SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-12644
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3261323
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
350 PARK AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
(212) 826-0100
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
At November 12, 2001, there were 33,216,900 outstanding shares of Common Stock
of the registrant (excludes 301,095 shares of treasury stock).
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INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations and
Comprehensive Income - Three and nine months ended
September 30, 2001 and 2000 4
Condensed Consolidated Statement of Changes in Shareholders'
Equity - Nine months ended September 30, 2001 5
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
---- ----
Bonds at market value (amortized cost of $2,175,150 and $1,998,143) $ 2,313,332 $ 2,103,316
Equity investments at market value (cost of $10,006) 10,076 9,747
Short-term investments 133,634 121,788
----------- -----------
Total investments 2,457,042 2,234,851
Cash 13,759 9,411
Deferred acquisition costs 227,555 201,136
Prepaid reinsurance premiums 395,232 354,117
Reinsurance recoverable on unpaid losses 23,577 24,617
Investment in unconsolidated affiliates 64,743 57,609
Other assets 279,231 266,953
----------- -----------
TOTAL ASSETS $ 3,461,139 $ 3,148,694
----------- -----------
LIABILITIES AND MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 1,041,728 $ 936,826
Losses and loss adjustment expenses 106,907 116,336
Deferred federal income taxes 110,879 88,817
Ceded reinsurance balances payable 26,609 48,784
Notes payable 230,000 230,000
Deferred compensation 90,104 90,275
Minority interest 43,819 37,228
Dividends payable 25,286
Accrued expenses and other liabilities 170,680 134,695
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,846,012 1,682,961
----------- -----------
Common stock (200,000,000 shares authorized; 33,517,995
issued; par value of $.01 per share) 335 335
Additional paid-in capital - common 903,495 903,479
Accumulated other comprehensive income (net of deferred income
tax provision of $44,212 and $34,818) 94,040 70,095
Accumulated earnings 617,257 491,824
Deferred equity compensation 23,716 24,004
Less treasury stock at cost (301,095 and 304,757 shares held) (23,716) (24,004)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,615,127 1,465,733
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST
AND SHAREHOLDERS' EQUITY $ 3,461,139 $ 3,148,694
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
3
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Net premiums written (net of premiums ceded
of $36,821, $31,264, $112,317 and $119,024) $ 69,164 $ 43,909 $ 230,519 $ 153,548
========= ======== ========= =========
Premiums earned (net of premiums ceded of
$24,280, $20,204, $70,780 and $58,170) 59,941 45,684 171,438 137,950
Net investment income 32,239 30,741 95,490 88,580
Net realized gains (losses) 1,450 (565) 5,640 (38,298)
Other income 981 231 1,373 916
--------- -------- --------- ---------
TOTAL REVENUES 94,611 76,091 273,941 189,148
--------- -------- --------- ---------
Expenses:
Losses and loss adjustment expenses [net of
reinsurance recoveries of $236, $1,609,
$2,795 and $1,000] 3,139 2,281 9,112 7,139
Interest expense 4,154 4,154 12,461 12,461
Policy acquisition costs 10,668 8,996 30,368 28,436
Merger related expenses 105,541
Other operating expenses 10,181 7,610 29,620 27,381
--------- -------- --------- ---------
TOTAL EXPENSES 28,142 23,041 81,561 180,958
--------- -------- --------- ---------
Minority interest and equity in earnings of
unconsolidated affiliates 1,682 (113) 2,893 (1,020)
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 68,151 52,937 195,273 7,170
Benefit (provision) for income taxes (15,333) (11,145) (42,964) 10,050
--------- -------- --------- ---------
NET INCOME 52,818 41,792 152,309 17,220
--------- -------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Holding gains arising during period 28,773 16,602 27,728 39,900
Less: reclassification adjustment for gains
(losses) included in net income 951 (365) 3,783 (25,714)
--------- -------- --------- ---------
Other comprehensive income 27,822 16,967 23,945 65,614
--------- -------- --------- ---------
COMPREHENSIVE INCOME $ 80,640 $ 58,759 $ 176,254 $ 82,834
========= ======== ========= =========
</Table>
See notes to condensed consolidated financial statements.
