FINANCIAL STATEMENTS
Financial Guaranty Insurance Company
December 31, 2003
with Report of Independent Auditors
Financial Guaranty Insurance Company
Financial Statements
December 31, 2003
Contents
Report of Independent Auditors....................................... 1
Balance Sheets....................................................... 3
Statements of Income................................................. 4
Statements of Stockholder's Equity................................... 5
Statements of Cash Flows............................................. 6
Notes to Financial Statements........................................ 7
1
Report of Independent Auditors
The Board of Directors and Stockholder
Financial Guaranty Insurance Company
We have audited the accompanying balance sheet of Financial Guaranty Insurance
Company (the "Company") as of December 31, 2003, and the related statements of
income, stockholder's equity and cash flows for the periods from December 18,
2003 through December 31, 2003, and from January 1, 2003 through December 17,
2003. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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, 2003, and the results of its operations and its cash
flows for the periods from December 18, 2003 through December 31, 2003 and from
January 1, 2003 through December 17, 2003 in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 20, 2004
4
Independent Auditors' Report
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying predecessor basis balance sheet of Financial
Guaranty Insurance Company as of December 31, 2002, and the related predecessor
basis statements of income, stockholder's equity and cash flows for each of the
years in the two-year period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New York, New York
February 14, 2003
Financial Guaranty Insurance Company
Balance Sheets
(Dollars in thousands, except per share amounts)
Successor Predecessor
----------------------------
December 31
2003 2002
--------------------------------
Assets
Fixed maturity securities, at fair value (amortized cost of
$2,688,459 in 2003 and $2,744,614 in 2002) $ 2,691,922 $ 2,825,472
Short-term investments, at cost, which approximates fair value 14,377 43,144
-----------------------------
Total investments 2,706,299 2,868,616
Cash 78,645 7,260
Accrued investment income 32,803 33,077
Receivable for securities sold 170 991
Reinsurance recoverable 8,065 8,371
Other reinsurance receivable 5,295 -
Prepaid reinsurance premiums 123,768 129,958
Deferred policy acquisition costs 2,921 71,350
Receivable from related party 9,759 -
Property and equipment, net of accumulated depreciation
of $8,266 in 2002) - 375
Prepaid expenses and other assets 6,058 7,799
Federal income taxes receivable 126 -
------------------------------
Total assets $ 2,973,909 $ 3,127,797
==============================
Liabilities and stockholder's equity
Liabilities:
Unearned premiums $ 918,882 $ 683,532
Loss and loss adjustment expenses 40,467 47,868
Ceded reinsurance balances payable 114 2,239
Accounts payable and accrued expenses 19,238 11,858
Obligations under capital lease 6,982
Payable for securities purchased - 5,333
Current federal income taxes payable - 97,477
Deferred federal income tax liability 18,862 90,595
------------------------------
Total liabilities 1,004,545 938,902
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 1,857,772 383,511
Accumulated other comprehensive income, net of tax 2,059 49,499
Retained earnings 94,533 1,740,885
------------------------------
Total stockholder's equity 1,969,364 2,188,895
------------------------------
Total liabilities and stockholder's equity $ 2,973,909 $ 3,127,797
==============================
See accompanying notes to financial statements.
3
Financial Guaranty Insurance Company
Statements of Income
(Dollars in thousands)
Successor Predecessor
--------- -----------------------------------
Period from Period from
December January
18, 2003 1, 2003
through through
31, 2003 December
17, 2003 Year ended December 31
--------------------------
2002 2001
--------------------------------------------------------------
Revenues:
Gross premiums written $ 12,213 $ 248,112 $ 232,579 $ 154,627
Reassumed ceded premiums 6,300 14,300 2,600 3,200
Ceded premiums written (39) (14,852) (29,202) (21,965)
---------------------------------------------------------------
Net premiums written 18,474 247,560 205,977 135,862
Increase in net unearned premiums (9,892) (105,811) (71,080) (33,380)
---------------------------------------------------------------
Net premiums earned 8,582 141,749 134,897 102,482
Net investment income 4,269 112,619 119,595 124,992
Net realized gains - 31,506 68,546 77,043
Other income 44 580 5,309 1,896
---------------------------------------------------------------
Total revenues 12,895 286,454 328,347 306,413
Expenses:
Loss and loss adjustments expenses 236 (6,757) 501 1,752
Underwriting expenses 7,622 55,780 34,092 27,097
Policy acquisition costs deferred (2,931) (23,641) (14,911) (11,742)
Amortization of deferred policy
acquisition costs 10 15,563 15,261 8,472
---------------------------------------------------------------
Total expenses 4,937 40,945 34,943 25,579
Income before income taxes 7,958 245,509 293,404 280,834
Income tax expense (benefit):
Current 1,191 55,772 87,203 63,011
Deferred 573 (1,612) (11,385) 2,555
---------------------------------------------------------------
Income tax expense 1,764 54,160 75,818 65,566
---------------------------------------------------------------
Income before extraordinary item 6,194 191,349 217,586 215,268
Extraordinary gain 13,852 - - -
---------------------------------------------------------------
Net income $ 20,046 $ 191,349 $ 217,586 $ 215,268
===============================================================
See accompanying notes to financial statements.
