance with a no action request filed on August 21, 1995 with the
Commission by Onyx Acceptance Financial Corporation, originator of the Onyx
Acceptance Grantor Trust 1996-1 and Onyx Acceptance Corporation as servicer and
the affirmative response thereto by the Securities and Exchange Commission
dated September 22, 1995. The filing of the monthly Distribution Date Statement
will occur subsequent to each monthly distribution to the Trust's
Certificateholders until and unless exempted under provisions of the Securities
and Exchange Act.
Item 7. Financial Statements and Exhibits.
a. Financial Statements
Audited Financial Statements of Capital Markets Assurance
Corporation
for the years ended 1995.
c. Exhibits
19 Monthly Distribution Date Statement of the Onyx
Acceptance Grantor Trust 1996-1 dated May 15, 1996
<PAGE>
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.
Onyx Acceptance Financial Corporation
REGAN E. KELLY
By:_____________________________________________________
Regan E. Kelly Executive Vice President
DON P. DUFFY
By:_____________________________________________________
Don P. Duffy Chief Financial Officer
Date: May 29, 1996
<TABLE>
<CAPTION>
EXHIBIT 19
Onyx Acceptance Grantor Trust 1996-1 Distribution Date Statement
5.40% Auto Loan Pass-Through Certificates 22-May-96
<S> <C> <C> <C>
Collection Period Beginning on: 04/01/96
Collection Period Ending on: 04/30/96
Distribution Date: 05/15/96
1 Original Pool Balance $100,499,912.72
2 Collection Period Beginning Pool Balance $91,524,365.34
3 Collection Period Beginning Pool Balance Factor 0.910691
Computation of Collection Account Amounts Available for Distribution
4 Total Collections from Obligors 01-Aprto6 30-Apr-96$4,058,462.40
5 Full Prepayments through first 5 business days of current month 271,478.06
6 Full Prepayments included in Prior Collection Period 341,310.97
7 Partial Prepayments deposited to PayAhead Acct 0.00
8 Amounts Withdrawn from PayAhead Acct & Deposited to Collection Acct 40,918.73
9 Yield Supplement Amount to be Deposited to Collection Account 0.00
10 Net Liquidation Proceeds on Defaulted Contracts 01-Aprto6 30-Apr-96 136,357.11
11 Net Liquidation Proceeds first 5 business days of current month 0.00
12 Net Liquidation Proceeds included in Prior Collection Period 0.00
13 Net Insurance Proceeds 0.00
14 Net Insurance Proceeds first 5 business days of current month 0.00
15 Net Insurance Proceeds included in Prior Collection Period 0.00
16 Aggregate Amount of Repurchased Contracts 0.00
17 Reinvestment Earnings on Funds in Collection Acct (ccma #7075) 01-Aprto6 30-Apr-96 11,461.22
18 Collection Account Amounts Available (4+5-6-7+8+9+10+11-12+13+14-15+16+17) $4,177,366.55
Computation of Certificate Ending Pool Balance
19 Collection Period Beginning Pool Balance $91,524,365.34
20 Scheduled Principal Decline (recomputed actuarial) 1,445,839.75
21 Full Prepayments 08-Aprto6 30-Apr-96 1,304,529.77
22 Full Prepayments through first 5 business days of current month 271,478.06
23 Defaulted Contracts (Liquidated Proceeds received) 08-Aprto6 30-Apr-96 199,685.00
23aDefaulted Contracts (Liquidated Proceeds received) thru 1st 5 business days of current month 0.00
24 Defaulted Contracts (4 or more periods.Liquidated Proceeds not received) 0.00
24aDefaulted Contracts (4 or more periods.Liquidated Proceeds not received) thru 1st 5 bus. days of current mo. 0.00
25 Repurchased Contracts 0.00
26 Certificate Ending Pool Balance (19-20-21-22-23-23a-24-24a-25) $88,302,832.76
Certificate Ending Balance Pool Factor 0.878636
27 Principal Distribution Amount (19-26) $3,221,532.58
Distributions From Collection Account
28 Principal Distribution Amount $3,221,532.58
29 Interest Distribution Amount (5.4% / 12) 411,859.64
30 Servicing Fee Payable to Servicer (1.0% / 12) 76,270.30
