FSA Holdings Fourth Quarter 2007 Results
Financial Security Assurance Holdings Ltd. (the Company), a member
of the Dexia group and the holding company for bond insurer Financial
Security Assurance Inc. (FSA), announced a net loss of $91.9 million
for the fourth quarter of 2007 and $65.7 million for the full year,
due primarily to unrealized negative fair-value adjustments of $188.6
million for the fourth quarter and $417.7 million for the year for its
insured derivative portfolio, consisting mainly of insured credit
default swaps (CDS) on pooled corporate risk. FSA´s total insured CDS
portfolio was 96.4% Triple-A or Super Triple-A, 2.5% Double-A and 1.1%
Single-A at December 31, 2007.
Operating earnings, which exclude fair-value adjustments for
insured derivatives and economic hedges, were $94.3 million for the
fourth quarter of 2007, a 9.5% increase from the fourth-quarter result
in 2006, and $378.0 million for the year, approximately 4.1% higher
than for 2006.
Present value (PV) originations, a non-GAAP measure, totaled
$318.4 million for the fourth quarter of 2007, 8.9% higher than for
last year. Annual PV originations increased 39.6% to a record $1,271.0
million in 2007. Premiums from new originations flow into earnings
over the life of the transactions, supporting a stable base of future
earned premiums.
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NET INCOME (LOSS) AND RECONCILIATION TO NON-GAAP
OPERATING EARNINGS (1)
(in millions)
Three Months Ended Year Ended
December 31, December 31,
------------------ ------------------
2007 2006 2007 2006
--------- -------- --------- --------
Net income (loss) $ (91.9) $ 92.8 $ (65.7) $ 424.2
Less fair-value adjustments for
economic hedges 2.4 1.9 (26.0) 40.5
Less fair-value adjustments for
investment-grade insured
derivatives (188.6) 4.8 (417.7) 20.7
--------- -------- --------- --------
Operating earnings $ 94.3 $ 86.1 $ 378.0 $ 363.0
========= ======== ========= ========
(1) For a discussion of operating earnings and the adjustments made to
net income in calculating operating earnings, see below, "Analysis of
Financial Results - Operating Earnings." Also see "Non-GAAP Measures"
below for a discussion of measures not promulgated in accordance with
accounting principles generally accepted in the United States of
America (GAAP).
*T
Shareholders´ equity under GAAP (book value) was $1.6 billion.
Non-GAAP adjusted book value (ABV) was $4.5 billion at December 31,
2007. Over the past 12 months, after taking dividends into account,
ABV grew 18.0%.
In the fourth quarter of 2007, FSA transferred $63.0 million from
the non-specific reserve to case reserves for five home equity line of
credit (HELOC) transactions, of which $6.1 million was paid in the
fourth quarter, leaving $56.9 million in case reserves.
See "Non-GAAP Measures" below for a more detailed discussion of
ABV and a reconciliation to U.S. GAAP shareholders´ equity. The
Company´s management considers ABV to be an operating measure of the
Company´s intrinsic value and discloses ABV because it provides
information important to management that would not be available to
investors through GAAP disclosure alone.
Robert P. Cochran, chairman and chief executive officer of the
Company and FSA, said: "FSA´s performance during unprecedented
turbulence in the global credit markets in 2007 confirmed the value of
our conservative approach to our business, and the market rewarded us
with a record-setting year, as measured by PV originations of nearly
$1.3 billion.
"The unrealized negative mark-to-market adjustments were to be
expected as credit spreads widened significantly during the fourth
quarter. As we´ve said in the past, these adjustments are mainly due
to liquidity dislocations rather than credit deterioration and are not
expected to result in realized loss.
"Our insured subprime mortgage and insured credit default swap
portfolios, as well as the residential mortgage-backed investments in
the Financial Products portfolio, generally continue to maintain their
high credit quality. While we have experienced some claims in the
insured HELOC portfolio, they should be manageable.
"Beginning in the fourth quarter of 2007, we saw a growing
preference for FSA-insured bonds across our markets, especially in
U.S. municipal finance. To assist us in taking advantage of these new
opportunities, our parent Dexia announced last week that it would
contribute $500 million of additional capital to FSA. This followed
reaffirmations of FSA´s Triple-A ratings by Fitch, Moody´s and S&P
without consideration of the capital increase. With an already strong
capital position, bolstered by this additional capital, we look
forward to further building our momentum in 2008."