4
5
Financial Guaranty Insurance Company
Statements of Stockholder's Equity
(Dollars in thousands)
Accumulated Other
Additional Comprehensive
Common Paid-in Income (Loss), Retained
Stock Capital Net of Tax Earnings Total
---------------------------------------------------------------------
Predecessor
Balance at January 1, 2001 15,000 $ 383,511 $ 23,120 $ 1,608,031 $ 2,029,662
Net income - - - 215,268 215,268
Other comprehensive loss:
Change in fixed maturity securities available-for-sale - - (36,940) - (36,940)
Change in foreign currency translation adjustment - - (1,112) - (1,112)
------------
Total comprehensive income - - - - 177,216
Dividend declared - - - (200,000) (200,000)
--------------------------------------------------------------------
Balance at December 31, 2001 15,000 383,511 (14,932) 1,623,299 2,006,878
Net income - - - 217,586 217,586
Other comprehensive income (loss):
Change in fixed maturity securities available-for-sale - - 67,113 - 67,113
Change in foreign currency translation adjustment - - (2,682) - (2,682)
------------
Total comprehensive income - - - - 282,017
Dividend declared - - - (100,000) (100,000)
--------------------------------------------------------------------
Balance at December 31, 2002 15,000 383,511 49,499 1,740,885 2,188,895
Net income - - - 191,349 191,349
Other comprehensive income (loss):
Change in fixed maturity securities available-for-sale - - (424) - (424)
Change in foreign currency translation adjustment - - 4,267 - 4,267
--------------
Total comprehensive income - - - - 195,192
Dividend declared - - - (284,300) (284,300)
-------------------------------------------------------------------
Balance at December 17, 2003 15,000 383,511 53,342 1,647,934 2,099,787
Successor
Purchase accounting adjustments - 1,474,261 (53,342) (1,573,447) (152,528)
Net income - - - 20,046 20,046
Other comprehensive income:
Change in fixed maturity securities available for sale - - 2,059 - 2,059
--------------
Total comprehensive income - - - - 22,105
--------------------------------------------------------------------
Balance at December 31, 2003 $15,000 $ 1,857,772 $ 2,059 $ 94,533 $ 1,969,364
====================================================================
See accompanying notes to financial statements.
Financial Guaranty Insurance Company
Statements of Cash Flows
(Dollars in thousands)
Successor Predecessor
------------ -------------------------
Period from Period from
December January
18, 2003 1, 2003
through through
December December Year ended December 31
31, 2003 17, 2003 2002 2001
-----------------------------------------------------------
Operating activities
Net income $ 20,046 $191,349 $217,586 $215,268
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain (13,852) - - -
Amortization of deferred policy acquisition 10 15,563 15,261 8,472
costs
Policy acquisition costs deferred (2,931) (23,641) (14,911) (11,742)
Net realized gains on investments - (31,506) (68,546) (77,043)
Change in unearned premiums 2,460 86,250 70,741 31,406
Change in loss and loss adjustment expenses 236 (7,644) (987) 2,148
Depreciation of property and equipment - 22 53 198
Change in reinsurance recoverable (104) 410 1,269 (684)
Change in prepaid reinsurance premiums 7,432 19,725 340 1,973
Other reinsurance receivable (5,295) - - -
Change in federal income taxes receivable (172) (2,407) - -
Change in receivable from affiliate (76) (9,811) - -
Change in accrued investment income, and
payable, (5,065) 6,292 2,769 5,949
prepaid expenses and other assets
Change in ceded reinsurance balances and
accounts payable and accrued expenses 6,485 1,804 (5,867) 4,014
Deferred federal income tax liability 573 (1,612) (11,385) 2,555
Amortization of fixed maturity securities 693 21,129 12,081 5,320
Change in current federal income taxes payable - (97,477) 9,748 10,637
-----------------------------------------------------------
Net cash provided by operating activities 10,440 168,446 228,152 198,471
-----------------------------------------------------------
Investing activities
Sales and maturities of fixed maturity securities 1,780 1,028,103 2,155,864 2,106,761
Purchases of fixed maturity securities - (877,340) (2,478,839) (1,989,270)
Purchases, sales, and maturities of short-term
investments, net (12,736) 41,504 212,127 (131,339)
Receivable for securities sold 538 283 (991) -
Payable for securities purchased - (5,333) (9,334) 14,667
-----------------------------------------------------------
Net cash (used in) provided by investing activities (10,418) 187,217 (121,173) 819
-----------------------------------------------------------
Financing activities
Dividends paid - (284,300) (100,000) (200,000)
-----------------------------------------------------------
Net cash used in financing activities - (284,300) (100,000) (200,000)
-----------------------------------------------------------
Net increase (decrease) in cash 22 71,363 6,979 (710)
Cash at beginning of year 78,623 7,260 281 991
-----------------------------------------------------------
Cash at end of year $ 78,645 $ 78,623 $ 7,260 $ 281
===========================================================
See accompanying notes to financial statements.
6
Financial Guaranty Insurance Company
Notes to Financial Statements
December 31, 2003
(Dollars in Thousands)
1. Business and Organization
Financial Guaranty Insurance Company (the "Company") is an 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
(see Note 15). In addition, FGIC Corporation 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.
7
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
2. Basis of Presentation
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.
The accompanying financial statements have been prepared on the basis of GAAP,
which differs in certain respects from the accounting practices prescribed or
permitted by the New York Department of Insurance (the "Department") (see Note
4).