31 Surety Fee Payable to Surety (0.15% / 360 * Days in Collection Period) 11,440.55
31aReinsurance Fee Payable to Surety (2.00%/360 * Days in period * $2,009,998.25) 3,350.00
32 Reinvestment Earnings Payable to Finco 11,461.22
33 Total Distributions from Collection Account (28+29+30+31+31a+32) $3,735,914.29
34 Total Excess Spread Available for Deposit to Spread Account (18-33) $441,452.26
Spread Account Reconciliation
35 Initial Deposit $0.00
36 Deposits to Spread Account Prior Collection Periods $1,411,159.22
37 Deposit to Spread Account this Collection Period (34) $441,452.26
38 Reinvestment Earnings on Funds in Spread Acct 01-Aprto6 30-Apr-96 $4,839.31
39 Draws from Spread Account Prior Periods $0.00
40 Spread Account Balance (35+36+37+38-39) $1,857,450.79
41 Required Spread Account Balance (Max of 6% x (26) or 2% x (1) ) $5,298,169.97
42 Draws from Spread Account this Collection Period ((40 - 41) if positive, 0 otherwise) $0.00
43 Spread Account Balance net of Draws this Collection Period (40 - 42) $1,857,450.79
Delinquency Statistics
44 Number of Accts Delinquent 30 - 59 Days 63
45 Number of Accts Delinquent 60 - 89 Days 22
45aNumber of Accts Deliquent 90 Days and Over 18
46 Total Number of Delinquent Accounts 30 Days and Over 103
47 Aggregate Net Outstanding Balance of Delinquent Loans 30-59 days $838,669
48 Aggregate Net Outstanding Balance of Delinquent Loans 60 - 89 days $265,999
48aAggregate Net Outstanding Balance of Delinquent Loans 90 days and over $248,103
49 Total Aggregate Net Outstanding Balance of Delinquent Loans (44 + 45) $1,352,772
50 Policy Claim Amount $0.00
Repossession Statistics
51 Number of Accounts in Repo Inventory @ Beginning of Collection Period 23
52 Number of Accounts Repossessed During Collection Period 23
53 Number of Repo'd Accounts Sold or Reinstated During Collection Period 18
54 Number of Accounts in Repo Inventory @ End of Collection Period 28
55 Aggregate Net Outstanding Balance of Accounts in Repo Inventory @ Beginning of Collection Period $301,859.52
56 Aggregate Net Outstanding Balance of Accounts Repossessed During Month 335,809.73
57 Aggregate Net Outstanding Balance of Repo Accounts Sold or Reinstated During Month 235,562.23
58 Aggregate Net Outstanding Balance of Accounts in Repo Inventory @ End of Collection Period $402,107.02
Yield Supplement Account Balance
59 Initial Deposit $0.00
60 Draws from Yield Supplement to Collection Account $0.00
61 Yield Supplement Account Balance $0.00
Accounts Outstanding
62 Original Accounts Outstanding 8,407
63 Remaining Number of Accounts Outstanding @ End of Collection Period 7,851
Net Yield
64 Interest Collected on Contracts 1,349,011.61
65 Interest Collected on Contracts - Prior Collection Period 1,358,173.85
66 Interest Collected on Contracts - Two Collection Periods Ago 1,338,331.24
67 Liquidated Contract Balances (less Liquidation proceeds) 63,327.89
68 Liquidated Contract Balances (less Liquidation proceeds) - Prior Collection Period 14,040.66
69 Liquidated Contract Balances (less Liquidation proceeds) - Two Collection Periods Ago 32,261.15
70 Interest Paid to Certificate Holders 411,859.64
71 Interest Paid to Certificate Holders - Prior Collection Period 425,226.71
72 Interest Paid to Certificate Holders - Two Collection Periods Ago 438,089.61
73 Servicing Fees Paid to Servicer $76,270.30
74 Servicing Fees Paid to Servicer - Prior Collection Period $78,745.69
75 Servicing Fees Paid to Servicer - Two Collection Periods Ago $81,127.71
76 Certificate Ending Pool Balance $88,302,832.76
77 Certificate Ending Pool Balance - Prior Collection Period $94,494,824.42
78 Certificate Ending Pool Balance - Two Collection Periods Ago $97,353,247.50
79 Net Yield 10.39%
A.P.R. of Trust Contracts
80 Dollar Weighted A.P.R. of Contracts @ Cutoff Date 15.07%
