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 $421.6 million
for the first quarter of 2008 due primarily to after-tax unrealized
negative fair-value adjustments of $317.9 million for credit derivatives
in the insured portfolio and after-tax loss expense of $195.3 million
related to second-lien residential mortgage backed securities (RMBS).
Credit derivatives in the insured portfolio consist mainly of credit
default swaps (CDS) on pooled corporate risk. FSA´s
total insured CDS portfolio was 90.5% Triple-A or Super Triple-A, 8.2%
Double-A, 0.3% Single-A or Triple-B and only 1.0% below investment grade
at March 31, 2008.
Non-GAAP operating earnings, which exclude fair-value adjustments
considered to be non-economic, were negative $99.0 million for the first
quarter of 2008, compared with positive $95.0 million for the first
quarter of 2007. The decline in operating earnings was driven primarily
by increased estimated losses on insured second-lien RMBS - primarily
issues backed by home equity lines of credit (HELOCs) and Alt-A (i.e.
near-prime) closed-end second-lien (CES) mortgage loans. Excluding loss
expense, the Company would have reported strong operating earnings
generally in line with those of recent quarters. Earned premiums
realized gains on credit derivatives (i.e., premiums for insuring credit
derivatives, formerly included in earned premiums) and net investment
income all increased.
See "Analysis of Financial Results "“ Operating Earnings" below for the recently
modified definition of operating earnings and a reconciliation of
operating earnings to net income. See "Analysis
of Financial Results "“ Premiums and Realized
Gains on Credit Derivatives" below for an
explanation of the newly adopted presentation of credit derivative fees.
Present value (PV) originations, a non-GAAP measure of new business
production, totaled $281.9 million for the first quarter of 2008, 42.7%
higher than for last year´s first quarter.
Shareholders´ equity (book value) was $44.4
million under U.S. generally accepted accounting principles (GAAP) at
March 31, 2008. Book value decreased by $1.5 billion, driven primarily
by $1.5 billion of negative unrealized fair-value adjustments recorded
in other comprehensive income for the Company´s
Financial Products (FP) Investment Portfolio. Book value also reflects
the previously disclosed $500 million capital contribution to the
Company by its parent in February 2008.
Non-GAAP adjusted book value (ABV) was $5.0 billion at March 31, 2008.
Over the past 12 months, ABV grew 14.0% excluding the effects of
dividends and capital contributions during the past 12 months.
Management believes that growth in ABV excluding such effects indicates
the organic growth in economic value of the enterprise. See "Non-GAAP
Measures" below for a discussion of ABV and
a reconciliation to U.S. GAAP shareholders´ equity.
Commenting on the financial results, Robert P. Cochran, chairman and
chief executive officer of the Company and FSA, said: "FSA´s
originations got off to a good start in the first quarter, primarily due
to exceptionally strong production in the U.S. municipal market, where
investors have expressed a decided preference for FSA-insured
transactions. Though market liquidity continued to limit the volume of
executed transactions in the structured finance markets, we found a
number of opportunities to guarantee high-quality and attractively
priced securities in the international public infrastructure and
asset-backed sectors.
"While our business originations produced
strong results, we are disappointed to report additions to case reserves
for projected losses across a limited number of HELOCs and CES, both of
which are forms of second-lien mortgage securitizations. Since the
beginning of 2008, these transactions have experienced much higher
default rates than ever observed in the past. Taking into account the
higher monthly charge-offs and growing delinquencies, we have
constructed our reserves to anticipate the continuation of this adverse
environment through the remainder of 2008 and into 2009. At present, we
believe losses will be confined to these second-mortgage products, as
our first-mortgage RMBS exposures are generally performing within
structural tolerances. We have no material exposure to collateralized
debt obligations of asset-backed securities (CDOs of ABS), where high
concentrations of subordinated interests in RMBS collateral have been
downgraded dramatically in recent months.
"We have reviewed the projected losses and
first-quarter financial results with Fitch, Moody´s
and S&P. We remain Triple-A, with a stable outlook, by all of these
rating agencies.
"While unrealized negative mark-to-market
adjustments increased significantly this quarter, they are mainly due to
liquidity dislocations rather than credit impairment and are not
currently indicative of economic loss. We have repeatedly said that
given our ability and intent to hold these risks until maturity
decreases or increases to income due to marks should reverse to zero
when the exposure matures, adjusted only by any actual economic loss.
