FGIC UK LIMITED. Registered number: For the year ended 31 December 2011

Transcription

1 Registered number: Directors Report & Financial Statements For the year ended 31 December 2011

2 COMPANY INFORMATION Directors John Dubel Nicholas Jones Timothy Travers A. Edward Turi Secretary Andrew Goldsworthy Company number Registered fice Tower Bridge House St Katharine s Way London E1W IDD Auditors Ernst & Young LLP

3 CONTENTS Page Directors report Statement directors responsibilities 7 Independent auditors report 8 Prit and loss technical account 10 Prit and loss non-technical account 11 Balance sheet 12 Cash flow statement 13 Notes to the financial statements 14

4 DIRECTORS REPORT Company registration number: Amounts in 000 s or $000 s unless otherwise noted. The directors present their report and audited financial statements the company for the year ended 31 December2011. PRINCIPAL ACTIVITIES, RISKS AND UNCERTAINTIES FGIC UK Limited ( UK Limited or the company ), a wholly owned subsidiary Financial Guaranty Insurance Company ( FGIC ), is an insurance company subject to regulation by the Financial Services Authority ( FSA ). UK Limited was authorised to write financial guaranty business in the United Kingdom and had passport rights to write business in other European Economic Area member countries. Prior to the deed termination described below, UK Limited was a party to a reinsurance agreement with FGIC whereby FGIC provided quota share reinsurance 90% all financial guarantees written by UK Limited. Since the fourth quarter 2007, FGIC has incurred significant losses on its policies relating to certain residential mortgage-backed securities ( RMBS ) and to certain collateralized debt obligations asset-backed securities ( ABS CDOs ) backed primarily by subprime RMBS, which have resulted in a substantial reduction FGIC s statutory policyholders surplus over time. As a result, FGIC is in a policyholders surplus deficit position approximately $3,567,076 as 31 December Under the New York State Insurance Law (the Insurance Law ), FGIC, as a financial guaranty insurance company also licensed to transact credit insurance and surety, must maintain policyholders surplus at least $66,400. Given such policyholders surplus deficit, (i) New York s Superintendent Financial Services (the Superintendent ) could seek court appointment as rehabilitator or liquidator FGIC at any time or (ii) in the exercise its fiduciary duties, the FGIC Board Directors (the FGIC Board ) may request the Superintendent to seek, and in such event it is likely that the Superintendent would seek, such court appointment. Due to the adverse developments described above, FGIC and UK Limited voluntarily ceased writing financial guaranty policies concerning new or additional risks in January On 1 July 2009, UK Limited filed a voluntary variation permission with the FSA to remove its ability to write new insurance contracts. This filing was approved on 10 July Neither FGIC nor UK Limited currently has any plans to recommence writing new financial guaranty business. FGIC has been engaged in discussions with the New York State Insurance Department or New York State Department Financial Services (the Department ) and starting in November 2010, the steering committee for an advisory group policyholders regarding potential surplus restoration plans to restore FGIC s statutory surplus and to restructure FGIC in a manner that is fair and equitable to its policyholders and other creditors. Recent surplus restoration plan discussions have focused on, among other things, restoring FGIC to statutory solvency through a rehabilitation proceeding under Article 74 the Insurance Law, and FGIC has also been engaged in discussions with counsel for the New York Liquidation Bureau and the financial advisor retained by such counsel regarding such a potential plan since May 2011 and September 2011, respectively (such plan and any other plan that may be developed are referred to collectively as the Surplus Restoration Plan ). FGIC has also been engaged in discussions with credit default swap ( CDS ) counterparties to negotiate agreements ( Other Restructuring Transactions ) regarding certain CDS transactions insured by FGIC or UK Limited, which would be included in, and would be completed as part and subject to the successful effectuation the Surplus Restoration Plan. The Surplus Restoration Plan, if successfully effectuated, would be expected to restore FGIC to statutory solvency and to provide for (i) FGIC s policy obligations to be modified in a manner that is fair and equitable to its policyholders, (ii) the moratorium on the payment claims pursuant to the Department s order to be lifted and (iii) FGIC to execute a run-f its business in which it will be obligated to pay its policy and other obligations as modified by, and strictly in the manner and priority provided for under, the Surplus Restoration Plan.

