EXHIBIT 99.2
FINANCIAL GUARANTY INSURANCE COMPANY
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Unaudited Interim Financial Statements
September 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
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($ in Thousands)
September 30, December 31,
1996 1995
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Assets (Unaudited)
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
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Total assets $2,649,336 $2,580,302
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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
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Total liabilities 1,017,449 1,032,421
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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
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Total stockholder's equity 1,631,887 1,547,881
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Total liabilities and stockholder's equity $2,649,336 $2,580,302
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Statements Of Income
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($ in Thousands)
Nine Months Ended September 30,
1996 1995
(Unaudited)
Revenues:
Gross premiums written $ 65,875 $ 66,151
Ceded premiums (14,178) (14,430)
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Net premiums written 51,697 51,721
Decrease in net unearned premiums 39,589 29,428
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Net premiums earned 91,286 81,149
Net investment income 92,957 89,716
Net realized gains 11,132 19,574
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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
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Total expenses 21,560 25,129
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Income before provision for federal income taxes 173,815 165,310
Provision for federal income taxes 37,566 33,323
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Net income $136,249 $131,987
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Statements Of Cash Flow
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($ in Thousands)
Nine Months Ended September 30,
1996 1995
(Unaudited)
Operating activities:
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)
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Net cash provided by operating activities 152,081 81,501
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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)
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Net cash used for investing activities (151,283) (75,268)
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Increase in cash 798 6,233
Cash at beginning of period 199 1,766
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Cash at end of period $ 997 $ 7,999
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See accompanying notes to interim financial statements
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Financial Guaranty Insurance
Company Notes to Financial Statements
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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.
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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:
Nine Months Ended September 30,
1996 1995
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
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Statutory basis amount $131,232 $1,097,600 $122,078 $994,461
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Financial Guaranty Insurance
Company Notes to Financial Statements
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September 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:
o Statutory surplus after dividends may not be less
than the minimum required paid-in capital, which was
$2,100,000 in 1996.
o Dividends may not exceed the lesser of 10 percent of
its surplus or 100 percent of adjusted net investment
income, as defined therein, for the twelve month period
ending on the preceding December 31, without the prior
approval of the Superintendent of the New York State
Insurance Department.
The amount of the Company's surplus available for dividends 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.
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