BUSINESS PRODUCTION
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TOTAL ORIGINATIONS
(in millions)
Three Months Ended Year Ended
December 31, December 31,
--------------------- ---------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Gross par insured $ 28,062.6 $ 33,704.3 $119,134.2 $ 93,780.7
Gross PV originations (1) 318.4 292.4 1,271.0 910.2
(1) For definition and discussion, see "Non-GAAP Measures" below.
*T
Unless otherwise noted, percentage changes mentioned in this
release compare the period named with the comparable period of the
previous year.
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PUBLIC FINANCE ORIGINATIONS
(in millions)
Three Months Ended Year Ended
December 31, December 31,
------------------- -------------------
2007 2006 2007 2006
--------- --------- --------- ---------
United States:
Gross par insured $16,742.1 $16,978.6 $56,949.4 $46,448.2
Gross PV premiums
originated (1) 139.6 92.8 388.2 309.6
International:
Gross par insured $ 2,145.4 $ 2,933.5 $12,501.4 $ 9,403.9
Gross PV premiums originated 67.9 98.7 404.9 317.7
(1) For definition and discussion, see "Non-GAAP Measures" below. For
a reconciliation of PV premiums originated to gross premiums written,
see "Analysis of Financial Results - Premiums" below.
*T
Full-year 2007 estimated U.S. municipal market volume of $429.0
billion was 10% higher than in 2006 and the highest market volume on
record. Insurance penetration was approximately 47%, compared with 49%
in 2006. FSA insured approximately 25% of the par amount of insured
new U.S. municipal bond issues sold during 2007. In December, FSA´s
share of the insured market exceeded 50%. During the fourth quarter,
municipal market volume slowed down, as issuers scaled back borrowing
in response to market volatility and wider credit spreads.
In the U.S., the par amount insured by FSA in the fourth quarter
decreased 1.4%, but PV premiums originated increased 50.4%. The
significant increase in PV premiums was due to FSA´s ability to
achieve attractive pricing across sectors based on the market´s
growing preference for FSA-insured bonds. Approximately 91% of bonds
insured had an underlying credit quality of Single-A or higher. For
the year, U.S. municipal par insured increased 22.6%, and PV premiums
increased 25.4%.
International public finance par originated decreased 26.9%, and
PV premiums originated decreased 31.2% in the fourth quarter. Results
in this sector tend to be irregular because of the timing of large
transactions with long development periods. For the full year,
international public finance par insured increased 32.9% to $12.5
billion, and PV premiums originated increased 27.4% to a record $404.9
million, driven by a significant number of large transactions in
diverse sectors, such as transportation, health care and utilities.
While FSA was most active in the United Kingdom and Europe, it also
insured issues in Canada, Mexico, Australia, New Zealand, Japan and
South Korea.
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ASSET-BACKED ORIGINATIONS
(in millions)
Three Months Ended Year Ended
December 31, December 31,
------------------- -------------------
2007 2006 2007 2006
--------- --------- --------- ---------
United States:
Gross par insured $ 6,978.8 $10,579.7 $40,446.1 $28,647.7
Gross PV premiums originated 89.9 39.4 322.3 113.4
International:
Gross par insured $ 2,196.3 $ 3,212.5 $ 9,237.3 $ 9,280.9
Gross PV premiums originated 17.7 26.0 67.7 49.0
*T
In the fourth quarter, FSA´s U.S. asset-backed production
decreased by 34.0% in par originated and increased by 128.2% in PV
premiums originated. The business was primarily focused on
Super-Triple-A pooled corporate credit default swaps, where FSA found
particularly strong opportunities based on widening spreads. FSA also
selectively insured a number of high-quality residential
mortgage-backed (RMBS) transactions in the primary and secondary
markets. While the issuance of RMBS and ABS has slowed, there is
heightened demand for FSA´s guaranty. For the year, FSA increased U.S.
asset-backed par originated 41.2%. Due to spread widening and longer
average lives of transactions, PV premiums originated grew 184.2%.
Outside the United States, FSA´s asset-backed par insured
decreased 31.6% for the fourth quarter, primarily due to reduced
issuance in the collateralized loan obligation market, and PV premiums
originated decreased 31.9%. For the year, FSA´s international
asset-backed par originations were flat, while PV premiums originated
grew 38.2%. As in the U.S., the increase in PV premiums relative to
par originated was primarily due to spread widening.