While we do not view the marks as economically significant, I would note
that we are beginning to see spread tightening in various CDS indices
that suggests these marks are beginning to move in a positive direction."
Discussing the firm´s outlook, Mr. Cochran
said: "While the current weak economic
environment and capital market dislocation may reduce our opportunities
in structured finance sectors, we believe that we will continue to play
a strong role in municipal and public infrastructure finance markets. In
fact, at mid-point of the second quarter of 2008, primary-market U.S.
municipal PV premiums are already ahead of first-quarter production.
"Across all of our markets, the return to a
more credit-sensitive environment can be expected to bring greater
investor recognition of our value proposition, which goes beyond
Triple-A protection in the event of default, to include our role in
analyzing and structuring transactions, as well as the surveillance and
remediation we provide."
= = = = = = = = = = =
BUSINESS PRODUCTION
- - - - - -
- - - - - -
TOTAL ORIGINATIONS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Gross par insured
$
20,474.7
29,721.0
- - - - - -
Gross PV originations(1)
281.9
197.5
- - - - - -
- - - - - -
(1) For definition and discussion, see "Non-GAAP
Measures" below.
- - - - - -
Unless otherwise noted, percentage changes mentioned in this release
compare the period named with the comparable period of the previous
year. Some of the amounts shown for the first quarter of 2007 differ
from those originally reported for that period because of subsequent
reclassifications, primarily to reflect the underlying exposure of
transactions previously wrapped by other monoline financial guarantors.
= = = = = = = = = = =
PUBLIC FINANCE ORIGINATIONS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
United States:
- - - - - -
Gross par insured
$
18,358.2
$
14,264.3
- - - - - -
Gross PV financial guaranty originations(1)
196.6
74.0
- - - - - -
- - - - - -
International:
- - - - - -
Gross par insured
$
499.1
$
1,220.4
- - - - - -
Gross PV financial guaranty originations
18.0
28.8
- - - - - -
(1) Consists of PV premiums originated and PV
credit derivative fees originated. For definition and discussion, see "Non-GAAP
Measures" below. For a reconciliation of PV
financial guaranty originations to gross premiums written, see "Analysis
of Financial Results "“ Premiums" below. For the new financial statement presentation relating to credit
derivative fees, see "Analysis of Financial
Results "“ Premiums and Credit Derivative Fees" below.
First-quarter 2008 estimated U.S. municipal market volume of $84.9
billion was 21% lower than in the first quarter of 2007 due to widening
credit spreads and the sharp decline in liquidity in the auction rate
securities market. Insurance penetration was approximately 26%, compared
with 51% in the first quarter of 2007, largely because of concerns
related to the ratings outlook for a number of monoline industry players.
FSA insured approximately 64% of the par amount of insured new U.S.
municipal bond issues sold through March 31, significantly higher than
FSA´s typical market share in recent years
which has been approximately 25%.
In U.S. public finance, FSA increased its par originated by 28.7% and PV
financial guaranty originations by 165.7%, reflecting the market´s
strong preference for FSA-insured bonds. More than 98% of the municipal
bonds FSA insured during the quarter had underlying credit quality of
Single-A or higher.
In the international public finance markets, where the liquidity crunch
has caused a general decline in activity and wider credit spreads, FSA´s
par originated decreased 59.1% in the first quarter and PV financial
guaranty originations decreased 37.6%. FSA guaranteed the only insured
infrastructure bonds issued in Europe during the first quarter, a ₤119
million acquisition financing by Belfast Gas Transmission Financing plc.
FSA was also active in the secondary sterling utility market. The
Company would expect to increase its activity in this sector as the
markets normalize.
