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 20, 2000
Residential Asset Securities Corporation
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 333-84939 51-0362653
-------- --------- ----------
(State or other (Commission file number) (I.R.S. employer
jurisdiction of identification no.)
incorporation)
8400 Normandale Lake Blvd., Suite 600, Minneapolis, MN 55437
----------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (612) 832-7000
------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Exhibit Index located on page 4.
<PAGE>
Items 1 through 6 and Item 8 are not included because they are not applicable.
Item 5. Other Events.
The audited financial statements of Financial Guaranty Insurance Company
("FGIC") as of December 31, 1999 and 1998, and for each of the years in the
three year period ended December 31, 1999, prepared in accordance with generally
accepted accounting principles, and the unaudited financial statements of FGIC
as of June 30, 2000 and for the periods ending June 30, 2000 and June 30, 1999,
are hereby filed and incorporated by reference in (i) the registration statement
(No. 333-84939) of the Registrant (the "Prospectus"); and (ii) the Prospectus
Supplement for Home Equity Mortgage Asset-Backed Pass-Through Certificates,
Series 2000-KS4, and shall be deemed to be a part hereof.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not applicable
(b) Not applicable
(c) Exhibits
23. Consent of KPMG LLP, independent auditors of FGIC with respect to (a)
the incorporation by reference in the Registration Statement and Prospectus
Supplement of their report dated January 21, 2000 on the audit of the financial
statements of Financial Guaranty Insurance Company as of December 31, 1999 and
1998 and for each of the years in the three-year period ended December 31, 1999
and (b) with respect to the reference to their firm under the caption "Experts"
in the Prospectus Supplement.
99.1 Audited Financial Statements of Financial Guaranty Insurance Company as of
December 31, 1999 and 1998.
99.2 Unaudited Interim Financial Statements of Financial Guaranty Insurance
Company as of June 30, 2000 and 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
RESIDENTIAL ASSET SECURITIES CORPORATION
By: /s/ Julie Steinhagen
Name: Julie Steinhagen
Title: Vice President
Dated: September 20, 2000
<PAGE>
Exhibit 23
Consent of Independent Auditors of FGIC
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Financial Guaranty Insurance Company:
We consent to the use of our report dated January 21, 2000 on the financial
statements of Financial Guaranty Insurance Company as of December 31, 1999 and
1998, and for each of the years in the three year period ended December 31, 1999
included in the Form 8-K of Residential Asset Securities Corporation (the
"Registrant") which is incorporated herein by reference in the registration
statement (No. 333-84939) and in the Prospectus Supplement of the Registrant
(the "Prospectus Supplement") and to the reference to our firm under the heading
"Experts" in the Prospectus Supplement.
/s/ KPMG LLP
New York, New York
September 20, 2000
<PAGE>
Exhibit 99.1
AUDITED FINANCIAL STATEMENTS
OF
FINANCIAL GUARANTY INSURANCE COMPANY
FINANCIAL GUARANTY INSURANCE COMPANY
================================================================================
Audited Financial Statements
December 31, 1999
Report of Independent Auditors..............................1
Balance Sheets..............................................2
Statements of Income........................................3
Statements of Stockholder's Equity..........................4
Statements of Cash Flows....................................5
Notes to Financial Statements...............................6
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1999 and 1998, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all materials respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1999 and 1998 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
/s/KPMG LLP
January 21, 2000
-1-
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
----------------------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
December 31,
December 31,
Assets 1999
----------
1998
Fixed maturity securities, at fair value
<S> <C> <C>
(amortized cost of $2,484,753 in 1999 and $2,519,490 in 1998)$2,412,504 $2,663,024
Short-term investments, at cost, which approximates fair value 114,776 30,395
Cash 924 318
Accrued investment income 38,677 40,038
Reinsurance recoverable 8,118 8,115
Prepaid reinsurance premiums 133,874 148,366
Deferred policy acquisition costs 71,730 80,924
Property and equipment, net of accumulated depreciation
($7,803 in 1999 and $6,981 in 1998) 967 1,802
Prepaid expenses and other assets 16,672 11,047
------------ ------------
Total assets $2,798,242 $2,984,029
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 578,930 $ 610,182
Loss and loss adjustment expenses 45,201 59,849
Ceded reinsurance balances payable 2,310 3,129
Accounts payable and accrued expenses 16,265 46,764
Current federal income taxes payable 62,181 69,542
Deferred federal income taxes 46,346 122,839
Payable for securities purchased 7,894 6
---------------- -------------
Total liabilities 759,127 912,311
------------- --------
Stockholder's Equity:
Common stock, par value $1,500 per share;
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive income (46,687) 91,922
Retained earnings 1,687,291 1,581,285