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FINANCIAL PRODUCTS ORIGINATIONS
(in millions)
Three Months Ended Year Ended
December 31, December 31,
------------------ ------------------
2007 2006 2007 2006
--------- -------- -------- ---------
Gross PV NIM originated $ 3.3 $ 35.5 $ 87.9 $ 120.5
*T
In the financial products (FP) segment, the present value of net
interest margin originated (PV NIM originated) decreased 90.7% for the
fourth quarter. Although the Company issued $1.5 billion of new
guaranteed investment contracts (GICs), it limited new asset
acquisitions in order to build excess liquidity in response to
volatile market conditions. For the year, PV NIM originated declined
27.1% due primarily to the reduced investment activity in the last
quarter.
ANALYSIS OF FINANCIAL RESULTS
MARK-TO-MARKET ACCOUNTING REQUIREMENTS AND THE NATURE OF FSA´S
INSURED CREDIT DEFAULT SWAPS. Under U.S. GAAP, insurance policies
issued in CDS form typically must be marked to market through the
income statement. However, absent any claims under the guaranty, any
decreases or increases to income due to marks will sum to zero by the
time of each contract´s maturity.
FSA primarily insures two types of CDS contracts: (1) those that
reference a static pool of underlying corporate credits, subject to a
large deductible, and (2) those that reference individual securities,
such as Triple-A-rated collateralized loan obligations or
Triple-A-rated insured infrastructure financings. In either case, the
terms of the insured CDS contract are similar to those of FSA´s
financial guaranty policy in that claims, if any, are paid over time
and no collateral is posted to secure FSA´s obligations under the CDS.
FSA has generally not participated in the CDO of ABS market and has
exposure to only one CDS execution of such a transaction, which was
originated in 2005 with a total net par of $300 million and four times
the Triple-A credit protection requirement.
At December 31, 2007, FSA´s insured CDS portfolio subject to
mark-to-market accounting requirements had a net outstanding par value
of $84.2 billion, representing approximately one-fifth of total
insured net par outstanding.
MARK-TO-MARKET ACCOUNTING REQUIREMENTS AND THE NATURE OF THE
COMPANY´S FINANCIAL PRODUCTS BUSINESS. The FP Group, whose primary
business is the issuance of GICs, raises low-cost funds that are
invested primarily in high-quality, liquid asset-backed obligations
with the goal of earning an attractive and sustainable net interest
margin.
The FP Investment Portfolio is marked to market under U.S. GAAP,
with unrealized gains or losses generally classified as accumulated
other comprehensive income, part of the Company´s equity balance. The
Financial Products group has the ability and the intent to hold its
assets to their maturities, and therefore, absent a credit event,
marks should sum to zero when the asset matures. Given the large size
of the FP Investment Portfolio ($18.1 billion carrying value), even a
small price change can have a material impact on aggregate market
value.
The FP Portfolio is managed to minimize interest rate and
convexity risk by generally matching the asset and liability
portfolios on a floating to floating basis, to minimize credit risk
through investments in high-quality securities and to limit liquidity
risk. As of December 31, 2007, approximately 66.8% of the investment
portfolio was invested in non-agency RMBS, 91.9% of which were rated
Triple-A, with 7.6% rated Double-A and 0.5% rated Single-A. Although
some of these assets may be downgraded in the future, FSA does not
expect to have losses, due to the high level of overcollateralization
at origination.
GAAP EQUITY. GAAP equity decreased by $1.1 billion since December
31, 2006, principally due to the negative effects of the unrealized
fair value adjustments for insured derivatives, which are recorded in
the income statement, combined with unrealized fair-value adjustments
on available-for-sale assets held in the Financial Products (FP)
Investment Portfolio, which are recorded as a separate component of
equity. Unrealized mark-to-market adjustments in the FP investment
portfolio totaled negative $631.0 million after tax in the fourth
quarter, primarily resulting from changes in fair value of residential
mortgage-backed securities (RMBS), and negative $964.5 million after
tax for the year. Partially offsetting these reductions were
contributions from operating earnings. Unrealized portfolio gains and
losses and CDS fair-value adjustments have no effect on insurance
company statutory equity or claims-paying resources, and rating
agencies generally do not take these unrealized gains or losses into
account for evaluating FSA´s capital adequacy.
NET INCOME. The $91.9 million net loss in the fourth quarter
represents a 199.0% decrease from net income of $92.8 million for the
fourth quarter of 2006, primarily due to the loss of $188.6 million
related to the fair-value adjustments for insured derivatives
discussed above. For the same reason, net income decreased to a loss
of $65.7 million for the year. See "Operating Earnings" below for a
discussion of the impact of fair-value adjustments for economic
hedges.