81 Dollar Weighted A.P.R. of Remaining Contracts in Trust as of End of Collection Period 15.07%
Credit Losses
82 Gross Credit Losses during Collection Period (23+23a+24+24a) $199,685.00
83 Recoveries during Collection Period (10+11-12) 136,357.11
84 Net Credit Losses during Collection Period (82-83) $63,327.89
85 Cumulative Net Credit Losses $110,018.08
86 Cumulative Net Credit Losses as a Percent of Original Certificate Balance (85 / 1) 0.11%
I certify that the computations reflected above for the collection period
ended 30-Apr-96 are accurate and have been prepared in accordance with
the Pooling and Servicing Agreement dated September 1, 1994.
REGAN E. KELLY May 15, 1996
By : ______________________________________ Date: _______________
Name: Regan Kelly
</TABLE>
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CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(With Independent Auditors' Report Thereon)
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets
Assurance Corporation as of December 31, 1995 and 1994 and the related
statements of income, stockholder's equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidenc
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Capital Markets
Assurance Corporation as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115,""Accounting for
Certain Investments in Debt and Equity Securities ," at December 31, 1993.
/s/ KPMG Peat Marwick LLP
January 25, 1996
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
ASSETS
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $210,651 at December 31,
1995 and $178,882 at December 31,1994) $215,706 172,016
Short-term investments(at amortized cost which approximates fair value) 68,646 2,083
Mutual funds at fair value (cost $16,434 at December 31, 1994) - 14,969
Total investments 284,352 189,068
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
Total assets $343,133 229,443
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 #
Deferred income taxes 11,303 3,599
Total liabilities 77,067 46,564
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments, net of tax 3,286 (5,499)
Retained earnings 41,972 26,570
Total stockholder's equity 266,066 182,879
Total liabilities and stockholder's equity $343,133 229,443
</TABLE>
See accompanying notes to financial statements.
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994 Year Ended December 31, 1993
<S> <C> <C> <C>
Revenues:
Direct premiums written $56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
Net premiums earned 29,242 23,103 17,483
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
Total revenues 44,769 33,387 29,391
Expenses:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
Total expenses 24,152 17,791 15,035
Income before income taxes 20,617 15,596 14,356
Income Taxes:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
Total income taxes 5,215 3,708 3,726
NET INCOME $15,402 11,888 10,630
</TABLE>
See accompanying notes to financial statements.
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994 Year Ended December 31, 1993
<S> <C> <C> <C>
Common stock:
Balance at beginning of period $15,000 15,000 15,000
Balance at end of period 15,000 15,000 15,000
Additional paid-in capital:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 # #
Balance at end of period 205,808 146,808 146,808
Unrealized (depreciation) appreciation on
investments, net of tax:
Balance at beginning of period (5,499) 3,600 #
Unrealized appreciation (depreciation)
on investments 8,785 (9,099) 3,600
Balance at end of period 3,286 (5,499) 3,600
Retained earnings:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
Balance at end of period 41,972 26,570 14,682
Total stockholder's equity $266,066 182,879 180,090
</TABLE>
See accompanying notes to financial statements.