5 DIRECTORS REPORT As 31 December 2011, FGIC continues to report a deficit in policyholders surplus and to be out compliance with the $66,400 minimum policyholders surplus requirement under the Insurance Law (and in the absence a successful effectuation the Surplus Restoration Plan, FGIC will continue to report such a deficit and non-compliance). As a result, (i) the Superintendent could seek court appointment as rehabilitator or liquidator FGIC at any time or (ii) in the exercise its fiduciary duties, the FGIC Board may request the Superintendent to seek, and in such event it is likely that the Superintendent would seek, such court appointment. There can be no assurance that, in connection with any such appointment, the Superintendent would seek to effectuate the Surplus Restoration Plan. Any such appointment the Superintendent as rehabilitator or liquidator FGIC could have a material adverse impact on FGIC s business, results operations and financial condition. There can be no assurance that Ci) an agreement will be reached on the terms the Surplus Restoration Plan or the transactions that are intended to form part the Surplus Restoration Plan, (ii) the Surplus Restoration Plan and the transactions contemplated thereby will receive all required regulatory and judicial approvals, or (iii) the transactions contemplated by the Surplus Restoration Plan will be consummated or the Surplus Restoration Plan will otherwise be successfully effectuated. Even if the Surplus Restoration Plan were to be successfully effectuated, there can be no assurances provided regarding FGIC s future financial condition or possible intervention by the Department. As a result uncertainties associated with the aforementioned factors and continuing risks such as those described below, FGIC s management has concluded that there is substantial doubt about the ability the FGIC to continue as a going concern. As a result uncertainties associated with the aforementioned factors and continuing risks, UK Limited management concluded that its reinsurance agreements with FGIC were impaired and cannot be relied upon to satisfy UK Limited guarantee obligations. In June 2011, FGIC and UK Limited entered into a Deed Termination pursuant to which they mutually agreed to terminate the following reinsurance agreements: (i) the whole account 90% quota share reinsurance agreement effective 31 March 2004 (the Reinsurance Agreement ) providing for FGIC s reinsurance the company. (ii) the unlimited whole account aggregate excess loss reinsurance agreement effective 31 March 2004 providing for FGIC s reinsurance UK Limited (the Excess Loss Reinsurance Agreement ). FGIC and UK Limited agreed to release each other from all present and future claims and liabilities under or in connection with such agreements. Pursuant to the Deed Termination, FGIC was relieved its reinsurance obligations in respect approximately 4.9 billion par exposure and UK Limited was permitted to retain 100% all premiums (net ceding commissions) previously paid to FGIC. The termination the agreements resulted in a net charge 33,690 to the prit and loss account for the period. The termination these reinsurance agreements was approved by the Board Directors each the company and FGIC, as well as, the approval or the express non-objection from the FSA and the Department. As a result the termination the reinsurance arrangements discussed above UK Limited has reported a shareholder s deficit 3,736 at 31 December 2011(2010: shareholder s funds 23,790). UK Limited has also reported a regulatory capital deficit 8,414 at 31 December 2011(2010: regulatory capital surplus 19,112). Based on information available as 3l December 2011, UK Limited does not anticipate paying claims on any the transactions it has insured and has therefore not recorded a provision for claims. UK Limited has issued financial guaranty contracts for the benefit the counterparties to certain CDS issued by FGIC Credit Products LLC, which guarantee timely payment FGIC Credit Products LLC s payment obligations under the CDS. The remaining CDS contracts insured by UK Limited have provisions that may give the related counterparties the right to terminate such CDS contracts and to require mark-to-market termination payments under the CDS, which payments are guaranteed by UK Limited, following the occurrence certain events default thereunder, as and to the extent applicable in respect UK Limited, FGIC or FGIC Credit Products LLC. Such termination payments are generally calculated either based on market quotation or loss (each

6 DIRECTORS REPORT as defined in the Master Agreement published by the International Swaps and Derivatives Association, Inc.) If FGIC were able to consummate the Other Restructuring Transactions as part a successful effectuation the Surplus Restoration Plan, this would mitigate existing exposure UK Limited may have to pay claims based on mark-to-market termination payments with respect to the subject CDS contracts as a result events that have occurred or may occur prior to such consummation. If such Other Restructuring Transactions are not consummated, the aggregate amount claims based on termination payments that may be asserted against UK Limited would significantly exceed its available claims paying resources and liquidity funds and, accordingly, would result in an increase in UK Limited s shareholder s surplus deficit and have a material adverse effect on FGIC s financial position, results operations and solvency. UK Limited continues to closely monitor the Reliance Rail Finance Pty Limited PPP ( Reliance Rail ) transaction which is significantly behind schedule. This transaction has been downgraded numerous times since financial close in 2006, reflecting not only the production schedule delay, but also the difficulties experienced by UK Limited and Syncora Guarantee, as well as the funding and refinancing risks the project faces. Based on the fact that the project has recently reached an agreement with the New South Wales Government on a financial restructuring, UK Limited currently does not believe it will incur a loss and therefore has not established a loss reserve for this transaction. This financial restructuring should allow Reliance Rail to draw down the bank debt needed to complete the construction the project, as well as, lessen the refinancing risk the project faces in Liquidity Risk Liquidity risk relates principally to the adequacy UK Limited s available claims paying resources. UK Limited had cash and investments 36,l53 (2010: 31,080). UK Limited has no other debt obligations at 31 December2011. Operating risk Legal risks include uncertainty with respect to the enforceability the obligations insured, including the security provisions these obligations, enforceability rights and remedies, and legal integrity the transaction structures. UK Limited seeks to mitigate these risks through careful analysis legal documents by internal and external counsel and through adherence to internal guidelines regarding legal risk parameters. The nature the financial guarantee business makes the risks fraud and money laundering remote, due in part to the level due diligence conducted on each transaction. In order to achieve investment grade quality ratings and meet underwriting guidelines, the parties involved with an insured credit generally must have at least three to five years operating history, must be audited by a reputable and independent public accounting finn, and must have established financing activities with reputable financial institutions satisfactory credit rating. UK Limited does not accept any cash receipts and does not pay anything in cash. All premiums are received via wire, and to a limited extent, cheques from financial institutions.

