-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DaF7QpP+MBWDHlZmpxc9s1kQr4ZqK70jL7OWkOJd7Qo3KyHFkmhAgdBfGkHmOUSf ehRksEdm0cJvB+s5rJKKeA== 0000950123-96-007628.txt : 19961231 0000950123-96-007628.hdr.sgml : 19961231 ACCESSION NUMBER: 0000950123-96-007628 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961223 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961230 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQCC RECEIVABLES CORP CENTRAL INDEX KEY: 0000897897 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 593170055 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-66152 FILM NUMBER: 96687732 BUSINESS ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9049875000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQCC ASSET BACKED CORP CENTRAL INDEX KEY: 0000897898 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 593170052 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-66152-01 FILM NUMBER: 96687733 BUSINESS ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 BUSINESS PHONE: 9049875000 MAIL ADDRESS: STREET 1: C/O EQUICREDIT CORP OF AMERICA STREET 2: 10401 DEERWOOD PARK BLVD CITY: JACKSONVILLE STATE: FL ZIP: 32256 8-K 1 FORM 8-K 1 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): December 26, 1996 EQCC RECEIVABLES CORPORATION EQCC ASSET BACKED CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrants as specified in governing instruments) 59-3170055 Delaware 333-17893 59-3170052 - --------------- ---------------- ------------------- (State or other (Commission File (IRS Employer jurisdiction of Number) Identification Nos.) organization) 10401 Deerwood Park Blvd., Jacksonville, Florida 32256 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 987-5120 Not Applicable - -------------------------------------------------------------------------------- (Former name or former address if changed since last report) Exhibit Index located at Page 2 2 Items 1 through 4, Item 6 and Item 8 are not included because they are not applicable. Item 5. Other Events. The financial statements of Financial Guaranty Insurance Company ("FGIC") as of December 31, 1995 and 1994 that are included in this Form 8-K have been audited by KPMG Peat Marwick LLP. The consent of KPMG Peat Marwick LLP to the inclusion of their audit report on such financial statements in this Form 8-K and to being named as "experts" in the Prospectus Supplement for the EQCC Home Equity Loan Trust 1996-4 is attached hereto as Exhibit 23.1. The financial statements of Financial Guaranty Insurance Company as of December 31, 1995 and 1994 are attached hereto as Exhibit 99.1. The unaudited financial statements of Financial Guaranty Insurance Company as of September 30, 1996 are attached hereto as Exhibit 99.2. Item 7. Financial Statements and Exhibits. (a) Financial Statements - Not Applicable (b) Pro Forma Financial Information - Not Applicable (c) Exhibits (executed copies) - The following execution copies of Exhibits to the Form S-3 Registration Statement of the Registrant are hereby filed:
Sequentially Exhibit Numbered Number Exhibit Page ------- ------- ------------ 10.1(A) Securities Insurance Policy with 004 respect to EQCC Home Equity Loan Trust, Series 1996-4 23.1(A) Consent of Independent Auditors of 008 the Insurer 99.1(A) Audited Financials of the FGIC as of December 31, 1995 and December 31, 1994. 010 99.2 Unaudited Financial Statements of FGIC as of September 30, 1996.
2 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized. EQCC RECEIVABLES CORPORATION EQCC ASSET BACKED CORPORATION (Registrants) EQCC RECEIVABLES CORPORATION December 26, 1996 By: /s/ Stephen R. Veth ----------------------- Stephen R. Veth President EQCC ASSET BACKED CORPORATION December 26, 1996 By: /s/ Stephen R. Veth ---------------------- Stephen R. Veth President EX-10.1.C 2 SECURITIES INSURANCE POLICY 1 Exhibit 10.1(c) Securities Insurance Policy FINANCIAL GUARANTY INSURANCE COMPANY 115 BROADWAY NEW YORK, NEW YORK 10006 (212) 312-3000 (800) 352-0001 SURETY BOND ISSUER: EQCC Home Equity Loan Trust POLICY NUMBER: 1996-4 SECURED OBLIGATIONS: $ CONTROL NUMBER: aggregate principal amount of EQCC Home Equity Loan Asset Backed Certificates, Series 1996-4 DEPOSIT PREMIUM: $ TRUSTEE: First Bank National Association Financial Guaranty Insurance Company ("Financial Guaranty"), a New York stock insurance company, in consideration of its receipt of the Deposit premium and subject to the terms of this Surety Bond, hereby unconditionally and irrevocably agrees to pay each Insured Payment to the Trustee named above or its successor, as trustee for the Series 1996-4 Certificates, to the extent set forth in the Pooling and Servicing Agreement. The Series 1996-4 Certificates are referred to herein as the "Insured Obligations." Financial Guaranty will make such payment out of its own funds by 10:00 A.M. (New York City Time) in immediately available funds to the Trustee on the later of (i) the Business Day next following the day on which Financial Guaranty shall have received Notice that an Insured Payment is due and (ii) the Payment Date on which the Insured Payment is distributable to Series 1996-4 Certificateholders pursuant to the Pooling and Servicing Agreement, for disbursement to Series 1996-4 Certificateholders in the same manner as the payments with respect to the Series 1996-4 Certificates. Upon such payment, Financial Guaranty shall be fully subrogated to the rights of the Series 1996-4 Certificateholders to receive the amount so paid as set forth in Section 6.05(c) of the Pooling and Servicing Agreement. Financial Guaranty's obligations hereunder with respect to each Payment Date shall be discharged to the extent funds consisting of the Insured Payment are received by the Trustee on behalf of the 2 FINANCIAL GUARANTY INSURANCE COMPANY 115 BROADWAY NEW YORK, NEW YORK 10006 (212) 312-3000 (800) 352-0001 SURETY BOND Series 1996-4 Certificateholders for distribution to such holders, as provided in the Pooling and Servicing Agreement and herein, whether or not such funds are properly applied by the Trustee. This Surety Bond is non-cancelable for any reason, including nonpayment of any premium. The premium on this Surety Bond is not refundable for any reason, including the payment of the Series 1996-4 Certificates prior to their respective maturities. In addition to the Deposit Premium set forth on the face of this Surety Bond, a monthly premium shall be due and payable on this Surety Bond on each Payment Date, commencing January 15, 1996, in an amount equal to one-twelfth of .