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 June 30, 1999
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 July 31, 1999, there were outstanding 31,533,781 shares of Common Stock, par
value $0.01 per share, of the registrant (includes 1,391,972 shares of Common
Stock owned by a trust on behalf of the Company and excludes 742,520 shares of
Common Stock actually held in treasury).
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income - Three and six months
ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
- Six months ended June 30, 1999 5
Consolidated Statements of Cash Flows
- Six months ended June 30, 1999 and 1998 6
Notes to 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 Securities Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, December 31,
ASSETS 1999 1998
---- ----
Bonds at market value (amortized cost of $1,707,243 and $1,655,042) $ 1,697,581 $ 1,708,040
Equity investments at market value (cost of $62,005 and $64,292) 63,705 68,243
Short-term investments 112,498 98,554
----------- -----------
Total investments 1,873,784 1,874,837
Cash 8,426 3,490
Deferred acquisition costs 195,107 199,559
Prepaid reinsurance premiums 234,477 217,096
Reinsurance recoverable on unpaid losses 1,456 3,907
Receivable for securities sold 22,611 1,655
Other assets 175,537 143,662
----------- -----------
TOTAL ASSETS $ 2,511,398 $ 2,444,206
=========== ===========
LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 755,463 $ 721,699
Losses and loss adjustment expenses 64,882 63,947
Deferred federal income taxes 68,969 87,254
Ceded reinsurance balances payable 18,471 31,502
Payable for securities purchased 161,477 105,859
Notes payable 230,000 230,000
Minority interest 21,429 20,388
Accrued expenses and other liabilities 107,278 117,421
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST
REDEEMABLE PREFERRED STOCK 1,427,969 1,378,070
----------- -----------
Redeemable preferred stock (20,000,000 and 3,000,000 shares
authorized; 2,000,000 issued and outstanding; par
value of $.01 per share) 20 20
Additional paid-in capital - preferred 680 680
----------- -----------
700 700
----------- -----------
Common stock (200,000,000 and 50,000,000 shares authorized;
32,276,301 issued; par value of $.01 per share) 323 323
Additional paid-in capital - common 740,863 733,442
Accumulated other comprehensive income (loss) (net of deferred
income tax provision (benefit) of $(2,161) and $20,288) (4,014) 37,678
Accumulated earnings 373,973 325,150
Deferred equity compensation 41,268 43,946
Less treasury stock at cost (2,134,492 and 2,372,839 shares held) (69,684) (75,103)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,082,729 1,065,436
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST,
REDEEM-ABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY $ 2,511,398 $ 2,444,206
=========== ===========
See notes to condensed consolidated financial statements. 1998 numbers have
been revised. See Note 3 "Restatements and Reclassifications."
3
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Net premiums written (net of premiums ceded
of $20,090, $27,121, $48,514 and $43,512) $ 51,835 $ 62,121 $ 101,745 $ 100,068
Increase in deferred premium revenue (9,061) (29,669) (17,677) (35,695)
--------- --------- --------- ---------
Premiums earned (net of premiums ceded of
$14,780, $12,581, $30,221 and $25,701) 42,774 32,452 84,068 64,373
Net investment income 22,736 19,255 44,760 37,938
Net realized gains (losses) (10,454) 3,939 (9,630) 6,672
Other income 94 126 152 356
--------- --------- --------- ---------
TOTAL REVENUES 55,150 55,772 119,350 109,339
--------- --------- --------- ---------
Expenses:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $(2,425), $(27),
$(2,231) and $(6,868)) 1,825 1,047 4,000 2,094
Interest expense 4,153 2,408 8,307 4,842
Policy acquisition costs 10,676 8,527 20,593 16,914
Other operating expenses 8,857 7,606 13,377 16,489
--------- --------- --------- ---------
TOTAL EXPENSES 25,511 19,588 46,277 40,339
--------- --------- --------- ---------
Minority interest and equity earnings (343) (928)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 29,296 36,184 72,145 69,000
Provision for income taxes 5,824 9,446 16,516 17,948
--------- --------- --------- ---------
NET INCOME 23,472 26,738 55,629 51,052
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during period (35,254) 4,368 (48,340) 6,787
Less: reclassification adjustment for losses
(gains) included in net income 7,184 (2,561) 6,648 (4,337)
--------- --------- --------- ---------
Other comprehensive income (loss) (28,070) 1,807 (41,692) 2,450
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (4,598) $ 28,545 $ 13,937 $ 53,502
========= ========= ========= =========
As based upon net income:
Basic earnings per common share $ 0.77 $ 0.92 $ 1.82 $ 1.76
========= ========= ========= =========
Diluted earnings per common share $ 0.73 $ 0.88 $ 1.74 $ 1.69
========= ========= ========= =========
See notes to condensed consolidated financial statements. Net income for the
periods ended June 30, 1998 has been revised.