4
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
Additional Accumulated Deferred
Paid-In Other Comp- Equity
Common Capital - rehensive Accumulated Compen- Treasury
Stock Common Income Earnings sation Stock Total
----- ------ ------ -------- ------ ----- -----
BALANCE, December 31, 2000 $335 $903,479 $70,095 $ 491,824 $ 24,004 $(24,004) $ 1,465,733
Net income 152,309 152,309
Dividends (26,876) (26,876)
Deferred equity payout 16 (288) 288 16
Net unrealized loss on investments,
net of tax 23,945 23,945
---- -------- ------- --------- -------- -------- -----------
BALANCE, September 30, 2001 $335 $903,495 $94,040 $ 617,257 $ 23,716 $(23,716) $ 1,615,127
==== ======== ======= ========= ======== ======== ===========
</Table>
See notes to condensed consolidated financial statements.
5
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Premiums received, net $ 194,971 $ 157,166
Policy acquisition and other operating expenses
paid, net (67,856) (239,374)
Loss and LAE recovered (paid), net (16,809) 1,723
Net investment income received 92,638 79,339
Recoverable advances paid (607) (4,040)
Federal income taxes paid (36,090) (22,241)
Interest paid (12,403) (10,006)
Other, net 3,206 (984)
--------- -----------
Net cash provided by operating activities 157,050 (38,417)
--------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 364,945 1,256,398
Purchases of bonds (497,944) (1,517,243)
Purchases of property and equipment (2,723) (3,570)
Net decrease in short-term securities (10,707) 179,391
Other investments, net (4,684) 2,519
--------- -----------
Net cash used for investing activities (151,113) (82,505)
--------- -----------
Cash flows from financing activities:
Dividends paid (1,589) (7,876)
Treasury stock 38,644
Settlement of forward shares 39,408
Other 46,978
--------- -----------
Net cash provided by (used for) financing
activities (1,589) 117,154
--------- -----------
Net increase in cash 4,348 (3,768)
Cash at beginning of period 9,411 6,284
--------- -----------
Cash at end of period $ 13,759 $ 2,516
========= ===========
</Table>
(a) In 2001, restricted treasury stock of $288 was distributed to a Director
as a deferred compensation plan payout.
See notes to condensed consolidated financial statements.
6
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance
holding company domiciled in the State of New York. The Company is primarily
engaged (through its insurance company subsidiaries, collectively known as FSA)
in the business of providing financial guaranty insurance on asset-backed and
municipal obligations. The Company is an indirect subsidiary of Dexia S.A.
(Dexia), a publicly held Belgian corporation.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, accordingly, do not
include all of the information and disclosures required by accounting principles
generally accepted in the United States of America. These statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report to Shareholders filed on Form 10-K.
The accompanying financial statements have not been audited by independent
accountants in accordance with auditing standards generally accepted in the
United States of America but, 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 September 30, 2001
and for all periods presented, have been made. The December 31, 2000 condensed
balance sheet data 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
September 30, 2001 and 2000 are not necessarily indicative of the operating
results for the full year. Certain prior year balances have been reclassified to
conform to current year's presentation.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 was
subsequently amended by SFAS No. 137 and No. 138. These statements established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure the instruments at fair
value. At December 31, 2000 and September 30, 2001, the Company had a limited
number of insurance policies considered to be derivatives for accounting
purposes and had no open positions in U.S. Treasury bond futures, call options
or other derivative instruments used for hedging purposes. For the three months
and nine months ended September 30, 2001, the Company recorded, as an increase
to premiums earned, a market value adjustment of $2,302,000 and $6,039,000,
respectively, relating to these policies. The adoption on January 1, 2001 of
this standard did not have a material impact on the Company's financial
position, results of operations or cash flows.