__% of the then outstanding Series 1996-4 Principal Balance on the Payment Date on which said monthly premium shall be due and payable after giving effect to distributions to Series 1996-4 Certificateholders. This Surety Bond is subject to and shall be governed by the laws of the State of New York. The proper venue for any action or proceeding on this Surety Bond shall be the County of New York, State of New York. The insurance provided by this Surety Bond is not covered by the New York Property/Casualty Insurance Security Fund (New York Insurance Code, Article 76). Capitalized terms used and not defined herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. "Notice" means written notice in the form of Exhibit Q to the Pooling and Servicing Agreement by registered or certified mail or telephonic or telegraphic notice, subsequently confirmed by written notice delivered via telecopy, telex or hand delivery from the Trustee to Financial Guaranty specifying the Class A Remittance Amount, the Available Payment Amount and Excess Spread for such Payment Date, and the Insured Payment which shall be due and owing on the Payment Date. "Series 1996-4 Certificateholder" means, as to a particular Series 1996-4 Certificate, the person, other than the Trust, the Servicer, any Subservicer or the Representative or any Depositor who, on the applicable Payment Date is entitled under the terms of such Certificate to payment thereof. "Pooling and Servicing Agreement" means the Pooling and Servicing Agreement by and among EquiCredit Corporation of America, as Servicer, the Depositors listed therein and First Bank National Association as Trustee, dated as of December 1, 1996. In the event that payments under any Series 1996-4 Certificate is accelerated, nothing herein contained shall obligate Financial ii 3 FINANCIAL GUARANTY INSURANCE COMPANY 115 BROADWAY NEW YORK, NEW YORK 10006 (212) 312-3000 (800) 352-0001 SURETY BOND Guaranty to make any payment of principal or interest on such Certificates on an accelerated basis, unless such acceleration of payment by Financial Guaranty is at the sole option of Financial Guaranty. IN WITNESS WHEREOF, Financial Guaranty has caused this Policy to be affixed with its corporate seal and to be signed by its duly authorized officer in facsimile to become effective and binding upon Financial Guaranty by virtue of the countersignature of its duly authorized representative. _____________________________ ______________________________ President Authorized Representative Effective Date: December 30, 1996 iii EX-23.1.C 3 CONSENT OF INDEPENDENT AUDITIORS 1 Exhibit 23.1(c) Consent of Independent Auditors of the Insurer The Board of Directors Financial Guaranty Insurance Company: We consent to the use of our report dated January 19, 1996 on the financial statements of Financial Guaranty Insurance Company as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995 included in the Form 8-K of EQCC Receivables Corporation and EQCC Asset Backed Corporation, and to reference to our firm under the heading "Experts" in the Prospectus Supplement. Our report refers to changes, in 1993, in accounting methods for multiple-year retrospectively rated reinsurance contracts and for the adoption of 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. /s/ KPMG Peat Marwick LLP New York, New York December 23, 1996 EX-99.1.A 4 AUDITED FINANCIALS 1 Exhibit 99.1(A) Audited Financial Statements of the Insurer 2 APPENDIX A AUDITED FINANCIALS OF INSURER FINANCIAL GUARANTY INSURANCE COMPANY FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) A-1 3 FINANCIAL GUARANTY INSURANCE COMPANY AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1995
PAGE ---- Report of Independent Auditors........................................................ A-3 Balance Sheets........................................................................ A-4 Statements of Income.................................................................. A-5 Statements of Stockholder's Equity.................................................... A-6 Statements of Cash Flows.............................................................. A-7 Notes to Financial Statements......................................................... A-8
A-2 4 LOGO Report of Independent Auditors' The Board of Directors and Stockholder Financial Guaranty Insurance Company: We have audited the accompanying balance sheets of Financial Guaranty Insurance Company as of December 31, 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 then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Financial Guaranty Insurance Company as of December 31, 1995 and 1994 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. As described in notes 6 and 2, respectively, in 1993, the Company changed its methods of accounting for multiple-year retrospectively rated reinsurance contracts and for the adoption of 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. LOGO January 19, 1996 LOGO A-3 5 FINANCIAL GUARANTY INSURANCE COMPANY BALANCE SHEETS ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ ASSETS Fixed maturity securities available-for-sale (amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994)....................... $2,141,584 $1,889,910 Short-term investments, at cost, which approximates market......... 91,032 75,674 Cash............................................................... 199 1,766 Accrued investment income.......................................... 37,347 40,637 Reinsurance recoverable............................................ 7,672 14,472 Prepaid reinsurance premiums....................................... 162,087 164,668 Deferred policy acquisition costs.................................. 94,868 90,928 Property and equipment, net of accumulated depreciation ($12,861 in 1995 and $10,512 in 1994)........................................ 6,314 7,912 Receivable for securities sold..................................... 26,572 -- Prepaid expenses and other assets.................................. 12,627 12,243 ---------- ---------- Total assets............................................. $2,580,302 $2,298,210 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums................................................ $ 727,535 $ 757,425 Loss and loss adjustment expenses................................ 77,808 98,746 Ceded reinsurance balances payable............................... 1,942 2,258 Accounts payable and accrued expenses............................ 32,811 28,489 Payable to Parent................................................ 1,647 18,600 Current federal income taxes payable............................. 51,296 82,123 Deferred federal income taxes.................................... 99,171 22,640 Payable for securities purchased................................. 40,211 8,206 ---------- ---------- Total liabilities........................................ 1,032,421 1,018,487 ========== ========== Stockholder's Equity: Common stock, par value $1,500 per share; 10,000 shares authorized, issued and outstanding................. 15,000 15,000 Additional paid-in capital....................................... 334,011 334,011 Net unrealized gains (losses) on fixed maturity securities available-for-sale, net of tax................................ 63,785 (41,773) Foreign currency translation adjustment.......................... (1,499) (1,221) Retained earnings................................................ 1,136,584 973,706 ---------- ---------- Total stockholder's equity............................... 1,547,881 1,279,723 ---------- ---------- Total liabilities and stockholder's equity............... $2,580,302 $2,298,210 ========== ==========