See Note 3 "Restatements and Reclassifications."
4
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Additional Accumulated Deferred
Paid-In Other Comp- Equity
Common Capital - rehensive Accumulated Compen- Treasury
Stock Common Income (Loss) Earnings sation Stock Total
----- ------ ------------- -------- ------ ----- -----
BALANCE, December 31, 1998 $323 $733,442 $37,678 $325,150 $43,946 $ (75,103) $ 1,065,436
Net income 55,629 55,629
Net unrealized loss on investments (41,692) (41,692)
Dividends paid on common stock
($0.225 per share) (6,806) (6,806)
Deferred equity compensation 8,646 8,646
Deferred equity payout 1,534 (11,324) 1,644 (8,146)
Purchase of 42,025 shares of
common stock (2,008) (2,008)
Sale of 221,100 shares of treasury
stock 5,887 5,783 11,670
---- -------- ------- -------- ------- ----------- -----------
BALANCE, June 30, 1999 $323 $740,863 $(4,014) $373,973 $41,268 $ (69,684) $ 1,082,729
==== ======== ======= ======== ======= =========== ===========
See notes to condensed consolidated financial statements.
1998 numbers have been revised.
See Note 3 "Restatements and Reclassifications."
5
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Cash flows from operating activities:
Premiums received, net $ 78,387 $ 116,661
Policy acquisition and other operating expenses
paid, net (44,123) (43,352)
Loss and LAE recovered (paid), net (600) 15,672
Net investment income received 37,470 34,742
Recoverable advances received (paid) (10,350) 4,561
Federal income taxes paid (21,266) (30,038)
Interest paid (8,037) (4,820)
Other, net 338 993
----------- -----------
Net cash provided by operating activities 31,819 94,419
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 1,076,195 873,081
Purchases of bonds (1,097,665) (1,011,388)
Purchases of property and equipment (476) (605)
Net decrease (increase) in short-term securities (12,253) 66,759
Other investments, net 1,283 (12,314)
----------- -----------
Net cash used for investing activities (32,916) (84,467)
----------- -----------
Cash flows from financing activities:
Dividends paid (6,806) (6,184)
Treasury stock, net 12,888 (39)
Other (49) (202)
----------- -----------
Net cash provided by (used for) financing
activities 6,033 (6,425)
----------- -----------
Net increase in cash 4,936 3,527
Cash at beginning of period 3,490 12,475
----------- -----------
Cash at end of period $ 8,426 $ 16,002
=========== ===========
See notes to condensed consolidated financial statements.
1998 numbers have been revised. See Note 3
"Restatements and Reclassifications."
6
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 1999 and 1998
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 subsidiaries, collectively known as FSA) in the
business of providing financial guaranty insurance on asset-backed and municipal
obligations. At June 30, 1999, the Company was owned 12.0% by MediaOne Capital
Corporation (MediaOne), 13.7% by White Mountains Insurance Group, Inc. (White
Mountains), formerly Fund American Enterprises Holdings, Inc., 6.4% by The Tokio
Marine and Fire Insurance Co., Ltd. (Tokio Marine), 5.4% by XL Capital Ltd (XL)
and 62.5% by the public and employees. These percentages are calculated based
upon outstanding shares, which are reduced by treasury shares as presented in
these financial statements.
