Exhibit 99.10
XL FINANCIAL ASSURANCE LTD.
(Incorporated in Bermuda)
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2002 AND 2001
XL FINANCIAL ASSURANCE LTD.
CONDENSED BALANCE SHEETS
AS AT JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
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2002 2001
----------------------
ASSETS:
Investments :
Fixed maturities, at fair value
(amortized cost: 2002 - $375,624; 2001 - $418,904) $378,514 $420,914
Short-term investments, at fair value
(amortized cost: 2002 - $45,170; 2001 - $18,780) 45,298 18,769
----------------------
Total investments available for sale 423,812 439,683
Cash and cash equivalents 61,975 50,243
Accrued investment income 3,266 3,088
Reinsurance balances receivable 52,425 22,171
Deferred acquisition costs 16,697 15,184
Prepaid reinsurance premiums 45,373 10,966
Unpaid losses & loss expenses recoverable 2,197 594
Amounts due from parent and affiliates 9,347 1,523
Other assets 105 87
----------------------
TOTAL ASSETS $615,197 $543,539
======================
LIABILITIES, REDEEMABLE PREFERRED SHARES AND
SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 901 $ 1,768
Derivative liabilities 10,429 17,939
Deferred premium revenue 149,208 83,756
Unpaid losses and loss expenses 18,954 11,831
Reinsurance premiums payable 25,350 4,863
Net payable for investments purchased 80,704 122,315
Dividend payable on preferred shares 7,632 1,932
----------------------
TOTAL LIABILITIES $293,178 $244,404
----------------------
REDEEMABLE PREFERRED SHARES:
Redeemable preferred shares (par value of $120 per share;
10,000 shares authorized; 363 issued and outstanding as at
June 30, 2002 and December 31, 2001, respectively) $ 44 $ 44
Additional paid-in capital 38,956 38,956
----------------------
TOTAL REDEEMABLE PREFERRED SHARES $ 39,000 $ 39,000
----------------------
SHAREHOLDERS' EQUITY:
Common shares (par value of $120 per share;
10,000 shares authorized; 2,057
issued and outstanding as at
June 30, 2002 and December 31, 2001, respectively) $ 247 $ 247
Additional paid-in capital 220,653 220,653
Accumulated other comprehensive income 3,018 1,998
Retained earnings 59,101 37,237
----------------------
TOTAL SHAREHOLDERS' EQUITY $283,019 $260,135
----------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND
SHAREHOLDERS' EQUITY $615,197 $543,539
======================
The accompanying notes are an integral part of these condensed financial
statements.
XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2002 2001 2002 2001
-----------------------------------------------
REVENUES :
Net premiums earned $ 11,953 $ 6,953 $ 21,833 $ 12,510
Net investment income 5,048 4,875 9,704 9,661
Net realized gains (losses) on investments 2,231 (299) 4,028 5,067
Net realized and unrealized gains (losses) on
derivative instruments 988 (231) 7,511 (585)
-----------------------------------------------
Total revenues $ 20,220 $ 11,298 $ 43,076 $ 26,653
-----------------------------------------------
EXPENSES :
Losses and loss expenses $ 3,032 $ 1,240 $ 5,519 $ 1,459
Acquisition costs 4,522 1,385 6,791 2,108
Operating expenses 1,439 1,752 3,201 2,895
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Total expenses $ 8,993 $ 4,377 $ 15,511 $ 6,462
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Net income before cumulative effect of accounting
change $ 11,227 $ 6,921 $ 27,565 $ 20,191
Cumulative effect of accounting change -- -- -- (1,350)
-----------------------------------------------
Net income before dividends on preferred shares $ 11,227 $ 6,921 $ 27,565 $ 18,841
Dividends on preferred shares (5,220) (1,143) (5,701) (1,624)
-----------------------------------------------
NET INCOME FOR COMMON SHAREHOLDERS $ 6,007 $ 5,778 $ 21,864 $ 17,217
===============================================
COMPREHENSIVE INCOME
Net income for common shareholders $ 6,007 $ 5,778 $ 21,864 $ 17,217
Unrealized gains (losses) 8,289 (2,893) 5,048 1,490
Less: reclassification for gains (losses)
realized in income 2,231 (299) 4,028 5,067
-----------------------------------------------
Change in net unrealized appreciation
(depreciation) of investments $ 6,058 (2,594) $ 1,020 $ (3,577)
-----------------------------------------------
COMPREHENSIVE INCOME $ 12,065 $ 3,184 $ 22,884 $ 13,640
===============================================
The accompanying notes are an integral part of these condensed financial
statements.
XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL - OTHER
COMMON COMMON COMPREHENSIVE RETAINED
SHARES SHAREHOLDERS INCOME (LOSS) EARNINGS TOTAL
---------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 247 $ 220,653 $3,932 $17,603 $242,435
Net income for common shareholders
for the year 19,634 19,634
Other comprehensive loss (1,934) (1,934)
---------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 247 $ 220,653 $1,998 $37,237 $260,135
Net income for common shareholders
for the period 21,864 21,864
Other comprehensive income 1,020 1,020
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BALANCE, JUNE 30, 2002 $ 247 $ 220,653 $3,018 $59,101 $283,019
---------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements.
XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
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2002 2001
-----------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 27,565 $ 20,191
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized gains on investments (4,028) (5,067)
Net realized and unrealized losses (gains) on derivative instruments (7,511) 585
Amortization of discount on fixed maturities (517) (496)
Accrued investment income (178) 559
Reinsurance premiums receivable (30,254) (780)
Deferred acquisition costs (1,513) (2,594)
Prepaid reinsurance premiums (34,407) 255
Unpaid losses & loss expenses recoverable (1,603) (33)
Amounts due from parent and affiliates (7,824) 515
Other assets and liabilities (18) (171)
Accounts payable and accrued liabilities (867) (364)
Reinsurance premiums payable 20,487 (201)
Deferred premium revenue 65,452 10,597
Unpaid losses and loss expenses 7,123 1,847
Portfolio transfer -- 25,669
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Total adjustments $ 4,342 $ 30,321
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Net cash provided by operating activities $ 31,907 $ 50,512
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES :
Proceeds from sale of fixed maturities and short-term investments $ 1,040,503 $ 1,229,220
Proceeds from redemption of fixed maturities and short-term investments 19,663 6,783
Purchase of fixed maturities and short-term investments (1,080,341) (1,230,860)
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Net cash provided by (used in) investing activities $ (20,175) $ 5,143
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CASH FLOWS USED IN FINANCING ACTIVITY
Dividends paid on preferred shares $ -- $ (1,492)
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INCREASE IN CASH AND CASH EQUIVALENTS $ 11,732 $ 54,163
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 50,243 17,154
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 61,975 $ 71,317
=============================
The accompanying notes are an integral part of these condensed financial
statements.
XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
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1. ORGANIZATION AND BUSINESS
XL Financial Assurance Ltd. (the "Company") was incorporated with limited
liability under the Bermuda Companies Act 1981 on October 14, 1998 and is
registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto
and related regulations ("The Act"). At March 31, 2002 and 2001, the Company was
approximately 85% owned by XL Insurance (Bermuda) Ltd (a wholly-owned subsidiary
of XL Capital Ltd); 6% by FSA Insurance Company (a wholly-owned subsidiary of
Financial Security Assurance Holdings Ltd) and 9% by Financial Security
Assurance International Ltd. (owned 20% by XL Insurance (Bermuda) Ltd and 80% by
FSA Insurance Company). The Company is an integral part of a joint venture
agreement between XL Capital Ltd and Financial Security Assurance Holdings Ltd.
The Company is primarily engaged in the business of providing reinsurance of
financial guaranties on asset-backed and municipal obligations underwritten by
XL Insurance (Bermuda) Ltd, FSA Insurance Company and XL Capital Assurance Inc.
(a wholly-owned subsidiary of XL Capital Ltd) and other monoline and multiline
insurance companies. This may be in the form of traditional financial guaranty
insurance or via a credit default swap execution. The Company's underwriting
policy is to provide reinsurance of asset-backed and municipal obligations that
would be of a lower investment-grade quality without the benefit of the
Company's reinsurance. The asset-backed obligations reinsured by the Company are
generally issued in structured transactions and are backed by pools of assets
such as residential mortgages loans, consumer or trade receivables, securities
or other assets having ascertainable cash flows or market value. The municipal
obligations reinsured by the Company consist primarily of general obligation
bonds that are supported by the issuers' taxing power and of special revenue
bonds and other special obligations of states and local governments that are
supported by the issuers' ability to impose and collect fees and charges for
public services or specific projects. Reinsurance written by the Company
guarantees payment when due of scheduled payments on an issuers' obligation. In
the case of a payment default on an insured obligation, the Company is generally
required to pay the principal, interest or other such amounts due in accordance
with the obligations' original payment schedule or, at its option, to pay such
amounts on an accelerated basis. The Company conducts surveillance on its
exposures to try and ensure early identification of any loss events. In
addition, in the normal course of business, the Company seeks to reduce the loss
that may arise from such events by reinsuring certain levels of risks in various
areas of exposure with other insurance enterprises or reinsurers.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The accompanying condensed financial statements have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments, which
include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at June 30, 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 year-end condensed balance sheet 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 June 30, 2002 and 2001 are not
necessarily indicative of the operation results for the full year.
The preparation of condensed financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Any such adjustments are reflected in income in the period in which the
XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
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2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION (CONTINUED)
adjustments are made. The financial statement estimates subject to most
uncertainty are estimates for loss reserves and calculation of the fair value of
credit default swap instruments. Certain comparative figures have been
reclassified to conform with the current year's presentation.
3. DERIVATIVE INSTRUMENTS
The following table summarizes the change in fair value of the Company's credit
default swaps recognized in income for the six month period ended June 30, 2002.
Net premiums earned $ 3,506
Losses and loss expenses (876)
Net realized and unrealized (losses) gains on
derivative instruments 7,511
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Total fair value adjustment $ 10,141
========
4. FACULTATIVE QUOTA SHARE REINSURANCE TREATY
On October 6, 1999, the Company entered into a Facultative Quota Share
Reinsurance Treaty ("Treaty") with XL Capital Assurance Inc. ("XLCA"). The
Treaty was amended and restated on June 22, 2001. Under the terms of this
agreement, the Company agrees to reinsure up to 90% of the XLCA's acceptable
risks. The Company is subject to a 30% ceding commission on premiums assumed
under the terms of this agreement.
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 special purpose vehicles by the transferors. 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 special purpose 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 special purpose vehicles are not consolidated.