See accompanying notes to financial statements. A-4 6 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF INCOME ($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- REVENUES: Gross premiums written................................... $ 97,288 $161,940 $291,052 Ceded premiums........................................... (19,319) (46,477) (49,914) -------- -------- -------- Net premiums written.................................. 77,969 115,463 241,138 Decrease (increase) in net unearned premiums............. 27,309 53,364 (74,902) -------- -------- -------- Net premiums earned................................... 105,278 168,827 166,236 Net investment income.................................... 120,398 109,828 99,920 Net realized gains....................................... 30,762 5,898 35,439 -------- -------- -------- Total revenues................................... 256,438 284,553 301,595 -------- -------- -------- EXPENSES: Loss and loss adjustment expenses........................ (8,426) 3,646 42,894 Policy acquisition costs................................. 13,072 15,060 19,592 (Increase) decrease in deferred policy acquisition costs................................................. (3,940) 3,709 2,658 Other underwriting expenses.............................. 19,100 21,182 21,878 -------- -------- -------- Total expenses................................... 19,806 43,597 87,022 -------- -------- -------- Income before provision for Federal income taxes......... 236,632 240,956 214,573 -------- -------- -------- Federal income tax expense (benefit): Current............................................... 28,913 43,484 59,505 Deferred.............................................. 19,841 7,741 (7,284) -------- -------- -------- Total Federal income tax expense...................... 48,754 51,225 52,221 -------- -------- -------- Net income before cumulative effect of change in accounting principle................................ 187,878 189,731 162,352 -------- -------- -------- Net cumulative effect of change in accounting principle........................................... -- -- 3,008 -------- -------- -------- Net income....................................... $187,878 $189,731 $165,360 ======== ======== ========
See accompanying notes to financial statements. A-5 7 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY ($ IN THOUSANDS)
NET UNREALIZED GAINS (LOSSES) ON ADDITIONAL FIXED MATURITY SECURITIES FOREIGN COMMON PAID-IN AVAILABLE-FOR-SALE, CURRENCY RETAINED STOCK CAPITAL NET OF TAX ADJUSTMENT EARNINGS ------- ---------- ------------------------- ---------- ---------- Balance, January 1, 1993......... $ 2,500 $ 324,639 $ 7,267 $ (1,597) $ 618,615 Net income....................... -- -- -- -- 165,360 Capital contribution............. -- 21,872 -- -- -- Adjustment to common stock par value.......................... 12,500 (12,500) -- -- -- Unrealized gains on fixed maturity securities previously held at market, net of tax of ($713)......................... -- -- (1,325) -- -- Implementation of change in accounting for adoption of SFAS 115, net of tax of $45,643..... -- -- 84,766 -- -- Foreign currency translation adjustment..................... -- -- -- (668) -- ------- -------- -------- ------- ---------- Balance, December 31, 1993....... 15,000 334,011 90,708 (2,265) 783,975 Net income....................... -- -- -- -- 189,731 Unrealized losses on fixed maturity securities available-for-sale, net of tax of ($71,336)................... -- -- (132,481) -- -- Foreign currency translation adjustment..................... -- -- -- 1,044 -- ------- -------- -------- ------- ---------- Balance, December 31, 1994....... 15,000 334,011 (41,773) (1,221) 973,706 Net income....................... -- -- -- -- 187,878 Dividend paid.................... -- -- -- -- (25,000) Unrealized gains on fixed maturity securities available for sale, net of tax of $56,839........................ -- -- 105,558 -- -- Foreign currency translation adjustment..................... -- -- -- (278) -- ------- -------- -------- ------- ---------- Balance, December 31, 1995....... $15,000 $ 334,011 $ 63,785 $ (1,499) $1,136,584 ======= ======== ======== ======= ==========
See accompanying notes to financial statements. A-6 8 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 --------- --------- ----------- OPERATING ACTIVITIES: Net income........................................ $ 187,878 $ 189,731 $ 165,360 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax...................................... -- -- (3,008) Change in unearned premiums....................... (29,890) (45,927) 90,429 Change in loss and loss adjustment expense reserves........................................ (20,938) 2,648 51,264 Depreciation of property and equipment............ 2,348 2,689 2,012 Change in reinsurance receivable.................. 6,800 (304) (9,040) Change in prepaid reinsurance premiums............ 2,581 (7,437) (15,527) Change in foreign currency translation adjustment...................................... (427) 1,607 (1,029) Policy acquisition costs deferred................. (16,219) (18,306) (19,592) Amortization of deferred policy acquisition costs........................................... 12,279 22,015 22,250 Change in accrued investment income, and prepaid expenses and other assets....................... 2,906 (5,150) (9,048) Change in other liabilities....................... (12,946) 2,577 7,035 Change in deferred income taxes................... 19,841 7,741 (7,284) Amortization of fixed maturity securities......... 1,922 5,112 8,976 Change in current income taxes payable............ (30,827) 33,391 30,089 Net realized gains on investments................. (30,762) (5,898) (35,439) -------- -------- ----------- Net cash provided by operating activities......... 94,546 184,489 277,448 -------- -------- ----------- INVESTING ACTIVITIES: Sales and maturities of fixed maturity securities...... 836,103 550,534 789,036 Purchases of fixed maturity securities............ (891,108) (721,908) (1,090,550) Purchases, sales and maturities of short-term investments, net................................ (15,358) (11,486) 4,164 Purchases of property and equipment, net.......... (750) (1,290) (985) -------- -------- ----------- Net cash used in investing activities............. (71,113) (184,150) (298,335) -------- -------- ----------- FINANCING ACTIVITIES: Dividends paid......................................... (25,000) -- -- Capital contribution.............................. -- -- 21,872 -------- -------- ----------- Net cash provided by financing activities......... (25,000) -- 21,872 -------- -------- ----------- (Decrease) Increase in cash....................... (1,567) 339 985 Cash at beginning of year......................... 1,766 1,427 442 -------- -------- ----------- Cash at end of year............................... $ 199 $ 1,766 $ 1,427 ======== ======== ===========