OPERATING EARNINGS. Operating earnings (a non-GAAP measure) and
the adjustments to net income used to calculate it are disclosed
above, in the table entitled "Net Income (Loss) and Reconciliation to
Non-GAAP Operating Earnings." Operating earnings increased in the
fourth quarter due primarily to growth in earned premiums, which,
excluding the effect of refundings, rose 16.6%.
The Company defines operating earnings as net income excluding the
effects of fair-value adjustments for:
-- economic hedges, defined as hedges that are economically
effective but do not meet the criteria necessary to receive
hedge accounting treatment under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), with any
residual hedge ineffectiveness remaining in operating
earnings; and
-- investment-grade insured derivatives, which are certain
contracts for which fair-value adjustments are recorded
through the income statement because they qualify as
derivatives under SFAS 133 or Statement of Financial
Accounting Standards No. 155, "Accounting for Certain Hybrid
Financial Instruments" (SFAS 155). These contracts include
FSA-insured CDS, insured swaps in certain public finance
obligations and insured net interest margin (NIM)
securitizations.
The majority of the economic hedges relate to situations where the
Company converts the fixed interest rates of certain assets and
liabilities to dollar-denominated LIBOR-based floating rates by means
of interest rate derivatives. Without hedge accounting, SFAS 133
requires the marking to fair value of each such derivative in the
income statement without the offsetting mark to fair value on the risk
it is intended to hedge. These one-sided valuations cause income
volatility. Under the Company´s definition of operating earnings, the
economic effect of these hedges is recognized, which, for interest
rate swaps, generally results in any cash paid or received being
recognized ratably as an expense or revenue over the hedged item´s
life.
PREMIUMS. The following table reconciles gross premiums written,
which captures premiums collected and accrued for in the period
regardless of when the related business was originated, to PV premiums
originated, a non-GAAP measure that management uses to evaluate
current financial guaranty business production, which excludes PV NIM
originated in the FP segment.
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RECONCILIATION OF GROSS PREMIUMS WRITTEN TO PV PREMIUMS ORIGINATED
(in millions)
Three Months
Ended Year Ended
December 31, December 31,
---------------- ------------------
2007 2006 2007 2006
-------- ------- --------- --------
Gross premiums written $ 282.1 $256.5 $ 852.8 $ 816.0
Gross installment premiums received (79.5) (63.0) (287.9) (241.9)
-------- ------- --------- --------
Gross upfront premiums originated 202.6 193.5 564.9 574.1
Gross PV estimated installment
premiums originated 112.5 63.4 618.2 215.6
-------- ------- --------- --------
Gross PV premiums originated $ 315.1 $256.9 $1,183.1 $ 789.7
======== ======= ========= ========
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The following table summarizes earned and written premiums, net of
reinsurance.
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NET EARNED AND WRITTEN PREMIUMS
(in millions)
Three Months Ended Year Ended
December 31, December 31,
------------------ ---------------
2007 2006 2007 2006
--------- -------- -------- ------
Net premiums written $187.7 $161.8 $560.5 $527.2
Net premiums earned 116.1 104.0 420.6 388.7
Net premiums earned excluding effect
of refundings and accelerations 99.1 85.0 367.4 339.9
*T
For the fourth quarter, gross premiums written increased 10.0%,
and net premiums written increased 16.0%, both reflecting increases in
public finance and asset-backed premiums written. For the year, gross
premiums written increased by 4.5%, and net premiums written increased
by 6.3%. In each case, the change primarily reflected an increase in
asset-backed premiums written.
Fourth-quarter net premiums earned increased 11.6% to $116.1
million, including $17.0 million from refundings and accelerations.
For last year´s comparable period, net premiums earned from refundings
and accelerations totaled $19.0 million. Excluding premiums from
refundings and accelerations, fourth-quarter net premiums earned
increased 16.6%, reflecting an increase in both public finance and
asset-backed earned premiums.
For the year, net premiums earned increased 8.2% to $420.6
million, including $53.2 million from refundings and accelerations.
For the prior year, net premiums earned from refundings and
accelerations totaled $48.8 million. Excluding premiums from
refundings and accelerations, year-to-date net premiums earned
increased 8.1% for the year, reflecting increases in both public
finance and asset-backed earned premiums.