----------- -----------
Total stockholder's equity 2,039,115 2,071,718
----------- -----------
Total liabilities and stockholder's equity $2,798,242 $2,984,029
========== ==========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Income
----------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
1999 1998 1997
Revenues:
<S> <C> <C> <C>
Gross premiums written $112,029 $112,425 $95,995
Ceded premiums (14,988) (19,444) (19,780)
-------- -------- ---------
Net premiums written 97,041 92,981 76,215
Decrease in net unearned premiums 16,759 12,529 39,788
-------- ---------- --------
Net premiums earned 113,800 105,510 116,003
Net investment income 134,994 133,353 127,773
Net realized gains 32,878 29,360 16,700
-------- --------- ---------
Total revenues 281,672 268,223 260,476
------- ------- ---------
Expenses:
Loss and loss adjustment expenses (11,185) 3,178 12,539
Policy acquisition costs 7,198 13,870 12,936
Decrease in deferred policy acquisition costs 9,194 5,362 5,659
Other underwriting expenses 18,467 18,539 14,691
---------- ------ --------
Total expenses 23,674 40,949 45,825
----------- ------- --------
Income before provision for Federal income taxes 257,998 227,274 214,651
---------- ------- --------
Federal income tax expense:
Current 53,849 41,467 39,133
Deferred (1,857) 17 1,715
------------ ------------- -----------
Total Federal income tax expense 51,992 41,484 40,848
---------- ---------- ----------
Net income $206,006 $185,790 $173,803
======== ======== ========
</TABLE>
-3-
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Statements of Cash Flows
----------------------------------------------------------------------------------------------
($ in Thousands)
For the Year Ended December 31,
1999 1998 1997
Operating Activities:
<S> <C> <C> <C>
Net income $206,006 $185,790 $173,803
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in unearned premiums (31,252) (18,371) (53,263)
Change in loss and loss adjustment expense reserves (14,648) (17,077) 4,310
Depreciation of property and equipment 835 1,399 2,013
Change in reinsurance recoverable (3) 105 (1,205)
Change in prepaid reinsurance premiums 14,492 5,842 13,475
Change in foreign currency translation adjustment 2,538 (958) (497)
Policy acquisition costs deferred (7,198) (13,870) (12,936)
Amortization of deferred policy acquisition costs 16,392 19,232 18,595
Change in accrued investment income, and prepaid
expenses and other assets (4,264) 12,847 (2,754)
Change in other liabilities (6,318) 15,606 (36,233)
Deferred income taxes 1,857 17 1,715
Amortization of fixed maturity securities 4,674 4,149 2,698
Change in current income taxes payable (7,361) 50,207 (32,681)
Net realized gains on investments (32,878) (29,360) (16,700)
-------- --------- ---------
Net cash provided by operating activities 142,872 215,558 60,340
------- ------- -------
Investing Activities:
Sales and maturities of fixed maturity securities 881,268 607,372 741,604
Purchases of fixed maturity securities (814,153) (818,999) (848,843)
Purchases, sales and maturities of short-term (84,381) 45,644 (2,200)
investments, net
Purchases of property and equipment, net (59) (459)
------------ --------- ------------
-
Net cash used in investing activities (17,266) (166,042) (109,898)
-------- --------- ---------
Financing Activities:
Capital Contributions - - 49,500
Dividends paid (125,000) (50,000)
--------- --------
-
Net cash used in financing activities (125,000) (50,000) 49,500
--------- -------- -----------
(Decrease) Increase in cash 606 (484) (58)
Cash at beginning of year 318 802 860
---------- -------- -------------
Cash at end of year $ 924 $ 318 $ 802
========= ======== ============
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company
Statements of Stockholder's Equity
----------------------------------------------------------------------------------------------
Additiona Accumulated Other
Common Paid-In Comprehensive Retained
Stock Capital Income Earnings Total
----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $15,000 $334,011 $ 38,731 $1,296,692 $1,684,434
Net income - - - 173,803 173,803
Other comprehensive income:
Change in fixed maturity
securities - - 45,527 - 45,527
available for sale, net of tax of
($13,260)
Change in foreign currency - - (323)
translation adjustment - (323)
-----
Total comprehensive income - - - - 219,007
----------
Capital contribution - 49,500 - 49,500
--------- -------- ----------- ------------------------
-
Balance, December 31, 1997 15,000 383,511 83,935 1,470,495 1,952,941
------ ------- ------- --------- ---------
Net Income - - - 185,790 185,790
Other comprehensive income:
Change in fixed maturity
securities - - 8,610 - 8,610
available for sale, net of tax of
($24,516)
Change in foreign currency - - (623) -
translation adjustment (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 2,071,718
------ ------- ------ --------- ----------
Net Income - - - 206,006 206,006
Other comprehensive income:
Change in fixed maturity
securities - - (140,259) - (140,259)
available for sale, net of tax
benefit of $75,524
Change in foreign currency - 1,650
translation adjustment - - 1,650
-----
Total comprehensive income - - - -
67,397
Dividend declared - -
------------------------ ------------
- (100,000) (100,000)
- --------- ---------
Balance at December 31, 1999 $15,000 $383,511 $(46,687) $1,687,291 $2,039,115
======= ======== ========= ========== ==========
See accompanying notes to financial statements.