See accompanying notes to financial statements. A-7 9 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (1) BUSINESS Financial Guaranty Insurance Company (the "Company"), a wholly-owned insurance subsidiary of FGIC Corporation (the "Parent"), provides financial guaranty insurance on newly issued municipal bonds and municipal bonds trading in the secondary market, the latter including bonds held by unit investment trusts and mutual funds. The Company also insures structured debt issues outside the municipal market. Approximately 88% of the business written since inception by the Company has been municipal bond insurance. The Company insures only those securities that, in its judgment, are of investment grade quality. Municipal bond insurance written by the Company insures the full and timely payment of principal and interest when due on scheduled maturity, sinking fund or other mandatory redemption and interest payment dates to the holders of municipal securities. The Company's insurance policies do not provide for accelerated payment of the principal of, or interest on, the bond insured in the case of a payment default. If the issuer of a Company-insured bond defaults on its obligation to pay debt service, the Company will make scheduled interest and principal payments as due and is subrogated to the rights of bondholders to the extent of payments made by it. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which differ in certain respects from the accounting practices prescribed or permitted by regulatory authorities (see Note 3). The prior years financial statements have been reclassified to conform to the 1995 presentation. Significant accounting policies are as follows: Investments As of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." The Statement defines three categories for classification of debt securities and the related accounting treatment for each respective category. The Company has determined that its fixed maturity securities portfolio should be classified as available-for-sale. Under SFAS 115, securities held as available-for-sale are recorded at fair value and unrealized holding gains/losses are recorded as a separate component of stockholder's equity, net of applicable income taxes. Short-term investments are carried at cost, which approximates fair value. Bond discounts and premiums are amortized over the remaining terms of the securities. Realized gains or losses on the sale of investments are determined on the basis of specific identification. Premium Revenue Recognition Premiums are earned over the period at risk in proportion to the amount of coverage provided which, for financial guaranty insurance policies, generally declines according to predetermined schedules. When unscheduled refundings of municipal bonds occur, the related unearned premiums, net of premium credits allowed against the premiums charged for insurance of refunding issues and applicable acquisition A-8 10 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) costs, are earned immediately. Unearned premiums represent the portion of premiums written related to coverage yet to be provided on policies in force. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate directly to premium production. Such costs include compensation of employees involved in underwriting, marketing and policy issuance functions, rating agency fees, state premium taxes and certain other underwriting expenses, offset by ceding commission income on premiums ceded to reinsurers (see Note 6). Net acquisition costs are deferred and amortized over the period in which the related premiums are earned. Anticipated loss and loss adjustment expenses are considered in determining the recoverability of acquisition costs. Loss and Loss Adjustment Expenses Provision for loss and loss adjustment expenses is made in an amount equal to the present value of unpaid principal and interest and other payments due under insured risks at the balance sheet date for which, in management's judgment, the likelihood of default is probable. Such reserves amounted to $77.8 million and $98.7 million at December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, such reserves included $28.8 million and $71.0 million, respectively, established based on an evaluation of the insured portfolio in light of current economic conditions and other relevant factors. Loss and loss adjustment expenses include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in 1994. 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. 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. A-9 11 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 1995 and 1994 and revenues and expenses are translated at average monthly exchange rates. The cumulative translation loss at December 31, 1995 and 1994 was $1.5 million and $1.2 million, respectively, net of tax, and is reported as a separate component of stockholder's equity. (3) STATUTORY ACCOUNTING PRACTICES The financial statements are prepared on the basis of GAAP, which differs in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The following are the significant ways in which statutory-basis accounting practices differ from GAAP: (a) premiums are earned in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (b) policy acquisition costs are charged to current operations as incurred rather than as related premiums are earned; (c) a contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist, whereas under GAAP, a reserve is established based on an ultimate estimate of exposure; (d) certain assets designated as non-admitted assets are charged directly against surplus but are reflected as assets under GAAP, if recoverable; (e) federal income taxes are only provided with respect to taxable income for which income taxes are currently payable, while under GAAP taxes are also provided for differences between the financial reporting and the tax bases of assets and liabilities; (f) purchases of tax and loss bonds are reflected as admitted assets, while under GAAP they are recorded as federal income tax payments; and (g) all fixed income investments are carried at amortized cost rather than at fair value for securities classified as available-for-sale under GAAP. A-10 12 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):