= = = = = = = = = = =
ASSET-BACKED ORIGINATIONS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
United States:
- - - - - -
Gross par insured
$
1,148.7
12,153.6
- - - - - -
Gross PV financial guaranty originations
46.6
53.8
- - - - - -
- - - - - -
International:
- - - - - -
Gross par insured
468.7
2,082.7
- - - - - -
Gross PV financial guaranty originations
20.3
14.1
- - - - - -
In the first quarter, FSA´s U.S.
asset-backed production decreased 90.5% in par originated and 13.4% in
PV financial guaranty originations. Relatively few new funded
asset-backed securities were issued in the quarter due to market
illiquidity. Exercising caution in light of the current credit
environment, FSA focused on Super Triple-A pooled corporate credit
default swaps, where it continued to find attractive opportunities based
on wide credit spreads. It also insured one Triple-A residential
mortgage transaction with a high level of underlying credit protection.
Outside the United States, FSA´s
asset-backed par originated decreased 77.5% for the first quarter, while
PV financial guaranty originations increased 43.6%. As in the U.S.
originations were concentrated in the Super Triple-A CDS sector, and PV
financial guaranty originations rose despite the decline in par
originated primarily because of spread widening.
= = = = = = = = = = =
FINANCIAL PRODUCTS ORIGINATIONS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Gross PV NIM originated
$
0.4
26.8
- - - - - -
In the financial products (FP) segment, the present value of net
interest margin originated (PV NIM originated) decreased 98.4% for the
first quarter. The Company had fewer opportunities to issue new
guaranteed investment contracts (GICs) due to the curtailment of the
credit-linked note market, which provided opportunities with attractive
deposit terms in previous periods, and the slow start in the U.S.
municipal bond market. At the same time, it continued to limit new asset
acquisitions in order to build liquidity in response to volatile market
conditions.
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. At March 31, 2008, FSA´s
insured CDS portfolio subject to mark-to-market accounting requirements
had a net outstanding par value of $82.2 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 backing GICs 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 assets mature. Given the
large size of the FP Investment Portfolio ($15.0 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 March 31
2008, approximately 67.4% of the investment portfolio was invested in
non-agency RMBS, 88.0% of which were rated Triple-A, with 7.0% rated
Double-A, 4.0% rated Single-A and 1.0% rated Triple-B. Although some of
these assets may be downgraded in the future, management believes that
based on current information, asset performance does not indicate
economic loss.
GAAP EQUITY. GAAP equity decreased by $1.5 billion since December 31
2007, principally due to $1,533.1 million of negative unrealized
fair-value adjustments on available-for-sale assets (primarily RMBS)
held in the FP Investment Portfolio, which were recorded in other
comprehensive income. The decline also reflected the negative unrealized
fair-value adjustments for credit derivatives in the insured portfolio
and the charges to increase reserves for HELOC and Alt-A CES
transactions. Partially offsetting these reductions in equity was the
$500 million capital contribution by Dexia. Unrealized portfolio gains
and losses and CDS fair-value adjustments did not affect insurance
company statutory equity or claims-paying resources, and rating agencies
generally do not take these unrealized gains or losses into account in
evaluating FSA´s capital adequacy.
RESERVES. During the quarter, the Company increased its estimated
projected net losses for eight HELOC transactions, with an aggregate net
par outstanding of $4.5 billion, from $65.0 million to $333.1 million
and established an $86.9 million net case reserve for four Alt-A CES
with an aggregate net par of $784.9 million. This $355.0 million
increase in loss projections was accounted for by a transfer from the
non-specific reserve to case reserves of $53.7 million (with no effect
on income) and a pre-tax loss expense of $300.4 million, or $195.3
million after-tax.
Through March 31, 2008, the Company had paid a total of $104.2 million
in net claims for HELOC transactions, of which $56.6 million was paid in
the first quarter. No claims had been paid on Alt-A CES through March
31, 2008, and most will not be due for over 20 years. After claim
payments, the HELOC net case reserve at March 31 was $228.8 million.
At March 31, 2008, aggregate case and non-specific reserves, net of
reinsurance recoverables, totaled $401.1 million, compared with $198.1
million at December 31, 2007.
OPERATING EARNINGS. The Company defines operating earnings as net income
excluding the effects of fair-value adjustments considered to be
non-economic and including International Financial Reporting Standards
(IFRS) amounts where different from U.S. GAAP. The IFRS adjustments are
being applied for the first time in 2008 because it is the accounting
standard used by FSA´s parent company Dexia
S.A. (Dexia) and is the basis on which all of FSA´s
compensation plans are referenced in 2008 and forward. All compensation
performance cycles that were linked to operating earnings under the
previous, non-IFRS definition have now expired. Additionally, the
Company has revised its definition of operating earnings to eliminate
non-economic fair-value adjustments arising from new accounting
standards implemented in the first quarter of 2008.