7 DIRECTORS REPORT RESULTS FOR THE YEAR AND DIVIDENDS Change Gross principal written - Net principal written - Gross premiums written (411) (3,547) 3,136 Reinsurers share premiums written* 84,124 3,192 80,932 Net premiums written 83,713 (355) 84,068 Gross premiums earned 10,089 10,654 (565) Reinsurers share premiums earned* (86,949) (9,574) (77,375) Net premiums earned (76,860) 1,080 (77,940) Net investment income 1,010 1, Gains on realisation investments (15) Unrealised gains 1, Net operating expenses 47, ,611 Retained (loss)/prit (27,526) 2,745 (30,271) *Reinsurer s share premiums written includes the impact terminating the reinsurance The termination the reinsurance agreements discussed above resulted in a net charge 33,690 to the prit and loss account for the year. The net charge during the year is made up the following items: 1) amortisation the remaining reinsurer s share unearned premium 168,994, 2) write back the creditor relating to amounts due to FGIC under the reinsurance arrangements 84,409 and 3) write back the deferred reinsurance commissions in the amount 50,895. Gross and net premiums represent the changes in estimated amounts that UK Limited expects to receive in the future on financial guarantees paid on an instalment basis and other premium adjustments. The par in force the company s insured portfolio is set out below. The par in force decreased 13% from 31 December The mix the portfolio remained constant. The decrease is a result normal amortisation the insured obligations and policyholder termination certain guarantees. As mentioned above, UK Limited voluntarily ceased writing financial guaranty policies concerning new or additional risks in January December 31 December Infrastructure Utility 1,780,612 1,810,824 PFI 1,466,710 1,446,515 Transportation 681, ,839 Sub-Sovereign 85,765 85,765 Structured Finance CLO 168, ,186 Pooled Aircraft 201, ,000 Total 4,383,849 5,019,129 Based on information available to date, the company does not anticipate paying claims on any the transactions it has insured, including the Reliance Rail transaction discussed above, and has therefore not

8 DIRECTORS REPORT recorded a provision for claims. A provision has been recorded for loss adjustment expenses approximately 120 for advisory fees, net reimbursements, related to the Reliance Rail transaction. Net operating income includes the write back ceding commission income in the amount 50,895 resulting from the termination the reinsurance arrangements discussed earlier. No dividend has been proposed for the year (2010: Nil). FINANCIAL INSTRUMENTS The company s principal financial instruments include investments and cash. The company s current investment strategy provides for investment primarily in UK government and highly rated corporate debt securities. As 31 December 2011, 74% the investments were in UK Treasury bonds (2010: 65%) and 22% in Corporate Debt (2010: 24%). Excess cash balances are invested in AAA rated Undertakings for Collective Investments in Transferable Securities ( UCITS ), as appropriate in accordance with short-term liquidity requirements. The investments strategy the UCITS focuses on debt obligations governments, international organisations, and corporations or financial institutions high credit standing. Income generated from the UCITS is accumulated daily and reinvested at each month end. At 31 December 2011, 4% investments were in UCITS (2010: 11%). Cash balances are maintained with recognized banking institutions that have an established market presence. All relationship banks must maintain a strong presence in their country operation and the UK. GOING CONCERN The principal activities, risks and uncertainties affecting UK Limited are discussed above. These material uncertainties cast significant doubt about the company s ability to continue as a going concern. However, management believes the use the going concern assumption is still appropriate. This conclusion is supported by: 1) the company has no expected losses at year end and it is expected that it will be able to meet its obligations as they come due for the next twelve months, 2) the company projects a prit in 2012 and 2013 that, if achieved, will result in compliance with the FSA s Minimum Capital Requirements by 31 December 2013 and 3) management feels they can engage a non-affiliated third party if FGIC is no longer able to provide support services. DIRECTORS AND THEIR INTERESTS The directors FGIC UK Limited who served during the year ended 31 December 2011 were as follows: John Dubel Nicholas Jones Timothy Travers A. Edward Turi COMPANY SECRETARY Andrew Goldsworthy served as Company Secretary during the year ended 31 December 2011.

9 DIRECTORS REPORT DISCLOSURE OF INFORMATION TO THE AUDITORS So far as each person who was a director at the date approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, which the auditor is unaware. Having made enquiries fellow directors, each director has taken all the steps that he is obliged to take as a director in order to make himself aware any relevant audit information and to establish that the auditor is aware that information. AUDITORS Pursuant to section 487 the Companies Act 2006, the auditors will be deemed to be reappointed and will therefore continue in fice. This report was approved by the Board on 23 March 2012 and signed on its behalf. Andrew Go1dswortfflr Company Secretary 2 March2012

10 7 STATEMENT OF DIRECTORS RESPONSIBILITIES For the year ended 31 December 2011 The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view the state affairs the company and the prit or loss the company for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company s transactions and disclose with reasonable accuracy at any time the financial position the company and to enable them to ensure that the financial statements comply with the Companies Act They are also responsible for safeguarding the assets the company and hence for taking reasonable steps for the prevention and detection fraud and other irregularities.

11 INDEPENDENT AUDITORS REPORT TO THE MEMBER OF FGIC UK LIMITED We have audited the financial statements FGIC UK Limited for the year ended 31 December 2011 which comprise the Prit and Loss Account, the Balance Sheet, the Cash Flow Statement and the related notes 1 to 17. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company s members, as a body, in accordance with Chapter 3 Part 16 the Companies Act Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities directors and auditor As explained more fully in the Directors Responsibilities Statement set out in page 7, the directors are responsible for the preparation the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope the audit the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment : whether the accounting policies are appropriate to the company s circumstances and have been consistently applied and adequately disclosed; the reasonableness significant accounting estimates made by the directors; and the overall presentation the financial statements. In addition, we read all the financial and non-financial information in the Directors Report and Financial Statements to identify material inconsistencies with the audited financial statements. If we become aware any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view the state the company s affairs as at 31 December 2011 and its loss for the year then ended; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Emphasis matter - going concern In forming our opinion on the financial statements, which is not modified, we have considered the adequacy the disclosures made in note 1.1 to the financial statements relating to the company s ability to continue as a going concern. These conditions described in note 1.1 indicate the existence a material uncertainty which may cast significant doubt about the company s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the company was unable to continue as a going concern.