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994 Year Ended December 31, 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $15,402 11,888 10,630
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Reserve for losses and
loss adjustment expenses 1,357 1,429 902
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued expenses 472 3,726 1,079
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
Total adjustments 6,530 6,292 (2,022)
Net cash provided by operating activities 21,932 18,180 8,608
Cash flows from investing activities:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities of investments 28,803 19,665 106,042
Net cash used in investing activities (80,673) (18,348) (8,624)
Cash flows from financing activities:
Capital contribution 59,000 # #
Net cash provided by financing activities 59,000 # #
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
Cash balance at end of period $344 85 253
Supplemental disclosure of cash flow information:
Income taxes paid $1,450 1,063 833
</TABLE>
See accompanying notes to financial statements.
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1995 and 1994
Capital Markets Assurance Corporation
Notes to Financial Statements # (Continued)
1) Background
Capital Markets Assurance Corporation (""CapMAC" or ""the Company") is a
New York-domiciled monoline stock insurance company which engages only in the
business of financial guaranty and surety insurance. CapMAC is a wholly-owned
subsidiary of CapMAC Holdings Inc. (""Holdings"). CapMAC is licensed in all 50
states in addition to the District of Columbia, the Commonwealth of Puerto Rico
and the territory of Guam. CapMAC insures structured asset-backed, corporate,
municipal and other financial obligations in the U.S. and international capital
markets. CapMAC also provides financial guaranty reinsurance for structured
asset-backed, corporate, municipal and other financial obligations written by
other major insurance companies.CapMAC's claims-paying ability is rated ""Aaa"
by Moody's Investors Service, Inc. (""Moody's"), ""AAA"by S&P Ratings Group
(""S&P"), ""AAA" by Duff & Phelps Credit Rating Co. (""Duff & Phelps"), and
""AAA" by Nippon Investors Service, Inc., a Japanese rating agency. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles (""GAAP"). Such accounting principles
differ from statutory reporting practices used by insurance companies in
reporting to state regulatory authorities.The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes the most significant
estimates relate to deferred acquisition costs, reserve for losses and loss
adjustment expenses and disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
b) Investments
At December 31, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards (""SFAS") No. 115, ""Accounting for Certain
Investments in Debt and Equity Securities ." Under SFAS No. 115, the Company can
classify its debt and marketable equity securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the securities until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 and 1994, all of the Company's
securities have been classified as available-for-sale. Available-for-sale
securities are recorded at fair value. Fair value is based upon quoted market
prices. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholder's equity until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
A decline in the fair value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at amortized
cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
c) Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in income
when due, net of amounts payable to reinsurers. Premiums which are payable
quarterly, semi-annually or annually are reflected in income, net of amounts
payable to reinsurers, on an equal monthly basis over the corresponding policy
term. Premiums that are collected as a single premium at the inception of the
policy and have a term longer than one year are earned, net of amounts payable
to reinsurers, by allocating premium to each bond maturity based on the
principal amount and earning it straightline over the term of each bond
maturity. For the year ended December 31, 1995, 91% of net premiums earned were
attributable to premiums payable in installments and 9% were attributable to
premiums collected on an upfront basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs include
direct and indirect expenses related to underwriting, marketing and policy
issuance, rating agency fees and premium taxes. The deferred acquisition costs
are amortized over the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections due to various
factors such as renewal or early termination of insurance contracts or different
run-off patterns of exposure resulting in a corresponding change in the
amortization pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve (""SLR") and a case basis loss reserve. The SLR is
established based on expected levels of defaults resulting from credit failures
on currently insured issues. This SLR is based on estimates of the portion of
earned premiums required to cover those claims.
A case basis loss reserve is established for insured obligations when,
in the judgement of management, a default in the timely payment of debt service
is imminent. For defaults considered temporary, a case basis loss reserve is
established in an amount equal to the present value of the anticipated defaulted
debt service payments over the expected period of default. If the default is
judged not to be temporary, the present value of all remaining defaulted debt
service payments is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss reserves when such
amounts are reasonably estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment expenses
with respect to financial guaranties issued by CapMAC. The establishment of the
appropriate level of loss reserves is an inherently uncertain process involving
numerous estimates and subjective judgments by management, and therefore there
can be no assurance that losses in CapMAC's insured portfolio will not exceed
the loss reserves.