3. Summary of Significant Accounting Policies
The Company's significant accounting policies are as follows:
a. Investments
The Company classifies all of its fixed maturity securities as
available-for-sale, which is recorded on the trade date at fair value.
Unrealized gains and losses are recorded as a separate component of accumulated
other comprehensive income, 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 term of the
securities. Realized gains or losses on the sale of investments are determined
based on the specific identification method.
Securities which have been determined to be other-than-temporarily impaired are
reduced to realizable value, establishing a new cost basis, with a charge to
realized loss at such date.
b. Premium Revenue Recognition
Premiums are received either up-front or over time on an installment basis. The
premium collection method is determined at the time the policy is issued.
Up-front premiums are paid in full at the inception of the policy and are earned
over the period of risk based on total exposure outstanding at any point in
time. Installment premiums are collected periodically and premiums are reflected
in income pro rata over the period covered by the premium payment. Unearned
premiums represent the portion of premiums received that is
8
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
3. Summary of Significant Accounting Policies (continued)
applicable to future periods on policies in force. When an obligation insured by
the Company has been refunded prior to the end of the expected policy coverage
period, any remaining unearned premium is recognized at that time. A refunding
occurs when an insured obligation is repaid or fully defeased prior to stated
maturing. Ceded premiums are earned in a manner consistent with the underlying
policies.
c. Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate directly to
premium production. Such costs include compensation of employees involved in
marketing, underwriting and policy issuance functions, rating agency fees, state
premium taxes and certain other expenses. In determining policy acquisition
costs, the Company must estimate and allocate the percentage of its costs and
expenses that are attributable to premium production, rather than to other
activities. Policy acquisition costs, net of ceding commission income on
premiums ceded to reinsurers, are deferred and amortized over the period in
which the related premiums are earned. Anticipated loss and loss adjustment
expenses and maintenance costs and net investment income are considered in
determining the recoverability of acquisition costs.
d. 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 future loss is probable and for
which the expected losses can be reasonably estimated. Case reserves are
established for the net present value of estimated losses on particular insured
obligations. These reserves represent an estimate of the present value of the
anticipated shortfall, net of reinsurance, between (1) payments on insured
obligations plus anticipated loss adjustment expenses and (2) anticipated cash
flow from, and proceeds to be received on, sales of any collateral supporting
the obligation and/or other anticipated recoveries. As of December 31, 2003 and
2002, discounted case-basis loss and loss adjustment expense reserves were
$18,900 and $21,500, respectively. Loss and loss adjustment expenses included
amounts discounted at an approximate interest rate of 4.4% in 2003 and 3.4% in
2002. The amount of the discount at December 31, 2003 and 2002 was $3,400 and
$4,000, respectively. The discount rate used is based upon the risk-free rate
for the average maturity of the applicable bond sector.
9
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
3. Summary of Significant Accounting Policies (continued)
In addition to case reserves, the Company establishes reserves to cover those
impaired credits on its credit watch list. These reserves are designed to
recognize the potential for claims on credits that have migrated to an impaired
level where there is an increased probability of default, but that are not
presently or imminently in payment default. The methodology for establishing and
calculating the watch list reserve relies on a categorization and assessment of
the probability of default, and loss severity given default, of the impaired
credits on the list. The reserve applies to the group of credits at various
stages of impairment, not each individual credit, as is the situation in a case
basis reserve. The watch list reserve is adjusted as necessary to reflect
changes in the loss expectation inherent in the group of impaired credits. As of
December 31, 2003, such reserves were $21,600. Prior to the Transaction, the
Company established similar reserves based upon an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors. As
of December 31, 2002, such reserves were $26,400.
The reserve for loss and loss adjustment expenses is based upon estimates and,
in management's opinion, the reserves for loss and loss adjustment expenses are
adequate. However, actual results will likely differ from those estimates.
e. 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 and
losses on available-for-sale fixed maturity securities, premium revenue
recognition, deferred acquisition costs, discount on loss and loss adjustment
reserves and certain loss reserves, alternative minimum tax (AMT) credit carry
forwards and profit commission. 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 4). The amounts deducted must be included in taxable income
upon their release from the reserves. 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.
10
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
3. Summary of Significant Accounting Policies (continued)
f. Property and Equipment
Property and equipment consists of office furniture, fixtures, computer
equipment and software and leasehold improvements, which are reported at, cost
less accumulated depreciation. Office furniture and fixtures 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.
g. Goodwill
Effective January 1, 2002, the FGIC Corporation adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
Under SFAS No. 142, goodwill is no longer amortized but rather is tested for
impairment at least annually.
In accounting for the acquisition of FGIC Corporation by the Investor Group in
2003, the Company has applied purchase accounting as prescribed by Statement of
Financial accounting Standards No. 141 Business Combinations ("SFAS 141") and
Securities and Exchange Commission Staff Accounting Bulletin 54. Under this
accounting method, the purchase price has been pushed down into the accompanying
financial statements, with the difference between the purchase price and the sum
of the fair value of tangible and identifiable intangible assets acquired less
liabilities assumed resulting in negative goodwill of $27,300 at December 18,
2003. In accordance with SFAS 141 the Company reduced the value assigned to
non-financial assets, the remaining negative goodwill of $13,852 was recorded as
an extraordinary gain in the consolidated statement of income. In 1989, when
FGIC Corporation was acquired by GE Capital, FGIC Corporation did not push down
the purchase price and related goodwill to the Company.
