(a) Prepared in accordance with accounting principles generally accepted in the United States of America. (b) The sum of statutory capital, statutory unearned premium reserve, present value of future net installment premiums, statutory loss reserve, and credit available under standby line of credit ("soft capital") facility.
On July 5, 2000, Financial Security Assurance Holdings Ltd. (the Company) completed the previously announced merger in which the Company became an indirect, wholly owned subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation. At the merger date, each outstanding share of the Company's common stock was converted into the right to receive $76.00 in cash. Dexia also indirectly acquired the Company's redeemable preferred stock, which was then contributed to the Company's capital. As a result of the merger transaction, the Company has valued its liabilities under the Company's equity-based compensation plans at the transaction price and changed its assumption regarding those plans by assuming all future payments will be settled in cash. The Company also reflected the settlement of its forward share agreements at the merger price and the sale of 511,031 shares of the Company's common stock to Dexia at the merger price. The net effect of the merger was to decrease net income by $75.5 million and to decrease shareholders' equity by $36.1 million.
The Company employs two measures of gross premiums originated for a given period. Gross premiums written captures premiums collected in the period, whether collected up front for business originated in the period, or in installments for business originated in prior periods. An alternative measure, gross present value of premiums written (gross PV premiums written), reflects future installment premiums discounted to their present value, as well as upfront premiums, but only for business originated in the period. The Company considers gross PV premiums written to be the better indicator of a given period's origination activity because a substantial portion of the Company's premiums is collected in installments, a practice typical of the asset-backed business. To calculate PV premiums, management estimates the life of each transaction that has installment premiums and discounts the future installment premium payments. The Company calculates the discount rate as the average pre-tax yield on its investment portfolio for the previous three years. The rates for 2000, 1999 and 1998 were 5.77%, 5.93% and 6.31%, respectively. Management intends to revise the discount rate in future years according to the same formula, in order to reflect interest rate changes.
The Company's principal operating subsidiary, Financial Security Assurance Inc. (FSA), produced strong origination results despite a decline in U.S. municipal market volume and a generally slow first quarter caused by Year 2000 (Y2K) concerns. Anticipated computer problems associated with Y2K prompted many issuers to accelerate closing dates for their financings, which increased premium production in the fourth quarter of 1999 and reduced first quarter 2000 production. FSA wrote insurance policies generating $448.3 million of gross PV premiums in 2000, 13.3% lower than the record $517.2 million in 1999. The annual par value of bonds insured by FSA rose 4.8%, to $62.6 billion. PV premiums declined because FSA generally insured higher quality, lower premium transactions.
In the U.S. municipal bond market, the Company confronted reduced market volume. A strong economy created budget surpluses, reducing the need for bond issues to fund capital expenditures, and interest rate conditions discouraged refundings. The U.S. municipal business contributed $140.1 million in PV premiums, compared with $183.0 million written in 1999. FSA's U.S. municipal par insured fell to $21.5 billion in 2000 from $26.3 billion in 1999. The business was well diversified across sectors, average capital charges declined, and FSA guaranteed approximately 25% of the insured bonds issued during the year.
Net investment income was $121.1 million for 2000 and $94.7 million for 1999, an increase of 27.9%. This increase was due primarily to higher invested balances arising from the proceeds of an equity offering in the fourth quarter of 1999 and revenues from new business writings. For further discussion, see Liquidity and Capital Resources below. The Company's effective tax rate on investment income was 13.1% for 2000, compared with 15.3% for 1999. In 2000, the Company realized $36.8 million in net capital losses, compared with $13.3 million of net capital losses in 1999. Capital gains and losses are a by-product of the normal investment management process and can vary substantially from period to period.
The provision for losses and loss adjustment expenses in 2000 was $9.4 million, compared with $8.8 million in 1999, representing additions to the Company's general reserve. The additions to the general reserve represent management's estimate of the amount required to cover the present value of the net cost of claims adequately. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business, and future economic conditions. At December 31, 2000, the general reserve totaled $65.2 million.