</TABLE>
-4-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
--------------------------------------------------------------------------------
(1) Business
Financial Guaranty Insurance Company (the "Company") is a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"). The Parent is
owned approximately ninety-nine percent by General Electric Capital
Corporation ("GE Capital") and approximately one percent by Sumitomo
Marine and Fire Insurance Company, Ltd. The Company provides financial
guaranty insurance on newly issued municipal bonds and municipal bonds
trading in the secondary market, the latter including bonds held by unit
investment trusts and mutual funds. The Company also insures structured
debt issues outside the municipal market. Approximately 86% of the
business written since inception by the Company has been municipal bond
insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the
Company insures the full and timely payment of principal and interest
when due on scheduled maturity, sinking fund or other mandatory
redemption and interest payment dates to the holders of municipal
securities. The Company's insurance policies do not provide for
accelerated payment of the principal of, or interest on, the bond
insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service, the
Company will make scheduled interest and principal payments as due and
is subrogated to the rights of bondholders to the extent of payments
made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(2) Significant Accounting Policies
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") which differ in
certain respects from the accounting practices prescribed or permitted
by regulatory authorities (see Note 3). Significant accounting policies
are as follows:
Investments
Securities held as available-for-sale are recorded at fair value and
unrealized holding gains/losses are recorded as a separate component of
stockholder's equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair
value. Bond discounts and premiums are amortized over the remaining
terms of the securities. Realized gains or losses on the sale of
investments are determined on the basis of specific identification.
-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 and maintenance costs are
considered in determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses includes principal and
interest and other payments due under insured risks at the balance sheet
date for which, in management's judgment, the likelihood of default is
probable. Such reserves amounted to $45.2 million and $59.8 million at
December 31, 1999 and 1998, respectively. As of December 31, 1999 and
1998, such reserves included $32.7 million and $39.6 million,
respectively, established based on an evaluation of the insured
portfolio in light of current economic conditions and other relevant
factors. As of December 31, 1999 and 1998, discounted case-basis loss
and loss adjustment expense reserves were $12.5 million and $20.2
million, respectively. Loss and loss adjustment expenses include amounts
discounted at an approximate interest rate of 6.6% in 1999 and 5.0% in
1998. The amount of the discount as of December 31, 1999 and 1998 was
$8.7 million and $8.9 million, respectively. The discount rate used is
based upon the risk free rate for the average maturity of the applicable
bond sector. The reserve for loss and loss adjustment expenses is
necessarily based upon estimates, however, in management's opinion the
reserves for loss and loss adjustment expenses is adequate. However,
actual results will likely differ from those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. These temporary differences relate principally to unrealized
gains (losses) on fixed maturity securities available-for-sale, premium
revenue recognition, deferred acquisition costs and deferred
compensation. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
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>
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to
income over their estimated service lives. Office furniture and
equipment are depreciated straight-line over five years. Leasehold
improvements are amortized over their estimated service life or over the
life of the lease, whichever is shorter. Computer equipment and software
are depreciated over three years. Maintenance and repairs are charged to
expense as incurred.
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches
are local currencies. Accordingly, the assets and liabilities of these
foreign branches are translated into U.S. dollars at the rates of
exchange existing at December 31, 1999 and 1998 and revenues and
expenses are translated at average monthly exchange rates. The
cumulative translation gain/(loss) at December 31, 1999 and 1998 was
$0.3 million and $(1.4) million, respectively, net of tax, and is
reported in the statement of stockholder's equity.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The requirements for SFAS No. 133 were delayed by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," and are
now effective for financial statements for periods beginning after
June 15, 2000. SFAS No. 133 establishes standards for accounting and
reporting for derivative instruments and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. The Company is currently evaluating the impact of SFAS No. 133
but does not expect it to have a material impact on the Company.
