XL CAPITAL ASSURANCE INC.
CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE
THREE MONTH PERIODS ENDED
MARCH 31, 2002 AND 2001
XL CAPITAL ASSURANCE INC.
BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------
AS OF AS OF
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
ASSETS
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 2002 - $91,499; 2001 - $76,940) $ 92,295 $ 78,586
Short-term investments, at fair value, which
approximates cost 12,971 38,681
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TOTAL INVESTMENTS 105,266 117,267
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Cash and cash equivalents 20,029 39,204
Premiums receivable 1,452 1,070
Accrued investment income 950 897
Reinsurance balances recoverable on unpaid losses 3,321 1,786
Deferred acquisition costs, net (1,321) (1,118)
Prepaid reinsurance premium 50,149 41,727
Current Federal income tax recoverable 1,651 1,651
Deferred Federal income tax asset 5,026 3,495
Intangible assets - acquired licenses 11,529 11,529
Other assets 528 922
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TOTAL ASSETS $ 198,580 $ 218,430
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LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 54,616 $ 44,933
Unpaid losses and loss adjustment expenses 3,552 1,846
Reinsurance premiums payable 9,277 17,648
Payable for securities purchased -- 12,974
Accounts payable and accrued expenses 4,380 3,767
Intercompany payable to affiliates 3,878 11,309
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TOTAL LIABILITIES 75,703 92,477
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Shareholder's Equity:
Common stock (par value $7,500 for March 31, 2002
and December 31, 2001, 2,000 shares authorized, issued and
outstanding for March 31, 2002 and December 31, 2001) 15,000 15,000
Additional paid-in capital 119,154 119,154
Accumulated other comprehensive income (Net of deferred
Federal income taxes of: 2002 - $298; 2001 - $592) 498 1,054
Accumulated deficit (11,775) (9,255)
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TOTAL SHAREHOLDER'S EQUITY 122,877 125,953
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 198,580 $ 218,430
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See notes to condensed financial statements.
XL CAPITAL ASSURANCE INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTH
PERIODS ENDED MARCH 31, 2002 AND 2001
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------------------------------------
MARCH 31, MARCH 31,
2002 2001
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REVENUES
Gross premiums written $ 16,515 $ 1,625
Ceded premiums written (14,568) (1,495)
-------- --------
Net premiums written 1,947 130
Change in net deferred premium revenue (1,261) (120)
-------- --------
Net premiums earned (Net of ceded earned premium of 686 10
$6,146 in 2002 and $415 in 2001)
Net investment income 1,599 941
Net realized capital gains 236 446
-------- --------
Total revenues 2,521 1,397
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EXPENSES
Losses and loss adjustment expenses (Net of ceded losses and
loss adjustment expenses of $1,536 in 2002 and $104 in 2001) 172 3
Operating expenses 6,106 6,382
-------- --------
Total expenses 6,278 6,385
-------- --------
Loss before Federal income tax benefit (3,757) (4,988)
-------- --------
Deferred Federal income tax benefit (1,237) (1,544)
-------- --------
NET LOSS (2,520) (3,444)
-------- --------
Other comprehensive (loss) income (556) 122
-------- --------
$ (3,076) $ (3,322)
COMPREHENSIVE LOSS -- --
-------- --------
See notes to condensed financial statements.
XL CAPITAL ASSURANCE INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002 AND THE YEAR ENDED DECEMBER 31,
2001 (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
COMMON SHARES
Number of shares, beginning of year 2,000 2,500
Shell acquisition - retirement of XL Capital Assurance Inc. shares -- (2,500)
Shell acquisition - issue new XL Capital Assurance Inc. shares -- 2,000
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Number of shares, end of period 2,000 2,000
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COMMON STOCK $ 15,000 $ 15,000
Balance - beginning of year -- --
Balance-end of period 15,000 15,000
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ADDITIONAL PAID-IN CAPITAL
Balance - beginning of year 119,154 70,000
Contribution of The London Assurance of America Inc. -- 24,154
Capital contribution -- 25,000
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Balance-end of period 119,154 119,154
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance - beginning of year 1,054 951
Net change in unrealized (depreciation) appreciation of investments,
net of deferred Federal tax benefit of $294 in 2002 and expense
of $80 in 2001 (556) 103
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Balance-end of period 498 1,054
--------- ---------
ACCUMULATED DEFICIT
Balance - beginning of year (9,255) (3,067)
Net loss (2,520) (6,188)
--------- ---------
Balance-end of period (11,775) (9,255)
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TOTAL SHAREHOLDER'S EQUITY $ 122,877 $ 125,953
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See notes to condensed financial statements.
