Exhibit 99.2
Financial Statements
Financial Guaranty Insurance Company
June 30, 2004
Financial Guaranty Insurance Company
Financial Statements
June 30, 2004
Contents
Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003 | 1 |
Statements of Income for the Three Months and Six Months Ended June 30, 2004 and 2003 (Unaudited) ; | 2 |
Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited) ; | 3 |
Notes to Financial Statements (Unaudited) | 4 |
Financial Guaranty Insurance Company
Balance Sheets
(Dollars in thousands, except per share amounts)
Successor | ||
June 30 | December 31 | |
2004 | 2003 | |
(Unaudited) | ||
Assets | ||
Fixed maturity securities, available for sale, at fair value (amortized cost of | $ 2,686,439 | $ 2,691,922 |
Short-term investments, at cost, which approximates fair value | 94,171 | 14,377 |
Total investments | 2,780,610 | 2,706,299 |
Cash | 115,199 | 78,645 |
Accrued investment income | 32,694 | 32,803 |
Receivable for securities sold | - | 170 |
Reinsurance recoverable on losses | 5,934 | 8,065 |
Other reinsurance receivables | - | 5,295 |
Deferred policy acquisition costs | 18,890 | 2,921 |
Receivable from related parties | 90 | 9,759 |
Property and equipment, net of accumulated depreciation of $12 in 2004 | 102 | - |
Prepaid reinsurance premiums | 118,298 | 123,768 |
Prepaid expenses and other assets | 6,792 | 6,058 |
Current federal income taxes receivable | - | 126 |
Deferred federal income taxes receivable | 99 | - |
Total assets | $ 3,078,708 | $ 2,973,909 |
Liabilities and stockholder's equity | ||
Liabilities: | ||
Unearned premiums | $ 988,352 | $ 918,882 |
Losses and loss adjustment expenses | 37,347 | 40,467 |
Ceded reinsurance payable | 656 | 114 |
Accounts payable and accrued expenses | 18,871 | 19,238 |
Obligations under capital lease | 6,248 | 6,982 |
Payable for securities purchased | 11,006 | - |
Current federal income taxes pay able | 7,758 | - |
Deferred federal income taxes payable | - | 18,862 |
Total liabilities | 1,070,238 | 1,004,545 |
Stockholder's equity: | ||
Common stock, par value $1,500 per share; 10,000 shares authorized, | 15,000 | 15,000 |
Additional paid-in capital | 1,857,772 | 1,857,772 |
Accumulated other comprehensive (loss) income, net of tax | (45,533) | 2,059 |
Retained earnings | 181,231 | 94,533 |
Total stockholder's equity | 2,008,470 | 1,969,364 |
Total liabilities and stockholder's equity | $ 3,078,708 | $ 2,973,909 |
See accompanying notes to unaudited interim financial statements.
Financial Guaranty Insurance Company
Statements of Income
(Unaudited)
(Dollars in thousands)
Successor | Predecessor | Successor | Predecessor | |
Three months ended | Six months ended | |||
June 30 | June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Revenues: | ||||
Gross premiums written | $ 106,457 | $ 93,483 | $ 162,851 | $ 141,941 |
Ceded premiums written | (812) | 3,962 | (3,559) | 4,025 |
Net premiums written | 105,645 | 97,445 | 159,292 | 145,966 |
Increase in net unearned premiums | (52,494) | (55,043) | (74,939) | (69,638) |
Net premiums earned | 53,151 | 42,402 | 84,353 | 76,328 |
Net investment income | 23,360 | 30,127 | 46,031 | 59,978 |
Net realized (losses) gains | (749) | 404 | 778 | 30,382 |
Other income | 240 | 57 | 557 | 57 |
Total revenues | 76,002 | 72,990 | 131,719 | 166,745 |
Expenses: | ||||
Losses and loss adjustment expenses | (1,070) | 6,429 | (406) | 3,729 |
Underwriting expenses | 21,435 | 16,109 | 35,802 | 30,672 |
Policy acquisition cost deferred | (8,630) | (8,827) | (16,311) | (14,804) |
Amortization of deferred policy acquisition costs | 184 | 4,325 | 342 | 8,602 |
Total expenses | 11,919 | 18,036 | 19,427 | 28,199 |
Income before income taxes | 64,083 | 54,954 | 112,292 | 138,546 |
Federal income tax expense | 15,690 | 12,672 | 25,594 | 32,497 |
Net income | $ 48,393 | $ 42,282 | $ 86,698 | $ 106,049 |
See accompanying notes to unaudited interim financial statements.