Income before income taxes for 2000 was $67.4 million, down 58.9% from $164.0 million for 1999. The decrease resulted primarily from expenses incurred in 2000 of $105.5 million relating to the merger with Dexia.
The primary objective in managing the Company's investment portfolio is generation of an optimal level of after-tax investment income while preserving capital and maintaining adequate liquidity. Investment strategies are based on many factors, including the Company's tax position, fluctuation in interest rates, regulatory and rating agency criteria and other market factors. One internal investment manager for fixed-income investments and two external investment managers for fixed-income and equity investments execute investment decisions. These investment decisions are based on guidelines established by management and approved by the board of directors.
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risks related to financial instruments of the Company relate primarily to its investment portfolio, of which over 99% was invested in fixed-income securities at December 31, 2000. Changes in interest rates affect the value of the Company's fixed-income portfolio. As interest rates rise, the fair value of fixed-income securities decreases. Sensitivity to interest rate movements can be estimated by projecting a hypothetical increase in interest rates of 1.0%. Based on market values and interest rates at year-end 2000, this hypothetical increase in interest rates would result in an after-tax decrease of $101.0 million in the net fair value of the Company's fixed-income portfolio. Since the Company is able to hold these investments to maturity, absent an unusually large demand for funds, it does not expect to recognize any material adverse impact to income or cash flows under the above scenario.
The Company increased its production in the U.S. asset-backed market, which was characterized by robust issuance and by lack of liquidity in the market for subordinated securities. In this sector, FSA increased its PV premiums by 35.7% to $200.4 million and its par originated by 14.7% to $24.8 billion. FSA expanded its business in the CDO market, where it has established a leadership position, benefited from its strong relationships with repeat issuers in the sub-prime finance sector and completed a number of innovative mortgage-backed transactions.
In the U.S. municipal bond market, the Company registered strong results, despite a 21% decline in total market volume of new municipal bonds and reduced insurance penetration. In an environment characterized by improved pricing, the opportunities to earn higher returns increased, and FSA continued its commitment to pricing and credit discipline. The U.S. municipal business contributed $183.0 million in PV premiums, compared with the record $220.3 million written in 1998. The 16.9% decrease in U.S. municipal PV premiums is significantly less than the 23.8% decline in FSA's U.S. municipal par insured, which fell to $26.3 billion in 1999 from $34.5 billion in 1998.
FSA's gross premiums written increased 13.6% to $362.7 million for 1999 from $319.3 million for 1998. Net premiums written were $230.4 million during 1999, an increase of 4.8% when compared with the 1998 result. Gross premiums written grew at a faster pace than net premiums written because the Company used more reinsurance. This was the result of joint venture transactions with XL Capital Ltd and The Tokio Marine and Fire Insurance Co., Ltd., along with expansion of reinsurance capacity for large transactions and capacity-constrained issuers. Reinsurance cessions totaled 36.5% of 1999 gross premiums written, compared with 31.1% in 1998. Net premiums earned in 1999 were $175.0 million, compared with $137.9 million in 1998, an increase of 26.8%. Premiums earned from refundings and prepayments were $13.9 million for 1999 and $15.8 million for 1998, contributing $6.6 million and $7.4 million, respectively, to after-tax earnings. Refundings declined in response to the rising interest rate environment of 1999. Excluding the effects of refundings, net premiums earned grew 31.9% over the comparable 1998 result. No assurance can be given that refundings and prepayments will continue at the level experienced in 1999 or 1998.
Interest expense in 1999 was $16.6 million, $6.0 million higher than in 1998, reflecting the first full year of interest on debt issued in the fourth quarter of 1998. For further discussion, see Liquidity and Capital Resources below.