2. BASIS OF PRESENTATION
The accompanying 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 generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report to Shareholders filed on Form 10-K, as amended. The accompanying
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards 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 June 30, 1999 and for all periods presented have been made. The
December 31, 1998 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. The results of operations for the periods ended
June 30, 1999 and 1998 are not necessarily indicative of the operating results
for the full year.
3. RESTATEMENTS AND RECLASSIFICATIONS
During a review of the Company's shelf registration statement in April
1999, the Securities and Exchange Commission (SEC) staff advised the Company
that, in its opinion, the accounting the Company had used for the forward
purchase agreements for the benefit of employees and directors should be changed
(see Note 2 section entitled "Restatement and Reclassifications" of the
Company's consolidated financial statements filed on Form 10-K, as amended).
The effect of this change in accounting for the forward purchase
agreements as previously reported and as adjusted are shown below (in thousands,
except per share data):
Information as reported:
1998
-------------------------
First Six Second
Months Quarter
------ -------
Income before taxes $ 74,297 $ 38,203
Net income 54,495 28,049
Basic earnings per common share 1.88 0.97
Diluted earnings per common share 1.80 0.92
7
Information as adjusted:
1998
-------------------------
First Six Second
Months Quarter
------ -------
Income before taxes $ 69,000 $ 36,184
Net income 51,052 26,738
Basic earnings per common share 1.76 0.92
Diluted earnings per common share 1.69 0.88
The effect on shareholders' equity was a decrease of $7,300,000 at
December 31, 1998.
In addition, the Company reclassified the redeemable preferred stock
outside of shareholders' equity, which decreased shareholders' equity as of
December 31, 1998 by $700,000.
8
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
1999 and 1998 Second Quarter Results
The Company's 1999 second quarter net income was $23.5 million, compared with
$26.7 million for the same period in 1998, a decrease of 12.2%. Core net income
(operating net income less the after-tax effect of refundings and prepayments)
was $33.6 million, compared with $26.3 million for the same period in 1998, an
increase of 27.5%. Total core revenues in the second quarter of 1999 increased
$14.4 million, from $48.4 million in 1998 to $62.8 million in 1999, while total
core expenses increased only $5.6 million. Operating net income (net income less
the after-tax effect of net realized capital gains or losses and the cost of the
equity based compensation programs and other non-operating items) was $34.9
million for the second quarter of 1999 versus $28.0 million for the comparable
period in 1998, an increase of $6.9 million or 25.0%.
There are 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 5.9% for 1999 and was 6.3%
for 1998. 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 decreased 19.4%, from $89.2 million for the second
quarter of 1998 to $71.9 million for the second quarter of 1999. Gross PV
premiums written increased 9.1%, to $117.0 million in the second quarter of 1999
from $107.3 million in the second quarter of 1998. The decline in gross premiums
written is due to the decline in municipal originations, where premiums are
usually collected up front rather than in installments, whereas the increase in
gross PV premiums written was due to primarily the increase in asset-backed and
international transactions. In the second quarter of 1999, asset-backed gross PV
premiums written were $66.6 million, as compared with $31.7 million in 1998, an
increase of 110.1%, while international gross PV premiums were $22.4 million as
compared with $7.2 million, an increase of 211.1%. The increase in asset-backed
transactions was strong across all sectors while in the international sector the
Company insured several large European transactions during the quarter. For the
municipal business, gross PV premiums written in the second quarter decreased to
$28.0 million in 1999 from $68.4 million in 1998, a decrease of 59.1%. Second
quarter municipal PV premiums were lower than in the second quarter of 1998 due
to the decline in municipal volume, the comparative effect of FSA's insurance of
$1.4 billion of bonds for the Long Island Power Authority in the second quarter
of 1998, and a shift in sector concentration, with a higher percentage of
tax-supported issues and a significant reduction in health care activity.