7
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3. RECENTLY ISSUED ACCOUNTING STANDARDS-CONTINUED
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 requires the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires unallocated negative goodwill to be
written off immediately as an extraordinary gain (instead of being deferred and
amortized). These provisions are effective for business combinations accounted
for by the purchase method for which the date of acquisition is after June 30,
2001. Certain SFAS No. 141 provisions also apply to purchase business
combinations for which the acquisition date was before July 1, 2001. SFAS No.
142 addresses how intangible assets acquired individually or with a group of
other assets (but not those acquired in a business combination) should be
accounted for in the financial statements. This statement requires that goodwill
no longer be amortized and instead be subject to an impairment test performed at
least annually. The provisions of SFAS No. 142 will be effective for fiscal
years beginning after December 31, 2001. Management believes that the
implementation of these standards, on January 1, 2002, will not have a material
effect on the Company's financial position, results of operations or cash flows.
8
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Management and investors consider the following measures important in analyzing
the financial results of the Company: core net income, operating net income,
core revenue, core expenses and PV premiums written. However, none of these
measures are promulgated in accordance with accounting principles generally
accepted in the United States of America and should not be considered as
substitutes for net income, revenues, expenses and gross premiums written.
2001 AND 2000 THIRD QUARTER RESULTS
The Company's 2001 third quarter net income was $52.8 million, compared with net
income of $41.8 million for the same period in 2000. Core net income (operating
net income less the after-tax effect of refundings and prepayments) was $54.6
million, compared with $44.4 million for the same period in 2000, an increase of
23.1%. Total core revenues increased $16.2 million, from $74.2 million in the
third quarter of 2000 to $90.5 million in the third quarter of 2001, while total
core expenses increased only $4.0 million. Operating net income (net income less
the after-tax effect of net realized capital gains or losses, the cost of the
equity-based compensation programs, changes in fair value of certain insurance
products as required by Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133)
and other non-operating items) was $54.8 million for the third quarter of 2001
versus $45.4 million for the comparable period in 2000, an increase of $9.4
million, or 20.6%.
The Company employs two measures of gross premiums originated for a given
period. Gross premiums written captures premiums collected in the period,
whether collected up-front for business originated in the period or in
installments for business originated in prior periods. An alternative measure,
the gross present value of premiums written (gross PV premiums written),
reflects future installment premiums discounted to a present value, as well as
up-front premiums, but only for business originated in the period. The Company
considers gross PV premiums written to be the better indicator of a given
period's origination activity because a substantial part of the Company's
premiums are collected in installments, a practice typical of the asset-backed
business. The discount rate used to calculate the gross PV premiums written is
5.79% for 2001 and was 5.77% for 2000. The discount rates represent the average
pre-tax yield on the Company's investment portfolio for the previous three
years. Regardless of the measure used, quarter to quarter comparisons are of
limited significance because originations fluctuate from quarter to quarter but
historically have not exhibited a seasonal pattern.
Gross premiums written increased 41.0%, to $106.0 million for the third quarter
of 2001 from $75.2 million for the third quarter of 2000. Gross PV premiums
written increased 54.9%, to $139.5 million in the third quarter of 2001 from the
third quarter result of $90.1 million in 2000. In the third quarter of 2001,
U.S. asset-backed gross PV premiums written were $65.0 million as compared with
$38.5 million in the same period of 2000, an increase of 68.8%; U.S. municipal
gross PV premiums written were $35.0 million as compared with $34.0 million, an
increase of 2.9%; and international gross PV premiums were $39.5 million as
compared with $17.6 million, an increase of 124.4%.
9
<Page>
In the third quarter of 2001, the Company insured par value of obligations
totaling $26.6 billion, an increase of 86.5% compared to the third quarter of
2000. FSA's third quarter U.S. asset-backed component rose 78.4% to $12.3
billion and the U.S. municipal component rose 39.0% to $7.4 billion. The
international sector increased to $6.9 billion in the third quarter of 2001 from
$2.1 billion in the third quarter of 2000.