The provision for losses and loss adjustment expenses in 1999 was $8.8 million, compared with $4.0 million in 1998, representing additions to the Company's general reserve. During 1998, the Company transferred $18.4 million to its general reserve from case basis reserves due to recoveries on certain commercial mortgage transactions. This recovery allowed for a decrease of $4.1 million in the amount needed to fund the general reserve for originations of new business in 1998. The additions to the general reserve represent management's estimate of the amount required to cover the present value of the net cost of claims adequately. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business, and future economic conditions. At December 31, 1999, the general reserve totaled $55.0 million.
Total policy acquisition and other operating expenses (excluding the cost of equity-based compensation programs, which was $17.1 million for 1999 and $19.9 million for 1998) were $49.1 million in 1999, compared with $45.6 million in 1998, an increase of $3.5 million. Further excluding the effect of refundings, total policy acquisition and other operating expenses were $45.4 million in 1999, compared with $41.2 million in 1998, an increase of $4.2 million. The increase resulted from greater amortization of deferred acquisition costs due to a higher level of core premiums earned, along with higher personnel costs. The Company's core expense ratio fell to 28.2% from 33.8% in 1998 due to higher core premiums earned.
Income before income taxes for 1999 was $164.0 million, up 4.3% from $157.3 million for 1998. The Company's effective tax rate for 1999 was 23.5%, compared with 26.7% for 1998. The decrease in the effective tax rate is due to higher income from the Company's international joint ventures and a higher proportion of tax-exempt securities in the investment portfolio.
The Company's consolidated invested assets at December 31, 2000, net of unsettled security transactions, were $2,234.7 million, compared with the December 31, 1999 balance of $1,937.1 million. These balances include the change in the market value of the investment portfolio, which had an unrealized gain position of $104.9 million at December 31, 2000, compared with an unrealized loss position of $73.5 million at December 31, 1999. At December 31, 2000, the Company had, at the holding company level, an investment portfolio of $26.1 million available to fund the liquidity needs of its activities outside of its insurance operations. Because the majority of the Company's operations are conducted through FSA, the long-term ability of the Company to service its debt will largely depend upon its receipt of dividends from, or payment on surplus notes by, FSA.
Dividends paid by the Company to its shareholders were $7.9 million and $14.1 million in 2000 and 1999, respectively. The amounts are not comparable, as the dividends paid in 2000 represent only six months of regular quarterly dividends, which were discontinued after the merger.
During the fourth quarter of 1999, the Company sold 2,583,764 shares at $54.20 per share for a total of $140.0 million. The Company issued 1,400,000 new shares and also sold 1,183,764 shares from its treasury and rabbi trust accounts. The proceeds augmented the Company's capital base for future growth and for anticipated employee compensation payments at the beginning of 2000. During the fourth quarter of 1998, the Company issued $100.0 million of 6.950% Senior Quarterly Income Debt Securities due November 1, 2098 and callable on or after November 1, 2003. The Company used these proceeds to augment the capital in its insurance company subsidiaries and for general corporate purposes. The Company also has outstanding $130.0 million of 7.375% Senior Quarterly Income Debt Securities due September 30, 2097 and callable on or after September 18, 2002.
In December 2000, Financial Security Assurance International Ltd. (International), an indirect subsidiary of the Company, contributed $24.0 million of additional capital to XL Financial Assurance Ltd to maintain the Company's 15% ownership. In December 1999, International received $50.0 million of additional capital. FSA contributed $40.0 million, and XL Capital Ltd contributed the remaining $10.0 million to maintain its minority interest percentage in the subsidiary.
The Company believes that FSA's expected operating liquidity needs, both on a short- and long-term basis, can be funded from its operating cash flow. In addition, FSA has a number of sources of liquidity that are available to pay claims on a short- and long-term basis: cash flow from written premiums, FSA's investment portfolio and earnings thereon, reinsurance arrangements with third-party reinsurers, liquidity lines of credit with banks, and capital market transactions.
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 37
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
(a) In 2000, $14,088 in treasury stock was distributed to employees to settle the Company's deferred equity obligation. (b) In addition, in 1998, the Company exchanged $20,000 of its stock at market value for $20,000 of XL Capital Ltd stock at market value.