12 INDEPENDENT AUDITORS REPORT TO THE MEMBER OF FGIC UK LIMITED (continued) Matters on which we are required to report by exception We have nothing to report in respect the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or certain disclosures directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. gnit J Kevin Senior (Senior statutory auditor) for and on behalf Ernst & Young LLP, Statutory Auditor London 7j. March 2012 á

13 PROFIT AND LOSS ACCOUNT TECHNICAL ACCOUNT - GENERAL BUSINESS For the year ended 31 December 2011 Notes Gross written premiums 2.2 (41 1) (3,547) Outward reinsurance premiums 84,124 3,192 Change in the provision for unearned premiums 83,713 (355) Gross amount 11 10,500 14,201 Reinsurers share 11 (171,073) (12,766) (160,573) 1,435 Earned premiums, net reinsurance (76,860) 1,080 Claims paid Gross amount (1,017) Net claims paid - Change in provision for outstanding claims (1,017) Gross amount (120) Net change in the provision for claims (120) Claims incurred, net reinsurance (1,137) Net operating expenses 47, BALANCE ON THE TECHNICAL ACCOUNT - GENERAL BUSINESS (30,189) 1,277

14 PROFIT AND LOSS ACCOUNT NON-TECHNICAL ACCOUNT For the year ended 31 December 2011 Notes BALANCE ON THE TECHNICAL ACCOUNT - GENERAL BUSINESS (30,189) 1,277 Investment income 5 1,010 1,032 Gains on realisation investments Unrealised gains on investments 5 1, Unrealised losses on investments 5 (11) Other fee income - 61 Foreign exchange gains/(losses) 63 (343) (Loss)/prit on ordinary activities before tax 6 (27,526) 2,745 Tax on (loss)/prit on ordinary activities (Loss)/prit for the financial year (27,526) 2,745 All amounts relate to continuing run-f operations. There were no recognised gains and losses for 2011 or 2010 other than those included in the Prit and loss account, accordingly a separate statement total recognised gains and losses has not been prepared. The accounting policies and notes to the financial statements form an integral part these financial statements.

15 group group amounts amounts FGIC UK LIMITED Registered number: BALANCE SHEET as at 31 December ASSETS Notes Investments Other financial investments 8 33,037 28,984 Reinsurers share technical provisions Provision for unearned premiums ,073 Debtors Debtors arising out direct insurance operations 4,571 7,871 falling due within one year Debtors arising out direct insurance operations 125, ,836 falling due after one year Other debtors undertakings 31 Other assets Cashatbankandinhand 3,116 2,096 Prepayments and accrued income Deferred acquisition costs 10,061 11,094 Other prepayrnents and accrued income Total assets 176, ,401 LIABILITIES Capital and reserves Called up share capital Share premium account 13 17,272 17,272 Prit and loss account 13 (69,038) (41,512) Other reserve 13 47,855 47,855 Shareholder s (deficit)/funds 14 (3,736) 23,790 Technical provisions Provision for unearned premiums 179, ,064 Provision for claims outstanding Creditors Creditors arising out direct insurance operations - group undertakings 86,402 Other creditors undertakings Accruals and deferred income ,145 Total liabilities 176, ,401 Approved by the Board Directors and authorised for issue on 23 March 2012 and signed on its behalf by: T S Travers The accounting policies and notes to financial statements form an integral part these financial statements.

16 Registered number: CASHFLOW STATEMENT for the year ended 31 December 2011 RECONCILIATION OF PROFIT BEFORE TAX TO NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES Notes (Loss)/prit before taxation (27,526) 2,745 Decrease in debtors, prepayments & accrued income 7,844 12,357 Increase/(decrease) in net unearned premium 160,573 (1,435) Increase in technical provisions Decrease in deferred reinsurance commissions, net DAC (49,879) (3,261) Decrease in creditors (86,059) (7,706) Unrealised investment (gains)/losses (1,478) (591) Interest expense Net cash inflow from operating activities 3,621 2,119 CASH FLOW STATEMENT Net cash inflow from operating activities 3,621 2,119 Returns on investments and servicing finance Interest expense (26) (10) Taxation Net cash inflow 3,595 2,109 Cash flows were invested as follows: Increase in cash holdings 1, Net portfolio investment Shares and other variable yield securities (131) (497) Debt securities and other fixed income securities 4, Units in collective investment schemes (1,964) 972 Net investment cash flows 3,595 2,109 The accounting policies and notes to financial statements form an integral part these financial statements.