As a result of the purchase accounting 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 Consolidated
Balance Sheet, Statements of Income, Shareholders' Equity and Cash Flows.
11
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
3. Summary of Significant Accounting Policies (continued)
h. Foreign Currency Translation
The Company has an established foreign branch in the United Kingdom and exposure
in France and determined that the functional currencies of these branches are
their 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, 2003 and 2002 and revenues and expenses are translated at average
monthly exchange rates. The cumulative translation gain (loss) at December 31,
2003 and 2002 was $0 and $(2,729), respectively, net of tax expense (benefit) of
$0 and $(1,470), respectively, and is reported as a separate component of
accumulated other comprehensive income in the statement of stockholders' equity.
i. New Accounting Pronouncements
In January 2003, the FASB issued Financial Interpretation Number 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 December 31,
2003, the Company had $1,021,000 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 municipal
finance and structured finance transactions insured, the Company has evaluated
the transactions, and does not believe any such transactions require
consolidation or disclosure under FIN 46.
12
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
4. 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 the
Department. The National Association of Insurance Commissioners ("NAIC")
approved the codification project ("Codification") effective January 1, 2001 and
the Department adopted certain but not all provisions of Codification.
The following are the significant differences between the Company's
statutory-basis accounting practices and 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 under GAAP;
(b) policy acquisition costs are charged to current operations as incurred
rather than as related premiums are earned under GAAP;
(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 nonadmitted assets are charged directly
against surplus but are reflected as assets under GAAP, if recoverable;
(e) deferred tax assets are limited to 1) the amount of federal income
taxes paid in prior years that can be recovered through loss carry backs
for existing temporary differences that reverse by the end of he
subsequent calendar year, plus 2) the lesser of the remaining gross
deferred tax assets expected to be realized within one year of the
balance sheet date or 10% of capital and surplus excluding any net
deferred tax assets, EDP equipment and operating software and any net
positive goodwill, plus 3) the amount of remaining gross deferred tax
assets that can be offset against existing gross deferred tax
liabilities. The remaining deferred tax assets are non-admitted.
Deferred taxes do not include amounts for state income taxes. Under
GAAP, state income taxes are included in the computation of deferred
taxes, a deferred tax asset is recorded for the amount of gross
deferred tax assets expected to be realized in future years, and a
valuation allowance is established for deferred tax assets not
realizable.
13
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
4. Statutory Accounting Practices (continued)
(f) purchases of tax and loss bonds are reflected as admitted assets; while
under GAAP they are recorded as federal income tax payments;
(g) all fixed income investments are carried at amortized cost rather than at
fair value for securities classified as available-for-sale under GAAP;
(h) profit commissions are recognized as received while under GAAP
management's best estimate of the Company's ultimate recoverable is
accrued; and
(i) case reserves are discounted at the average investment portfolio yield
for statutory purposes and at the risk-free rate under GAAP.
Statutory-basis surplus of the Company at December 31, 2003 and 2002 was
$1,153,500 and $977,573, respectively. Statutory-basis net income (loss) for the
period from December 18, 2003 through December 31, 2003, from January 1, 2003
through December 17, 2003 and for the years ended December 31, 2002 and 2001 was
($1,669), $180,091, $205,476 and $206,893, respectively.
5. Investments
Investments in fixed maturity securities carried at fair value of $3,900 as of
December 31, 2003 and 2002 were on deposit with various regulatory authorities
as required by law.
The amortized cost and fair values of investments in fixed maturity securities
classified as available-for-sale are as follows:
Successor
--------------------------------------------------------------------
Amortized Cost Gross Gross Fair Value
Unrealized Unrealized
Gains Losses
--------------------------------------------------------------------
At December 31, 2003:
Obligations of states and
political subdivisions $ 2,363,870 $ 3,098 $ 538 $ 2,366,430
Asset and mortgage backed 245,394 630 394 245,630
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 4,280 - 35 4,245
Debt securities issued by foreign
governments 44,405 737 - 45,142
Preferred stock 30,510 14 49 30,475
--------------------------------------------------------------------
Total $ 2,688,459 $ 4,479 $ 1,016 $ 2,691,922
====================================================================
14
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
5. Investments (continued)
Predecessor
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------
At December 31, 2002:
Obligations of states and
political subdivisions $ 2,141,391 $ 73,155 $ 4,586 $ 2,209,960
Asset and mortgage backed 525,607 10,900 63 536,444
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 3,365 833 - 4,198
Debt securities issued by foreign
governments 43,653 1,127 - 44,780
Preferred stock 30,598 7 515 30,090
--------------------------------------------------------------------
Total $ 2,744,614 $ 86,022 $ 5,164 $ 2,825,472
====================================================================
The following table shows gross unrealized losses and fair value of fixed
maturity securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003:
Successor
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------------------------------------------------------------
Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized
Losses Losses Losses
------------------------------------------------------------------------------
Obligations of states and political
subdivisions $ 786,381 $ 538 $ - $ - $ 786,381 $ 538
Asset and mortgage backed 209,032 394 - - 209,032 394
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 4,245 35 - - 4,245 35
Preferred stock 13,450 49 - - 13,450 49
------------------------------------------------------------------------------
Total temporarily impaired $ 1,013,108 $ 1,016 $ - $ - $ 1,013,108 $ 1,016
securities ==============================================================================
15
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
5. Investments (continued)
The amortized cost and fair values of investments in fixed maturity securities,
available-for-sale at December 31, 2003, 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.