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 1994 1993 ----------------------- ----------------------- ----------------------- NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S INCOME EQUITY INCOME EQUITY INCOME EQUITY -------- ------------- -------- ------------- -------- ------------- GAAP basis amount................ $187,878 $ 1,547,881 $189,731 $ 1,279,723 $165,360 1,221,429 Premium revenue recognition...... (22,555) (166,927) (4,970) (144,372) (16,054) (139,401) Deferral of acquisition costs.... (3,940) (94,868) 3,709 (90,928) 2,658 (94,637) Contingency reserve.............. -- (386,564) -- (328,073) -- (252,542) Non-admitted assets.............. -- (5,731) -- (7,566) -- (8,951) Case basis loss reserves......... 4,048 (52) (3,340) (4,100) 1,626 (759) Portfolio loss reserves.......... (22,100) 24,000 (11,050) 46,100 43,650 57,150 Deferral of income taxes (benefits)..................... 19,842 64,825 7,741 45,134 (7,284) 35,209 Unrealized gains (losses) on fixed maturity securities held at fair value, net of tax...... -- (63,785) -- 41,773 -- (90,708) Recognition of profit commission..................... 3,096 (5,744) (2,410) (8,840) (4,811) (4,811) Provision for unauthorized reinsurance.................... -- -- -- (266) -- -- Contingency reserve tax deduction (see Note 2)................... -- 78,196 -- 55,496 -- 45,402 Allocation of tax benefits due to Parent's net operating loss to the Company (see Note 5)....... 637 10,290 (63) 9,653 -- 9,716 -------- ---------- -------- ---------- -------- ---------- Statutory-basis amount........... $166,906 $ 1,001,521 $179,348 $ 893,734 $185,145 $ 777,097 ======== ========== ======== ========== ======== ==========
(4) INVESTMENTS Investments in fixed maturity securities carried at fair value of $3.2 million and $3.0 million as of December 31, 1995 and 1994, 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):
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR 1995 COST GAINS LOSSES VALUE - --------------------------------------------- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies................................... $ 71,182 $ 1,696 -- $ 72,878 Obligations of states and political subdivisions............................... 1,942,001 98,458 $1,625 2,038,834 Debt securities issued by foreign governments................................ 30,270 152 550 29,872 ---------- -------- ------ ---------- Investments available-for-sale............... 2,043,453 100,306 2,175 2,141,584 Short-term investments....................... 91,032 -- -- 91,032 ---------- -------- ------ ---------- Total.............................. $2,134,485 $ 100,306 $2,175 $2,232,616 ========== ======== ====== ==========
A-11 13 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair values of short-term investments and of investments in fixed maturity securities available-for-sale at December 31, 1995, 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 1995 COST VALUE ------------------------------------------------------------ ---------- ---------- Due in one year or less..................................... $ 99,894 $ 99,984 Due after one year through five years....................... 137,977 141,235 Due after five years through ten years...................... 287,441 300,560 Due after ten years through twenty years.................... 1,406,219 1,476,261 Due after twenty years...................................... 202,954 214,576 ---------- ---------- Total....................................................... $2,134,485 $2,232,616 ========== ==========
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR 1994 COST GAINS LOSSES VALUE - --------------------------------------------- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies................................... $ 10,945 $ 8 $ (519) $ 10,434 Obligations of states and political subdivisions............................... 1,839,566 25,809 (85,200) 1,780,175 Debt securities issued by foreign governments................................ 103,666 400 (4,765) 99,301 ---------- ------- -------- ---------- Investments available-for-sale............... 1,954,177 26,217 (90,484) 1,889,910 Short-term investments....................... 75,674 -- -- 75,674 ---------- ------- -------- ---------- Total.............................. $2,029,851 $ 26,217 $ (90,484) $1,965,584 ========== ======= ======== ==========
In 1995, 1994 and 1993, proceeds from sales of investments in fixed maturity securities available-for-sale carried at fair value were $836.1 million, $550.5 million, and $789.0 million, respectively. For 1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million respectively, and gross losses of $5.5 million, $12.3 million and $1.0 million respectively, were realized on such sales. Net investment income of the Company is derived from the following sources (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- Income from fixed maturity securities.............. $112,684 $108,519 $ 97,121 Income from short-term investments................. 8,450 2,479 3,914 -------- -------- -------- Total investment income............................ 121,134 110,998 101,035 Investment expenses................................ 736 1,170 1,115 -------- -------- -------- Net investment income.............................. $120,398 $109,828 $ 99,920 ======== ======== ========
As of December 31, 1995, the Company did not have more than 10% 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 A-12 14 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Company's effective federal corporate tax rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993. Federal income tax expense (benefit) relating to operations of the Company for 1995, 1994 and 1993 is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- Current tax expense................................... $28,913 $43,484 $59,505 Deferred tax expense.................................. 19,841 7,741 (7,284) ------- ------- ------- Federal income tax expense............................ $48,754 $51,225 $52,221 ======= ======= =======
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, ---------------------------------- 1995 1994 1993 -------- -------- -------- Income taxes computed on income before provision for federal income taxes, at the statutory rate............................................. $ 82,821 $ 84,334 $ 75,101 Tax effect of: Tax-exempt interest.............................. (30,630) (30,089) (27,185) Other, net....................................... (3,437) (3,020) 4,305 -------- -------- -------- Provision for income taxes......................... $ 48,754 $ 51,225 $ 52,221 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities at December 31, 1995 and 1994 are presented below (in thousands):