The fair-value adjustments excluded from operating earnings are itemized
below.
Fair-value adjustments for instruments with economically hedged risks.
These include adjustments related to hedges that are economically
effective but do not meet the criteria necessary to receive hedge
accounting treatment under Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS
133). (Any residual hedge ineffectiveness remains in operating
earnings.) These also include adjustments related to non-economic
changes in fair value related to the trading portfolio, such as the
effect of changes in credit spreads.
Fair-value adjustments for credit derivatives in the insured
portfolio, which are certain contracts for which fair-value
adjustments are recorded through the income statement because they
qualify as derivatives under SFAS 133 or SFAS 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. In the event of a credit impairment, operating
earnings would include the present value of estimated economic losses.
Impairment charges on investments, other than the present value of
estimated economic losses.
Fair-value adjustments attributable to the Company´s
own credit risk, such as debt valuation adjustments on FP segment debt
for which the fair-value option was elected and fair-value adjustments
on the Company´s committed preferred trust
capital facility.
In 2008, the Company elected the fair value option for certain FP
Segment fixed rate liability contracts. To the extent hedge accounting
was applied previously, it was discontinued beginning in 2008. In
addition, the Company commenced hedge accounting on selected fixed rate
investments in the FP Segment Investment Portfolio. The election of the
fair value option and the changes in designations of hedging
relationships had no effect on operating earnings but does affect net
income and the classification of fair-value adjustments in the financial
statements.
The table below reconciles net income to operating earnings for all
periods presented in order to provide comparable results period over
period.
= = = = = = = = = = =
NET INCOME (LOSS) AND RECONCILIATION TO NON-GAAP OPERATING
EARNINGS (LOSSES)(1)
- - - - - -
(in millions)
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Net income (loss)
$
(421.6
)
$
85.2
- - - - - -
After-tax adjustments:
- - - - - -
Less fair-value adjustments for instruments with economically hedged
risks
(59.0
)
0.0
- - - - - -
Less fair-value adjustments for credit derivatives in insured
portfolio
(317.9
)
(8.6
)
- - - - - -
Less fair-value adjustments attributable to the Company´s
own credit risk
51.6
"“"“
- - - - - -
Subtotal
(96.3
)
93.8
- - - - - -
IFRS adjustments
(2.7
)
1.2
- - - - - -
Operating earnings (losses)
$
(99.0
)
$
95.0
- - - - - -
(1) 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).
PREMIUMS AND REALIZED GAINS ON CREDIT DERIVATIVES. In consultation with
the Securities and Exchange Commission staff, members of the financial
guaranty industry have reclassified credit derivative items into two
captions: "Realized gains and other
settlements from credit derivative contracts" and "Unrealized gains (losses) on credit
derivatives." In prior years, the Company
recorded all credit derivative fees as premiums earned or premiums
written, regardless of whether they qualified as derivatives under SFAS
133. The prior-year results have been reclassified to conform to the
current-year presentation. 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 financial
guaranty originations, a non-GAAP measure that management uses to
evaluate current financial guaranty business production. PV financial
guaranty originations includes PV premiums originated and PV credit
derivative fees originated and excludes PV NIM originated in the FP
segment.
= = = = = = = = = = =
RECONCILIATION OF GROSS PREMIUMS WRITTEN TO PV PREMIUMS AND
CREDIT DERIVATIVE FEES ORIGINATED
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Gross premiums written
$
242.1
$
124.4
- - - - - -
Gross installment premiums received
(35.1
)
(36.9
)
- - - - - -
Gross upfront premiums originated
207.0
87.5
- - - - - -
Gross PV estimated installment premiums originated
11.7
25.4
- - - - - -
Gross PV premiums originated
$
218.7
$
112.9
- - - - - -
Gross PV credit derivative fees originated
62.8
57.8
- - - - - -
Gross PV financial guaranty originations
$
281.5
$
170.7
- - - - - -
- - - - - -
The following table summarizes earned and written premiums, net
of reinsurance.