17 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December ACCOUNTING POLICIES 1.1 Basis preparation The financial statements have been prepared in accordance with paragraph 6 and Schedule 3 Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 relating to insurance companies and with the Statement Recommended Accounting Practice on Accounting for Insurance Business issued by the Association December 2006). The Large and British Insurers ( the ABI SORP ) in December 2005 (as amended in Since the fourth quarter 2007, FOIC has incurred significant losses on its policies relating to certain residential mortgage-backed securities ( RMBS ) and to certain collateralized debt obligations securities ( ABS CDOs ) backed primarily by subprime RMBS, which have resulted in a substantial reduction FGIC s statutory policyholders surplus over time. As a result, FGIC is in a policyholders surplus deficit position December Under the New York State Insurance Law (the Insurance Law ), FGIC, as a financial guaranty insurance company also licensed to transact credit insurance and surety, must maintain policyholders surplus at least $66,400. Given such policyholders surplus deficit, (i) New York s Superintendent Financial Services (the Superintendent ) could seek court appointment as rehabilitator or liquidator its fiduciary duties, the FGIC Board Directors (the FGIC Board ) may request the Superintendent to seek, and in such event it is likely that the Superintendent would seek, such court appointment. approximately $3,567,076 as 3l FGIC at any time or (ii) in the exercise asset-backed Due to the adverse developments described above, FGIC and FGIC UK Limited ( UK Limited ) voluntarily ceased writing financial guaranty policies concerning new or additional risks in January On 1 July 2009, FGIC UK Ltd. filed a voluntary variation permission with the U.K. Financial Services Authority ( UK FSA ), its principal regulator, to remove its ability to write new insurance contracts. This filing was approved on 10 July Neither FGIC nor FGIC UK Ltd. currently has any plans to recommence writing new financial guaranty business. FGIC has been engaged in discussions with the New York State Insurance Department or New York State Department for an advisory group surplus and to restructure FGIC in a manner that is fair and equitable to its policyholders and other creditors. Recent surplus restoration plan discussions have focused on, among other things, restoring FGIC to statutory solvency through a rehabilitation proceeding under Article 74 the Insurance Law, and FGIC has also been engaged in discussions with counsel for the New York Liquidation Bureau and the financial advisor retained by such counsel regarding such a potential plan since May 2011 and September 2011, respectively (such plan and any other plan that may be developed are referred to collectively as the Surplus Restoration Plan ). FGIC has also been engaged in discussions with credit default swap ( CDS ) counterparties to negotiate agreements ( Other Restructuring Transactions ) regarding certain CDS transactions insured by FGIC or UK Limited, which would be included in, and would be completed as part and subject to the successful effectuation, the Surplus Restoration Plan. The Surplus Restoration Plan, successfully effectuated, would be expected to restore FGIC to statutory solvency and to provide for (i) FGIC s policy obligations to be modified in a manner that is fair and equitable to its policyholders, (ii) the moratorium on the payment claims pursuant to the Department s order to be lifted and (iii) FGIC to execute a its business in which it will be obligated to pay its policy and other obligations as modified by, and strictly in the manner and priority provided for under, the Surplus Restoration Plan. Financial Services (the Department ) and starting in November 2010, the steering committee policyholders regarding potential surplus restoration plans to restore FGIC s statutory if run-f As 31 December 2011, FGIC continues to report a deficit in policyholders surplus and to be out compliance with the $66,400 minimum policyholders surplus requirement under the Insurance Law (and in the absence a successful effectuation the Surplus Restoration Plan, FGIC will continue to report such a deficit and non-compliance). As a result, (i) the Superintendent could seek court appointment as rehabilitator or liquidator its fiduciary duties, the FOIC Board may request the FGIC at any time or (ii) in the exercise

18 15 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2011 Superintendent to seek, and in such event it is likely that the Superintendent would seek, such court appointment. There can be no assurance that, in connection with any such appointment, the Superintendent would seek to effectuate the Surplus Restoration Plan. Any such appointment the Superintendent as rehabilitator or liquidator FGIC could have a material adverse impact on FGIC s business, results operations and financial condition. There can be no assurance that (i) an agreement will be reached on the terms the Surplus Restoration Plan or the transactions that are intended to form part the Surplus Restoration Plan, (ii) the Surplus Restoration Plan and the transactions contemplated thereby will receive all required regulatory and judicial approvals, or (iii) the transactions contemplated by the Surplus Restoration Plan will be consummated or the Surplus Restoration Plan will otherwise be successfully effectuated. Even if the Surplus Restoration Plan were to be successfully effectuated, there can be no assurances provided regarding FGIC s future financial condition or possible intervention by the Department. As a result uncertainties associated with the aforementioned factors and continuing risks such as those described below, FGIC s management has concluded that there is substantial doubt about the ability the FGIC to continue as a going concern. As a result uncertainties associated with the aforementioned factors and continuing risks, UK Limited management concluded that its reinsurance agreements with FGIC were impaired and cannot be relied upon to satisfy UK Limited guarantee obligations. In June 2011, FGIC and UK Limited entered into a Deed Termination pursuant to which they mutually agreed to terminate the following reinsurance agreements: (iii) the whole account 90% quota share reinsurance agreement effective 31 March 2004 (the Reinsurance Agreement ) providing for FGIC s reinsurance the company; (iv) the unlimited whole account aggregate excess loss reinsurance agreement effective 31 March 2004 providing for FGIC s reinsurance UK Limited. FGIC and UK Limited agreed to release each other from all present and future claims and liabilities under or in connection with such agreements. Pursuant to the Deed Termination, FGIC was relieved its reinsurance obligations in respect approximately 4.9 billion par exposure and UK Limited was permitted to retain 100% all premiums (net ceding commissions) previously paid to FGIC. The termination the agreements resulted in a net charge 33,690 to the prit and loss account for the period. Further details are provided in note 3. The tennination these reinsurance agreements was approved by the Board Directors each the company and FGIC, as well as, the approval or the express non-objection from the FSA and the Department. As a result the termination the reinsurance arrangements discussed above UK Limited has reported a shareholder s deficit 3,736 at 31 December 2011(2010: shareholder s funds 23,790). UK Limited has also reported a regulatory capital deficit 8,414 at 31 December 2011(2010: regulatory capital surplus 19,112). UK Limited projects a prit in 2012 and 2013 that, if achieved, will result in compliance with the FSA s Minimum Capital Requirements by 31 December Based on information available as 3l December 2011, UK Limited does not anticipate paying claims on any the transactions it has insured and has therefore not recorded a provision for claims. UK Limited has issued financial guaranty contracts for the benefit the counterparties to certain CDS issued by FGIC Credit Products LLC, which guarantee timely payment FGIC Credit Products LLC s payment obligations under the CDS. The remaining CDS contracts insured by UK Limited have provisions that may give the related counterparties the right to terminate such CDS contracts and to require mark-to-market termination payments under the CDS, which payments are guaranteed by UK Limited, following the occurrence certain events default thereunder, as and to the extent applicable in respect UK Limited, FGIC or FGIC Credit Products LLC. Such tennination payments are generally calculated either based on market quotation or loss (each as defined in the Master Agreement published by the International Swaps and Derivatives Association, Inc.) If