(3) Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which
differs in certain respects from accounting practices prescribed or
permitted by state insurance regulatory authorities. The NAIC has
approved the codification project effective January 1, 2001. The Company
is currently assessing the impact of the NAIC codification on its
statutory financial statements. The following are the significant ways
in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to
the total exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations
as incurred rather than as related premiums are earned;
(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;
-8-
<PAGE>
(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.
4) Investments
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.2 million as of December 31, 1999 and 1998, respectively,
were on deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1999 Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S.
<S> <C> <C> <C> <C>
government corporations and $ 44,592 $ 2 $2,163 $ 42,431
agencies
Obligations of states and
political subdivisions 2,336,563 12,916 81,062 2,268,417
Debt securities issued by
foreign governments 41,043 604 373 41,274
Other 62,555 112 2,285
------------ --------- ---------
60,382
Investments available-for-sale 2,484,753 13,634 85,883 2,412,504
Short-term investments 114,776 - -
------------ ------------ ------------
114,776
Total $2,599,529 $13,634 $85,883 $2,527,280
========== ======= ======= ==========
</TABLE>
-9-
<PAGE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December
31, 1999, by contractual maturity date, are shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
1999 Cost
Value
Due in one year or less $ 138,289 $ 138,268
Due after one year through five years 122,715 123,151
Due after five years through ten years 652,777 646,212
Due after ten years through twenty years 1,459,655 1,411,749
Due after twenty years 226,093 207,900
------------ ------------
Total $2,599,529 $2,527,280
========== ==========
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1998 Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S.
<S> <C> <C> <C> <C>
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>
In 1999, 1998 and 1997, proceeds from sales and maturities of
investments in fixed maturity securities available-for-sale carried at
fair value were $881.3 million, $607.3 million, and $741.6 million,
respectively. For 1999, 1998 and 1997 gross gains of $35.1 million,
$29.6 million, and $19.1 million respectively, and gross losses of
$2.2 million, $0.2 million, and $2.4 million respectively, were
realized on such sales.
-10-
<PAGE>
Net investment income of the Company is derived from the following
sources (in thousands):
Year Ended December 31,
1999 1998 1997
------ ------ -----
Income from fixed maturity securities $130,402 $129,942 $122,372
Income from short-term investments 5,564 4,421 6,366
----------- ----------- ---------
Total investment income 135,966 134,363 128,738
Investment expenses 972 1,010 965
----------- ----------- -----------
Net investment income $134,994 $133,353 $127,773
======== ======== ========
As of December 31, 1999, the Company did not have more than 3% of its investment
portfolio concentrated in a single issuer or industry.
(5) Income Taxes
The Company files a federal tax return as part of the consolidated
return of General Electric Capital Corporation ("GE Capital"). Under a
tax sharing agreement with GE Capital, taxes are allocated to the
Company and the Parent based upon their respective contributions to
consolidated net income. The Company also has a separate tax sharing
agreement with its Parent. Under this agreement the Company can utilize
its Parent's net operating loss to offset taxable income on a
stand-alone basis. The Company's effective federal corporate tax rate
(20.1 percent in 1999, 18.3 percent in 1998, and 19.0 percent in 1997)
is less than the corporate tax rate on ordinary income of 35 percent in
1998, 1997 and 1996, primarily due to tax exempt interest on municipal
investments.
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,
1999 1998 1997
-------- -------- -------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $90,299 $79,546 $75,128
Tax effect of:
Tax-exempt interest (34,914) (35,660) (34,508)
Original issue discount - (2,511) -
Other, net (3,393) 109 228
--------- --------- --------
Provision for income taxes $51,992 $41,484 $40,848
======= ======= =======
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<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1999
and 1998 are presented below (in thousands):
1999
----
1998
----
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available for sale $25,287 -
Loss reserves 9,914 12,364
Deferred compensation 2,274 2,230
Tax over book capital gains 4,754 3,464
Other 3,579
---- ----------
3,189
Total gross deferred tax assets 45,418 21,637
-------- --- ------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale - 50,237
Deferred acquisition costs 25,106 28,323
Premium revenue recognition 45,350 44,935
Rate differential on tax and loss bonds 9,454 9,454
Tax exempt bond discount 6,593 5,746
Other
5,261 5,781
----- -----
Total gross deferred tax liabilities 91,764 144,476
-------- -- -------
Net deferred tax liability $46,346 $122,839
======= ========
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are
deductible and the estimated reversal of future taxable temporary
differences, the Company believes it is more likely than not that it
will realize the benefits of these deductible differences and has not
established a valuation allowance at December 31, 1999 and 1998. The
Company anticipates that the related deferred tax asset will be realized
based on future profitable business.
Total federal income tax payments during 1999, 1998 and 1997 were $60.4
million, $(8.7) million, and $71.8 million, respectively.