1995 1994 -------- ------- Deferred tax assets: Unrealized losses on fixed maturity securities, available-for-sale......................................... -- $22,493 Loss reserves................................................. $ 8,382 16,136 Deferred compensation......................................... 5,735 9,685 Tax over book capital gains................................... 1,069 365 Other......................................................... 3,248 3,760 -------- ------- Total gross deferred tax assets................................. 18,434 52,439 -------- ------- Deferred tax liabilities: Unrealized gains on fixed maturity securities, available-for-sale......................................... 34,346 -- Deferred acquisition costs.................................... 33,204 31,825 Premium revenue recognition................................... 32,791 24,674 Rate differential on tax and loss bonds....................... 9,454 9,454 Other......................................................... 7,810 9,126 -------- ------- Total gross deferred tax liabilities............................ 117,605 75,079 -------- ------- Net deferred tax liability...................................... $ 99,171 $22,640 ======== =======
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 A-13 15 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) differences and has not established a valuation allowance at December 31, 1995 and 1994. The company anticipates that the related deferred tax asset will be realized. Total federal income tax payments during 1995, 1994 and 1993 were $59.8 million, $10.1 million, and $29.4 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 $33.7 million that can be drawn on in the event of default. Effective January 1, 1993, the Company adopted the Emerging Issues Task Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 requires that an asset be recognized by a ceding company to the extent a payment would be received from the reinsurer based on the contract's experience to date, regardless of the outcome of future events. To reflect the adoption of EITF 93-6 in the accompanying financial statements, an initial adjustment of $4.6 million, before applicable income taxes, has been reflected in the 1993 income statement. Net premiums earned are presented net of ceded earned premiums of $21.9 million, $39.0 million and $34.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. Loss and loss adjustment expenses incurred are presented net of ceded losses of $1.1 million, $0.3 million and $9.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. (7) LOSS AND LOSS ADJUSTMENT EXPENSES Activity in the reserve for loss and loss adjustment expenses is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- -------- ------- Balance at January 1,............................... $ 98,746 $ 96,098 $44,834 Less reinsurance recoverable...................... 14,472 14,168 5,128 -------- -------- ------- Net balance at January 1,........................... 84,274 81,930 39,706 Incurred related to: Current year................................... 26,681 15,133 -- Prior years.................................... (1,207) (437) (756) Portfolio reserves............................. (33,900) (11,050) 43,650 -------- -------- ------- Total Incurred............................ (8,426) 3,646 42,894 -------- -------- ------- Paid related to: Current year................................... (197) (382) -- Prior years.................................... (5,515) (920) (670) -------- -------- ------- Total Paid................................ (5,712) (1,302) (670) -------- -------- ------- Net balance at December 31,......................... 70,136 84,274 81,930 Plus reinsurance recoverable...................... 7,672 14,472 14,168 -------- -------- ------- Balance at December 31,............................. $ 77,808 $ 98,746 $96,098 ======== ======== =======
A-14 16 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The changes in incurred portfolio reserves principally relate 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. (8) RELATED PARTY TRANSACTIONS The Company has various agreements with subsidiaries of General Electric Company ("GE") and GE Capital. These business transactions include appraisal fees and due diligence costs associated with underwriting structured finance mortgage-backed security business; payroll and office expenses incurred by the Company's international branch offices but processed by a GE subsidiary; investment fees pertaining to the management of the Company's investment portfolio; and telecommunication service charges. Approximately $3.2 million, $3.2 million and $1.0 million in expenses were incurred in 1995, 1994 and 1993, respectively, related to such transactions. The Company also insured certain non-municipal issues with GE Capital involvement as sponsor of the insured securitization and/or servicer of the underlying assets. For some of these issues, GE Capital also provides first loss protection in the event of default. Gross premiums written on these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and $3.3 million in 1993. The Company insures bond issues and securities in trusts that were sponsored by affiliates of GE (approximately 1 percent of gross premiums written in 1995 and 1994 and 2 percent in 1993). (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 $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and 1993, 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 $2.1 million in 1995 and 1994, 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, 1995 and 1994, the amount of the Company's surplus available for dividends was approximately $100.2 million and $89.3 million, respectively. During 1995, the company paid dividends of $25 million. No dividends were paid during 1994 or 1993. (11) FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair values is estimated using quoted market prices for similar securities. Fair value disclosure for fixed maturity securities is included in the balance sheets and in Note 4. A-15 17 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 1995 and 1994 are as follows (in thousands):
1995 1994 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Financial Assets Cash On hand and in demand accounts...................... $ 199 $ 199 $ 1,766 $ 1,766 Short-term investments................................ 91,032 91,032 75,674 75,674 Fixed maturity securities............................. 2,141,584 2,141,584 1,889,910 1,889,910