19 16 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2011 FGIC were able to consummate the Other Restructuring Transactions as part a successful effectuation the Surplus Restoration Plan, this would mitigate existing exposure UK Limited may have to pay claims based on mark-to-market termination payments with respect to the subject CDS contracts as a result events that have occurred or may occur prior to such consummation. If such Other Restructuring Transactions are not consummated, the aggregate amount claims based on termination payments that may be asserted against UK Limited would significantly exceed its available claims paying resources and liquidity funds and, accordingly, would result in an increase in UK Limited s shareholder s surplus deficit and have a material adverse effect on FGIC s financial position, results operations and solvency. UK Limited continues to closely monitor the Reliance Rail Finance Pty Limited PPP ( Reliance Rail ) transaction which is significantly behind schedule. This transaction has been downgraded numerous times since financial close in 2006, reflecting not only the production schedule delay, but also the difficulties experienced by UK Limited and Syncora Guarantee, as well as the funding and refinancing risks the project faces. Based on the fact that the project has recently reached an agreement with the New South Wales Government on a financial restructuring, UK Limited currently does not believe it will incur a loss and therefore has not established a loss reserve for this transaction. This financial restructuring should allow Reliance Rail to draw down the bank debt needed to complete the construction the project, as well as, lessen the refinancing risk the project faces in These material uncertainties cast significant doubt about the company s ability to continue as a going concern. However, management believes the use the going concern assumption is still appropriate. This conclusion is supported by: 1) UK Limited has no expected losses at year end and it is expected that it will be able to meet its obligations as they come due for the next twelve months, 2) UK Limited projects a prit in 2012 and 2013 that will, if achieved, result in compliance with the FSA s Minimum Capital Requirements by 31 December 2013 and 3) management feels they can engage a non-affiliated third party if FGIC is no longer able to provide support services. 1.2 Premium income and unearned premiums Written premiums comprise the total estimated premium receivable for the whole period covered under contracts incepted during the financial year as well as changes in estimated premiums receivable for contracts incepted in prior years. Outward reinsurance premiums are accounted for in the same way as the premiums for the related direct business being reinsured. Where the premium on a policy is received up front, the premium is recognised as written at the date inception and earned in the technical account on a basis proportionate to the remaining scheduled periodic maturity principal and payment interest to the original total principal and interest insured. When an issue insured by the company has been retired or legally defeased prior to stated maturity, the remaining unearned premium is earned at that time. When the premium on a policy is receivable in instalments, the total estimated premium is recognised as written at the inception date. Instalment premiums are collected periodically and premiums on such policies are earned in the technical account general business on a straight line basis pro-rata over the period the premium instalments. The recorded premium receivable is based on assumptions and circumstances at the time policy inception and actual premiums collected could differ materially. In addition, the estimated premium receivable could change due to changes in estimated par amortization and policy terminations in periods subsequent to the contract inception. 1.3 Acquisition costs Certain costs incurred related to the production business have been deferred. These costs include direct and