- - - - - -
- - - - - -
NET EARNED AND WRITTEN PREMIUMS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Net premiums written
$
195.4
$
78.7
- - - - - -
Net premiums earned
72.9
76.8
- - - - - -
Net premiums earned excluding effect of refundings and accelerations
66.5
61.8
- - - - - -
Realized gains and other settlements from credit derivative contracts
34.7
22.2
- - - - - -
For the first quarter, gross premiums written increased 94.6%, and net
premiums written increased 148.3%, both reflecting increases in public
finance.
Excluding premiums from refundings and accelerations, first-quarter net
premiums earned increased 7.6%, reflecting an increase in both public
finance and asset-backed earned premiums. Premiums earned from
refundings and accelerations decreased to $6.4 million in the first
quarter of 2008, compared with $15.0 million in the first quarter of
2007.
FP SEGMENT NET INTEREST MARGIN. FP Segment NIM decreased to $16.1
million for the first quarter of 2008 from $24.6 million for the first
quarter of 2007, driven primarily by interest rates resetting to lower
levels sooner for assets than for funding liabilities, lower interest
income due to increased liquidity balances, and realized gains taken in
the first quarter of 2007. FP Segment NIM is a non-GAAP measure defined
as the net interest margin from the FP segment excluding fair-value
adjustments for economic hedges.
GENERAL INVESTMENT PORTFOLIO. First-quarter net investment income
increased to $64.8 million from $57.7 million a year ago. The increase
primarily reflects higher invested balances in the investment portfolio
resulting from high origination activity and the mid-quarter capital
contribution. 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
13.0% in 2008, versus 12.2% for last year´s
comparable period.
EXPENSES.
= = = = = = = = = = =
EXPENSES AND POLICY ACQUISITION COSTS
- - - - - -
(in millions)
- - - - - -
- - - - - -
Three Months EndedMarch 31
- - - - - -
2008
2007
- - - - - -
Other operating expenses and amortization of deferred policy
acquisition costs(1)
$
35.7
$
46.2
- - - - - -
Other operating expenses and amortization of deferred policy
acquisition costs,excluding deferred compensation plans
(DCP) and supplemental executive retirement (SERP) plans
44.7
44.0
- - - - - -
(1) Includes expenses related to the Company´s
DCP and SERP obligations, which increase or decrease based on changes in
the market value of related investments. Such obligations are largely
economically defeased by holding related assets for which fair-value
changes appear as a component of other income.
Excluding DCP and SERP obligations, first-quarter other operating
expenses and amortization of policy acquisition costs increased by $0.7
million, or 1.6%. This increase resulted primarily from a lower overall
deferral rate. Compensation expenses declined.
NON-GAAP MEASURES
To more accurately reflect 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 credit derivative fees originated, PV financial
guaranty originations, PV NIM originated, PV originations, ABV and FP
segment NIM. In the tables above, operating earnings is reconciled to
net income, and PV financial guaranty originations 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 financial guaranty originations, defined as (1) PV premiums
originated, which consist of estimated future installment premiums
discounted to their present value and upfront premiums, plus (2) PV
credit derivative fees originated (see "Analysis
of Financial Results "“ Premiums and
Realized Gains on Credit Derivatives" above).
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 4.92% for 2008 originations and 4.86% for 2007
originations. PV premiums originated, PV credit derivative fees
originated, PV NIM originated and PV originations are based on estimates
of, among other things, prepayment speeds of asset-backed securities.
PV financial guaranty originations is a measure of gross origination
activity and does not reflect cessions 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.
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, credit derivative fees 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.