Financial Security Assurance Holdings Ltd. (the Company) is a holding company incorporated in the State of New York. The Company is principally engaged, through its insurance company subsidiaries, in providing financial guaranty insurance on asset-backed and municipal obligations. The Company's underwriting policy is to insure asset-backed and municipal obligations that it determines would be of investment-grade quality without the benefit of the Company's insurance. The asset-backed obligations insured by the Company are generally issued in structured transactions and are backed by pools of assets, such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. The municipal obligations insured by the Company consist primarily of general obligation bonds that are supported by the issuers' taxing power and of special revenue bonds and other special obligations of states and local governments that are supported by the issuers' ability to impose and collect fees and charges for public services or specific projects. Financial guaranty insurance written by the Company guarantees scheduled payments on an issuer's obligation. In the case of a payment default on an insured obligation, the Company is generally required to pay the principal, interest or other amounts due in accordance with the obligation's original payment schedule or, at its option, to pay such amounts on an accelerated basis.
On July 5, 2000, the Company completed a merger in which the Company became a direct subsidiary of Dexia Holdings, Inc., which is an indirect, wholly owned subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation. At the merger date, each outstanding share of the Company's common stock was converted into the right to receive $76.00 in cash. Dexia also indirectly acquired the Company's redeemable preferred stock, which was then contributed to the Company's capital. As a result of this transaction, the Company has valued its liabilities under the Company's equity-based compensation plans at the transaction price and changed its assumption regarding those plans by assuming all future payments will be settled in cash. It also reflected the settlement of its forward share agreements at the merger price and the sale of 511,031 shares of the Company's common stock to Dexia at the transaction price. The net effect of the merger, reflected in the December 31, 2000 financial statements, is to decrease net income by $75.5 million and to decrease shareholders' equity by $36.1 million. At December 31, 2000, the only holders of the Company's common stock were Dexia Holdings, Inc. and certain directors of the Company who owned shares of the Company's common stock or economic interests in the Company's common stock under the Director Share Purchase Program (see Note 11).
Investments in debt securities designated as available for sale are carried at market value. Equity investments are carried at market value. Any resulting unrealized gain or loss is reflected as a separate component of shareholders' equity, net of applicable deferred income taxes. All of the Company's debt and equity securities are classified as available for sale.
Bond discounts and premiums are amortized on the effective yield method over the remaining terms of the securities acquired. For mortgage-backed securities, and any other holdings for which prepayment risk may be significant, assumptions regarding prepayments are evaluated periodically and revised as necessary. Any adjustments required due to the resulting change in effective yields are recognized in current income. Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at market value, which approximates cost. Cash equivalents are amounts deposited in money market funds and investments with a maturity at time of purchase of three months or less and are included in short-term investments. Realized gains or losses on sale of investments are determined on the basis of specific identification. Investment income is recorded as earned.
Derivative securities, including U.S. Treasury bond futures contracts and call option contracts, are not accounted for as hedges and are marked to market on a daily basis. Any gains or losses are included in realized capital gains or losses. There were no open positions in U.S. Treasury bond futures contracts and call option contracts at December 31, 2000.
Investments in unconsolidated affiliates are based on the equity method of accounting (see Note 19).
Gross and ceded premiums are earned in proportion to the amount of risk outstanding over the expected period of coverage. The amount of risk outstanding is equal to the sum of the par amount of debt insured. Deferred premium revenue and prepaid reinsurance premiums represent the portion of premium that is applicable to coverage of risk to be provided in the future on policies in force. When an insured issue is retired or defeased prior to the end of the expected period of coverage, the remaining deferred premium revenue and prepaid reinsurance premium, less any amount credited to a refunding issue insured by the Company, are recognized.
A case basis reserve for unpaid losses and loss adjustment expenses is recorded at the present value of the estimated loss when, in management's opinion, the likelihood of a future loss is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using risk-free rates ranging from 5.5% to 6.1%.