In the U.S. asset-backed market, where credit spreads were generally wide,
funded and synthetic collateralized debt obligations (CDOs) and steady business
from repeat consumer receivable issuers made the biggest contributions to third
quarter results. Additionally, a market has developed for guarantees of
residential mortgage-backed securities rated Triple-A prior to the application
of the Company's guaranty. In the U.S. municipal market, market volume remained
robust through the first ten weeks of the quarter. The driving forces have been
lower interest rates (and related growth in refundings), continuing
infrastructure needs and the weakening economy. The September 11, 2001 terrorist
attacks in New York City and Washington, D.C. caused an interruption of new
issuance at the end of the quarter, but activity has since resumed. In the
international market, the main sources of the Company's business were funded and
synthetic CDOs and other structured financings.
Net premiums written were $69.2 million for the third quarter of 2001, an
increase of 57.5% compared with the third quarter of 2000. Net premiums earned
for the third quarter of 2001 were $59.9 million, compared with $45.7 million in
the third quarter of 2000, an increase of 31.2%. Premiums earned from refundings
and prepayments were $0.4 million for the third quarter of 2001 and $2.4 million
for the same period of 2000, contributing $0.2 million and $1.1 million,
respectively, to after-tax earnings. For the third quarter of 2001, premium
adjustments relating to the mark-to-market adjustment required by SFAS No. 133
resulted in an increase of $2.3 million to premiums earned. Net premiums earned
for the quarter grew 32.4% relative to the same period in 2000 when the effects
of refundings and prepayments and the mark-to-market adjustment are eliminated.
Net investment income was $32.2 million for the third quarter of 2001 and $30.7
million for the comparable period in 2000, an increase of 4.9%. The Company's
effective tax rate on investment income was 10.8% for the third quarter of 2001
compared with 12.5% for the same period in 2000. In the third quarter of 2001,
the Company realized $1.5 million in net capital gains compared with net capital
losses of $0.6 million for the same period in 2000. Capital gains and losses are
generally a by-product of the normal investment management process and will vary
substantially from period to period.
The provision for losses and loss adjustment expenses during the third quarter
of 2001 was $3.1 million compared with $2.3 million in 2000, representing
additions to the Company's general loss reserve. Additions to the general loss
reserve represent management's estimate of the amount required to adequately
cover the net cost of claims. The Company will, on an ongoing basis, monitor
these reserves and may periodically adjust such reserves, upward or downward,
based on the Company's actual loss experience, its future mix of business and
future economic conditions. The Company evaluated its insured portfolio to
assess the potential impact of the events of September 11, 2001, and does not
expect that it will incur any losses as a direct result of the tragedy. The
Company's insured portfolio includes approximately $131.0 million of gross
exposure (approximately $76.0 million after reinsurance) to Port Authority of
New York and New Jersey Consolidated Revenue Bonds backed by the Authority's
general revenues, including those from bridges and tunnels, and not directly
secured by lease payments or other payments related to the World Trade Center.
No new case reserves were established during the third quarter of 2001. At
September 30, 2001, the unallocated balance in the Company's general loss
reserve was $71.4 million.
Total policy acquisition and other operating expenses (excluding the cost of the
equity-based compensation programs of $6.4 million for the third quarter of 2001
compared with $4.9 million for the same period of 2000) were $14.4 million for
the third quarter of 2001 compared with $11.7 million for the same period in
2000. Excluding the effects of refundings, total policy acquisition and other
operating expenses were $14.2 million for the third quarter of 2001 compared
with $11.0 million for the same period in 2000.
10
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Income before income taxes for the third quarter of 2001 was $68.2 million
compared with $52.9 million for the same period in 2000.