= = = = = = = = = = =
RECONCILIATION OF US GAAP SHAREHOLDERS´ EQUITY TO ADJUSTED BOOK
VALUE
- - - - - -
(in millions)
- - - - - -
- - - - - -
March 31, 2008
December 31,2007
- - - - - -
Shareholders´ Equity (Book Value) "“ U.S. GAAP
$
44.4
$
1,577.8
- - - - - -
After-tax adjustments:
- - - - - -
Plus net unearned financial guaranty revenues
1,240.3
1,162.4
- - - - - -
Plus PV outstanding(1)
875.9
857.8
- - - - - -
Less net deferred acquisition costs
225.2
226.1
- - - - - -
Less fair-value gains (losses) for credit derivatives in insured
portfolio
(651.0
)
(359.7
)
- - - - - -
Less fair-value adjustments attributable to the Company´s
own credit risk
80.9
"“"“
- - - - - -
Less fair value of gains (losses) for instruments with economicallyhedged
risks
(59.5
)
84.9
- - - - - -
Less unrealized gains (losses) on investments
(2,396.2
)
(848.4
)
- - - - - -
Subtotal
4,961.2
4,495.1
- - - - - -
IFRS Adjustments
1.7
0.2
- - - - - -
Adjusted Book Value
4,962.9
$
4,495.3
- - - - - -
(1) PV outstanding includes the after-tax
present value of future earnings from premiums, credit derivative fees
FP net interest margin and ceding commissions. 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 4.92% for 2008 and 4.86% for 2007.
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.
= = = = = = = = = = =
CLAIMS-PAYING RESOURCES (STATUTORY BASIS) FINANCIAL SECURITY
ASSURANCE INC. AND SUBSIDIARIES
- - - - - -
(dollars in thousands)
- - - - - -
- - - - - -
March 31, 2008
December 31,2007
- - - - - -
Contingency Reserve
$
1,182,614
$
1,094,352
- - - - - -
Surplus to Policyholders
1,830,258
1,608,768
- - - - - -
Qualified Statutory Capital
3,012,872
2,703,120
- - - - - -
Net Unearned Premium Reserve
2,419,502
2,274,577
- - - - - -
Loss and Loss Adjustment Expense Reserve
354,851
98,079
- - - - - -
Qualified Statutory Capital and Reserves
5,787,225
5,075,776
- - - - - -
Net Present Value of Installment Premiums
1,146,100
1,113,051
- - - - - -
Third-Party Capital Support(1)
550,000
550,000
- - - - - -
Total Claims-Paying Resources(2)
$
7,483,325
$
6,738,827
- - - - - -
- - - - - -
Net Insurance in Force (principal & interest)
$
639,904,551
$
623,157,997
- - - - - -
Capital Ratio(3)
212:1
231:1
- - - - - -
Claims-Paying Ratio(4)
86:1
92:1
- - - - - -
= = = = = = = = = = =
(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.
- - - - - -
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 entitled "First
Quarter 2008 Results and Business Profile," dated May 14, 2008 and posted to 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 future and conditional verbs such as "will," "should," "would," "could" and "may" 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:
the risks discussed in the Company´s
Annual Report on Form 10-K under "Item 1A.
Risk Factors";
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;
impairments to assets in the FP Investment Portfolio proving to be "other-that-temporary" rather than temporary, resulting in reductions in net income;
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 General 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.
= = = = = = = = = = =
Financial Security Assurance Holdings Ltd.
- - - - - -
Condensed Consolidated Statements of Operations and Comprehensive
Income
- - - - - -
(unaudited)
- - - - - -
(in thousands)
- - - - - -
- - - - - -
Three Months Ended
- - - - - -
March 31
- - - - - -
2008
2007
- - - - - -
REVENUES
- - - - - -
Net premiums written
$
195,382
$
78,681
- - - - - -
Net premiums earned
$
72,905
$
76,773
- - - - - -
Net investment income from general investment portfolio
64,846
57,709
- - - - - -
Net realized gains (losses) from general investment portfolio
160
(155
)
- - - - - -
Change in fair value of credit derivatives:
- - - - - -
Realized gains (losses) and other settlements
34,688
22,239
- - - - - -
Net unrealized gains (losses)
(489,134
)
(13,206
)
- - - - - -
Net change in fair value of credit derivatives
(454,446
)
9,033
- - - - - -