FP SEGMENT NET INTEREST MARGIN. FP Segment NIM increased to $18.0
million for the fourth quarter of 2007 from $17.4 million for the
fourth quarter of 2006, reflecting primarily the growth in the GIC
book of business, partially offset by the effects of accumulating
liquidity. FP Segment NIM was $86.1 million for 2007 and $72.7 million
for 2006. Growth in the book of business and realized gains more than
offset the write-down (in the third quarter of 2007) of positions the
Company determined to be other-than-temporarily impaired. FP Segment
NIM is a non-GAAP measure defined as the net interest margin from the
financial products segment excluding fair-value adjustments for
economic hedges.
GENERAL INVESTMENT PORTFOLIO. Fourth-quarter net investment income
increased to $60.4 million from $57.1 million a year ago. For the
year, net investment income increased to $236.7 million from $218.9
million in 2006. The increases primarily reflect higher invested
balances in the investment portfolio resulting from high origination
activity. The Company´s year-to-date effective tax rate on investment
income (excluding the effects of realized gains and losses, the FP
Segment and assets acquired in refinancing transactions) was 12.4% in
2007, versus 12.2% for 2006.
EXPENSES.
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EXPENSES AND POLICY ACQUISITION COSTS
(in millions)
Three Months
Ended Year Ended
December 31, December 31,
--------------- ---------------
2007 2006 2007 2006
------- ------- ------- -------
Other operating expenses and
amortization of deferred policy
acquisition costs (1) $ 55.4 $ 63.8 $ 205.5 $ 187.6
Other operating expenses and
amortization of deferred policy
acquisition costs, excluding deferred
compensation plans (DCP) and
supplemental executive retirement
(SERP) plans 56.9 53.4 199.5 173.2
(1) These expenses include certain compensation expenses related
primarily to the Company´s DCP and SERP plans, which are based on
changes in the market value of related investments and are offset by
amounts in other income arising from marking to fair value the assets
held to economically defease such obligations.
*T
Excluding DCP and SERP plans, other operating expenses and
amortization of policy acquisition costs increased by $3.5 million, or
6.6%, for the fourth quarter of 2007. For the year, such expenses
increased by $26.3 million, or 15.2%. The increases relate primarily
to higher compensation expenses and a lower deferral rate.
RESERVES. The Company recorded losses and loss adjustment expenses
incurred of $12.5 million for the fourth quarter of 2007 and $7.0
million for the fourth quarter of 2006. Losses and loss adjustment
expenses totaled $31.6 million for 2007 and $23.3 million for 2006.
The increases are driven primarily by increased origination volume,
including a large increase in international public infrastructure
transactions (which are generally assigned higher reserves) and an
increase in the experience factor used in calculating the non-specific
reserve. Adjustments to reserves represent management´s estimate of
the amount required to cover the present value of the net cost of
claims, based on statistical provisions for new originations.
During the fourth quarter of 2007, a net amount of $65.5 million
was transferred from the non-specific reserve to case reserves,
including the $63.0 million for HELOCs discussed above. Transfers
between non-specific and case reserves represent a reallocation of
existing loss reserves and have no impact on earnings. At December 31,
2007, aggregate case and non-specific reserves, net of reinsurance
recoverables, totaled $198.1 million, compared with $190.8 million at
December 31, 2006.
NON-GAAP MEASURES
To reflect accurately how the Company´s management evaluates the
Company´s operations and progress toward long-term goals, this release
contains both measures promulgated in accordance with accounting
principles generally accepted in the United States of America (GAAP
measures) and measures not so promulgated (non-GAAP measures).
Although the measures identified as non-GAAP in this release should
not be considered substitutes for GAAP measures, management considers
them key performance indicators and employs them in determining
compensation. Non-GAAP measures therefore provide investors with
important information about the way management analyzes its business
and rewards performance.
Non-GAAP measures used in this release include operating earnings,
PV premiums originated, PV NIM originated, PV originations, ABV and FP
segment NIM. In the tables above, operating earnings is reconciled to
net income, and PV premiums originated is reconciled to gross premiums
written.
The Company employs PV originations to describe the present value
of all the Company´s originations in a given period. PV originations
are estimated by the Company for business originated in the period as
the sum of:
-- PV premiums originated, defined as estimated future
installment premiums discounted to their present value, as
well as upfront premiums, and
-- PV NIM originated in the financial products segment, defined
as estimated interest to be received on investments less
estimated transaction expenses and interest to be paid on
liabilities plus results from derivatives used for hedging
purposes, discounted to present value.
Management believes that, by disclosing the components of PV
originations in addition to premiums written, the Company provides
investors with a more comprehensive description of its new business
activity in a given period. The discount rate used to calculate PV
originations was 4.86% for 2007 originations and 5.07% for 2006
originations. PV premiums originated, PV NIM originated and PV
originations are based on estimates of, among other things, prepayment
speeds of asset-backed securities.