(6) Reinsurance
The Company reinsures portions of its risk with other insurance
companies through quota share reinsurance treaties and, where warranted,
on a facultative basis. This process serves to limit the Company's
exposure on risks underwritten. In the event that any or all of the
reinsuring companies were unable to meet their obligations, the Company
would be liable for such defaulted amounts. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. The Company holds collateral under reinsurance agreements
in the form of letters of credit and trust agreements in various amounts
with various reinsurers totaling $59.8 million that can be drawn on in
the event of default.
-12-
<PAGE>
Net premiums earned are presented net of ceded earned premiums of $29.5
million, $25.3 million and $33.3 million for the years ended December
31, 1999, 1998 and 1997, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $0.2 million, $0.9 million
and $0.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
In accordance with an amendment to an existing reinsurance agreement,
the Company received additional ceding commission income of $6.2 million
from the reinsurer. In addition, the Company bought back $14.4 million
of ceded premium from the reinsurer and subsequently ceded the risk to a
different reinsurer.
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is
summarized as follows (in thousands):
Year Ended December 31,
----------- --- ----------- -- -----------
1999 1998 1997
----------- ----------- -----------
Balance at January 1, $59,849 $76,926 $72,616
Less reinsurance recoverable (8,115) (8,220) (7,015)
------- -------- ---------
Net balance at January 1, 51,734 68,706 65,601
Incurred related to:
Current year 2,407 568 1,047
Prior years (6,592) (1,290) 6,492
Portfolio reserves (7,000) 3,900 5,000
------- ------- -----
Total Incurred (11,185) 3,178 12,539
--------- ------- ------
Paid related to:
Current year - - (1,047)
Prior years (3,466) (20,150) (8,387)
--------- -------- -------
Total Paid (3,466) (20,150) (9,434)
---------- -------- -------
Net balance at December 31, 37,083 51,734 68,706
Plus reinsurance recoverable 8,118 8,115 8,220
-------- -------- --------
Balance at December 31, $45,201 $59,849 $76,926
======= ======= =======
The changes in incurred portfolio and case reserves principally relates
to business written in prior years. The changes are based upon an
evaluation of the insured portfolio in light of current economic
conditions and other relevant factors. Due to improvements on specific
credits, items were removed from the credit watchlist causing a
reduction in the portfolio loss reserves.
(8) Related Party Transactions
The Company has various agreements with subsidiaries of General Electric
Company ("GE") and GE Capital. These business transactions include
appraisal fees and due diligence costs associated with underwriting
structured finance mortgage-backed security business; payroll and office
expenses incurred by the Company's international branch offices but
processed by a GE subsidiary; investment fees pertaining to the
management of the Company's investment portfolio; and telecommunication
service charges. Approximately $2.6 million, $3.2 million and $4.9
million in expenses were incurred in 1999, 1998 and 1997, respectively,
related to such transactions.
-13-
<PAGE>
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of
the underlying assets. For some of these issues, GE Capital also
provides first loss protection in the event of default. Gross premiums
written on these issues amounted to $0.4 million in 1999, $0.5 million
in 1998, and $0.5 million in 1997. As of December 31, 1999, par
outstanding on these deals before reinsurance was $83.7 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1999, 1998 and 1997.
(9) Compensation Plans
Officers and other key employees of the Company participate in the
Parent's incentive compensation, deferred compensation and profit
sharing plans. Expenses incurred by the Company under compensation plans
and bonuses amounted to $2.6 million, $2.2 million and $5.0 million in
1999, 1998 and 1997, respectively, before deduction for related tax
benefits.
(10) Dividends
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory
surplus after such dividend may not be less than the minimum required
paid-in capital, which was $66.4 million in 1999 and 1998, and (b)
dividends may not exceed the lesser of 10 percent of its surplus or 100
percent of adjusted net investment income, as defined by New York
insurance law, for the 12 month period ending on the preceding December
31, without the prior approval of the Superintendent of the New York
State Insurance Department. At December 31, 1999 and 1998, the amount of
the Company's surplus available for dividends was approximately $127.2
million and $124.6 million, respectively, without prior approval.
During 1999, and 1998, the Company declared dividends of $100.0 million,
and $75.0 million, respectively.
(11) Capital Contribution
During 1997, the Parent made a capital contribution of $49.5 million to
the Company.
(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.