f) Depreciation
Leasehold improvements, furniture and fixtures are being depreciated
over the lease term or useful life, whichever is shorter, using the
straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
h) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
3) Insured Portfolio
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion, respectively,
and net of reinsurance (net principal outstanding), was $12.6 billion and $9.4
billion, respectively, with a weighted average life of 6.0 years and 5.0 years,
respectively. CapMAC's insured portfolio was broadly diversified by geographic
distribution and type of insured obligations, with no single insured obligation
in excess of statutory single risk limits, after giving effect to any
reinsurance and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory contingency
reserve). At December 31, 1995 and 1994, the statutory qualified capital was
approximately $240 million and $170 million, respectively.
Type of Obligations Insured
<TABLE>
<CAPTION>
Net Principal Out.sstanding
December 31, 1995 December 31, 1994
Amount % Amount %
$ in millions
<S> <C> <C> <C> <C>
Consumer receivables $6,959 55.1 $4,740 50.4
Trade and other corporate
obligations 4,912 38.9 4,039 43.0
Municipal/government
obligations 757 6.0 618 6.6
Total $12,628 100.0 $9,397 100.0
</TABLE>
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures, a
pool of assets covering at least 100% of the principal amount guaranteed under
its insurance contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the impairment of
cash flows due to delinquency or loss on the underlying assets. CapMAC,
therefore, evaluates all the factors affecting past and future asset performance
by studying historical data on losses, delinquencies and recoveries of the
underlying assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of the originator
of the assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or dilution.
This first level of loss protection is usually available from reserve funds,
excess cash flows, overcollateralization, or recourse to a third party. The
level of first loss protection depends upon the historical losses and dilution
of the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and recognized
$2,200,000 of income which has been included in other income in the accompanying
financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods presented:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
<S> <C> <C> <C> <C>
Name % Name % Name % Name % of
of revenues
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill
Lynch & Co14.1
</TABLE>
4) Investments
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995 and
1994 were as follows ($ in thousands):
<TABLE>
<CAPTION>
Securities Available-for-Sale December 31, 1995
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses EstimatedFair Value
<S> <C> <C> <C> <C>
U.S. Treasury obligations $4,153 55 # 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states,
municipalities and political
subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
Total $279,297 5,222 167 284,352
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Securities Available-for-Sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury obligations $4,295 # 153 4,142
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 40,973 # 2,986 37,987
Obligations of states,
municipalities
and political subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual funds 16,434 # 1,465 14,969
Total $197,399 379 8,710 189,068
</TABLE>
The Company's investment in mutual funds in 1994 represents an
investment in an open-end management investment company which invests primarily
in investment-grade fixed-income securities denominated in foreign and United
States currencies.
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1995
Securities Available-for-Sale Amortized Cost Estimated Fair Value
<S> <C> <C>
Less than one year to maturity $5,569 5,572
One to five years to maturity 37,630 38,553
Five to ten years to maturity 99,567 102,264
Greater than ten years to
maturity 35,903 37,101
Sub-total 178,669 183,490
Mortgage-backed securities 100,628 100,862
Total $279,297 284,352
</TABLE>
Actual maturities may differ from contractual
maturities because borrowers may call or prepay obligations with or without call
or prepayment penalties. Proceeds from sales of investment securities were
approximately $49 million, $40 million and $24 million in 1995, 1994 and 1993,
respectively. Gross realized capital gains of $1,320,000, $714,000 and
$1,621,000, and gross realized capital losses of $19,000, $622,000 and $77,000
were realized on those sales for the years ended December 31, 1995, 1994 and
1993, respectively.