The Company's effective tax rate for the third quarter of 2001 was 22.5%
compared with 21.1% for the same period in 2000. The effective tax rate differs
from the statutory tax rate of 35.0% primarily due to tax-exempt interest
income.
2001 AND 2000 FIRST NINE MONTHS RESULTS
The Company's 2001 first nine months of net income was $152.3 million compared
with net income of $17.2 million (net income of $92.7 million excluding costs
relating to the July 5, 2000 merger with a subsidiary of Dexia S.A.) for the
same period in 2000. Core net income was $155.0 million, compared with $127.4
million for the same period in 2000, an increase of 21.7%. Total core revenues
for the first nine months of 2001 increased $38.8 million, from $220.2 million
in 2000 to $259.0 million in 2001, while total core expenses increased only $7.9
million. Operating net income was $156.6 million for the first nine months of
2001 versus $130.7 million for the comparable period in 2000, an increase of
$25.9 million, or 19.8%.
Gross premiums written increased 25.8% to $342.8 million for the first nine
months of 2001 from $272.6 million for the first nine months of 2000. Gross PV
premiums written increased 34.0%, from $321.8 million in 2000 to $431.0 million
in the first nine months of 2001. U.S. asset-backed gross PV premiums written
were $183.5 million in the first nine months of 2001, as compared with $137.2
million in the first nine months of 2000, an increase of 33.7%. In the U.S.
municipal business, for the first nine months gross PV premiums written
increased 58.8% to $158.3 million in 2001 from $99.7 million in 2000. For the
international sector, gross PV premiums written in the first nine months
increased to $89.2 million in 2001 from $84.9 million in 2000, an increase of
5.1%.
In the first nine months of 2001, the Company insured par value of obligations
totaling $70.7 billion, a 75.8% increase over the same period in 2000. FSA's
first nine months par insured in the U.S. asset-backed and U.S. municipal
sectors increased 66.4% to $30.7 billion and 77.0% to $26.1 billion,
respectively, while its international sector par insured rose 98.6% to $13.9
billion.
Net premiums written were $230.5 million for the first nine months of 2001, an
increase of $77.0 million, or 50.1%, compared with 2000. Net premiums earned for
the first nine months of 2001 were $171.4 million, compared with $138.0 million
in the first nine months of 2000, an increase of 24.3%. Premiums earned from
refundings and prepayments were $3.3 million for the first nine months of 2001
and $7.3 million for the same period of 2000, contributing $1.6 million and $3.3
million, respectively, to after-tax earnings. For the first nine months of 2001,
premium adjustments relating to the mark-to-market adjustment required by SFAS
No. 133 resulted in an increase of $6.0 million to premiums earned. Net premiums
earned for the first nine months grew 24.1% relative to the same period in 2000
when the effects of refundings and prepayments and the mark-to-market adjustment
are eliminated.
Net investment income was $95.5 million for the first nine months of 2001 and
$88.6 million for the comparable period in 2000, an increase of 7.8%. The
Company's effective tax rate on investment income was 11.0% for the first nine
months of 2001 compared with 13.0% in 2000. In the first nine months of 2001,
the Company realized $5.6 million in net capital gains as compared with net
losses of $38.3 million for the same period in 2000. Capital gains and losses
are generally a by-product of the normal investment management process and will
vary substantially from period to period. The Company intentionally incurred
above normal realized losses during the first nine months of 2000 in order to
take advantage of various federal tax loss carrybacks available to the Company.
The provision for losses and loss adjustment expenses during the first nine
months of 2001 was $9.1 million compared with $7.1 million for the same period
in 2000, representing additions to the Company's general loss reserve.
11
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Total policy acquisition and other operating expenses (excluding the cost of the
equity-based compensation programs of $17.6 million for the first half of 2001
compared with $18.3 million for the same period of 2000) were $42.4 million for
the first nine months of 2001 compared with $37.6 million for the same period in
2000, an increase of 12.2%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $41.3 million for the first nine
months of 2001 compared with $35.4 million for the same period in 2000, an
increase of 16.7%. In the first nine months of 2000, the Company recognized
$105.5 million in merger related expenses, of which $85.8 million represented an
increase in equity-based compensation and $19.7 million was for various fees
related to the merger.