PV premiums originated is a measure of gross origination activity
and does not reflect premiums ceded to reinsurers or the cost of
credit default swaps or other credit protection, which may be
considerable, employed by the Company to manage its credit exposures.
PV NIM originated is the present value of estimated future net
interest margin generated by new business in the financial products
segment during a given period, adjusted for management´s estimate of
transaction and hedging costs. At the beginning of 2007, based on
experience, management reduced its estimate of the adverse effect of
such costs, and appropriate adjustments were included in the estimates
of 2007 PV NIM originated and the PV future net interest margin (PV
future NIM) component of ABV.
Management uses ABV as a measure of performance and to calculate a
portion of employee compensation. An investor attempting to evaluate
the Company using GAAP measures alone would not have the benefit of
this information. The ABV calculation relies on estimates of the
amount and timing of installment premiums and net interest margin and
applies discount factors to determine the present value. Actual values
may vary from the estimates. For performance reporting purposes, the
calculation of ABV includes adjustments to reflect IFRS results that
the Company reports to its principal shareholder, Dexia S.A., in order
to better align the interests of employees with the interests of Dexia
S.A., whose accounts are maintained under IFRS. The IFRS adjustments
relate primarily to accounting for foreign exchange, contingencies and
fair-value adjustments. ABV is reconciled to book value in the table
that follows.
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RECONCILIATION OF US GAAP SHAREHOLDERS´ EQUITY TO
ADJUSTED BOOK VALUE
(in millions)
December 31, December 31,
2007 2006
------------ ------------
Shareholders´ Equity (Book Value) - U.S. GAAP$ 1,577.8 $ 2,722.3
After-tax adjustments:
Plus net unearned premium revenues 1,162.4 1,071.4
Plus PV future net installment premiums and
financial products PV future net interest
margin (1)(2) 857.8 627.2
Less net deferred acquisition costs 226.1 221.4
Less fair-value gains (losses) for
investment-grade insured derivatives (359.7) 58.0
Less fair value of gains (losses) for
economic hedges 84.9 72.6
Less unrealized gains (losses) on
investments (848.4) 154.9
------------ ------------
Subtotal 4,495.1 3,914.0
IFRS Adjustments 0.2 4.8
------------ ------------
Adjusted Book Value $ 4,495.3 $ 3,918.8
============ ============
(1) Amounts include the effects of PV future ceding commission and
premium taxes. The discount rate varies according to the year of
origination. For each year´s originations, the Company calculates the
discount rate as the average pre-tax yield on its investment
portfolio for the previous three years. The rate was 4.86% for 2007
and 5.07% for 2006.
(2) At the beginning of 2007, based on experience, management applied
a reduced estimate of transaction and hedging costs to financial
products PV future NIM. This increased December 31, 2007 PV future
NIM by approximately $24.7 million net of tax.
*T
This release also contains certain other non-GAAP measures that
are based on statutory accounting principles applicable to insurance
companies. Management uses such measures because the measures are
required by regulators or used by rating agencies to assess the
capital adequacy of the Company. The following table presents
statutory-basis information for FSA.
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CLAIMS-PAYING RESOURCES (STATUTORY BASIS)
FINANCIAL SECURITY ASSURANCE INC. AND SUBSIDIARIES
(dollars in thousands)
December 31, December 31,
2007 2006
------------ ------------
Contingency Reserve $ 1,094,352 $ 1,011,034
Surplus to Policyholders 1,608,768 1,543,113
------------ ------------
Qualified Statutory Capital 2,703,120 2,554,147
Net Unearned Premium Reserve 2,274,577 2,070,751
Loss and Loss Adjustment Expense Reserve 98,079 52,964
------------ ------------
Qualified Statutory Capital and Reserves 5,075,776 4,677,862
Net Present Value of Installment Premiums 1,113,051 827,916
Third-Party Capital Support (1) 550,000 550,000
------------ ------------
Total Claims-Paying Resources (2) $ 6,738,827 $ 6,055,778
============ ============
Net Insurance in Force (principal & interest)$623,157,997 $552,695,033
Capital Ratio (3) 231:1 216:1
Claims-Paying Ratio (4) 92:1 91:1
(1) Standby line of credit facility and money market committed
preferred trust securities.
(2) Total claims-paying resources is a term used by rating agencies to
quantify total resources available to pay claims in their stress-case
scenarios. Rating agencies may apply further adjustments to some or
all of the figures in order to reflect their views of realization.
