EXHIBIT 99.2
FINANCIAL GUARANTY INSURANCE COMPANY
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Unaudited Interim Financial Statements
June 30, 1996
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows. 3
Notes to Unaudited Interim Financial Statements. 4
Financial Guaranty Insurance
Company Balance Sheets
($ in Thousands)
June 30, December 31,
1996 1995
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(Unaudited)
Assets
Fixed maturity securities, available for sale, at fair value
(amortized cost of $2,066,231 in 1996 and $2,043,453 in 1995) $2,057,812 $2,141,584
Short-term investments, at cost, which approximates market 133,832 91,032
Cash 1,294 199
Accrued investment income 37,753 37,347
Reinsurance receivable 7,358 7,672
Deferred policy acquisition costs 93,100 94,868
Property, plant and equipment net of
accumulated depreciation of $14,094 in
1996 and $12,861 in 1995 5,573 6,314
Prepaid reinsurance premiums 156,055 162,088
Prepaid expenses and other assets 50,908 39,198
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Total assets $2,543,685 $2,580,302
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Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums 698,149 727,535
Losses and loss adjustment expenses 71,034 77,808
Ceded reinsurance payable 2,777 1,942
Accounts payable and accrued expenses 38,035 32,811
Due to parent 267 1,647
Current federal income taxes payable 67,077 51,296
Deferred federal income taxes payable 63,850 99,171
Payable for securities purchased 32,186 40,211
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Total liabilities 973,375 1,032,421
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Stockholder's Equity:
Common stock, par value $1,500 per share at June 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 (losses) gains on fixed maturity securities
available for sale, net of tax (5,472) 63,785
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,229,067 1,136,584
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Total stockholder's equity 1,570,310 1,547,881
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Total liabilities and stockholder's equity $2,543,685 $2,580,302
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Statements Of Income
($ in Thousands)
Six Months Ended June 30,
1996 1995
(Unaudited)
Revenues:
Gross premiums written $ 45,481 $ 42,773
Ceded premiums (6,643) (5,965)
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Net premiums written 38,838 36,808
Decrease in net unearned premiums 23,353 18,136
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Net premiums earned 62,191 54,944
Net investment income 61,513 59,327
Net realized gains 8,348 17,446
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Total revenues 132,052 131,717
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Expenses:
Losses and loss adjustment expenses (2,702) 815
Policy acquisition costs 9,637 5,308
Other underwriting expenses 7,561 8,662
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Total expenses 14,496 14,785
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Income before provision for federal income
taxes 117,556 116,932
Provision for federal income taxes 25,071 25,066
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Net income $ 92,485 $ 91,866
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Statements Of Cash Flow
($ in Thousands)
Six Months Ended June 30,
1996 1995
(Unaudited)
(Unaudited)
Operating activities:
Net income $ 92,485 $ 91,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 2,400 11,991
Amortization of fixed maturity securities 398 1,096
Policy acquisition costs deferred (8,565) (10,254)
Amortization of deferred policy acquisition costs 10,333 5,308
Depreciation of fixed assets 1,233 1,167
Change in reinsurance receivable 314 4,569
Change in prepaid reinsurance premiums 6,033 5,877
Foreign currency translation adjustment (1,226) 972
Change in accrued investment income, prepaid
expenses and other assets (12,116) (3,483)
Change in unearned premiums (29,386) (24,013)
Change in losses and loss adjustment expense
reserves (6,774) (4,617)
Change in other liabilities 4,678 (11,076)
Change in current income taxes payable 15,781 (9,625)
Net realized gains on investments (8,348) (17,446)
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Net cash provided by operating activities 67,240 42,332
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Investing activities:
Sales or maturities of fixed maturity securities 406,676 478,328
Purchases of fixed maturity securities (429,529) (413,181)
Sales or maturities (purchases) of short-term
investments, net (42,800) (102,414)
Purchases of property and equipment, net (492) (354)
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Net cash used for investing activities (66,145) (37,621)
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Increase (decrease) in cash 1,095 4,711
Cash at beginning of period 199 1,766
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Cash at end of period $ 1,294 $ 477
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Notes to Financial Statements
June 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 six months
ended June 30, 1996 and 1995, (b) the financial position at
June 30, 1996 and December 31, 1995, and (c) cash flows for
the six months ended June 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.
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Financial Guaranty Insurance
Company Notes to Financial Statements
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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:
Six Months Ended June 30,
1996 1995
Net Stockholder's Net Stockholder's
Income Equity Income Equity
GAAP basis amount $92,485 $1,570,310 $ 91,866 $1,441,820
Premium revenue recognition (4,061) (170,988) (9,905) (154,322)
Deferral of acquisition costs 1,768 (93,100) (4,946) (95,874)
Contingency reserve - (415,603) - (357,817)
Non-admitted assets - (4,837) - (6,579)
Case-basis losses incurred and salvage recoverable
(3,394) (3,446) 6,631 2,531
Portfolio loss reserves - 24,000 (10,900) 35,200
Deferral of income tax 2,400 66,796 11,991 57,466
Unrealized gains on fixed maturity securities held at
fair value, net of taxes - 5,472 - (27,827)
Profit commission 1,273 (4,471) 4,909 (3,931)
Contingency reserve tax deduction - 85,176 - 78,196
Provision for unauthorized reinsurance - - - (266)
Allocation of tax benefits due to Parent's net
operating loss to the Company (4) 10,287 244 9,898
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Statutory basis amount $ 90,467 $1,069,596 $89,845 $978,495
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Financial Guaranty Insurance
Company Notes to Financial Statements
June 30, 1996 and 1995
(Unaudited)
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend
only from earned surplus subject to the following limitations:
(bullet) Statutory surplus after dividends may not be less than
the minimum required paid-in capital, which was
$2,100,000 in 1996.
(bullet) Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month
period ending on the preceding December 31, without
the prior approval of the Superintendent of the New
York State Insurance Department.
The amount of the Company's surplus available for dividends
during 1996 is approximately $106.2 million.
(4) Income Taxes
The Company's effective Federal corporate tax rate (21.3
percent and 21.4 percent for the six months ended June 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 $12.7 million and $11.6 million, respectively, for
the six months ended June 30, 1996 and 1995.
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