In the second quarter of 1999, the Company insured par value of bonds totaling
$17.1 billion, approximately the same when compared to the second quarter of
1998. FSA's second quarter asset-backed component rose 19.3% to $7.3 billion and
the international sector rose 398.6% to $3.0 billion while its municipal sector
declined 34.2% to $6.8 billion.
Net premiums written were $51.8 million for the second quarter of 1999, a
decline of 16.6% when compared with 1998. Net premiums earned for the second
quarter of 1999 were $42.8 million, compared with $32.5 million in the second
quarter of 1998, an increase of 31.8%. Premiums earned from refundings and
prepayments were $2.8 million for the second quarter of 1999 and $3.5 million
for the same period of 1998, contributing $1.4 million and $1.6 million,
respectively, to after-tax earnings. Net premiums earned for the quarter grew
37.8% relative to the same period in 1998 when the effects of refundings and
prepayments are eliminated.
9
Net investment income was $22.7 million for the second quarter of 1999 and $19.3
million for the comparable period in 1998, an increase of 18.1%. The Company's
effective tax rate on investment income was 17.8% for the second quarter of 1998
compared with 14.5% for the same period in 1999. In the second quarter of 1999,
the Company realized $10.5 million in net capital losses as compared with net
capital gains of $3.9 million for the same period in 1998. Capital gains and
losses are 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 second quarter
of 1999 was $1.8 million compared with $1.0 million in 1998, representing
additions to the Company's general loss reserve. The 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 based on the
Company's actual loss experience, its future mix of business, and future
economic conditions. At June 30, 1999, the unallocated balance in the Company's
general loss reserve was $50.6 million.
Total policy acquisition and other operating expenses (excluding the cost of the
equity based compensation programs of $6.4 million for the second quarter of
1999 compared with $5.8 million for the same period of 1998) were $13.1 million
for the second quarter of 1999 compared with $10.3 million for the same period
in 1998, an increase of 27.3%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $12.4 million for the second
quarter of 1999 compared with $9.3 million for the same period in 1998, an
increase of 32.7%. The increase was the result of higher DAC amortization due to
a higher level of premiums earned and personnel costs.
Income before income taxes for the second quarter of 1999 was $29.3 million,
down from $36.2 million, or 19.0%, for the same period in 1998.
The Company's effective tax rate for the second quarter of 1999 was 19.9%
compared with 26.1% for the same period in 1998. This decrease is the primarily
the result of lower pre-tax income as the Company recognized capital losses in
the second quarter of 1999 versus capital gains for the same period in 1998.
The weighted average number of diluted shares of common stock outstanding
increased from 30,371,000 for the quarter ended June 30, 1998, to 31,954,000
during the second quarter of 1999. This increase was primarily due to 1.6
million shares the Company issued to XL Capital Ltd in November 1998. Diluted
earnings per share decreased from $0.88 for the second quarter of 1998 to $0.73
for the same period in 1999.
1999 and 1998 First Six Months Results
The Company's 1999 first half net income was $55.6 million, compared with $51.1
million for the same period in 1998, an increase of 9.0%. Core net income was
$64.3 million, compared with $51.0 million for the same period in 1998, an
increase of 26.2%. Total core revenues in the first half of 1999 increased $26.8
million, from $94.5 million in 1998 to $121.3 million in 1999, while total core
expenses increased only $10.1 million. Operating net income was $68.0 million
for the first half of 1999 versus $54.8 million for the comparable period in
1998, an increase of $13.2 million or 24.2%.
Gross premiums written increased 4.7%, to $150.3 million for the first half of
1999 from $143.6 million for the first half of 1998. Also, gross PV premiums
written increased 51.4%, to $239.1 million in 1999 from $158.0 million in the
first half of 1998. In the first half of 1999, asset-backed gross PV premiums
written were $104.3 million, as compared with $47.8 million in the first half of
1998, an increase of 118.2%. For the international sector, gross PV premiums
written in the first half increased to $63.1 million in 1999 from $10.8 million
in 1998, an increase of 484.3%. For the municipal business, gross PV premiums
written in the first half decreased from $99.4 million in 1998 to $71.7 million
in 1999, a decrease of 27.9%.