Financial Guaranty Insurance Company
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Successor | Predecessor | |
Six months ended | ||
June 30 | ||
2004 | 2003 | |
Operating activities | ||
Net income | $ 86,698 | $ 106,049 |
Adjustments to reconcile net income to net cash provided by | ||
Amortization of deferred policy acquisition costs | 342 | 8,602 |
Policy acquisition costs deferred | (16,311) | (14,804) |
Depreciation of property and equipment | 12 | 4 |
Amortization of fixed maturity securities | 16,506 | 10,050 |
Net realized gains on investments | (778) | (30,382) |
Provision for deferred income taxes | 6,823 | (1,218) |
Change in accrued investment income, prepaid | (625) | 2,930 |
Change in receivable from related parties | 9,669 | - |
Change in other reinsurance receivables | 5,295 | - |
Change in reinsurance recoverable on losses | 2,131 | (1,107) |
Change in prepaid reinsurance premiums | 5,470 | 12,917 |
Change in current federal income tax receivable | 126 | - |
Change in unearned premiums | 69,470 | 56,721 |
Change in losses and loss adjustment expenses | (3,120) | 4,309 |
Change in ceded reinsurance payable and accounts | 175 | (4,696) |
Change in current federal income taxes payable | 7,758 | (7,016) |
Net cash provided by operating activities | 189,641 | 142,359 |
Investing activities | ||
Sales and maturities of fixed maturity securities | 161,637 | 798,879 |
Purchases of fixed maturity securities | (246,106) | (848,932) |
Purchases, sales and maturities of short-term investments | (79,794) | (99,694) |
Receivable for securities sold, net of payable for | 11,176 | 9,078 |
Net cash used in investing activities | (153,087) | (140,669) |
Net increase in cash | 36,554 | 1,690 |
Cash at beginning of period | 78,645 | 7,260 |
Cash at end of period | $ 115,199 | $ 8,950 |
See accompanying notes to unaudited interim financial statements.
Financial Guaranty Insurance Company
Notes to Financial Statements
(Unaudited)
June 30, 2004
(Dollars in thousands)
1. Basis of Presentation
Financial Guaranty Insurance Company (the "Company") is a wholly-owned subsidiary of FGIC Corporation (the "Parent"). The Parent was a wholly-owned subsidiary of General Electric Capital Corporation ("GE Capital"). The Company provides financial guaranty insurance for public finance and structured finance obligations. The Company began insuring public finance obligations in 1984 and structured finance obligations in 1988. The Company's financial strength is rated "Aaa" by Moody's Investors Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), and "AAA" by Fitch Ratings, Inc. ("Fitch"). The Company is licensed to engage in financial guaranty insurance in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and, through a branch, in the United Kingdom.
On December 18, 2003, an investor group consisting of The PMI Group, Inc. ("PMI"), affiliates of the Blackstone Group L.P. ("Blackstone"), affiliates of the Cypress Group L.L.C. ("Cypress") and affiliates of CIVC Partners L.P. ("CIVC"), collectively the "Investor Group", completed the acquisition (the "Transaction") of FGIC Corporation from a subsidiary of GE Capital in a transaction valued at approximately $2,200,000. At the closing of the Transaction, the Investor Group, acting through an affiliate, paid GE Capital a cash purchase price of approximately $1,600,000, which was funded by equity investments by the Investor Group and borrowings of approximately $227,300 under a bridge loan facility within an affiliate of Bank of America Corporation. The bridge loan originally was to mature on December 16, 2004; however, the bridge loan was repaid with the proceeds of the Senior Notes issued on January 12, 2004. In addition, FGIC Corp oration paid GE Capital approximately $284,300 in pre-closing dividends and GE Capital retained 2,346 shares of Convertible Preferred Stock (the "Senior Preferred Shares") with an aggregate liquidation preference of $234,600 and approximately 5% of FGIC Corporation's common stock. PMI is the largest stockholder of FGIC Corporation, owning approximately 42% of its common stock at December 31, 2003. Blackstone, Cypress and CIVC own approximately 23%, 23% and 7% of FGIC Corporation's common stock, respectively, at December 31, 2003.
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six-month period ended June 30, 2004 are not necessarily indicative of results that may be expected for the year ending December 31, 2004.
These unaudited interim financial statements should be read in conjunction with the financial statements and related notes included in the 2003 audited financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
As a result of the Transaction effective on December 18, 2003, the basis of the assets and liabilities has changed, which necessitates the presentation of Predecessor Company and the Successor Company columns in the Balance Sheets, Statements of Income and Cash Flows.