Management of the Company periodically evaluates its estimates for losses and loss adjustment expenses and establishes reserves that management believes are adequate to cover the present value of the ultimate net cost of claims. The reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not differ from such estimates. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves based on the Company's actual loss experience, its future mix of business, and future economic conditions.
Deferred acquisition costs comprise those expenses that vary with, and are primarily related to, the production of business, including commissions paid on reinsurance assumed, compensation and related costs of underwriting and marketing personnel, certain rating agency fees, premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Deferred acquisition costs and the cost of acquired business are amortized over the period in which the related premiums are earned. Recoverability of deferred acquisition costs is determined by considering anticipated losses and loss adjustment expenses.
As a monoline financial guaranty insurer, the Company has no reportable operating segments.
Bonds at amortized cost of $11,690,000 and $10,979,000 at December 31, 2000 and 1999, respectively, were on deposit with state regulatory authorities as required by insurance regulations.
The change in net unrealized gains (losses) consisted of (in thousands):
Balance, beginning of period $ 198,048 $ 199,559 $ 171,098 --------- --------- --------- Costs deferred during the period: Ceding commission income (42,496) (52,376) (27,693) Premium taxes 5,934 9,017 8,081 Compensation and other acquisition costs 77,252 81,657 83,512 --------- --------- --------- Total 40,690 38,298 63,900 --------- --------- ---------
Costs amortized during the period (37,602) (39,809) (35,439) --------- --------- ---------
Balance, end of period $ 201,136 $ 198,048 $ 199,559 ========= ========= =========
(i) For all policies written prior to July 1, 1989, an amount equal to 50% of cumulative earned premiums less permitted reductions, plus;
A reconciliation of net income for the calendar years 2000, 1999 and 1998 and shareholders' equity at December 31, 2000 and 1999, reported by the Company on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory basis, is as follows (in thousands):
GAAP BASIS $ 63,283 $125,405 $115,356 Non-insurance companies net loss 60,052 7,812 5,461 Premium revenue recognition (13,824) (19,397) (16,411) Losses and loss adjustment expenses incurred 10,233 4,171 12,938 Deferred acquisition costs (3,088) 1,511 (28,461) Deferred income tax provision 11,725 1,375 167 Current income tax 837 (9,266) (8,206) Accrual of deferred compensation, net (20,328) 22,119 33,268 Other 4,869 (124) 100 -------- -------- --------
Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ----
Tax at statutory rate 35.0% 35.0% 35.0% Tax-exempt interest (33.8) (10.1) (8.6) Income of foreign subsidiary (5.8) (1.4) Merger-related expenses 10.2 Other 0.5 0.3 ---- ---- ----
On September 2, 1994, the Company issued to White Mountains Insurance Group, Ltd. 2,000,000 shares of Series A, non-dividend paying, voting, redeemable preferred stock having an aggregate liquidation preference of $700,000. The preferred stock was purchased by Dexia as part of the merger and simultaneously contributed back to the Company and retired.
The Subsidiaries maintain both qualified and non-qualified, non-contributory defined contribution pension plans for the benefit of all eligible employees. The Subsidiaries' contributions are based upon a fixed percentage of employee compensation. Pension expense, which is funded as accrued, amounted to $3,521,000, $1,788,000 (net of forfeitures of $1,316,000) and $2,584,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company applies APB Opinion 25 and related Interpretations in accounting for its performance shares. The Company estimates the final cost of these performance shares and accrues for this expense over the performance period. The accrued expense for the performance shares was $50,076,000, which includes $26,177,000 of merger-related costs, $33,442,000 and $40,862,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Prior to the merger, in tandem with this accrued expense, the Company estimated those performance shares that it expected to settle in stock and recorded this amount in shareholders' equity as deferred compensation. The remainder of the accrual, which represented the amount of performance shares that the Company estimated it would settle in cash, was recorded in accrued expenses and other liabilities. As a result of the merger, the Company revised its assumption by assuming that all future payments would be settled in cash and recharacterized $39,599,000 from shareholders' equity to a liability. Had the compensation cost for the Company's performance shares been determined based upon the provisions of SFAS No. 123, there would have been no effect on the Company's reported net income.