Investments include bonds having a fair value of approximately
$3,985,000 and $3,873,000 (amortized cost of $3,970,000 and $4,011,000) which
are on deposit at December 31, 1995 and 1994, respectively, with state
regulators as required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
Year Ended December 31,
$ in thousands
1995 1994 1993
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bonds $11,105 9,193 7,803
Short-term
investments 1,245 484 572
Mutual funds (162) 579 1,801
Investment expenses (235) (184) (166)
Total $11,953 10,072 0,010
</TABLE>
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included in a separate component of
stockholder's equity as shown below:
Year Ended December 31
1995 1994
$ in thousands
<TABLE>
<CAPTION>
<S> <C> <C>
Balance at beginning of period $(5,499) 3,600
Change in unrealized appreciation
(depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
Net change 8,785 (9,099)
Balance at end of period $3,286 (5,499)
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S. government
agency securities, exceeds 10% of stockholder's equity as of December 31, 1995.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of period $24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amoritization (policy acquisition costs)(7,203) (4,529) (2,663)
Balance at end of period $35,162 24,860 15,249
</TABLE>
6) Employee Benefits
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. (""CFS"), which was then a newly formed wholly-owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to provide
various services, including underwriting, reinsurance, data processing and other
services to CapMAC in connection with the operation of CapMAC's insurance
business. CapMAC pays CFS an arm's length fee for providing such services, but
not in excess of CFS's cost for such services. CFS incurred, on behalf of
CapMAC, total compensation expenses, excluding bonuses, of $13,484,000,
$11,081,000 and $9,789,000 in 1995, 1994 and 1993, respectively.
CFS maintains an incentive compensation plan for its employees. The plan
is an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k)plan to cover
substantially all of its employees. CapMAC reimburses CFS for all out-of-pocket
expenses incurred by CFS in providing services to CapMAC, including awards given
under the incentive compensation plan and benefits provided under the health and
welfare plan. For the years ended December 31, 1995, 1994 and 1993, the Company
had provided approximately $7,804,000, $5,253,000 and $3,528,000, respectively,
for the annual discretionary bonus plan.
One June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units (""RSU") at $13.33 a share in respect of certain deferred
compensation. On December 7, 1995, the RSU's were converted to cash in the
amount of approximately $3.7 million, and such officers agreed to defer receipt
of such cash amount in exchange for receiving the same number of new shares of
restricted stock of Holdings as the number of RSU's such officers previously
held. The cash amount will be held by Holdings and invested in accordance with
certain guidelines. Such amount, including the investment earnings thereon, will
be paid to each officer upon the occurrence of certain events but no later than
December, 2000.
7) Employee Stock Ownership Plan
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
(""ESOP") to provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the ""ESOP Trust"). The ESOP
Trust purchased 750,000 shares at $13.33 per share of Holdings' stock. The ESOP
Trust financed its purchase of common stock with a loan from Holdings in the
amount of $10 million. The ESOP loan is evidenced by a promissory note delivered
to Holdings. An amount representing unearned employee compensation, equivalent
in value to the unpaid balance of the ESOP loan, is recorded as a deduction from
stockholder's equity (unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables
the ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to the
participants and held in trust for the employees based upon the ratio of the
current year's principal and interest payment to the sum of principal and
interest payments estimated over the life of the loan. As of December 31, 1995
approximately 262,800 shares were allocated to the participants. Compensation
expense related to the ESOP was approximately $2,087,000, $2,086,000 and
$1,652,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR. In 1995 CapMAC incurred its first claim on a
financial guaranty policy. Based on its current estimate, the Company expects
the aggregate amount of claims and related expenses not to exceed $2.7 million,
although no assurance can be given that such claims and related expenses will
not exceed that amount. Such loss amount was covered through a recovery under a
quota share reinsurance agreement of $0.2 million and a reduction in the SLR of
$2.5 million. The portion of such claims and expenses not covered under the
quota share agreement is being funded through payments to CapMAC from the Lureco
Trust Account (see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the liability for losses and loss
adjustment expenses ($ in thousands):
<TABLE>
<CAPTION>
<S> <C>
Case Basis Loss Reserve
Net balance at January 1, 1995 $#
Incurred related to:
Current year 2,473
Prior years #
Total incurred 2,473
Paid incurred to:
Current year 1,853
Prior years #
Total paid 1,853
Balance at December 31, 1995 620
Reinsurance recoverable 69
Supplemental loss reserve 5,859
Total $6,548
</TABLE>
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994 Year Ended December 31, 1993
$ in thousands
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed at
the statutory rate $7,216 35.0 $5,303 34.0 $4,881 34.0
Increase (decrease) in tax resulting
from: Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
Total income tax expense $5,215 25.3 $3,708 23.8 $3,726 26.0
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
December 31, 1995 December 31, 1994
$in thousands
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax assets:
Unrealized capital losses on
investments $# (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
Total gross deferred tax assets (3,853) (5,992)
Deferred tax liabilities:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 #
Deferred capital gains on investments 654 726
Other, net 426 412
Total gross deferred tax liabilities 15,156 9,591
Net deferred tax liability $11,303 3,599
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Management
that the deferred tax assets will be fully realized in the future.