2. Income Taxes
The Company's effective federal corporate tax rate (22.8% and 23.5% for the six months ended June 30, 2004 and 2003, and 24.5% and 23.1% for the three months ended June 30, 2004 and 2003, respectively) is less than the statutory corporate tax rate (35%) on income due to permanent differences between financial and taxable income, principally tax-exempt interest.
3. Reinsurance
Net premiums earned are shown net of ceded premiums earned of $9,029 and $8,900, respectively, for the six months ended June 30, 2004 and 2003, and $6,372 and $4,000 for the three months ended June 30, 2004 and 2003, respectively.
4. Comprehensive Income
Accumulated other comprehensive income (loss) of the Company consists of net unrealized gains on investment securities and foreign currency translation adjustments. The components of other comprehensive income (loss) for the six and three months ended June 30, 2004 and 2003 are as follows:
Successor | |||
Six months ended June 30, 2004 | |||
Before | Tax | Net of | |
Unrealized holding losses arising during the period | $ (74,105) | $ 25,937 | $ (48,168) |
Less reclassification adjustment for losses realized | (778) | 272 | (506) |
Unrealized losses on investments | (74,883) | 26,209 | (48,674) |
Foreign currency translation adjustment | 1,665 | (583) | 1,082 |
Total other comprehensive loss | $ (73,218) | $ 25,626 | $ (47,592) |
Successor | |||
Three months ended June 30, 2004 | |||
Before | Tax | Net of | |
Unrealized holding losses arising during the period | $ (92,626) | $ 32,419 | $ (60,207) |
Less reclassification adjustment for gains realized | 749 | (262) | 487 |
Unrealized losses on investments | (91,877) | 32,157 | (59,720) |
Foreign currency translation adjustment | (849) | 297 | (552) |
Total other comprehensive loss | $ (92,726) | $ 32,454 | $ (60,272) |
Predecessor | |||
Six months ended June 30, 2003 | |||
Before | Tax | Net of | |
Unrealized holding gains arising during the period | $ 78,151 | $ (27,363) | $ 50,798 |
Less reclassification adjustment for gains realized | (30,382) | 10,634 | (19,748) |
Unrealized gains on investments | 47,769 | (16,719) | 31,050 |
Foreign currency translation adjustment | 3,146 | (1,101) | 2,045 |
Total other comprehensive income | $ 50,915 | $ (17,820) | $ 33,095 |
Predecessor | |||
Three months ended June 30, 2003 | |||
Before | Tax | Net of | |
Unrealized holding gains arising during the period | $ 99,303 | $ (34,756) | $ 64,547 |
Less reclassification adjustment for gains realized | (408) | 143 | (265) |
Unrealized gains on investments | 98,895 | (34,613) | 64,282 |
Foreign currency translation adjustment | (219) | 77 | (142) |
Total other comprehensive income | $ 98,676 | $ (34,536) | $ 64,140 |
5. Variable Interest Entities
In January 2003, the FASB issued Financial Interpretation No. 46,Consolidation of Variable Interest Entities ("FIN 46"),which the Company adopted on July 1, 2003. FIN 46's consolidation criteria are based upon analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change not a change in the underlying economics associated with the transactions, which may be affected by the Interpretation. FIN 46 clarifies the consolidation criteria for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among parties involved. Variable interest entities that effectively disperse risks will not be consolidated. FIN 46 requires disclosures for entities that have either a primary or significant variable interest in a variable interest entity.
As a part of its structured finance business, the Company insures debt obligations or certificates issued by special purposes entities. At June 30, 2004, the Company had approximately $906,000 of gross principal outstanding related to insurance contracts issued to commercial paper conduits-variable interest entities under FIN 46-which the Company does not believe requires consolidation but which requires disclosure. With respect to the remainder of the structured finance transactions insured, the Company has evaluated the transactions, but does not believe any such transactions require consolidation or disclosure under FIN 46.
6. Subsequent Events
On July 19, 2004, FGIC closed on its new $300,000 "Soft Capital" facility of "Money Market Committed Preferred Custodial Trust Securities ("CPS Securities").This replaces the existing $300,000 "Soft Capital" facility previously provided by GE Capital. The CPS securities are structured in six separate and newly organized Delaware trusts, each trust will issue $50,000 in CPS Securities on a rolling 28 day auction rate basis. Proceeds from these securities are invested in high grade, short term securities (the "Eligible Assets") and held in the respective trust. To draw down these funds, which are available completely at the Company's discretion, the Company would exercise a put option against each trust, whereby it issues in perpetual preferred shares in FGIC to the holders of the securities in exchange for the Eligible Assets.