Net premiums earned in 1998 of $9.2 million were derived from $49.2 million of gross premiums written, of which $39.4 million were ceded under reinsurance agreements, and offset by a $0.6 million change in unearned premiums. The gross premiums written and ceded premiums included approximately $39 million from one transaction. The transaction was entered into by CGA to mitigate risks related to its exposure in connection with guarantees of two credit facilities for St. George. As a result of turmoil in certain areas of the capital markets during the month of October 1998, the spreads over treasuries at which investors were willing to purchase certain securities widened considerably. This spread widening caused a decrease in the market value of many of the securities used as collateral for two of St. George's insured credit facilities. The facilities had requirements that the lender's operating ratio, (the portfolio market value divided by the loan outstanding) be maintained above certain levels. In the event that an operating ratio fell below the required level and was not brought into compliance within a cure period, the lender could liquidate the collateral and require CGA to pay any remaining balance outstanding under the credit facility. On October 30, 1998 CGA provided asset specific guarantees and obtained third party credit support on a "cut-through" basis on approximately $382 million par amount of securities within the two insured investment portfolios. The three
The amount of CGA's insured portfolio increased from $1.6 billion net par as of December 31, 1998 to $2.2 billion as of December 31, 1999. The following table shows the net par insured obligations at December 31, by asset type:
1999 1998 1997 ---- ---- ---- "AAA" 4% 4% -- "AA" 2% 3% -- "A" 25% 12% 7% "BBB" 58% 67% 65% "BB" 9% 11% 28% Not rated 2% 3% -- --- --- ---
Operating expenses for the year ended December 31, 1999 were $13 million, $14 million for 1998 and $6.5 million for the nine months ended December 31, 1997. These costs are primarily personnel related which totaled $8.8 million for 1999 and $7.4 million for 1998. The primary reason for the operating expense reduction in 1999 compared to 1998 was due to a non-recurring expense of $1.2 million of client acquisition costs in 1998 which had previously been capitalized. These costs were incurred by CGA Investment Management to set up new investment programs and funding sources for its clients. The majority of the other operating expenses are comprised of occupancy costs, professional fees, travel, information services, and administration.
In December 1999, CGA Investment Management paid $5.5 million to St. George to cover a portion of the $9.5 million net cost incurred by St. George for the credit support arrangements which were provided in 1998 and cancelled in 1999.
CGA established general loss reserves of $3.3 million in 1999, $2.0 million in 1998, and $0.1 million in 1997. CGA established case basis reserves, net of reinsurance, of $15.3 million in 1999 and $20.8 million in 1998. Total case basis reserves to date, net of reinsurance, are $36.1 million and all relate to exposure to Commercial Financial Services securities.
In December 1998, Commercial Financial Services Inc., a credit-card debt collection company and certain affiliates filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. CGA previously had guaranteed approximately $212 million face amount of certain asset backed securities issued by various trusts established and serviced by CFS (the "CFS Securities"), and had reinsured approximately $162 million of this exposure, so that its original net exposure was $50 million. As of December 31, 1999, CGA has made claim payments under its guarantees in respect of the insured CFS Securities in an aggregate amount of approximately $117.8 million (of which $90 million was funded by CGA's reinsurer, and $27.8 million was funded by CGA from its own reserves). CGA made an additional claims payment with respect to the CFS Securities on March 15, 2000, in the amount of approximately $28.5 million ($21.8 million was funded by CGA's reinsurer, and $6.7 million was funded from CGA's case basis reserves). Upon making such payment, and together with all such prior payments, CGA's aggregate net exposure, (net of reinsurance and net of CGA's remaining $1 million case basis reserve) in respect of CFS Securities was reduced to approximately $9.6 million.
CGA, CGAIM and various other plaintiffs commenced legal proceedings against CFS, William Bartmann (CFS' founder and principal shareholder), other former members of CFS' senior management and the placement agent for the CFS securities insured by CGA, and CFS's auditors alleging various counts of federal and state securities law fraud and common law fraud. It is too early to predict what, if anything, CGA ultimately may recover in this legal proceeding.
The Accounting Standards Executive Committee issued Statement of Position 98-5,"Reporting on Costs of Start-Up Activities", effective for fiscal years beginning after December 15, 1998, which requires the Company to expense organization costs as incurred. The Company expensed the remaining unamortized organization costs totaling $3.9 million in July 1998 which is reflected in the financial statements as a change in accounting principle.
For the year ended December 31, 1999 the pay-in-kind dividends on preferred stock and accretion on preferred stock totaled $15.0 million compared to $20.9 million for 1998. The decrease resulted from the conversion of all outstanding Series B preferred stock into common stock on March 31, 1999.
As of and for the nine months ended December 31, 1997:
CGA Group capitalized Commercial Guaranty Assurance with $125 million. On March 31, 1999 CGA Group contributed an additional $27.2 million to Commercial Guaranty Assurance using proceeds from the sale of CGA Group's Series C preferred stock. In June, 1999, CGA Group contributed an additional $7.1 million to Commercial Guaranty Assurance. Alliance Capital Management Corporation manages Commercial Guaranty Assurance's entire investment portfolio. These funds are invested in foreign corporate and government debt securities which are rated "Double-A" or higher and denominated in U.S. dollars. The portfolio maintains a weighted average duration of two to five years. CGA Investment Management was capitalized with $3 million. It has required additional funding from CGA Group since its commencement of operations through December 31, 1999 of $13.9 million to cover its operations. It is projected to require additional funding at least through 2003 while it continues to build its assets under management up to an amount that generates sufficient fee income to cover its operations.
On a consolidated basis, CGA Group used $15.8 million of cash from operating activities during 1999 compared to providing $1.2 million during 1998. CGA Group applied $23.9 million of net cash to investing activities during 1999 compared to $5.8 million in 1998. Cash flows from financing activities in 1999 resulted from the sale of Series C preferred stock, which raised net proceeds of $49.9 million.
In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), subsequently amended by SFAS No. 137, which the company is required to adopt effective January 1, 2001. SFAS 133 requires all derivatives to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. Upon implementation, credit default swaps will be valued at fair value in accordance with this statement. The impact of SFAS 133 on the company's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, and the volume of credit default swaps written by Commercial Guaranty Assurance.