20 17 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2011 indirect expenses related to underwriting, marketing and policy issuance. Acquisition costs and ceding commission income which relate to a subsequent financial year are deferred and charged or credited to the accounting periods in which the related premiums are earned. Deferred acquisition costs represent the proportion acquisition costs incurred that corresponds to the proportion premiums written which are unearned at the balance sheet date. 1.4 Claims and other technical provisions Technical provisions for claims are established for the value estimated losses on specific insured obligations that are currently or likely to be in payment default and for which future loss is probable and can be reasonably estimated. The amount the provisions is detennined using internally developed models and represents an estimate the anticipated shortfall between (1) payments on insured obligations plus anticipated claim adjustment expenses and (2) anticipated cash flow from, and proceeds to be received on, sales any collateral supporting the obligation and/or other anticipated recoveries. The company s provision models are dependent on a number assumptions that require management to make judgments about the outcome future events using historical and current market data. Significant assumptions include the liquidation value the assets supporting the insured obligations, the volume and timing collateral cash flows and the behaviour the underlying borrower. Changes in any significant assumptions from time to time will affect the company s technical provision and financial results, possibly materially. The technical provision for claims is regularly reviewed and updated based on claim payments, where applicable, and the results ongoing insured portfolio surveillance. The company conducts ongoing insured portfolio surveillance seeking to identify a complete population impaired obligations and enable the company to establish a provision that recognises potential losses for each accounting period. The company s provision is necessarily based upon estimates and subjective judgments by management, including estimates and judgments with respect to the probability default, the severity loss upon default and the outcome other future events. As such, the ultimate liability associated with claims will likely differ, possibly materially, from estimates. 1.5 Investments Financial investments are stated at market value or current value at the end the period. The market value used is the closing bid price at the balance sheet date or the last market trading date before that date. 1.6 Investment income, expenses and charges Investment income comprises interest and dividends received, plus realised gains and losses on the disposal investments. Realised gains and losses are calculated as the difference between sale proceeds and purchase price. 1.7 Unrealised gains and losses on investments Movements in unrealised gains and losses on investments represent the difference between their valuation at the balance sheet date and their purchase price or, if they have been previously valued, their valuation at the last balance sheet date, together with the reversal unrealised gains and losses recognised in earlier accounting periods in respect investment disposals in the current period. 1.8 Foreign currencies Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates exchange at the end the financial year. Revenues and expenses are translated at average monthly exchange

21 18 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2011 rates. Non-monetary assets and liabilities at the balance sheet date are maintained at the average monthly rate ruling when the contract was entered into. Foreign exchange gains and losses arising from investment transactions are included in investment income. All other foreign exchange gains and losses are included in the prit and loss account. 1.9 Taxation Current tax assets/liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Payments for group relief to other subsidiary companies represent the amount tax saving. Deferred taxation is recognised in respect all timing differences that have originated but have not been reversed at the balance sheet date where transactions or events that result in an obligation to pay more, or a right to pay less or right to receive more, tax in the future have occurred at the balance sheet date. Deferred tax assets are recognised only to the extent that it is more likely than not that there will be suitable taxable prits from which the future reversal the underlying difference can be deducted. Where there is no expectation taxable prits will arise from which the future reversal the underlying difference can be deducted, a valuation allowance is made. Deferred tax is measured on a non-discounted basis at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates or laws that have been enacted or substantively enacted by the balance sheet date.

22 19 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December SEGMENTAL ANALYSIS 2.1. Segmental analysis by class business The company only wrote one class business, credit and suretyship, therefore the directors regard any segmental analysis by class business as inappropriate at the present time Segmental analysis by geographical area Gross premiums written by geographical area United Kingdom (411) (3,139) United States - (408) (411) (3,547) All business results from contracts concluded in the United Kingdom. 3. REINSURANCE BALANCE The reinsurance balance those items in the technical account that relate to outward reinsurance transactions is an expense 36,054k (2010: 6,274k). The expense includes 33,690k relating to the termination the reinsurance agreements discussed in note 1 above. The net charge during the year is made up the following items: 1) amortisation the remaining reinsurers share unearned premium 168,994k, 2) write back the creditor relating to amounts due to FGIC under the reinsurance arrangements 84,409k and 3) write back the deferred reinsurance commissions in the amount 50,895k. NET OPERATING EXPENSES Change in deferred acquisition costs 1, Administrative expenses 2,054 2,357 Gross operating expenses 3,087 3,103 Reinsurance commissions Change in deferred reinsurance commission (50,895) (4,007) (47,808) (197)

23 - Other current FGIC UK LIMITED Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December INVESTMENT RETURN Investment income 1,010 1,032 Gains on the realisation investments ,122 1,159 Unrealised gains on investments 1, Unrealised losses on investments (11) Investment return 2,600 1, (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAX Expenses are incurred directly by UK Limited as well as allocated from FGIC for providing support services. The remuneration the auditors is further analysed as follows: Audit the financial statements - year Other fees to auditors: services supplied pursuant to legislation

24 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December TAXATION a) Analysis tax (credit)/charge in the year Current tax (credit)/charge for the year b) Factors affecting the tax (credit)/charge for the year The tax assessed for the year is lower than the standard rate corporation tax in the UK (26.5%) (2010: 28%). The differences are explained below: Prit/(loss) on ordinary activities before tax (27,526) 2,745 Effects : Corporation tax in the UK 26.5% (2010: 28%) (7,294) 767 Effects : Increase/(utilisation) tax losses 7,294 (767) Current (credit)/charge for the year Factors that may affect future tax charges The company has tax losses carried forward 66,707k (2010: 39,1 80k).

25 22 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December OTHER FINANCIAL INVESTMENTS Market! Market! Current Current Cost Value Cost Value Shares and other variable yield securities Debt securities and other fixed income securities 28,488 31,573 23,879 25,425 Units in collective investment schemes 1,374 1,374 3,338 3,338 29,945 33,037 27,402 28,984 With the exception the units in collective investment schemes, all amounts included in the carrying values above are in respect listed investments. 9. DEFERRED TAXATION The asset recognised for deferred tax in the financial statements is as follows: Asset recognised in the balance sheet Trading losses 16,677 10,579 Valuation allowance (16,677) (10,579) A deferred tax asset l6,677k (2010: l0,579k) has not been recognised at 31 December 2011 as there is insufficient evidence that the asset will be recoverable. The deferred tax asset not recognised has been calculated at a value 25% being the corporation tax rate substantively enacted at the balance sheet date (2010: 27%). The corporation tax rate is expected to fall to 24% from 1 April 2012, 23% from 1 April 2013 and 22% from 1 April 2014 following announcements from the Government in the 2012 Budget, however, those rates are not yet substantively enacted and therefore have not been applied to the unrecognised deferred tax asset disclosed above. The asset would be recoverable if management projected sufficient future taxable prits that would be available to fset the carried forward taxable losses. The company will continue to analyze the need for a valuation allowance on a quarterly basis.