For obligations under the Company's Deferred Compensation Plan (DCP) and Supplemental Executive Retirement Plan (SERP), the Company generally purchases investments, which should perform similarly to the tracking investments chosen by the participants under the plans. In the fourth quarter of 2000, the Company purchased 304,757 shares of its common stock from Dexia Holdings, Inc. for $24,004,000. This purchase is intended to fund obligations relating to the Company's Director Share Purchase Program (DSPP), which enables its participants to make deemed investments in the Company's common stock under the DCP and SERP. Under the DSPP, the deemed investments in the Company's stock are irrevocable, settlement of the deemed investments must be in stock and, after receipt, the participants must generally hold the stock for at least six months.
The Company does not currently provide post-retirement benefits, other than under its defined contribution plans, to its employees, nor does it provide post-employment benefits to former employees other than under its severance plans.
The Company and its Subsidiaries lease office space and equipment under non-cancelable operating leases, which expire at various dates through 2005. Future minimum rental payments are as follows (in thousands):
During the ordinary course of business, the Company and its Subsidiaries become parties to certain litigation. Management believes that these matters will be resolved with no material impact on the Company's financial position, results of operations or cash flows.
December 31, ------------ 2000 1999 ---- ---- Principal outstanding ceded $57,424,542 $45,313,349 Principal outstanding assumed 1,262,963 1,245,430
Deferred premium revenue ceded 354,117 285,105 Deferred premium revenue assumed 15,490 9,100
Loss and loss adjustment expense reserves ceded 24,617 9,492 Loss and loss adjustment expense reserves assumed 714 762
In its asset-backed business, the Company considers geographic concentration as a factor in underwriting insurance covering securitizations of pools of such assets as residential mortgages or consumer receivables. However, after the initial issuance of an insurance policy relating to such securitization, the geographic concentration of the underlying assets may not remain fixed over the life of the policy. In addition, in writing insurance for other types of asset-backed obligations, such as securities primarily backed by government or corporate debt, geographic concentration is not deemed by the Company to be significant, given other more relevant measures of diversification, such as issuer or industry.
The Company seeks to maintain a diversified portfolio of insured municipal obligations designed to spread its risk across a number of geographic areas. The following table sets forth, by state, those states in which municipalities located therein issued an aggregate of 2% or more of the Company's net par amount outstanding of insured municipal securities as of December 31, 2000:
The Subsidiaries ceded premiums of $30,701,000, $28,388,000 and $23,838,000 to Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine), a partial owner of the Company prior to the merger, for the years ended December 31, 2000, 1999 and 1998, respectively. The amounts included in prepaid reinsurance premiums at December 31, 2000 and 1999 for reinsurance ceded to Tokio Marine were $89,574,000 and $76,327,000, respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was $7,675,000 and $4,889,000 at December 31, 2000 and 1999, respectively. The Subsidiaries ceded losses and loss adjustment expenses of $2,935,000, $3,376,000 and $603,000 to Tokio Marine for the years ended December 31, 2000, 1999 and 1998, respectively. The Subsidiaries ceded premiums of $22,581,000, $19,840,000 and $7,297,000 to subsidiaries of XL, a partial owner of the Company prior to the merger, for the years ended December 31, 2000, 1999 and 1998, respectively. The amounts included in prepaid reinsurance premiums at December 31, 2000 and 1999 for reinsurance ceded to subsidiaries of XL were $26,893,000 and $15,813,000, respectively.