XL CAPITAL ASSURANCE INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
MARCH 31, MARCH 31,
2002 2001
CASH PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (2,520) $ (3,444)
-------- --------
Adjustments to reconcile net loss to net cash used in
operating activities
Net realized gains on sale of investments (236) (446)
Amortization of premium on bonds 43 31
Amortization of fair value of acquired licenses -- 23
Increase in unpaid losses and loss adjustment expenses, net 172 3
Increase in deferred premium revenue, net 1,261 120
Decrease in deferred acquisition costs 203 --
(Decrease) increase in reinsurance premiums payable (8,371) 963
Increase in premiums receivable (382) (148)
(Increase) decrease in accrued investment income (53) 128
Increase in deferred Federal income tax asset (1,237) (1,689)
Increase in accounts payable and accrued expenses 613 815
Decrease in intercompany payable to affiliates (7,431) (1,604)
Other 495 (98)
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Total adjustments (14,923) (1,902)
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Net cash used in operating activities (17,443) (5,346)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed maturities and short term investments 5,386 9,652
Proceeds from maturity of fixed maturities and short term investments 75,449 34,273
Purchase of fixed maturities and short term investments (69,593) (30,080)
Payable for securities purchased (12,974) --
-------- --------
Net cash (used in) provided by investing activities (1,732) 13,845
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash of contributed company -- 11,279
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Net cash provided by financing activities -- 11,279
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(Decrease) increase in cash and cash equivalents (19,175) 19,778
Cash and cash equivalents-beginning of year 39,204 5,004
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Cash and cash equivalents-end of period $ 20,029 $ 24,782
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Taxes paid $ -- $ 143
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See notes to condensed financial statements.
XL CAPITAL ASSURANCE INC..
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
1. ORGANIZATION AND OWNERSHIP
XL Capital Assurance Inc. (the Company) is a wholly owned subsidiary of XL
Reinsurance Company of America Inc. ("XL RE AM"), formerly known as NAC
Reinsurance Corporation, which is an indirect wholly owned subsidiary of XL
America Inc. ("XLA"). XLA is an indirect wholly owned subsidiary of XL
Insurance (Bermuda) Ltd. ("XL Insurance"). XL Insurance is an indirect
wholly owned subsidiary of XL Capital Ltd. ("XL Capital"), a financial
service holding company registered in the Cayman Islands. XLA is XL
Capital's U.S. holding company.
XL Capital Assurance Inc. is an insurance company domiciled in the State of
New York. The Company is engaged in the business of providing credit
enhancements primarily through the sale of financial guaranty insurance
contracts on asset-backed structured finance, essential infrastructure
project finance, future flows and public finance transactions. The Company
issued its first insurance contract in December 2000.
2. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at March 31, 2002
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These statements should be read in conjunction with the Company's December
31, 2001 financial statements and notes thereto. The accompanying condensed
balance sheet as of December 31, 2001 was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. The results
of operations for the periods ended March 31, 2002 and 2001 are not
necessarily indicative of the operating results for the full year.
3. CREDIT DEFAULT SWAPS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activity", in June 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activity. It requires that an entity recognize all derivatives as either
other assets or other liabilities in the balance sheet and measure those
instruments at fair value. The Company adopted SFAS No. 133, as amended, as
of January 1, 2001.
Credit Default Swaps meet the definition of a derivative under FAS 133. The
Company has recorded these products at management's estimate of fair value.