Income before income taxes for the first nine months of 2001 was $195.3 million,
compared with $7.2 million for the same period in 2000.
The Company's effective tax rate for the first nine months of 2001 was 22.0%.
The effective tax rate differs from the statutory tax rate of 35.0% due to
tax-exempt interest income for the first nine months of 2001 and tax-exempt
interest income and the non-deductibility of certain merger related expenses for
the first nine months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated invested assets and cash equivalents at September 30,
2001, net of unsettled security transactions, was $2,422.3 million, compared
with the December 31, 2000 balance of $2,234.7 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized gain position of $138.3 million at September 30, 2001 and $104.9
million at December 31, 2000.
At September 30, 2001, the Company had, at the holding company level, an
investment portfolio of $11.2 million available to fund the liquidity needs of
its activities outside of its insurance operations. Because the majority of the
Company's operations are conducted through FSA, the long-term ability of the
Company to service its debt will largely depend upon the receipt of dividends or
surplus note payments from FSA and upon external financings.
FSA's ability to pay dividends is dependent upon FSA's financial condition,
results of operations, cash requirements, rating agency approval and other
related factors and is also subject to restrictions contained in the insurance
laws and related regulations of New York and other states. Under New York State
insurance law, FSA may pay dividends out of earned surplus, provided that,
together with all dividends declared or distributed by FSA during the preceding
12 months, the dividends do not exceed the lesser of (i) 10% of policyholders'
surplus as of its last statement filed with the New York Superintendent of
Insurance or (ii) adjusted net investment income during this period. FSA paid no
dividends in 2000. In the first nine months of 2001, Financial Security
Assurance International Ltd., a subsidiary of FSA, paid a preferred dividend of
$1.6 million to its minority interest owners. Based upon FSA's statutory
statements for the quarter ended September 30, 2001, and considering dividends
that can be paid by its subsidiary, the maximum amount normally available for
payment of dividends by FSA without regulatory approval over the following 12
months is approximately $76.6 million. However, as a customary condition for
approving the application of Dexia for a change in control of FSA, the prior
approval of the Superintendent of the New York State Insurance Department (the
Insurance Department) is required for any payment of dividends by FSA to the
Company for a period of two years following the change in control, which
occurred July 5, 2000. In addition, at September 30, 2001, the Company held $120
million of surplus notes of FSA. Payments of principal and interest on such
notes may be made only with the approval of the Insurance Department. FSA paid
$3.0 million and $4.5 million in interest on such notes in the first nine months
of 2001 and 2000, respectively. On October 2, 2001, FSA, with the approval of
the Insurance Department, paid $26.0 million of principal on such notes.
In September 2001, the Company declared a dividend of $0.76125 per share or
$25.3 million, which was paid in October 2001.
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FSA's primary uses of funds are to pay operating expenses and to pay dividends
to, or principal of or interest on surplus notes held by, its parent. FSA's
funds are also required to satisfy claims under insurance policies in the event
of default by an issuer of an insured obligation and the unavailability or
exhaustion of other payment sources in the transaction, such as the cash flow or
collateral underlying the obligations. FSA seeks to structure asset-backed
transactions to address liquidity risks by matching insured payments with
available cash flow or other payment sources. The insurance policies issued by
FSA provide, in general, that payments of principal, interest and other amounts
insured by FSA may not be accelerated by the holder of the obligation but are
paid by FSA in accordance with the obligation's original payment schedule or, at
FSA's option, on an accelerated basis. These policy provisions prohibiting
acceleration of certain claims are mandatory under Article 69 of the New York
Insurance Law and serve to reduce FSA's liquidity requirements.