The Subsidiaries ceded premiums of $(1,401,000), $84,000 and $203,000 on a quota share basis to Commercial Reinsurance Company (Comm Re), an affiliate of MediaOne Capital Corporation (MediaOne), a partial owner of the Company prior to the merger, for the years ended December 31, 2000, 1999 and 1998, respectively. The Subsidiaries assumed premiums of $8,568,000 from Comm Re for the year ended December 31, 2000, in connection with the acquisition of Comm Re by the Company in June 2000. The sellers have either posted a letter of credit or assumed Comm Re's exposure themselves to cover any losses on its exposure at the time of the acquisition, all of which is being accounted for as reinsurance by the Company. The amount included in prepaid reinsurance premiums for reinsurance ceded to this affiliate was $1,728,000 at December 31, 1999. The amount of reinsurance recoverable on unpaid losses ceded to this affiliate at December 31, 1999 was $501,000. The Subsidiaries ceded loss and loss adjustment expense recoveries of $501,000, $22,000 and $7,822,000 to this affiliate for the years ended December 31, 2000, 1999 and 1998, respectively.
Cash, receivable for investments sold and payable for investments purchased -- The carrying amount approximates fair value because of the short maturity of these instruments.
Deferred premium revenue, net of prepaid reinsurance premiums -- The carrying amount of deferred premium revenue, net of prepaid reinsurance premiums, represents the Company's future premium revenue, net of reinsurance, on policies where the premium was received at the inception of the insurance contract. The fair value of deferred premium revenue, net of prepaid reinsurance premiums, is an estimate of the premiums that would be paid under a reinsurance agreement with a third party to transfer the Company's financial guaranty risk, net of that portion of the premiums retained by the Company to compensate it for originating and servicing the insurance contract.
During 1998, the Company increased its general reserve by $3,949,000, reflecting $8,049,000 for originations of new business offset by a $4,100,000 decrease in the amount needed to fund the general loss reserve primarily because of recoveries on certain commercial mortgage transactions. During 1998, the Company transferred $18,403,000 to its general reserve from case basis reserves due to those recoveries on commercial mortgage transactions. Also during 1998, the Company transferred $9,414,000 from its general reserve to case basis reserves associated predominantly with certain consumer receivable transactions. Giving effect to these transfers, the general reserve totaled $47,251,000 at December 31, 1998.
The amount of discount taken was approximately $28,748,000, $31,113,000 and $28,564,000 at December 31, 2000, 1999 and 1998, respectively.
In June 1998, the Company invested $10,000,000 to purchase 1,000,000 shares of common stock, representing a 25% interest, in Fairbanks Capital Holding Corp. (Fairbanks), which buys, sells and services residential mortgages. In October 1999, the Company invested $4,517,000 to purchase 361,333 shares of preferred stock in Fairbanks and holds an approximate 22.2% interest in Fairbanks as of December 31, 1999. The Company's investment in Fairbanks is accounted for using the equity method of accounting. Amounts recorded by the Company in connection with Fairbanks as of December 31, 2000, 1999 and 1998 are as follows (in thousands):
At December 31, 2000 and 1999, the Company's retained earnings included $(679,000) and $(1,490,000), respectively, of accumulated undistributed earnings (losses) of Fairbanks (net of goodwill amortization).
Investment in XLFA $43,721 $16,631 $20,233 Equity in earnings from XLFA 3,090 1,372 333 Dividends received from XLFA 859 74 --
At December 31, 2000 and 1999, the Company's retained earnings included $3,862,000 and $1,631,000, respectively, of accumulated undistributed earnings of XLFA.
In November 1998, International sold to XL $20,000,000 of preferred shares representing a minority interest in International, which is a Bermuda-based financial guaranty subsidiary of FSA (see Note 7). In December 1999, International sold to XL an additional $10,000,000 of preferred shares to maintain its minority ownership percentage. The preferred shares are Cumulative Participating Voting Preferred Shares, which in total have a minimum fixed dividend of $1,500,000 per annum. For the years ended December 31, 2000, 1999 and 1998, the Company recognized minority interest of $5,295,000, $2,715,000 and $388,000, respectively.