-14-
<PAGE>
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
Cash
<S> <C> <C> <C> <C>
On hand and in demand accounts $ 924 $ 924 $ 318 $ 318
Short-term investments 114,776 114,776 $ 30,395 $ 30,395
Fixed maturity securities $2,412,504 $2,412,504 $2,663,024 $2,663,024
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of
deferred acquisition costs, and loss and loss adjustment expense
reserves. Estimated fair values of these guaranties are based on amounts
currently charged to enter into similar agreements (net of applicable
ceding commissions), discounted cash flows considering contractual
revenues to be received adjusted for expected prepayments, the present
value of future obligations and estimated losses, and current interest
rates. The estimated fair values of such financial guaranties range
between $335.3 million and $364.1 million compared to a carrying value
of $410.4 million as of December 31, 1999 and between $379.1 million and
$419.0 million compared to a carrying value of $432.6 million as of
December 31, 1998.
As of December 31, 1999 and 1998, the net present value of future
premiums was $55.7 million and $49.5 million, respectively.
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.
-15-
<PAGE>
As of December 31, 1999, the Company's total insured principal exposure
to credit loss in the event of default by bond issuers was $137.4
billion, net of reinsurance of $36.3 billion. The Company's insured
portfolio as of December 31, 1999 was broadly diversified by geography
and bond market sector with no single debt issuer representing more than
1% of the Company's principal exposure outstanding, net of reinsurance.
As of December 31, 1999, the composition of principal exposure by type
of issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
Municipal:
General obligation $77,780.2
Special revenue 45,531.2
Industrial revenue 471.5
Non-municipal 13,575.3
-----------
Total $137,358.2
==========
As of December 31, 1999, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
Ceded
Principal
Outstanding
Reinsurer:
Capital Re $12,267.6
Enhance Re 8,921.9
Other 15,148.5
----------
Total $36,338.0
=========
The Company's gross and net exposure outstanding, which includes
principal and interest, was $305,682.7 million and $237,682.2 million,
respectively, as of December 31, 1999.
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure
outstanding at December 31, 1999 by state, net of reinsurance, was as
follows (in millions):
Net
Principal
Outstanding
California $15,453.9
New York 13,081.7
Pennsylvania 12,829.8
Florida 12,548.5
Illinois 10,142.0
Texas 6,331.0
Michigan 5,912.3
New Jersey 5,120.4
Ohio 3,838.8
Arizona 3,665.6
-------
-16-
<PAGE>
Sub-total 88,924.0
Other states 48,015.1
International 419.1
----------
Total $137,358.2
==========
(13) Commitments
Total rent expense was $2.6 million, $2.6 million and $2.4 million in
1999, 1998 and 1997, respectively. For each of the next two years and in
the aggregate as of December 31, 1999, the minimum future rental
payments under noncancellable operating leases having remaining terms in
excess of one year approximate (in thousands):
Year Amount
2000 $2,909
2001 2,911
-------
Total minimum future rental payments $5,820
======
(14) Comprehensive Income
Comprehensive income requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Accumulated other comprehensive income of the Company
consists of net unrealized gains on investment securities and foreign currency
translation adjustments.
The following are the reclassification adjustments (in thousands) for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
Before Tax Tax Net of Tax
Amount Benefit Amount
Unrealized holding losses arising
<S> <C> <C> <C>
during the period $(182,905) $64,017 $(118,888)
Less: reclassification adjustment for
gains realized in net income (32,878) 11,507 (21,371)
----------- -------- -----------
Unrealized losses on investments $(215,783) $75,524 $(140,259)
========== ======= ==========
1998
Before Tax Tax Net of Tax
Amount Expense Amount
Unrealized holding losses arising
during the period $42,606 $(14,912) $27,694
Less: reclassification adjustment for
gains realized in net income (29,360) 10,276 (19,084)
-------- --------- ---------
Unrealized gains on investments $13,246 $ (4,636) $ 8,610
======= ========== ========
1997
Before Tax Tax Net of Tax
Amount Expense Amount
Unrealized holding losses arising
during the period $86,742 $(30,360) $56,382
Less: reclassification adjustment for
gains realized in net income (16,700) 5,845 (10,855)
--------- -------- ----------
Unrealized gains on investments $70,042 $(24,515) $45,527
======= ========= =======
</TABLE>
-17-
<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,
1999 1998 1997
__________________________ ___________________________ ____________________
Net Stockholder's Net Stockholder's Net Stockholder's
Income Equity Income Equity Income Equity