Successor
-------------------------------
Amortized Fair
Cost Value
-------------------------------
Due one year later or less $ 19,538 $ 19,803
Due after one year through five years 53,164 53,539
Due after five years through ten years 1,050,670 1,052,355
After ten years 1,565,087 1,566,225
--------------------------------
Total $ 2,688,459 $ 2,691,922
================================
For the period from December 18, 2003 through December 31, 2003, January 1, 2003
through December 17, 2003 and the years ended December 31, 2002 and 2001,
proceeds from sales of available-for-sale securities were $1,780, $1,023,378,
$2,155,829, and $2,106,761, respectively. For the period from January 1, 2003
through December 17, 2003 and the years ended December 31, 2002 and 2001, gross
gains of $31,700, $68,600 and $78,400 respectively, and gross losses of $200,
$100 and $1,400, respectively, were realized on such sales.
Net investment income of the Company is derived from the following sources:
Successor Predecessor
----------- ---------------------------
Period from Period from
December January
18, 2003 1, 2003
through through Year ended
December December December 31
31, 2003 17, 2003 2002 2001
------------------------------------------------------
Income from fixed maturity securities $ 4,294 $ 111,075 $ 113,108 $ 120,162
Income from short-term investments 12 2,326 7,485 5,838
------------------------------------------------------
Total investment income 4,306 113,401 120,593 126,000
Investment expenses (37) (782) (998) (1,008)
------------------------------------------------------
Net investment income $ 4,269 $ 112,619 $ 119,595 $ 124,992
======================================================
16
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
5. Investments (continued)
As of December 31, 2003, the Company did not have more than 3% of its investment
portfolio concentrated in a single issuer or industry; however, the Company had
the following investment concentrations by state:
Fair Value
-----------------
New York $ 258,356
Florida 222,205
Texas 212,768
New Jersey 164,427
Illinois 142,017
California 128,059
Michigan 107,879
Pennsylvania 100,434
Maryland 98,411
Ohio 80,416
---------------
1,514,972
All other states 871,259
All other investments 320,068
---------------
$ 2,706,299
===============
6. Income Taxes
For the period ending on the closing date of the Transaction, the Company files
its federal tax return as part of the consolidated return of GE Capital. Under
the tax sharing agreement with GE Capital, tax is allocated to the Company based
upon its respective contributions to consolidated net income. For the period
subsequent to the closing date of the sale transaction, the Company will become
eligible to file its own consolidated federal return.
17
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
6. Income Taxes (continued)
The Company's effective federal income tax rate is less than the corporate tax
rate on ordinary income of 35%, 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:
Successor Predecessor
--------------- ----------------------------------------------------
Period from Period from
December 18, 2003 January 1, 2003
through December through December Year ended December 31
--------------------------------
31, 2003 17, 2003 2002 2001
----------------------------------------------------------------------
Income taxes computed on income before $ 2,785 $ 85,928 $ 102,691 $ 98,292
provision for Federal income taxes,
at the statutory rate
Tax effect of:
Tax-exempt interest (979) (26,112) (26,788) (32,730)
Other, net (42) (5,656) (85) 4
----------------------------------------------------------------------
Provision for income taxes $ 1,764 $ 54,160 $ 75,818 $ 65,566
======================================================================
18
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
6. Income Taxes (continued)
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 2003 and 2002 are presented
below:
Successor Predecessor
2003 2002
-------------------------
Deferred tax assets:
Loss and loss adjustment expense reserves $ 6,026 $ 7,495
AMT credit carryforward 276 -
Property and equipment - 656
Foreign currency - 1,470
Deferred compensation 221 319
Premium revenue recognition 1,129 -
Capital lease 2,444 -
Net operating loss 4,690 -
Other 426 934
-------------------------
Total gross deferred tax assets 15,212 10,874
-------------------------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities,
available-for-sale 29,462 28,123
Deferred acquisition costs 1,022 24,973
Premium revenue recognition - 45,640
Profit commission 2,108 2,671
Foreign currency 916 -
Other 566 62
-------------------------
Total gross deferred tax liabilities 34,074 101,469
-------------------------
Net deferred tax liability $ 18,862 $ 90,595
=========================
The Company's net operating loss carry forwards of $13,400 expire in 2023. 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, 2003
and 2002.
19
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
6. Income Taxes (continued)
Total federal income tax payments during the period from December 18, 2003
through December 31, 2003, from January 1, 2003 through December 17, 2003 and
for the years ended December 31, 2002 and 2001 were $0, $156,800, $77,500 and
$38,300, respectively.
7. Reinsurance
Reinsurance is the commitment by one insurance company (the reinsurer) to
reimburse another insurance company (the ceding company) for a specified portion
of the insurance risks under policies insured by the ceding company in
consideration for a portion of the related premiums received. The ceding company
typically will receive a ceding commission from the reinsurer to cover costs of
producing business.
The Company uses reinsurance to increase its capacity to write insurance for
obligations of large, frequent issuers, to meet internal, rating agency or
regulatory single risk limits, to diversify risk and to reduce capital needs.
The Company currently arranges reinsurance on only a facultative (transaction by
transaction) basis. Prior to 2003, the Company also had treaty reinsurance
agreements that provided coverage for a specified portion of the exposure under
all qualifying policies issued during the term of the treaty.