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from earned
surplus and restrict the amount of dividends in any year that may be paid
without obtaining approval for such dividends from the Superintendent of
Insurance to the lower of (i) net investment income as defined or (ii) 10% of
statutory surplus as of December 31 of the preceding year. No dividends were
paid by CapMAC to Holdings during the years ended December 31, 1995, 1994 and
1993. No dividends could be paid during these periods because CapMAC had
negative earned surplus. Statutory surplus at December 31, 1995 and 1994 was
approximately $195,018,000 and $139,739,000, respectively. Statutory surplus
differs from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting purposes and
differences in accounting for investments, deferred acquisition costs, SLR and
deferred taxes provided under GAAP. Statutory net income was $9,000,000,
$4,543,000 and $4,528,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Statutory net income differs from net income determined under GAAP
principally due to deferred acquisition costs, SLR and deferred income taxes.
11) Commitments and Contingencies
On January 1, 1988, the Company assumed from Citibank, N.A. the
obligations of a sublease agreement for space occupied in New York. On November
21, 1993, the sublease was terminated and a new lease was negotiated which
expires on November 20, 2008. CapMAC has a lease agreement for its London office
beginning October 1, 1992 and expiring October 1, 2002. As of December 31, 1995,
future minimum payments under the lease agreements are as follows:
Payment
$ in thousands
<TABLE>
<CAPTION>
<S> <C>
1996 $2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
Total $47,878
</TABLE>
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the ""Liquidity Facility") provided by a consortium of banks, headed by Bank of
Montreal, as agent, which is rated ""A-1#" and ""P-1" by S&P and Moody's,
respectively. Under the Liquidity Facility, CapMAC will be able, subject to
satisfying certain conditions, to borrow funds from time to time in order to
enable it to fund any claim payments or payments made in settlement or
mitigation of claim payments under its insurance contracts. For the years ended
December 31, 1995, 1994 and 1993, no draws had been made under the Liquidity
Facility.
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily designed to
minimize losses from large risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
Years Ended December 31
1995 1994 1993
Written Earned Written Earned WrittenEarned
$ in thousands
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Direct $56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
Net Premiums $41,484 29,242 33,593 23,103 21,308 17,483
</TABLE>
liability to its policyholders, it is the industry practice of insurers for
financial statement purposes to treat reinsured risks as though they were risks
for which the ceding insurer was only contingently liable. A contingent
liability exists with respect to the aforementioned reinsurance arrangements
which may become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At December
31, 1995 and 1994, CapMAC had ceded loss reserves of $69,000 and $0,
respectively, and had ceded unearned premiums of $13,171,000 and $5,551,000,
respectively.