The Company believes that FSA's expected operating liquidity needs, both on a
short- and long-term basis, can be funded from its operating cash flow. In
addition, FSA has a number of sources of liquidity that are available to pay
claims on a short- and long-term basis: cash flow from written premiums, FSA's
investment portfolio and earnings thereon, reinsurance arrangements with
third-party reinsurers, liquidity lines of credit with banks, and capital market
transactions.
FSA has a credit arrangement, aggregating $125.0 million at September 30, 2001,
provided by commercial banks and intended for general application to
transactions insured by FSA and its insurance company subsidiaries. At September
30, 2001, there were no borrowings under this arrangement, which expires April
26, 2002, unless extended. In addition, there are credit arrangements assigned
to specific insured transactions. In August 1994, FSA entered into a facility
agreement with Canadian Global Funding Corporation and Hambros Bank Limited.
Under the agreement, FSA can arrange financing for transactions subject to
certain conditions. The amount of this facility was $186.9 million, of which
$117.3 million was unutilized at September 30, 2001.
FSA has a standby line of credit in the amount of $240.0 million with a group of
international banks to provide loans to FSA after it has incurred, during the
term of the facility, cumulative municipal losses (net of any recoveries) in
excess of the greater of $240.0 million or the average annual debt service of
the covered portfolio multiplied by 5.75%, which amounted to $632.5 million at
September 30, 2001. The obligation to repay loans made under this agreement is a
limited recourse obligation payable solely from, and collateralized by, a pledge
of recoveries realized on defaulted insured obligations in the covered
portfolio, including certain installment premiums and other collateral. This
commitment has a term that will expire on April 30, 2008 and contains an annual
renewal provision subject to approval by the banks. No amounts have been
utilized under this commitment as of September 30, 2001.
The Company has no plans for material capital expenditures within the next
twelve months.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements regarding, among other
things, the Company's plans and prospects. Important factors, including general
market conditions and the competitive environment, could cause actual results to
differ materially from those described in such forward-looking statements.
Certain of these factors are described in more detail under the heading
"Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 2000. Forward-looking statements in this
report are expressly qualified by all such factors. The Company undertakes no
obligation to revise or update any forward-looking statements to reflect changes
in events or expectations or otherwise.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 17, 2001, the Company's shareholders executed a Written Consent of
Shareholders in Lieu of Annual Meeting. Under the Written Consent, the Company's
shareholders unanimously approved:
(1) the election of Directors of the Company to hold office until the
later of the next annual meeting of shareholders or their successors shall
be duly elected and have qualified, as follows:
Robert P. Cochran
Pierre Richard
John J. Byrne
Martine Decamps
Alain Delouis
Robert N. Downey
Roland C. Hecht
David O. Maxwell
Sean W. McCarthy
James H. Ozanne
Paul Vanzeveren
Rembert von Lowis;
(2) the amendment and restatement of the Company's Equity Participation
Plan, and the ratification of grants of performance shares thereunder
theretofore approved by the Company's Human Resources Committee; and
(3) the ratification and approval of the selection by the Company's Board
of Directors of PricewaterhouseCoopers LLP as independent auditors for the
Company for the fiscal year ending December 31, 2001.
In September 2001, Mr. Vanzeveren resigned from the Company's Board of
Directors and was replaced by Mr. Bruno Deletre.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amended and Restated Employment Agreement dated as of
September 6, 2001, by and between the Company and Roger K.
Taylor.
99 Financial statements of Financial Security Assurance Inc. for
the quarterly period ended September 30, 2001.
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
By /s/ Jeffrey S. Joseph
---------------------------------------
November 13, 2001 Jeffrey S. Joseph
Managing Director & Controller
(Chief Accounting Officer)
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Exhibit Index
Exhibit No. Exhibit
- ----------- -------
10.1 Amended and Restated Employment Agreement dated as of September 6,
2001, by and between the Company and Roger K. Taylor.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended September 30, 2001.