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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. NET INCOME (LOSS) AND RECONCILIATION TO NON-GAAP OPERATING EARNINGS [1] (in millions) Three Months Ended December 31, Year Ended 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, €œAnalysis of Financial Results €“ Operating Earnings.€ Also see €œNon-GAAP Measures€ below for a discussion of measures not promulgated in accordance with accounting principles generally accepted in the United States of America (GAAP). 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 €œNon-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: €œ
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. €œThe 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. €œOur 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. €œBeginning 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 TOTAL ORIGINATIONS (in millions) Three Months Ended December 31, Year Ended 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 €œNon-GAAP Measures€ below. Unless otherwise noted, percentage changes mentioned in this release compare the period named with the comparable period of the previous year. PUBLIC FINANCE ORIGINATIONS (in millions) Three Months Ended December 31, Year Ended 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 €œNon-GAAP Measures€ below. For a reconciliation of PV premiums originated to gross premiums written, see €œAnalysis of Financial Results €“ Premiums€ below. 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. ASSET-BACKED ORIGINATIONS (in millions) Three Months Ended December 31, Year Ended 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 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. FINANCIAL PRODUCTS ORIGINATIONS (in millions) Three Months Ended December 31, Year Ended December 31, 2007 2006 2007 2006 Gross PV NIM originated $ 3.3 $ 35.5 $ 87.9 $ 120.5 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 €œOperating 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 €œNet 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, €œAccounting 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, €œAccounting 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. RECONCILIATION OF GROSS PREMIUMS WRITTEN TO PV PREMIUMS ORIGINATED (in millions) Three Months Ended December 31, Year Ended 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 The following table summarizes earned and written premiums, net of reinsurance. NET EARNED AND WRITTEN PREMIUMS (in millions) Three Months Ended December 31, Year Ended 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 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. EXPENSES AND POLICY ACQUISITION COSTS (in millions) Three Months Ended December 31, Year Ended 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. 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 s
UBS
titutes 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. RECONCILIATION OF US GAAP SHAREHOLDERS€™ EQUITY TO ADJUSTED BOOK VALUE (in millions) December 31, 2007 December 31, 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. 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 S
UBS
IDIARIES (dollars in thousands) December 31, 2007 December 31, 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. 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 s
UBS
idiary, 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 s
UBS
idiaries, 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 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.
Financial Security Assurance Holdings Ltd.
Condensed Consolidated Balance Sheets (unaudited) (in thousands) December 31, 2007 December 31, 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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