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $206,006 $2,039,115 $185,790 $2,071,718 $173,803 $1,952,941
Premium revenue recognition 596 (194,559) (13,946) (195,155) (4,924) (181,209)
Deferral of acquisition costs 9,194 (71,730) 5,362 (80,924) 5,659 (86,286)
Contingency reserve - (721,427) - (627,257) - (540,677)
Contingency reserve tax deduction (see Note 2) - 74,059 - 74,059 - 95,185
Non-admitted assets - (806) - (1,502) - (2,593)
Case basis loss reserves (1,294) (1,221) 1,945 73 1,377 (1,872)
Portfolio loss reserves (7,000) 25,900 3,900 32,900 5,000 29,000
Deferral of income taxes (1,857) 71,551 17 72,521 1,715 72,260
Unrealized (gains) on fixed maturity
securities held at fair value, net of tax - 46,962 - (93,297) - (84,687)
Recognition of profit commission (1,092) (7,143) 1,338 (6,050) (1,203) (7,388)
Unauthorized reinsurance - (87) - (39) - -
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) (76) 11,093 253 11,169 313 10,916
------------ ------------ ---------- ------------ --------- ----------
Statutory-basis amount $204,477 $1,271,707 $184,659 $1,258,216 $181,740 $1,255,590
======== ========== ======== ========== ======== ==========
</TABLE>
-18-
<PAGE>
Exhibit 99.2
UNAUDITED INTERIM FINANCIAL STATEMENTS
OF
FINANCIAL GUARANTY INSURANCE COMPANY
FINANCIAL GUARANTY INSURANCE COMPANY
============================================================================
Unaudited Interim Financial Statements
June 30, 2000
Balance Sheets.........................................................1
Statements of Income...................................................2
Statements of Cash Flows...............................................3
Notes to Unaudited Interim Financial Statements........................4
<PAGE>
<TABLE>
<CAPTION>
Financial Guaranty Insurance
Company Balance Sheets
($ in Thousands)
June 30, December 31,
2000 1999
------------------ ---------------
Assets (Unaudited)
Fixed maturity securities, available for sale,
at fair value (amortized cost of
<S> <C> <C> <C> <C> <C>
$2,154,362 in 2000 and $2,431,049 in 1999) $2,101,386 $2,412,504
Short-term investments, at cost, which approximates fair value 508,648 114,776
Cash 809 924
Accrued investment income 34,278 38,677
Reinsurance receivable 7,232 8,118
Deferred policy acquisition costs 72,458 71,730
Property, plant and equipment net of
accumulated depreciation of $7,864 in 2000 and $7,303 in 1999 777 967
Prepaid reinsurance premiums 133,526 133,874
Prepaid expenses and other assets 13,361 16,672
------------ ------------
Total assets $2,872,475 $2,798,242
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $585,740 $578,930
Losses and loss adjustment expenses 41,700 45,201
Ceded reinsurance payable 572 2,310
Accounts payable and accrued expenses 31,277 16,265
Current federal income taxes payable 59,844 62,181
Deferred federal income taxes payable 56,902 46,346
Payable for securities purchased - 7,894
------------ ---------
Total liabilities 776,035 759,127
-------- --------
Stockholder's Equity:
Common stock, par value $1,500 per share at June 30,
2000 and at December 31, 1999: 10,000 shares authorized,
issued and outstanding 15,000 15,000
Additional paid-in capital 383,511 383,511
Accumulated other comprehensive loss, net of tax (32,459) (46,687)
Retained earnings 1,730,388 1,687,291
---------- ----------
Total stockholder's equity 2,096,440 2,039,115
---------- -----------
Total liabilities and stockholder's equity $2,872,475 $2,798,242
========== ==========
</TABLE>
See accompanying notes to unaudited interim financial statements
<PAGE>
Financial Guaranty Insurance
Company Statements Of Income
($ in Thousands)
Six Months Ended June 30,
2000 1999
(Unaudited)
Revenues:
Gross premiums written $55,707 $ 56,974
Ceded premiums (8,913) (11,151)
--------- ----------
Net premiums written 46,794 45,823
(Increase)/Decrease in net unearned premiums (7,158) 3,402
--------- --------
Net premiums earned 39,636 49,225
Net investment income 68,113 67,416
Net realized gains 12,670 25,019
-------- --------
Total revenues 120,419 141,660
-------- -------
Expenses:
Losses and loss adjustment expenses (2,486) (2,683)
Policy acquisition costs 5,490 8,996
Other underwriting expenses 7,058 9,640
-------- ------
Total expenses 10,062 15,953
-------- -------
Income before provision for federal income taxes 110,357 125,707
Provision for federal income taxes 17,261 25,765
-------- -------
Net income $93,096 $99,942
======= =======
See accompanying notes to unaudited interim financial statements
<PAGE>
Financial Guaranty Insurance
Company Statements Of Cash
Flows
($ in Thousands)
Six Months Ended June 30,
2000 1999
(Unaudited)
Operating activities:
Net income $93,096 $99,942
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 2,895 1,308
Amortization of fixed maturity securities 2,679 1,830
Policy acquisition costs deferred (6,219) (6,314)
Amortization of deferred policy acquisition costs 5,490 8,996
Depreciation of fixed assets 190 645