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 $412.8 million and $456.2 million compared to a carrying value of $540.6 million as of December 31, 1995 and between $518.1 million and $565.9 million compared to a carrying value of $585.1 million as of December 31, 1994. Concentrations of Credit Risk The Company considers its role in providing insurance to be credit enhancement rather than credit substitution. The Company insures only those securities that, in its judgment, are of investment grade quality. The Company has established and maintains its own underwriting standards that are based on those aspects of credit that the Company deems important for the particular category of obligations considered for insurance. Credit criteria include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flows, including the historical and expected performance of assets pledged for payment of securities under varying economic scenarios and underlying levels of protection such as insurance or overcollateralization. In connection with underwriting new issues, the Company sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guarantee be provided for a term of the obligation insured by a party of acceptable credit quality obligated to make payment prior to any payment by the Company. The types and extent of collateral pledged varies, but may include residential and commercial mortgages, corporate debt, government debt and consumer receivables. As of December 31, 1995, the Company's total insured principal exposure to credit loss in the event of default by bond issuers was $98.7 billion, net of reinsurance of $20.7 billion. The Company's insured portfolio as of December 31, 1995 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. A-16 18 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1995, the composition of principal exposure by type of issue, net of reinsurance, was as follows (in millions):
NET PRINCIPAL OUTSTANDING ----------- Municipal: General obligation..................................... $43,308.2 Special revenue........................................ 38,137.9 Industrial revenue..................................... 2,480.0 Non-municipal.......................................... 14,734.2 --------- Total.......................................... $98,660.3 =========
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, 1995 by state, net of reinsurance, was as follows (in millions):
NET PRINCIPAL OUTSTANDING ----------- California............................................... $10,440.2 Florida.................................................. 8,869.3 Pennsylvania............................................. 8,653.4 New York................................................. 7,706.7 Illinois................................................. 5,697.5 Texas.................................................... 5,478.7 New Jersey............................................... 4,181.9 Michigan................................................. 3,385.9 Arizona.................................................. 2,776.9 Ohio..................................................... 2,327.7 --------- Sub-total................................................ 59,518.2 Other states and International........................... 39,142.1 --------- Total.......................................... $98,660.3 =========
(12) COMMITMENTS Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995, 1994 and 1993, respectively. For each of the next five years and in the aggregate as of December 31, 1995, the minimum future rental payments under noncancellable operating leases having remaining terms in excess of one year approximate (in thousands):
YEAR AMOUNT ----------------------------------------------------------- ------- 1996....................................................... $ 2,297 1997....................................................... 2,909 1998....................................................... 2,909 1999....................................................... 2,909 2000....................................................... 2,909 Subsequent to 2000......................................... 2,911 ------- Total minimum future rental payments............. $16,844 =======
A-17 19 APPENDIX B UNAUDITED FINANCIALS OF INSURER FINANCIAL GUARANTY INSURANCE COMPANY UNAUDITED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 1996
PAGE ---- Balance Sheets........................................................................ B-2 Statements of Income.................................................................. B-3 Statements of Cash Flows.............................................................. B-4 Notes to Unaudited Interim Financial Statements....................................... B-5
B-1 20 FINANCIAL GUARANTY INSURANCE COMPANY BALANCE SHEETS ($ IN THOUSANDS)
DECEMBER 31, 1995 SEPTEMBER ---------- 30, 1996 ---------- (UNAUDITED) ASSETS Fixed maturity securities, available for sale, at fair value (amortized cost of $2,153,856 in 1996 and $2,043,453 in 1995)..... $2,172,841 $2,141,584 Short-term investments, at cost, which approximates market.......... 147,460 91,032 Cash................................................................ 997 199 Accrued investment income........................................... 33,825 37,347 Reinsurance receivable.............................................. 7,418 7,672 Deferred policy acquisition costs................................... 93,676 94,868 Property, plant and equipment net of accumulated depreciation of $14,704 in 1996 and $12,861 in 1995............................... 5,032 6,314 Prepaid reinsurance premiums........................................ 159,506 162,087 Prepaid expenses and other assets................................... 28,581 39,199 ---------- ---------- Total assets.............................................. $2,649,336 $2,580,302 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums................................................. $ 685,364 $ 727,535 Losses and loss adjustment expenses............................... 72,127 77,808 Ceded reinsurance payable......................................... 12,507 1,942 Accounts payable and accrued expenses............................. 48,382 32,811 Due to parent..................................................... 260 1,647 Current federal income taxes payable.............................. 78,818 51,296 Deferred federal income taxes payable............................. 74,195 99,171 Payable for securities purchased.................................. 45,796 40,211 ---------- ---------- Total liabilities......................................... 1,017,449 1,032,421 ---------- ---------- Stockholder's Equity: Common stock, par value $1,500 per share at September 30, 1996 and at December 31, 1995: 10,000 shares authorized, issued and outstanding.................................................... 15,000 15,000 Additional paid-in capital........................................ 334,011 334,011 Net unrealized gains on fixed maturity securities available for sale, net of tax............................................... 12,340 63,785 Foreign currency translation adjustment........................... (2,296) (1,499) Retained earnings................................................. 1,272,832 1,136,584 ---------- ---------- Total stockholder's equity................................ 1,631,887 1,547,881 ---------- ---------- Total liabilities and stockholder's equity................ $2,649,336 $2,580,302 ========== ==========