In the first half of 1999, the Company insured par value of bonds totaling $30.0
billion, a 14.6% increase over the same period in 1998. FSA's first half
asset-backed and international sectors rose 42.3% to $12.9 billion and 399.8% to
$4.7 billion, respectively, while its municipal sector fell 23.5% to $12.4
billion.
10
Net premiums written were $101.7 million for the first half of 1999, an increase
of $1.7 million, or 1.7%, when compared with 1998. Net premiums earned for the
first half of 1999 were $84.1 million, compared with $64.4 million in the first
half of 1998, an increase of 30.6%. Premiums earned from refundings and
prepayments were $7.7 million for the first half of 1999 and $8.2 million for
the same period of 1998, contributing $3.7 million and $3.8 million,
respectively, to after-tax earnings. Net premiums earned for the first half grew
35.8% relative to the same period in 1998 when the effects of refundings and
prepayments are eliminated.
Net investment income was $44.8 million for the first half of 1999 and $37.9
million for the comparable period in 1998, an increase of 18.0%. The Company's
effective tax rate on investment income was 18.1% for the first half of 1998
compared with 14.9% in 1999. In the first half of 1999, the Company realized
$9.6 million in net capital losses as compared with $6.7 million of net capital
gains for the same period in 1998. Capital gains and losses are 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 first half of
1999 was $4.0 million compared with $2.1 million for the same period in 1998,
representing additions to the Company's general loss reserve.
Total policy acquisition and other operating expenses (excluding the cost of the
equity based compensation programs of $8.5 million for the first half of 1999
compared with $12.4 million for the same period of 1998) were $25.5 million for
the first half of 1999 compared with $21.0 million for the same period in 1998,
an increase of 21.5%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $23.4 million for the first half
of 1999 compared with $18.7 million for the same period in 1998, an increase of
25.6%.
Income before income taxes for the first half of 1999 was $72.1 million, up from
$69.0 million, or 4.6%, for the same period in 1998.
The Company's effective tax rate for the first half of 1999 was 22.9% compared
with 26.0% for the same period in 1998. This decrease is the primarily the
result of lower pre-tax income as the Company recognized capital losses in the
first half of 1999 versus capital gains for the same period in 1998.
The weighted average number of diluted shares of common stock outstanding
increased to 31,900,000 during the first six months of 1999 from 30,297,000, for
the six months ended June 30, 1998. Diluted earnings per share increased to
$1.74 for the first six months of 1999 from $1.69 for the same period in 1998.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash equivalents at June 30,
1999, net of unsettled security transactions, was $1,734.9 million, compared
with the December 31, 1998 balance of $1,770.6 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized loss position of $8.0 million at June 30, 1999 and $56.9 million in
unrealized gains at December 31, 1998.
At June 30, 1999, the Company had, at the holding company level, an investment
portfolio of $47.5 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 and to declare and pay dividends 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 1998. Based upon FSA's statutory statements for the quarter ended
June 30, 1999, and considering dividends that can be paid by its subsidiary, the
maximum amount available for payment of dividends by FSA without regulatory
approval over the following 12 months is approximately $67.9 million. In
addition, the Company holds $120 million of convertible surplus notes of FSA.
Payments of principal and interest on such notes may be made with the approval
of the New York Insurance Department.
11
Dividends paid by the Company to its shareholders increased to $6.8 million in
the first half of 1999 from $6.2 million in 1998 and to $0.2250 per common share
in 1999 from $0.2150 in 1998. In addition to paying dividends, the Company uses
funds to make debt service payments and to repurchase shares of the Company's
common stock to fund employee benefit plans.