Change in reinsurance receivable 886 (44)
Change in prepaid reinsurance premiums 348 1,632
Foreign currency translation adjustment 2,615 1,838
Change in accrued investment income, prepaid
expenses and other assets 7,710 2,773
Change in unearned premiums 6,810 (5,035)
Change in losses and loss adjustment expense reserves (3,501) (4,860)
Change in other liabilities 13,274 (2,602)
Change in current income taxes payable (2,337) (932)
Net realized gains on investments (12,670) (25,019)
--------- --------
Net cash provided by operating activities 111,266 74,158
------- -------
Investing activities:
Sales or maturities of fixed maturity securities 608,512 581,563
Purchases of fixed maturity securities (276,021) (469,911)
Purchases of short-term investments, net (393,872) (135,446)
--------- ---------
Net cash used for investing activities (61,381) (23,794)
--------- --------
Financing activities:
Dividends paid (50,000) (50,000)
-------- --------
Net cash used for financing activities (50,000) (50,000)
-------- --------
(Decrease)/Increase in cash (115) 364
Cash at beginning of period 924 318
-------- --------
Cash at end of period $ 809 $ 682
======== =======
See accompanying notes to unaudited interim financial statements
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
<PAGE>
June 30, 2000 and 1999
(Unaudited)
(1) Basis of Presentation
The interim financial statements of Financial Guaranty Insurance
Company (the Company) in this report reflect all adjustments
necessary, in the opinion of management, for a fair statement of
(a) results of operations for the six months ended June 30, 2000
and 1999, (b) the financial position at June 30, 2000 and
December 31, 1999, and (c) cash flows for the six months ended
June 30, 2000 and 1999.
These interim financial statements should be read in conjunction
with the financial statements and related notes included in the
1999 audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that 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.
<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,
2000 1999
--------------------------------------------- --------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
<S> <C> <C> <C> <C>
GAAP basis amount $93,096 $2,096,440 $99,942 $2,028,358
Premium revenue recognition (8,243) (202,802) (8,326) (203,481)
Deferral of acquisition costs (728) (72,458) 2,682 (78,242)
Contingency reserve - (737,124) - (648,106)
Contingency reserve tax deduction - 74,059 - 74,059
Non-admitted assets - (679) - (933)
Case-basis losses incurred (315) (1,536) (989) (916)
Portfolio loss reserves (3,000) 22,900 1,000 33,900
Deferral of income tax 2,895 75,360 1,308 74,509
Unrealized losses/(gains) on fixed
maturity securities held at fair - 34,434 - 1,200
value, net of taxes
Profit commission 141 (7,002) 13 (6,038)
Provision for unauthorized reinsurers - (85) - (38)
Allocation of tax benefits due to
Parent's net operating loss to the
Company 146 11,239 156 11,325
--------- ------------ --------- ------------
Statutory basis amount $83,992 $1,292,746 $95,786 $1,285,597
======= ========== ======= ==========
</TABLE>
<PAGE>
1023740v2
Financial Guaranty Insurance
Company Notes to Financial Statements
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend only
from earned surplus subject to the following limitations:
o Statutory surplus after dividends may not be less than the
minimum required paid-in capital, which was $66.4 million
in 2000.
o Dividends may not exceed the lesser of 10 percent of its
surplus or 100 percent of adjusted net investment income,
as defined therein, for the twelve month period ending on
the preceding December 31, without the prior approval of
the Superintendent of the New York State Insurance
Department.
The amount of the Company's surplus available for dividends
during 2000 is approximately $129.3 million.
The Company declared dividends of $50 million during the first
six months of 2000 and 1999.
(4) Income Taxes
The Company's effective Federal corporate tax rate (15.6 percent
and 20.5 percent for the six months ended June 30, 2000 and 1999,
respectively) is less than the statutory corporate tax rate (35
percent in 2000 and 1999) on ordinary income due to permanent
differences between financial and taxable income, principally
tax-exempt interest.
(5) Reinsurance
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 $9.3 million and $12.8 million,
respectively, for the six months ended June 30, 2000 and 1999.
(6) Comprehensive Income
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:
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
June 30, 2000 and 1999
(Unaudited)
For the Six Months
Ended June 30,
2000 1999
Net income $93,096 $99,942
Other comprehensive income:
Change in unrealized investment gains/,
(losses) net of taxes 12,528 (94,497)
Change in foreign exchange gains,
net of taxes 1,700 1,195
---------- --------
Comprehensive income $107,324 $ 6,640
======== =======
<PAGE>
