The Company rents office space in Hamilton, Bermuda under an operating lease which expires in 2000. CGAIM rents office space in New York under an operating lease which expires in 2003 and has one option for a renewal period of five years. Total rent expense was approximately $355,000 and $300,000 in 1998 and 1997 respectively. Future minimum rental commitments under the leases, are expected to be approximately $500,000 per annum.
Total revenues for the year ended December 31, 1998 were $23.9 million, of which $9.2 million was from financial guaranty insurance premiums, $3.4 million was from investment management and advisory fees, $8.5 million was from investment income and $2.8 million was from net realized gains on the sale of investments. Total revenues for the nine month period ended December 31, 1997 were $4.3 million, of which $.5 million was from financial guaranty insurance premiums, $3 million was from investment income and $.9 million was from net realized gains on the sale of investments. There were no investment management or advisory fees earned in 1997. Further comparisons between the year ended December 31, 1998 and the nine months ended December 31, 1997 have limited meaning, as the Company did not commence operations until after the private placement offering was completed on June 17, 1997.
The amount of CGA's insured portfolio increased from $319 million net par as of December 31, 1997 to $1.6 billion as of December 31, 1998. The weighted average term of the insured securities at December 31, 1998 is approximately 14 years, with 34 percent of the portfolio having an expected average life of less than five years. The following table shows the net par insured obligations at December 31, by asset type:
The following table presents the credit ratings of the above assets, as assigned by one or more nationally recognized credit rating agencies, based on net par outstanding at December 31:
During 1998 the par value of CGAIM's assets under management increased from $199 million to over $1.8 billion. CGAIM generally earns a management fee of .25% per annum on the average market value of the assets under its management. CGAIM did not earn any management fees in 1997.
Net investment income is presented after deducting the cost of external investment management fees which totaled $0.3 million for 1998 and $0.2 million for the nine months ended December 31, 1997. Commencing in September 1998, CGA modified its investment strategy to have the investment portfolio closely match the returns of a "Double-A" or better three to five year Eurodollar bond index. This strategy results in a less actively managed portfolio, which resulted in the management fee being reduced by approximately twenty basis points per annum. The new strategy also resulted in above normal turnover of the portfolio and contributed to the significant gains realized during the year. The total market value of the fixed maturity portfolio at December 31, 1998, including accrued interest receivable, was $104 million. Unrealized gains on the investment portfolio as of December 31, 1998 were $0.9 million. The average yield on the investment portfolio was 5.8% for 1998 and 6.3% for the period ended December 31, 1997.
REVENUES Net premiums earned $ 9,246,289 $ -- Net investment income 8,387,513 64,934 Net realized gains 2,814,132 -- Management fees -- 3,353,499 Total revenues 20,447,934 3,418,433
The Company capitalized CGA with $125 million. Alliance Capital Management Corporation manages CGA'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. CGAIM was initially capitalized with $3 million. It has required funding from the Company during 1997 and 1998 totaling $7.5 million to cover its operations. It is expected to require additional funding in 1999 and 2000 while it continues to build its assets under management to generate sufficient fee income to cover its operations.
In October 1998, CGA purchased a $30 million five year note from SG Holdings (the parent of SGI and SG3) in order to enable SG Holdings to provide its subsidiaries with sufficient funds to pay CGA the $38.95 million insurance premium referred to above. The $30 million note is recorded as an investment on CGA's books, however, it is not included in the calculation of CGA's claims paying resources.
During November 1998 the credit facility for SGI was terminated. As of December 31, 1998 the outstanding balance was approximately $425 million. The terms of the facility require repayment over four years with four equal principal installments due at the end of each year. It is expected that the facility will be repaid by a combination of asset sales and refinancing with another lender, however, there is no certainty that SGI will be able to complete such asset sales or refinancing. In the event that this transaction does not occur and SGI is not otherwise able to meet its debt obligation, the lender may call on the Company's loan guaranty for the shortfall. The Company may then liquidate the underlying collateral to subrogate losses paid.
As a result of the $30 million reduction in CGA's claims paying resources and its exposure to the CFS Securities, CGA modified its business plan pending the receipt of additional claims paying resources. Accordingly, CGA acquired additional exposure of only $41 million during the months of November and December 1998.
CGA monitors its exposure on a routine basis and stays in close contact with DCR to ensure that its AAA rating is maintained. CGA has a $20 million excess of loss reinsurance facility agreement and can also arrange reinsurance on an as needed basis to manage its exposure. The Company also has commitments which expire June 17, 2002, from certain institutional shareholders to purchase an aggregate of $60 million of additional Series B Preferred Stock. Should those commitments be called upon, the proceeds would likely be used to increase the capital of CGA. The commitments must be funded in the event that DCR notifies the Company at least 45 days prior to June 17, 2002 that CGA's rating will otherwise be downgraded below a "Triple-A" rating.
o That the Company amend the terms of the Series B Preferred Stock such that the dividend rate applicable to the Shares of Series B Preferred Stock which may be issued in the future upon exercise of the Unit Investors Capital Commitments or otherwise will not be greater than 7% per annum, that any such Series B Preferred Stock shall rank junior to the Series C Preferred Stock in all respects, and that any such Series B Preferred Stock shall not be entitled to voting rights; and
The Company has received irrevocable commitments from certain of its existing investors to subscribe for an aggregate of approximately $50.7 million (43.8 million shares) of Series C Preferred Stock. Shares of Series C Preferred Stock may be converted into shares of Common Stock on a one-for-one basis at the holder's option at any time, and are mandatorily convertible into shares of Common Stock on a one-for-one basis upon the occurrence of certain events. The anticipated closing date for the Rights Offering is March 31, 1999. The net proceeds from the Rights Offering will be used for general corporate purposes and to make capital investments in CGA.
The amount of new Common Stock to be issued in connection with the conversion of the Series B Preferred Stock is projected to be approximately 18.9 million shares, which will bring the amount of total Common Stock outstanding to approximately 28 million shares.
The Company also obtained agreements from the holders of Series A Preferred Stock to amend the terms of the Series A Preferred Stock so that the early redemption premium with respect thereto is eliminated.
On March 10, 1999 DCR reaffirmed its "Triple-A" claims paying rating for CGA.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. SFAS 133 requires all derivatives to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. The Company does not believe the application of SFAS 133 will have a material effect on its consolidated financial statements.
The financial statements listed in the accompanying Index to Financial Statements and Schedules are filed as part of this Report.