Credit Default Swaps are considered, in substance, financial guaranty
contracts as the Company has the intent to hold them to maturity.
Therefore, the change in fair value is split between premiums, losses and
loss adjustment expenses, and adjustments to fair value, which are reported
in "net realized gains/(losses)". The level of fair value adjustments is
dependent upon a number of factors including changes in interest rates,
credit spreads and other market factors. The fair value adjustment for the
period ended March 31, 2002 was a gain of $186,000, which was recorded as
follows:
XL CAPITAL ASSURANCE INC..
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (CONTINUED)
(Dollars in thousands-Unaudited)
Earned premiums (net of ceded premiums of $1,873) $ 113
Losses and loss adjustment expenses (net of ceded
losses of $468) (28)
Change in fair value of credit derivatives 101
-------
Total fair value adjustment $ 186
=======
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
states that all business combinations are to be accounted for using one
method - the purchase method. It requires that business combinations be
accounted for the same way as asset acquisitions are accounted for, based
on values exchanged. The adoption of SFAS No. 141 on July 1, 2001 had no
impact on the Company's financial position or results of operations. The
merger with The London Assurance of America, Inc. on February 22, 2001 had
previously been accounted for using the purchase method of accounting.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which changes the accounting for goodwill and other intangible
assets in business combinations from an amortization approach to an
impairment-only approach. The adoption of SFAS No. 142 on January 1, 2002
resulted in the Company's discontinuation of amortization of its intangible
asset. The Company tested its intangible asset for impairment under the new
standard and determined that no adjustment to recorded balances was
necessary. Amortization expense for the year ended December 31, 2001 was
$244,000.
5. SPECIAL PURPOSE VEHICLES
The Company utilizes special purpose vehicles to a limited extent both
directly and indirectly in the normal course of the Company's business. The
Company provides financial guaranty insurance of structured transactions
backed by pools of assets of specified types, municipal obligations
supported by the issuers' ability to charge fees for specified services or
projects, and corporate risk obligations including essential infrastructure
projects and obligations backed by receivables from future sales of
commodities and other specified services. The obligations related to these
transactions are often securitized through off-balance sheet vehicles. In
synthetic transactions, the Company guarantees payment obligations of
counterparties, including special purpose vehicles, through credit default
swaps referencing asset portfolios. The Company only provides financial
guaranty insurance of these vehicles for fixed premiums at market rates but
does not hold any equity positions or subordinated debt in these
off-balance sheet arrangements. Accordingly, these vehicles are not
consolidated.
The FASB is in the process of adopting a new accounting pronouncement as it
relates to consolidation of special purpose vehicles. The FASB expects a
proposal to be available in the second quarter, 2002. A finalized
pronouncement containing accounting guidance and implementation dates is
expected in the third quarter, 2002.
XL CAPITAL ASSURANCE INC..
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (CONTINUED)
6. TAX SHARING AGREEMENT
The Company's Federal income tax return is consolidated with XLA and its
subsidiaries. Under a tax sharing agreement with XLA, tax charges and
refunds to the Company are based on a separate return basis. At March 31,
2002 and December 31, 2001 the Company had a current Federal income tax
receivable of $1,651,000 from XLA. At March 31, 2002 and December 31, 2001
the Company had a deferred Federal income tax asset of $5,026,000 and
$3,495,000, respectively. The Company believes that a valuation allowance
is unnecessary in connection with the deferred tax asset.
7. FACULTATIVE QUOTA SHARE REINSURANCE TREATY
On October 6, 1999 the Company entered into a Facultative Quota Share
Reinsurance Treaty ("Treaty") with XL Financial Assurance Ltd. ("XLFA"), a
Bermuda financial guaranty insurer, which is 86.8% owned by XL Insurance
Ltd. The remaining 13.2% is owned by Financial Security Assurance Holdings
Ltd., an unrelated company. The Treaty was amended and restated on June 22,
2001. Under the terms of this agreement, XLFA agrees to reinsure up to 90%
of the Company's acceptable risks. The Company is allowed a 30% ceding
commission on premiums written ceded under the terms of this agreement.