26 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December OTHER CREDITORS Amounts owed to group undertakings TECHNICAL PROVISIONS AND DEFERRED ACQUISITION COSTS Provision for claims outstanding Provision for unearned premiums - 190,064 Gross Amount At 1 January2011 Movement in the provision 120 (10,500) At31 December ,564 Reinsurance amount At 1 January ,073 Movement in the provision (171,073) At 31 December 2011 Net technical provisions At31 December ,564 At I January ,991 Deferred acquisition costs were 10,061 k at 31 December 2011(2010: LII,094k) and reinsurance commissions deferred were Nil (2010: L50,895k). Deferred reinsurance commissions were written back following the termination the reinsurance arrangements described in note 1.

27 (131) FGIC UK LIMITED Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December SHARE CAPITAL Allotted, called up and fully paid ,000 ordinary shares 1 each RESERVES Prit & Share Loss Other Premium account Reserve Balance at 1 January ,272 (41,512) 47,855 Retained loss for the year - (27,526) - Balance at 31 December ,272 (69,038) 47, RECONCILIATION OF MOVEMENTS IN SHAREHOLDER S (DEFICIT)/FUNDS (Loss)/prit for the financial year (27,526) 2,745 Net (decrease)/increase in shareholder s (deficit)/funds (27,526) 2,745 Opening shareholder s funds 23,790 21,045 Closing shareholder s (deficit)/funds (3,736) 23, MOVEMENT IN CASH AND PORTFOLIO INVESTMENTS Ati Change in At31 Jan Market Dec 2011 Value Cash flow 2011 Cash at bank and in hand 2,096 1,020 3,116 Shares and other variable yield securities Debt securities and other fixed income securities 25,425 1,478 4,670 31,573 Units in collective investment schemes 3,338 - (1,964) 1,374 31,080 1,478 3,595 36,153

28 25 Registered number: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December RELATED PARTY TRANSACTIONS In June 2011, FGIC and FGIC UK Ltd entered into a Deed Termination pursuant to which they mutually agreed to release each other from all present and future claims and liabilities under or in connection with the following reinsurance arrangements: (i) A whole account quota share reinsurance agreement effective 31 March 2004 (the Reinsurance Agreement ) providing for FGIC s reinsurance the Company. (ii) An unlimited whole account aggregate excess loss reinsurance agreement effective 31 March 2004 providing for FGIC s reinsurance the Company (the Excess Loss Reinsurance Agreement ). Under the Reinsurance Agreement, FGIC agreed to reinsure a proportionate share equal to 90% all the Company s policies, contracts and/or binders and reimburse the Company a 90% share the Company s losses incurred on each transaction reinsured. Pursuant to the Deed Termination, FGIC was relieved its reinsurance obligations in respect approximately 4.9 billion par exposure and was permitted to retain 100% all premiums (net ceding commissions) previously paid to FGIC. The termination the agreements resulted in 1) amortisation the remaining reinsurer s share unearned premium 1 68,994k, 2) write back the creditor relating to amounts due to FGIC under the reinsurance arrangements 84,409k and 3) write back the deferred reinsurance commissions in the amount 50,895k. As 3l December 2011 the Company forwarded reinsurance premiums 1,048k (2010: 7,630k) to FGIC in respect the reinsurance arrangements outlined above. The total amount due to FGIC in respect the reinsurance arrangements at 31 December 2011 was nil (2010: 86,177k). At 31 December 2011 and 31 December 2010 no reinsurance recoveries were due from FGIC in respect claims provisions. FGIC Credit Products LLC ( Credit Products ), a wholly-owned subsidiary FGIC, issued credit derivative contracts. In connection with the issuance a credit derivative by Credit Products, either FGIC or the Company issued a financial guaranty contract for the benefit the counterparty guaranteeing timely payment Credit Products payment obligations under the credit derivative. The Company received premiums written 1,158k (2010: 778k) and recorded gross premiums earned l,096k (2010: 782k) related to these insurance contracts. At 31 December 2011 the Company was owed 31k (2010: 345k) from Credit Products. The Company is a party to a cost sharing arrangement with FG1C whereby FGIC provides management services to the Company. Charges in connection with this agreement include amounts allocated in respect overhead and staff costs incurred by FGIC as well direct charges paid by FGIC on behalf the Company. In 2011, the Company was charged 1,246k (2010: 1,442k) in respect allocated expenses under this arrangement. 343k was due to FGIC in respect this arrangement at the year end (2010: 120k due from). The management charge includes amounts allocated in respect staff employed by FGIC, a fellow subsidiary company. 17. PARENT UNDERTAKINGS The immediate parent company is FGIC, a company incorporated in the United States America. The ultimate parent company is FGIC Corporation, a company incorporated in the United States America. The company is not consolidated in any group financial statements for 2011 or 2010.