The Company seeks to place reinsurance with financially strong reinsurance
companies since, as a primary insurer, the Company is required to fulfill all
its obligations to policyholders even in cases where reinsurers fail to perform
their obligations under the various reinsurance agreements. The Company
regularly monitors the financial condition of its reinsurers. Under most of the
Company's reinsurance agreements, the Company has the right to reassume all the
exposure ceded to a reinsurer (and receive all the remaining unearned premiums
ceded) in the event of a significant ratings downgrade of the reinsurer or the
occurrence of certain other special cancellation events. In certain of these
cases, the Company also has the right to impose additional ceding commissions.
In recent years, a number of the Company's reinsurers have been downgraded by
the rating agencies, thereby reducing the financial benefits of using
reinsurance under the rating agency capital adequacy models because the Company
must allocate additional capital to the related reinsured exposure. The Company
still receives statutory credit for this reinsurance. In connection with such a
downgrade, the Company reassumed $6,300, $14,300, $2,600 and $3,200, of ceded
premiums for the period from December 18, 2003 through December 31, 2003, from
January 1, 2003 through December 17, 2003 and for the years ended December 31,
2002 and 2001, respectively, from the reinsurers.
20
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
7. Reinsurance (continued)
The Company holds collateral under reinsurance agreements in the form of letters
of credit and trust agreements in various amounts with various reinsurers
totaling $53,200 at December 31, 2003 that can be drawn on in the event of
default by the reinsurer.
The effect of reinsurance on the balances recorded in the consolidated
statements of income is as follows:
Successor Predecessor
Period from Period from
December 18, January 1, 2003
2003 through through
December December Year ended December 31
31, 2003 17, 2003 ---------------------------
2002 2001
-----------------------------------------------------------------
Net premiums earned $ 1,236 $ 20,300 $ 27,000 $ 20,600
Loss and loss adjustment expenses $ - $ 1,700 $ 800 $ 700
8. Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is summarized as
follows:
Successor Predecessor
------------- -------------------
Period from Period from
December 18, January 1, 2003
2003 through through
December December Year ended December 31
31, 2003 17, 2003 -------------------------
2002 2001
-----------------------------------------------------------
Balance at beginning of period $ 40,224 $ 47,868 $ 48,855 $ 46,707
Less reinsurance recoverable (8,058) (8,371) (9,640) (8,956)
------------------------------------------------------------
Net balance 32,166 39,497 39,215 37,751
------------------------------------------------------------
Incurred related to:
Current period - 5,000 5,074 -
Prior periods 236 (8,337) 3,127 1,752
Watchlist reserves - (3,420) (7,700) -
------------------------------------------------------------
Total incurred 236 (6,757) 501 1,752
------------------------------------------------------------
Paid related to:
Current period - - - -
Prior periods - (574) (219) (288)
------------------------------------------------------------
Total paid - (574) (219) (288)
------------------------------------------------------------
Net balance 32,402 32,166 39,497 39,215
Plus reinsurance recoverable 8,065 8,058 8,371 9,640
-----------------------------------------------------------
Balance at end of period $ 40,467 $ 40,224 $ 47,868 $ 48,855
===========================================================
21
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
8. Loss and Loss Adjustment Expenses (continued)
During the period from January 1, 2003 through December 17, 2003, the overall
decrease in case reserves was driven by a reduction in reserves previously
established on several structured finance transactions of one particular issuer.
Certain transactions related to the issuer were identified as potential problem
credits in 2001 and 2000 and case reserves were established during those years.
In 2002, there was further adverse development on such transactions and a
determination was made by management that several other transactions related to
that issuer also required case reserves.
9. Related Party Transactions
The Company had various agreements with subsidiaries of General Electric Company
and GE Capital. These business transactions included certain payroll and office
expenses, investment fees pertaining to the management of the Company's
investment portfolio and telecommunication service charges. Approximately
$1,600, $2,200 and $1,200 in expenses were incurred in the period from January
1, 2003 through December 17, 2003 and for the years ended December 31, 2002 and
2001, respectively, related to such transactions and are reflected in the
accompanying consolidated financial statements.
As part of the Transaction, the Company entered into a transitional services
agreement with GE Capital to provide certain administrative and support services
in exchange for certain scheduled fees during the 12 months following the date
of the agreement. Investment management services continue to be provided by GE
Capital. The Company plans to transfer investment management services by the end
of the first quarter of 2004 to Blackrock Financial Management, Inc. and
Wellington Management Company, LLP.
In connection with the Transaction, the Company entered into a capital lease
agreement with a subsidiary of GE Capital. The lease agreement covers leasehold
improvements made to the Company's headquarters as well as furniture and
fixtures, computer hardware and software used by the Company (see Note 13).