See accompanying notes to interim financial statements B-2 21 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF INCOME ($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1995 ----------- -------- (UNAUDITED) REVENUES: Gross premiums written............................................... $ 65,875 $ 66,151 Ceded premiums....................................................... (14,178) (14,430) -------- -------- Net premiums written................................................. 51,697 51,721 Decrease in net unearned premiums.................................... 39,589 29,428 -------- -------- Net premiums earned.................................................. 91,286 81,149 Net investment income................................................ 92,957 89,716 Net realized gains................................................... 11,132 19,574 -------- -------- Total revenues............................................. 195,375 190,439 EXPENSES: Losses and loss adjustment expenses.................................. (2,078) 1,191 Policy acquisition costs............................................. 13,056 9,013 Other underwriting expenses.......................................... 10,582 14,925 -------- -------- Total expenses............................................. 21,560 25,129 Income before provision for federal income taxes........... 173,815 165,310 Provision for federal income taxes................................... 37,566 33,323 -------- -------- Net income...................................................... $ 136,249 $131,987 ======== ========
See accompanying notes to interim financial statements B-3 22 FINANCIAL GUARANTY INSURANCE COMPANY STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1995 ---------- --------- (UNAUDITED) OPERATING ACTIVITIES: Net income.......................................................... $ 136,249 $ 131,987 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes............................... 3,155 14,917 Amortization of fixed maturity securities......................... 606 2,064 Policy acquisition costs deferred................................. (11,864) (14,213) Amortization of deferred policy acquisition costs................. 13,056 8,787 Depreciation of fixed assets...................................... 1,843 1,686 Change in reinsurance receivable.................................. 254 4,574 Change in prepaid reinsurance premiums............................ 2,581 2,930 Foreign currency translation adjustment........................... (1,226) (923) Change in accrued investment income, prepaid expenses and other assets......................................................... 14,140 (969) Change in unearned premiums....................................... (42,171) (32,359) Change in losses and loss adjustment expense reserves............. (5,681) (6,439) Change in other liabilities....................................... 24,749 (6,673) Change in current income taxes payable............................ 27,522 (4,294) Net realized gains on investments................................. (11,132) (19,574) ---------- ---------- Net cash provided by operating activities........................... 152,081 81,501 ---------- ---------- INVESTING ACTIVITIES: Sales or maturities of fixed maturity securities.................... 633,347 622,658 Purchases of fixed maturity securities.............................. (727,641) (651,424) Sales or maturities (purchases) of short-term investments, net...... (56,428) (46,053) Purchases of property and equipment, net............................ (561) (449) ---------- ---------- Net cash used for investing activities.............................. (151,283) (75,268) ---------- ---------- Increase in cash.................................................... 798 6,233 Cash at beginning of period......................................... 199 1,766 ---------- ---------- Cash at end of period............................................... $ 997 $ 7,999 ========== ==========
See accompanying notes to interim financial statements B-4 23 FINANCIAL GUARANTY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 (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 nine months ended September 30, 1996 and 1995, (b) the financial position at September 30, 1996 and December 31, 1995, and (c) cash flows for the nine months ended September 30, 1996 and 1995. These interim financial statements should be read in conjunction with the financial statements and related notes included in the 1995 audited financial statements. The 1995 financial statements have been reclassified to conform to the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") 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 in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (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. B-5 24 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:
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------- 1996 (UNAUDITED) 1995 (UNAUDITED) ------------------------ ------------------------ NET STOCKHOLDER'S NET STOCKHOLDER'S INCOME EQUITY INCOME EQUITY -------- ------------- -------- ------------- GAAP basis amount............................... $136,249 $ 1,631,887 $131,987 $ 1,487,346 Premium revenue recognition..................... (6,742) (173,669) (15,432) (159,804) Deferral of acquisition costs................... 1,192 (93,676) (5,426) (96,354) Contingency reserve............................. -- (428,798) -- (372,683) Non-admitted assets............................. -- (4,314) -- (6,084) Case-basis losses incurred and salvage recoverable................................... (3,854) (3,906) 1,586 (2,514) Portfolio loss reserves......................... -- 24,000 (10,900) 35,200 Deferral of income tax.......................... 3,155 67,550 14,917 59,728 Unrealized gains on fixed maturity securities held at fair value, net of taxes.............. -- (12,340) -- (34,463) Profit commission............................... 1,234 (4,510) 5,228 (3,613) Contingency reserve tax deduction............... -- 85,087 -- 78,196 Provision for unauthorized reinsurance.......... -- -- -- (266) Allocation of tax benefits due to Parent's net operating loss to the Company................. (2) 10,289 118 9,772 -------- ---------- -------- ---------- Statutory basis amount.......................... $131,232 $ 1,097,600 $122,078 $ 994,461 ======== ========== ======== ==========
(3) DIVIDENDS Under New York Insurance Law, the Company may pay a dividend only from earned surplus subject to the following limitations: - Statutory surplus after dividends may not be less than the minimum required paid-in capital, which was $2,100,000 in 1996. - 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 at September 30,1996 is approximately $109.8 million. (4) INCOME TAXES The Company's effective Federal corporate tax rate (21.6 percent and 20.2 percent for the nine months ended September 30, 1996 and 1995, respectively) is less than the statutory corporate tax rate (35 percent in 1996 and 1995) 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", adopted in 1993, 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 $16.8 million and $17.1 million, respectively, for the nine months ended September 30, 1996 and 1995. B-6 -----END PRIVACY-ENHANCED MESSAGE-----