EXHIBIT 99
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
September 30, 1998
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1998 and 1997
INDEX
FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
The New York State Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under the New
York Insurance Law, and for determining where its financial condition warrants
the payment of a dividend to its stockholders. No consideration is given by the
New York State Insurance Department to financial statements prepared in
accordance with generally accepted accounting principles in making such
determinations.
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30, December 31,
ASSETS 1998 1997
---- ----
Bonds at market value (amortized cost of $1,379,557 and
$1,192,771) $1,444,329 $1,235,441
Equity investments at market value (cost of $26,692 and
$20,405) 26,555 20,762
Short-term investments 73,943 103,926
---------- ----------
Total investments 1,544,827 1,360,129
Cash 4,971 11,235
Deferred acquisition costs 186,700 171,098
Prepaid reinsurance premiums 202,139 173,123
Reinsurance recoverable on unpaid losses 1,872 30,618
Receivable for securities sold 16,747 20,535
Other assets 98,764 72,901
---------- ----------
TOTAL ASSETS $2,056,020 $1,839,639
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Deferred premium revenue $ 682,228 $ 595,196
Losses and loss adjustment expenses 61,323 75,417
Deferred federal income taxes 61,113 59,867
Ceded reinsurance balances payable 24,370 11,199
Payable for securities purchased 84,356 72,979
Long-term debt 50,000 50,000
Accrued expenses and other liabilities 94,775 77,121
---------- ----------
TOTAL LIABILITIES 1,058,165 941,779
---------- ----------
Common stock (500 and 528 shares authorized, issued and
outstanding; par value of $30,000 and $28,391 per share) 15,000 15,000
Additional paid-in capital 614,787 617,870
Accumulated other comprehensive income (net of deferred
income tax provision of $22,574 and $15,059) 41,923 27,968
Accumulated earnings 326,145 237,022
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 997,855 897,860
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,056,020 $1,839,639
========== ==========
See notes to condensed consolidated financial statements.
1
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
REVENUES:
Net premiums written (net of premiums ceded of
$66,074 and $50,986) $154,530 $123,590
Increase in deferred premium revenue (57,539) (44,051)
-------- --------
Premiums earned (net of premiums ceded of
$37,497 and $28,791) 96,991 79,539
Net investment income 55,268 50,226
Net realized gains 16,808 6,329
Other income 295 10,490
-------- --------
TOTAL REVENUES 169,362 146,584
-------- --------
EXPENSES:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $(6,780) and $2,881) 3,140 6,687
Policy acquisition costs 25,311 20,714
Other operating expenses 18,566 14,843
-------- --------
TOTAL EXPENSES 47,017 42,424
-------- --------
INCOME BEFORE INCOME TAXES 122,345 104,160
Provision for income taxes 33,223 28,890
-------- --------
NET INCOME 89,122 75,270
-------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 24,880 15,823
Less: reclassification adjustment for gains included
in net income (10,925) (4,114)
-------- --------
Other comprehensive income 13,955 11,709
-------- --------
COMPREHENSIVE INCOME $103,077 $86,979
======== ========
See notes to condensed consolidated financial statements.
2
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Premiums received, net $ 173,581 $ 119,152
Policy acquisition and other operating expenses
paid, net (68,510) (36,373)
Recoverable advances received (paid) 1,884 (6,242)
Loss and LAE recovered (paid), net 10,928 (7,131)
Net investment income received 52,042 46,738
Federal income taxes paid (41,190) (20,683)
Other, net 1,701 2,601
----------- -----------
Net cash provided by operating activities 130,436 98,062
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 1,316,212 787,914
Purchases of bonds (1,476,892) (845,072)
Other 9,486
Purchases of property and equipment (822) (2,469)
Net decrease (increase) in short-term securities 33,302 (87,101)
----------- -----------
Net cash used for investing activities (128,200) (137,242)
----------- -----------
Cash flows from financing activities:
Surplus notes 50,000
Stock repurchase (8,500) (10,750)
----------- -----------
Net cash provided by (used for) financing
activities (8,500) 39,250
----------- -----------
Net increase (decrease) in cash (6,264) 70
Cash at beginning of period 11,235 7,517
----------- -----------
Cash at end of period $ 4,971 $ 7,587
=========== ===========
See notes to condensed consolidated financial statements.
3
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), a wholly owned subsidiary
of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance
company domiciled in the State of New York. The Company is primarily engaged in
the business of providing financial guaranty insurance on asset-backed and
municipal obligations.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by the Company and are unaudited. In the opinion of management, all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
September 30, 1998 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These statements should be read in
conjunction with the Company's December 31, 1997 consolidated financial
statements and notes thereto. The year-end condensed balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. The results of operations for the
periods ended September 30, 1998 and 1997 are not necessarily indicative of the
operating results for the full year.
3. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which requires that all components of other
comprehensive income be classified by their nature in a financial statement and
accumulated balances of other comprehensive income be displayed separately from
retained earnings and additional paid-in capital in the equity section of a
balance sheet. The Company is disclosing this information in its statements of
income. Comprehensive income is defined as the change in shareholders' equity
during a period from transactions and other events and circumstances from
non-owner sources and includes net income and all changes in shareholders'
equity except those from investments by owners and distributions to owners. This
statement did not change the current accounting treatment for components of
comprehensive income such as changes in unrealized gains or losses on securities
available for sale.
4. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS No. 133). FAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The impact of FAS No. 133 on the Company has not yet been
determined.
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5. SUBSEQUENT EVENT
On November 3, 1998, the Parent and EXEL Limited closed a transaction to
create two new Bermuda-based financial guaranty insurance companies. Each of the
new companies has been initially capitalized with approximately $100,000,000.
One company, Financial Security Assurance International Ltd. (International), is
an indirect subsidiary of the Company and the other company, X.L. Financial
Assurance Ltd., is a subsidiary of EXEL Limited. The Parent has a minority
interest in the EXEL company, and EXEL has a minority interest in International.
In connection with the transaction, the Parent purchased an $80,000,000
convertible surplus note from the Company, and the Company used the proceeds of
such note to fund the capitalization of International.
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