22
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
9. Related Party Transactions (continued)
In connection with the Transaction, the Company entered into the $300,000 Soft
Capital Facility with GE Capital as lender and administrative agent. The Soft
Capital Facility, which replaced the capital support facility that the Company
previously had with GE Capital, has an initial term of eight years. The
commitment of GE Capital or any other lender which GE Capital may syndicate to
under the Soft Capital Facility can be extended for one-year terms at the
request of the Company and with the consent of such lender. During the term of
the Soft Capital Facility, the Company may borrow thereunder if the cumulative
losses (net of reinsurance and net of recoveries) it incurs with regard to its
public finance insured portfolio exceed certain predetermined amounts, which
amount initially is the greater of $500,000 and 3.6% of the Company's average
annual debt service on its public finance insured portfolio and escalates each
year during the term of the Soft Capital Facility. The amount that the Company
may borrow at any given time cannot exceed the lesser of such excess cumulative
loss and the unutilized commitments of the lender under the Soft Capital
Facility. Any repayment of amounts drawn under the Soft Capital Facility is
limited primarily to the amount of any recoveries of losses related to policy
obligations in the covered public finance insured portfolio. No amounts are
currently outstanding under this facility. The Soft Capital Facility replaced a
prior agreement with GE Capital which was cancelled on the date of the
Transaction. Under the terms of an agreement dated May 14, 1993 and renewed
through December 17, 2003, GE Capital had agreed to purchase common shares up to
an aggregate fair value of $300,000 in the event that a rating downgrade of the
Company and its subsidiary, FGIC, are imminent. In exchange for this commitment,
the Company paid an annual commitment fee of 0.60% of the then outstanding
commitment at each quarter end.
As part of the Transaction, GE Capital and the Company entered into a
reimbursement agreement, which covers losses incurred in excess of $5,000
related to several structured finance transactions of one particular issuer. The
agreement is subject to a maximum of $25,000.
The Company also insured certain nonmunicipal 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 $20
for the period from January 1, 2003 through December 18, 2003, $50 in 2002 and
$100 in 2001. As of December 31, 2003, par outstanding on these deals before
reinsurance was $35,000.
23
9. Related Party Transactions (continued)
The Company insures bond issues and securities in trusts that were sponsored by
affiliates of GE (approximately 1% of gross premiums written) in 2003, 2002 and
2001.
As of December 31, 2003, receivable from related parties of $9,759 are due from
GE Capital and its affiliates for prepaid taxes.
10. Compensation Plans
Officers and other key employees of the Company participate in the incentive
compensation and deferred compensation plans. Expenses incurred by the Company
under compensation plans and bonuses amounted to $3,996, $10,087, $3,800 and
$2,700 for the period from December 18, 2003 through December 31, 2003, the
period from January 1, 2003 through December 17, 2003 and the years ended
December 31, 2002 and 2001, respectively and are reflected in the accompanying
financial statements. The increase in 2003 is driven by transaction related
costs which include retention bonuses and sign-on bonuses to new hires
post-acquisition.
11. Dividends
Under New York insurance law, the Company may pay a dividend to FGIC Corporation
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 $72,500 in 2003 and 2002, and (b) dividends may not exceed
the lesser of 10% of its surplus or 100% of adjusted net investment income, as
defined by New York insurance law, for the twelve-month period ended on the
preceding December 31, without the prior approval of the New York State
Superintendent of Insurance. In connection with the Transaction, FGIC
Corporation agreed that no dividends will be paid by the Company until December
18, 2005, without prior approval of the New York State Insurance Department.
During the period from January 1, 2003 through December 17, 2003 and for the
years ended December 31, 2002 and 2001, the Company declared and paid dividends
to FGIC Corporation of $284,300, $100,000 and $200,000, respectively. The
$284,300 and $200,000 in dividends declared in 2003 and 2001, respectively, were
approved by the New York State Superintendent of Insurance as extraordinary
dividends.
24
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
12. Financial Instruments
(a) 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 are estimated
using quoted market prices for similar securities. Fair value
disclosure for fixed maturity securities are included in the
consolidated balance sheets and in note 5.
Short-Term Investments: Short-term investments are carried at
cost, which approximates fair value.
Cash, Accrued Investment Income, Prepaid Expenses and Other
Assets, Receivable from Related Parties, Ceded Reinsurance
Balances Payable, Accounts Payable and Accrued Expenses 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, 2003 and 2002 are as follows:
Successor Predecessor
2003 2002
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Financial assets:
Cash:
On hand and in-demand accounts $ 78,645 $ 78,645 $ 7,260 $ 7,260
Short-term investments 14,377 14,377 43,144 43,144
Fixed maturity securities 2,691,922 2,691,922 2,825,472 2,825,472
25
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
12. Financial Instruments (continued)
Financial Guaranties: The carrying value of the Company's
financial guaranties is represented by the unearned premium
reserve, net of deferred acquisition costs, loss and loss
adjustment expense reserves and prepaid reinsurance premiums.
Estimated fair values of these guaranties are based on an estimate
of the balance that is necessary to bring the future returns for
the Company's embedded book of business to a market return. The
estimated fair values of such financial guaranties is $830,881
compared to a carrying value of $824,595 as of December 31, 2003
and is $581,764 compared to a carrying value of $521,721 as of
December 31, 2002.
As of December 31, 2003 and 2002, the net present value of future
installment premiums was $111,200 and $100,200, respectively,
discounted at 5% at December 31, 2003 and 2002.
(b) 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 over-collateralization.
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 guaranty 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.