The Company has outstanding $100.0 million of 6.950% Senior Quarterly Income
Debt Securities due November 1, 2098 and callable on or after November 1, 2003,
and $130.0 million of 7.375% Senior Quarterly Income Debt Securities due
September 30, 2097 and callable on or after September 18, 2002.
In May 1996, the Company entered into forward agreements with two financial
institutions (the Counterparties) in respect of 1,750,000 shares (the Forward
Shares) of the Company's common stock. Under the forward agreements, the Company
has the obligation either (i) to purchase the Forward Shares from the
Counterparties for a price equal to $26.50 per share plus carrying costs or (ii)
to direct the Counterparties to sell the Forward Shares, with the Company
receiving any excess or making up any shortfall between the sale proceeds and
$26.50 per share plus carrying costs in cash or additional shares, at its
option. The Company made the economic benefit and risk of 750,000 of these
shares available for subscription by certain of the Company's employees and
directors. When an individual participant exercises Forward Shares under the
subscription program, the Company settles with the participant but does not
necessarily close out the corresponding Forward Share position with the
Counterparties. At June 30, 1999, 562,200 Forward Shares remained in the
program. Of these, 33,078 shares were held for the benefit of the Company as a
result of the repurchase of Forward Shares from employees and directors, and
529,122 shares continued to be held for the benefit of employees and directors.
For each dollar change in the Company's share price, net income will be effected
by approximately $0.3 million, or $0.01 per share.
FSA's primary uses of funds are to pay operating expenses and to pay dividends
or make surplus note payments to its parent. FSA's funds are also required to
satisfy claims, if any, 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 $150.0 million, that is provided by
commercial banks and intended for general application to transactions insured by
FSA and its insurance company subsidiaries. At June 30, 1999, there were no
borrowings under this arrangement, which expires on April 28, 2000, 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 $136.3
million was unutilized at June 30, 1999.
FSA has a standby line of credit commitment in the amount of $240.0 million with
a group of international Aaa/AAA-rated 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 $230.0 million or 5.75% of
average annual debt service of the covered portfolio. 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 beginning on April 30,
1999 and expiring on April 30, 2006 and contains an annual renewal provision
subject to approval by the banks. No amounts have been utilized under this
commitment as of June 30, 1999.
The Company has no plans for material capital expenditures within the next
twelve months.
12
Year 2000 Readiness Disclosure
The Company established its Year 2000 (Y2K) committee in 1997. The committee has
investigated potential effects on FSA of the Y2K problem arising from the
inability of some computers to properly recognize dates in the year 2000 and
later. The Company has examined its hardware, software, network, and customer
and vendor interdependencies in FSA's information systems and has found no
material problems with any mission-critical FSA systems. It has conducted
appropriate tests on its larger hardware and networking components, personal
computers and material systems software, and all such systems are considered to
be Y2K compliant. As of June 30, 1999, the Company has completed verification of
Y2K compliance with outside vendors from which the Company purchases software.
The cost of the Company's Y2K compliance has been immaterial.
FSA's financial guaranty policies do not contain an exclusion for Y2K problems.
Each guaranty policy is customized for its individual transaction, so the actual
policy and other transaction documents should be consulted regarding questions
about the effect of Y2K problems of specific parties on specific policies. For
example, if an issuer fails to make an insured payment due to a Y2K problem,
FSA's insurance policy generally would cover such failure. On the other hand, if
the issuer made the payment and the trustee failed to distribute it to
bondholders due to a Y2K problem, FSA's insurance policy generally would not
cover such failure. To investigate whether certain entities connected with
transactions it insures have Y2K problems that could affect insured payments,
FSA has surveyed the servicers and trustees for FSA-insured asset-backed
transactions and has also surveyed certain companies that operate in a trustee,
paying agent or securities depository capacity for a large component of FSA's
public finance book of business. Responses to date have generally indicated
active Y2K testing and remediation programs. FSA plans to continue to query the
companies during 1999 to measure their progress.