In 1994, CapMAC entered into a reinsurance agreement (the ""Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. (""Lureco"), a
European-based reinsurer. The agreement is renewable annually at the Company's
option, subject to satisfying certain conditions. The agreement reinsured and
indemnified the Company for any loss incurred by CapMAC during the agreement
period up to the limits of the agreement. The Lureco Treaty provides that the
annual reinsurance premium payable by CapMAC to Lureco, after deduction of the
reinsurer's fee payable to Lureco, be deposited in a trust account (the ""Lureco
Trust Account") to be applied by CapMAC, at its option, to offset losses and
loss expenses incurred by CapMAC in connection with incurred claims. Amounts on
deposit in the Lureco Trust Account which have not been applied against claims
are contractually due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement. Premiums in
excess of the deposit amounts have been recorded as ceded premiums in the
statements of income. In the 1994 policy year, the agreement provided $5 million
of loss coverage in excess of the premium deposit amounts of $2 million retained
in the Lureco Trust Account. No losses were applied against the Lureco Trust
Account or ceded to the Lureco Treaty in 1994. The agreement was renewed for the
1995 policy year and provides $5 million of loss coverage in excess of the
premium deposit amount of $4.5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200% of the net
premiums earned up to $4 million for any one agreement year. In September 1995,
a claim of approximately $2.5 million on an insurance policy was applied against
the Lureco Trust Account.
In addition to its capital (including statutory contingency reserves)
and other reinsurance available to pay claims under its insurance contracts, on
June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the
""Stop-loss Agreement") with Winterthur Swiss Insurance Company (""Winterthur")
which is rated ""AAA" by S&P and ""Aaa" by Moody's. At the same time, CapMAC and
Winterthur also entered into a Quota Share Reinsurance Agreement (the
""Winterthur Quota Share Agreement") pursuant to which Winterthur had the right
to reinsure on a quota share basis 10% of each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years
and was renewable for successive one-year periods. In April 1995, Winterthur
notified CapMAC that it was canceling the Winterthur Stop-loss Agreement and the
Winterthur Quota Share Agreement effective June 30, 1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss Reinsurance
Agreement with Mitsui Marine (the ""Mitsui Stop-loss Agreement"). Under the
Mitsui Stop-loss Agreement, Mitsui Marine would be required to pay any losses in
excess of $100 million in the aggregate incurred by CapMAC during the term of
the Mitsui Stop-loss Agreement on the insurance policies in effect on December
1, 1995 and written during the one-year period thereafter, up to an aggregate
limit payable under the Mitsui Stop-loss Agreement of $50 million. The Mitsui
Stop-loss Agreement has a term of seven years and is subject to early
termination by CapMAC in certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC will reassume the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC will
reassume approximately $1.4 billion of principal insured by Winterthur as of
December 31, 1995. In connection with the commutation, Winterthur will return
the unearned premiums as of December 31, 1995, net of ceding commission and
federal excise tax. Such amount is expected to total approximately $2.0 million.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and 1994.
SFAS No. 107, ""Disclosures About Fair Value of Financial Instruments ," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
<S> <C> <C> <C> <C>
$ in thousands
Financial Assets:
Investments $284,352 284,352 189,068 189,068
Off-Balance-Sheet Instruments:
Financial Guarantees Outstanding $# 147,840 # 93,494
Ceding Commission $# 44,352 # 28,048
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
Investments
The fair values of fixed maturities and mutual funds are based upon
quoted market prices. The fair value of short-term investments approximates
amortized cost.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the fair
value of installment revenue which is derived by calculating the present value
of the estimated future cash inflow to CapMAC of policies in force having
installment premiums, net of amounts payable to reinsurers, at a discount rate
of 7% at December 31, 1995 and 1994. The amount calculated is equivalent to the
consideration that would be paid under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a third
party under reinsurance and other agreements. Ceding commission represents the
expected amount that would be paid to CapMAC to compensate CapMAC for
originating and servicing the insurance contracts. In constructing estimated
future cash inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant historical
experience. For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of installment
premium actually realized by the Company could be reduced in the future due to
factors such as early termination of insurance contracts, accelerated
prepayments of underlying obligations or lower than anticipated utilization of
insured structured programs, such as commercial paper conduits. Although
increases in future installment revenue due to renewals of existing insurance
contracts historically have been greater than reductions in future installment
revenue due to factors such as those described above, there can be no assurance
that future circumstances might not cause a net reduction in installment
revenue, resulting in lower revenues.
14) Capitalization
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized, issued
and outstanding shares at December 31, 1995 and 1994 were 15,000,000 at $1.00
per share.
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an Initial Public Offering and private
placements were contributed to CapMAC.