26
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
12. Financial Instruments (continued)
As of December 31, 2003, the Company's total insured principal exposure
to credit loss in the event of default by bond issues was $206,745,000,
net of reinsurance of $27,359,000. The Company's insured portfolio as of
December 31, 2003 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, 2003, the composition of principal exposure by type of issue,
net of reinsurance, was as follows:
Successor
-----------------
Net Principal
Outstanding
-----------------
Municipal:
General obligation $ 103,236,000
Special revenue 85,696,000
Industrial revenue 397,000
Nonmunicipal 17,416,000
-----------------
Total $ 206,745,000
=================
As of December 31, 2003, the composition of principal exposure ceded to
reinsurers was as follows:
Successor
------------------
Ceded Principal
Outstanding
------------------
Reinsurer:
Ace Guaranty Inc. $ 9,755,000
Radian Reinsurance Company 6,742,000
American Re-Insurance Company 2,876,000
RAM Reinsurance Company 2,443,000
Other 5,543,000
-----------------
Total $ 27,359,000
=================
The Company did not have recoverables in excess of 3% of equity from any single
reinsurer.
27
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
12. Financial Instruments (continued)
The Company's gross and net exposure outstanding, which includes principal and
interest, was $392,200,000 and $343,400,000, respectively, as of December 31,
2003.
The Company is authorized to do business in 50 states, the District of Columbia,
and in the United Kingdom. Principal exposure outstanding at December 31, 2003
by state, net of reinsurance, was as follows:
Successor
--------------------
Net Principal
Outstanding
--------------------
California $ 24,821,600
New York 18,630,900
Pennsylvania 15,992,600
Florida 14,975,600
Illinois 13,933,900
Texas 10,556,500
New Jersey 9,428,500
Michigan 7,834,900
Ohio 5,945,700
Washington 5,928,100
--------------------
Subtotal 128,048,300
Other states 64,480,100
Mortgage and asset backed 14,047,800
International 168,600
--------------------
Total $ 206,744,800
====================
28
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
13. Commitments
The Company leases office space under an operating lease agreement. Rent expense
under the operating lease for the period from December 18, 2003 through December
31, 2003, from January 1, 2003 through December 17, 2003 and for the years ended
December 31, 2002 and 2001 was $90, $3,210, $4,300 and $2,200, respectively.
Amount
---------------
Year:
2004 $ 1,910
2005 1,983
2006 2,085
2007 2,085
2008 1,216
---------------
Total minimum future rental payments $ 9,279
===============
In connection with the transaction, the Company entered into a capital lease
with a related party, covering leasehold improvements and computer equipment to
be used at its home office. At the lease termination date of June 30, 2009, the
Company will own the leased equipment. Future payments associated with this
lease are as follows:
Successor
-------------
Amount
-------------
Year ending December 31:
2004 $1,750
2005 1,646
2006 1,570
2007 1,545
2008 1,390
Thereafter 265
-------------
Total 8,166
Less: interest 1,184
-------------
Present value of minimum lease payments $6,982
=============
29
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
14. Comprehensive Income
Accumulated other comprehensive income (loss) of the Company consists of net
unrealized gains on investment securities and foreign currency transaction
adjustments.
The components of other comprehensive income for the period from December 18,
2003 through December 31, 2003, period from January 1, 2003 through December 17,
2003 and the years ended December 31, 2002 and 2001 or as follows:
Successor
-----------------------------------------
Period from December 18, 2003 though
December 31, 2003
-----------------------------------------
Before Tax Net of
Tax Tax
Amount Amount
-----------------------------------------
Unrealized holding gains arising during the period $ 3,168 $ (1,109) $ 2,059
Less reclassification adjustment for gains realized in net income - - -
-----------------------------------------
Unrealized gains on investments 3,168 (1,109) 2,059
Foreign currency translation adjustment - - -
-----------------------------------------
Total other comprehensive income $ 3,168 $ (1,109) $ 2,059
=========================================
Predecessor
-------------------------------------------
Period from January 1, 2003
through December 17, 2003
-------------------------------------------
Before Tax Net of
Tax Tax
Amount Amount
-------------------------------------------
Unrealized holding gains arising during the period $ 30,853 $ (10,798) $ 20,055
Less reclassification adjustment for gains realized in net income (31,506) 11,027 (20,479)
-------------------------------------------
Unrealized gains on investments (653) 229 (424)
Foreign currency translation adjustment 6,565 (2,298) 4,267
-------------------------------------------
Total other comprehensive income $ 5,912 $ (2,069) $ 3,843
===========================================
30
Financial Guaranty Insurance Company
Notes to Financial Statements (continued)
(Dollars in Thousands)
14. Comprehensive Income (continued)
Predecessor
-------------------------------------------
2002
-------------------------------------------
Before Tax Net of
Tax Tax
Amount Amount
-------------------------------------------
Unrealized holding gains arising during the period $ 171,797 $ (60,129) $ 111,668
Less reclassification adjustment for gains realized in net income (68,546) 23,991 (44,555)
-------------------------------------------
Unrealized gains on investments 103,251 (36,138) 67,113
Foreign currency translation adjustment (4,127) 1,445 (2,682)
-------------------------------------------
Total other comprehensive income $ 99,124 $ (34,693) $ 64,431
===========================================
Predecessor
--------------------------------------------
2001
--------------------------------------------
Before Tax Net of
Tax Tax
Amount Amount
--------------------------------------------
Unrealized holding gains arising during the period $ 20,213 $ (7,075) $ 13,138
Less reclassification adjustment for gains realized in net income (77,043) 26,965 (50,078)
--------------------------------------------
Unrealized losses on investments (56,830) 19,890 (36,940)
Foreign currency translation adjustment (1,711) 599 (1,112)
--------------------------------------------
Total other comprehensive loss $ (58,541) $ 20,489 $ (38,052)
============================================
31