(3) Capital ratio is net insurance in force divided by qualified
statutory capital.
(4) Claims-paying ratio is net insurance in force divided by claims-
paying resources.
*T
ADDITIONAL INFORMATION
The Company plans to post its latest Operating Supplement to its
website, www.fsa.com, today. The Operating Supplement contains
additional information about results for the period covered in this
release. Also, a presentation dated February 12, 2007 on the Analyst
Communications/Presentations page of the website provides additional
detail about the Company´s portfolio quality and mark-to-market
accounting.
FORWARD-LOOKING STATEMENTS
The Company relies on the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of
1995. This safe harbor requires that the Company specify important
factors that could cause actual results to differ materially from
those contained in forward-looking statements made by or on behalf of
the Company. Accordingly, forward-looking statements by the Company
and its affiliates are qualified by reference to the following
cautionary statements.
In its filings with the SEC, reports to shareholders, press
releases and other written and oral communications, the Company from
time to time makes forward-looking statements. Such forward-looking
statements include, but are not limited to:
-- projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial
forecasts;
-- statements of plans, objectives or goals of the Company or its
management, including those related to growth in adjusted book
value or return on equity; and
-- expected losses on, and adequacy of loss reserves for, insured
transactions.
Words such as "believes," "anticipates," "expects," "intends" and
"plans" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
The Company cautions that a number of important factors could
cause actual results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in forward-looking
statements made by the Company. These factors include:
-- changes in capital requirements or other criteria of
securities rating agencies applicable to FSA;
-- competitive forces, including the conduct of other financial
guaranty insurers;
-- changes in domestic or foreign laws or regulations applicable
to the Company, its competitors or its clients;
-- changes in accounting principles or practices that may result
in a decline in securitization transactions or affect the
Company´s reported financial results;
-- an economic downturn or other economic conditions (such as a
rising interest rate environment) adversely affecting
transactions insured by FSA or its investment portfolio;
-- inadequacy of reserves established by the Company for losses
and loss adjustment expenses;
-- disruptions in cash flow on FSA-insured structured
transactions attributable to legal challenges to such
structures;
-- downgrade or default of one or more of FSA´s reinsurers;
-- market conditions, including the credit quality and market
pricing of securities issued;
-- capacity limitations that may impair investor appetite for
FSA-insured obligations;
-- market spreads and pricing on insured CDS exposures, which may
result in gain or loss due to mark-to-market accounting
requirements;
-- prepayment speeds on FSA-insured asset-backed securities and
other factors that may influence the amount of installment
premiums paid to FSA; and
-- other factors, most of which are beyond the Company´s control.
The Company cautions that the foregoing list of important factors
is not exhaustive. In any event, such forward-looking statements made
by the Company speak only as of the date on which they are made, and
the Company does not undertake any obligation to update or revise such
statements as a result of new information, future events or otherwise.
THE COMPANY
Financial Security Assurance Holdings Ltd. (the Company),
headquartered in New York City, is a holding company whose affiliates
provide financial guarantees and financial products to clients in both
the public and private sectors around the world. The principal
operating subsidiary, Financial Security Assurance Inc. (FSA), a
leading guarantor of public finance and asset-backed obligations, has
been assigned Triple-A ratings, the highest ratings available, from
Fitch Ratings, Moody´s Investors Service, Inc., Standard & Poor´s
Ratings Services and Rating and Investment Information, Inc. Through
other subsidiaries, the Company provides FSA-insured financial
products, such as guaranteed investment contracts, to obtain funds at
Triple-A cost and then invests those funds in high-quality, liquid
securities. The Company is a member of the Dexia group.
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Financial Security Assurance Holdings Ltd.