Net interest income from financial products segment
208,764
250,791
- - - - - -
Net realized gains (losses) from financial products segment
--
534
- - - - - -
Net realized and unrealized gains (losses) on derivative instruments
430,766
31,577
- - - - - -
Net unrealized gains (losses) on financial instruments at fair value
(424,642
)
(3,113
)
- - - - - -
Income from assets acquired in refinancing transactions
3,722
5,852
- - - - - -
Other income
(504
)
5,828
- - - - - -
TOTAL REVENUES
(98,429
)
434,829
- - - - - -
- - - - - -
EXPENSES
- - - - - -
Losses and loss adjustment expenses
300,429
4,390
- - - - - -
Interest expense
11,584
11,584
- - - - - -
Amortization of deferred acquisition costs
15,829
15,951
- - - - - -
Foreign exchange (gains) losses from financial products segment
"•
17,504
- - - - - -
Net interest expense from financial products segment
239,267
241,683
- - - - - -
Other operating expenses
19,854
30,262
- - - - - -
TOTAL EXPENSES
586,963
321,374
- - - - - -
INCOME (LOSS) BEFORE INCOME TAXES
(685,392
)
113,455
- - - - - -
Provision (benefit) for income taxes
(263,816
)
28,259
- - - - - -
NET INCOME (LOSS)
(421,576
)
85,196
- - - - - -
- - - - - -
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
- - - - - -
Unrealized gains (losses) on available-for-sale securities arising
during the period
(1,547,544
)
(22,914
)
- - - - - -
Less: reclassification adjustment for gains (losses) included in net
income (loss)
1,604
610
- - - - - -
Other comprehensive income (loss)
(1,549,148
)
(23,524
)
- - - - - -
COMPREHENSIVE INCOME (LOSS)
$
(1,970,724
)
$
61,672
- - - - - -
- - - - - -
See Notes to Consolidated Financial Statements to be filed on Form
10-Q.
- - - - - -
= = = = = = = = = = =
Financial Security Assurance Holdings Ltd.
- - - - - -
Condensed Consolidated Balance Sheets (unaudited)
- - - - - -
(in thousands)
- - - - - -
- - - - - -
March 31, 2008
December 31, 2007
- - - - - -
ASSETS
- - - - - -
General investment portfolio:
- - - - - -
Bonds at fair value
$
5,468,063
$
5,054,664
- - - - - -
Equity securities at fair value
38,241
39,869
- - - - - -
Short-term investments
177,899
97,366
- - - - - -
Financial products segment investment portfolio:
- - - - - -
Bonds at fair value
14,356,547
16,936,058
- - - - - -
Short-term investments
1,513,631
1,927,347
- - - - - -
Trading portfolio at fair value
287,625
349,822
- - - - - -
Assets acquired in refinancing transactions
213,464
229,264
- - - - - -
Total investment portfolio
22,055,470
24,634,390
- - - - - -
Cash
44,994
26,551
- - - - - -
Deferred acquisition costs
346,456
347,870
- - - - - -
Prepaid reinsurance premiums
1,129,211
1,119,565
- - - - - -
Reinsurance recoverable on unpaid losses
125,178
76,478
- - - - - -
Deferred tax asset
1,453,829
412,170
- - - - - -
Other assets
2,048,000
1,714,456
- - - - - -
TOTAL ASSETS
$
27,203,138
$
28,331,480
- - - - - -
- - - - - -
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS´ EQUITY
- - - - - -
Deferred premium revenue
$
3,002,687
$
2,870,648
- - - - - -
Losses and loss adjustment expenses
526,301
274,556
- - - - - -
Financial products segment debt
20,888,930
21,400,207
- - - - - -
Notes payable
730,000
730,000
- - - - - -
Other liabilities and minority interest
2,010,862
1,478,255
- - - - - -
TOTAL LIABILITIES AND MINORITY INTEREST
27,158,780
26,753,666
- - - - - -
- - - - - -
COMMITMENTS AND CONTINGENCIES
- - - - - -
Common stock
335
335
- - - - - -
Additional paid-in capital
1,409,800
909,800
- - - - - -
Accumulated other comprehensive income (loss)
(2,349,062
)
(799,914
)
- - - - - -
Accumulated earnings
983,285
1,467,593
- - - - - -
Deferred equity compensation
19,714
19,663
- - - - - -
Less treasury stock at cost
(19,714
)
(19,663
)
- - - - - -
TOTAL SHAREHOLDERS´ EQUITY
44,358
1,577,814
- - - - - -
TOTAL LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS´ EQUITY
$
27,203,138
$
28,331,480
- - - - - -
- - - - - -
See Notes to Consolidated Financial Statements to be filed on Form
10-Q.
- - - - - -