While none of the parties that the Company has surveyed have informed the
Company of any material issues regarding Y2K readiness, there can be no
assurance that each party will be Y2K compliant. Failure by an issuer or
servicer in an FSA-insured transaction to be Y2K compliant may result in
unanticipated claims upon FSA. While FSA generally would be entitled to
reimbursement for any such claims paid, the liquidity and credit exposure to FSA
from such claims could be material. As a result, management is assessing the
need to increase its available liquidity in its investment portfolio at year end
1999 in order to meet presently unanticipated demand for claims payments. FSA
provides additional information about its Y2K compliance program on its website
at www.fsa.com/y2k.
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, as amended, for the year ended December 31, 1998. 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.
13
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The Company's Annual Meeting of Shareholders was held on Thursday, May 13,
1999. At the 1999 Annual Meeting, there were present by proxy or in person
28,301,302 shares of Common Stock and 2,000,000 shares of the Company's
outstanding Preferred Stock, representing approximately 90.4% of the 31,533,781
shares (including the 2,000,000 shares of Preferred Stock) outstanding and
eligible to vote. There were four proposals for consideration. The results of
the vote were as follows:
Proposal 1 -- Election of Directors
For the election of Directors of the Company to hold office until the next
Annual Meeting of Shareholders or until their respective successors are elected
and qualified:
Votes Cast For Votes Withheld
-------------- --------------
Robert P. Cochran 30,290,483 10,819
Robert N. Downey 30,290,618 10,684
Anthony M. Frank 30,288,624 12,678
Fudeji Hama 30,289,596 11,706
K. Thomas Kemp 30,289,518 11,784
David O. Maxwell 30,289,787 11,515
Sean W. McCarthy 30,289,018 12,284
James M. Osterhoff 30,290,563 10,739
James H. Ozanne 30,290,053 11,249
Richard A. Post 30,289,471 11,831
Roger K. Taylor 30,289,918 11,384
Howard M. Zelikow 30,290,593 10,709
Proposal 2 -- Approval of 1993 Equity Participation Plan, as Amended, and
Performance Goals
To approve the Company's 1993 Equity Participation Plan, as amended, and the
performance goals applicable to awards of performance shares thereunder:
FOR: 24,419,589 AGAINST: 5,870,884 ABSTAIN: 10,829
Proposal 3 -- Approval of Amendment to Restated Certificate of Incorporation, as
Amended
To approve an amendment to the Company's Restated Certificate of Incorporation,
as amended, to increase the number of authorized shares thereunder:
FOR: 23,722,514 AGAINST: 5,544,942 ABSTAIN: 10,356
Proposal 4 -- Ratification of Selection of PricewaterhouseCoopers LLP as
Independent Auditors
To ratify and approve 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, 1999:
FOR: 30,291,126 AGAINST: 5,157 ABSTAIN: 5,019
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Pre-Effective Amendment No. 2 to the registrant's
Registration Statement on Form S-3 (Reg. Nos. 333-74165 and
333-34181), and incorporated herein by reference).
10 Second Amended and Restated Credit Agreement dated as of April 30,
1999 among Financial Security Assurance Inc., FSA Insurance Company,
the Banks party thereto from time to time and Bayerische Landesbank
Girozentrale, New York Branch, as Agent.
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended June 30, 1999.
(b) Reports on Form 8-K
None
15
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
------------------------------------------
August 11, 1999 Jeffrey S. Joseph
Managing Director & Controller
(Chief Accounting Officer)
16
Exhibit Index
Exhibit No. Exhibit
- ----------- -------
3 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Pre-Effective Amendment No. 2 to the registrant's
Registration Statement on Form S-3 (Reg. Nos. 333-74165 and
333-34181), and incorporated herein by reference).
10 Second Amended and Restated Credit Agreement dated as of April 30,
1999 among Financial Security Assurance Inc., FSA Insurance Company,
the Banks party thereto from time to time and Bayerische Landesbank
Girozentrale, New York Branch, as Agent.
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended June 30, 1999.