Condensed Consolidated Statements of Operations and Comprehensive
Income
(unaudited)
(in thousands)
Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- ------------------------
2007 2006 2007 2006
---------- --------- ------------ -----------
REVENUES
Net premiums written $ 187,721 $161,794 $ 560,476 $ 527,177
========== ========= ============ ===========
Net premiums earned $ 116,077 $103,997 $ 420,556 $ 388,709
Net investment income 60,361 57,147 236,659 218,850
Net realized gains
(losses) 1,165 (394) (1,887) (8,328)
Net interest income
from financial
products segment 279,587 247,673 1,079,577 858,197
Net realized gains
(losses) from
financial products
segment - 31 1,867 108
Net realized and
unrealized gains
(losses) on
derivative
instruments (216,004) 60,819 (579,808) 163,202
Income from assets
acquired in
refinancing
transactions 4,409 5,997 20,907 24,661
Net realized gains
(losses) from assets
acquired in
refinancing
transactions 3,221 (66) 4,660 12,729
Other income 4,401 16,381 46,761 32,896
---------- --------- ------------ -----------
TOTAL REVENUES 253,217 491,585 1,229,292 1,691,024
---------- --------- ------------ -----------
EXPENSES
Losses and loss
adjustment expenses 12,440 6,960 31,568 23,303
Interest expense 11,583 8,851 46,335 29,096
Amortization of
deferred acquisition
costs 15,853 18,278 63,442 63,012
Foreign exchange
(gains) losses from
financial products
segment 94,522 60,156 138,479 159,424
Net interest expense
from financial
products segment 239,108 228,285 989,246 768,739
Other operating
expenses 39,594 45,509 142,090 124,622
---------- --------- ------------ -----------
TOTAL EXPENSES 413,100 368,039 1,411,160 1,168,196
---------- --------- ------------ -----------
INCOME (LOSS) BEFORE
INCOME TAXES AND
MINORITY INTEREST (159,883) 123,546 (181,868) 522,828
Provision (benefit) for
income taxes (68,015) 30,796 (116,214) 150,680
---------- --------- ------------ -----------
NET INCOME (LOSS) BEFORE
MINORITY INTEREST (91,868) 92,750 (65,654) 372,148
Less: Minority
interest - - - (52,006)
---------- --------- ------------ -----------
NET INCOME (LOSS) (91,868) 92,750 (65,654) 424,154
---------- --------- ------------ -----------
OTHER COMPREHENSIVE
INCOME (LOSS), NET OF
TAX
Unrealized gains
(losses) arising during
the period (608,973) 1,804 (949,442) 10,202
Less: reclassification
adjustment for gains
(losses) included in
net income 5,105 213 10,510 6,393
---------- --------- ------------ -----------
Other comprehensive
income (loss) (614,078) 1,591 (959,952) 3,809
---------- --------- ------------ -----------
COMPREHENSIVE INCOME
(LOSS) $(705,946) $ 94,341 $(1,025,606) $ 427,963
========== ========= ============ ===========
See Notes to Consolidated Financial Statements to be
filed on Form 10-K.
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Financial Security Assurance Holdings Ltd.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands)
December 31, December 31,
2007 2006
------------ ------------
ASSETS
General investment portfolio:
Bonds at fair value $ 5,054,664 $ 4,721,512
Equity securities at fair value 39,869 54,325
Short-term investments 97,366 96,578
Financial products segment investment
portfolio:
Bonds at fair value 16,936,058 16,757,979
Short-term investments 1,927,347 659,704
Trading portfolio at fair value 349,822 119,424
Assets acquired in refinancing transactions:
Bonds at fair value 5,949 41,051
Securitized loans 177,810 241,785
Other 45,505 55,036
------------ ------------
Total investment portfolio 24,634,390 22,747,394
Cash 28,696 32,471
Deferred acquisition costs 347,870 340,673
Prepaid reinsurance premiums 1,126,624 1,004,987
Reinsurance recoverable on unpaid losses 76,478 37,342
Deferred federal income tax asset 412,170 -
Other assets 1,583,617 1,611,216
------------ ------------
TOTAL ASSETS $28,209,845 $25,774,083
============ ============
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS´ EQUITY
Deferred premium revenue $ 2,914,878 $ 2,653,321
Loss and loss adjustment expense reserve 274,556 228,122
Financial products segment debt 21,376,116 18,349,665
Deferred federal income tax liability - 298,542
Notes payable 730,000 730,000
Other liabilities and minority interest 1,336,481 792,121
------------ ------------
TOTAL LIABILITIES AND MINORITY INTEREST 26,632,031 23,051,771
------------ ------------
COMMITMENTS AND CONTINGENCIES
Common stock 335 335
Additional paid-in capital--common 909,800 906,687
Accumulated other comprehensive income
(loss) (799,914) 160,038
Accumulated earnings 1,467,593 1,655,252
Deferred equity compensation 19,663 19,225
Less treasury stock at cost (19,663) (19,225)
------------ ------------
TOTAL SHAREHOLDERS´ EQUITY 1,577,814 2,722,312
------------ ------------
TOTAL LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS´ EQUITY $28,209,845 $25,774,083
============ ============
See Notes to Consolidated Financial Statements to be
filed on Form 10-K.
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