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, 1997
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 October 31, 1997, there were outstanding 31,075,633 shares of Common Stock,
par value $0.01 per share, of the registrant (includes 1,130,711 shares of
Common Stock owned by a trust on behalf of the Company and excludes 1,325,774
shares of Common Stock actually held in treasury).
<PAGE>
INDEX
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PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income - Three and nine months
ended September 30, 1997 and 1996 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1997 and 1996 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 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Bonds, at market value (amortized cost of $1,219,406 and
$1,058,417) $ 1,251,354 $ 1,072,439
Equity investments at market value (cost of $26,186 and
$8,336) 28,190 8,336
Short-term investments 208,358 73,641
----------- -----------
Total investments 1,487,902 1,154,416
Cash 8,410 8,146
Deferred acquisition costs 161,038 146,233
Prepaid reinsurance premiums 172,859 151,224
Reinsurance recoverable on unpaid losses 30,126 29,875
Receivable for securities sold 46,526
Other assets 61,360 47,848
----------- -----------
TOTAL ASSETS $ 1,968,221 $ 1,537,742
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 575,750 $ 511,196
Losses and loss adjustment expenses 73,112 72,079
Deferred federal income taxes 55,066 41,167
Ceded reinsurance balances payable 11,668 12,599
Payable for securities purchased 169,295 14,390
Notes payable 130,000 30,000
Accrued expenses and other liabilities 70,338 55,051
----------- -----------
TOTAL LIABILITIES 1,085,229 736,482
----------- -----------
Preferred stock (3,000,000 shares authorized; 2,000,000
issued and outstanding; par value of $.01 per share) 20 20
Common stock (50,000,000 shares authorized; 32,401,407
and 32,276,301 issued; par value of $.01 per share) 324 323
Additional paid-in capital - preferred 680 680
Additional paid-in capital - common 694,764 695,118
Unrealized gain on investments (net of deferred income tax
provision of $11,884 and $4,908) 22,068 9,114
Accumulated earnings 206,550 142,721
Deferred equity compensation 19,585 12,069
Less treasury stock at cost (2,456,483 and 2,303,407 shares
held) (60,999) (58,785)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 882,992 801,260
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,968,221 $ 1,537,742
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net premiums written (net of premiums ceded
of $13,559, $10,545, $50,986 and $43,021) $ 28,911 $ 28,449 $ 123,590 $ 93,314
Increase in deferred premium revenue (1,707) (6,812) (44,051) (29,193)
-------- -------- --------- ---------
Premiums earned (net of premiums ceded of
$9,525, $7,687, $28,791 and $28,854) 27,204 21,637 79,539 64,121
Net investment income 17,920 16,467 51,402 48,135
Net realized gains (losses) 5,315 (3,338) 6,648 (1,826)
Other income 5,765 119 9,022 224
-------- -------- --------- ---------
TOTAL REVENUES 56,204 34,885 146,611 110,654
-------- -------- --------- ---------
Expenses:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $443, $816, $2,881
and $1,947) 2,426 1,482 6,867 4,637
Interest expense 1,834 541 2,917 1,624
Policy acquisition costs 7,365 5,461 20,714 18,081
Other operating expenses 6,683 4,453 15,893 11,919
-------- -------- --------- ---------
TOTAL EXPENSES 18,308 11,937 46,391 36,261
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 37,896 22,948 100,220 74,393
Provision for income taxes 10,671 5,738 27,512 18,891
-------- -------- --------- ---------
NET INCOME $ 27,225 $ 17,210 $ 72,708 $ 55,502
======== ======== ========= =========
Weighted average common shares outstanding 29,897 30,078 29,920 30,739
======== ======== ========= =========
Earnings per common share $ 0.91 $ 0.58 $ 2.43 $ 1.81
======== ======== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Additional Unrealized Deferred
Paid-In Paid-In Gain Equity
Preferred Common Capital - Capital - (Loss) on Accumulated Compen- Treasury
Stock Stock Preferred Common Investments Earnings sation Stock Total
----- ----- --------- ------ ----------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $20 $323 $680 $695,118 $ 9,114 $142,721 $12,069 $(58,785) $801,260
Net income 72,708 72,708
Net unrealized gain on investments 12,954 12,954
Dividends paid on common stock
($0.2975 per share) (8,879) (8,879)
Deferred equity compensation 10,536 10,536
Deferred equity payout (468) (3,020) 56 (3,432)
Issuance of common stock 1 114 115
Repurchase of common stock (2,270) (2,270)
BALANCE, September 30, 1997 $20 $324 $680 $694,764 $22,068 $206,550 $19,585 $(60,999) $882,992
=== ==== ==== ======== ======= ======== ======= ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Premiums received, net $119,152 $ 97,506
Policy acquisition and other operating expenses
paid, net (33,278) (29,233)
Loss and LAE paid, net (7,131) (9,700)
Net investment income received 49,136 48,858
Recoverable advances received (paid) (6,242) 6,373
Federal income taxes recovered (paid) (13,479) (24,774)
Interest paid (2,442) (1,057)
Other, net 653 (2,712)
-------- ---------
Net cash provided by operating activities 106,369 85,261
-------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 789,671 864,310
Purchases of bonds (853,566) (843,612)
Other, net 7,986
Purchases of property and equipment (2,547) (1,576)
Net increase in short-term securities (131,920) (48,591)
-------- -------
Net cash used for investing activities (190,376) (29,469)
-------- -------
Cash flows from financing activities:
Issuance of long-term debt, net 125,905
Repayment of debt (30,000)
Stock-based compensation purchases (654)
Dividends paid (8,879) (7,882)
Treasury stock (2,215) (40,499)
Other common stock transactions 114 (1,135)
-------- ---------
Net cash provided by (used for) financing
activities 84,271 (49,516)
-------- ---------
Net increase in cash 264 6,276
Cash at beginning of period 8,146 1,118
-------- ---------
Cash at end of period $ 8,410 $ 7,394
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997 and 1996
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 September 30, 1997, the Company was owned 40.4% by U S WEST
Capital Corporation (U S WEST), 11.6% by Fund American Enterprises Holdings,
Inc. (Fund American), 6.4% by The Tokio Marine and Fire Insurance Co., Ltd.
(Tokio Marine) and 41.6% by the public and employees.
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 1996 Annual
Report to Shareholders. 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 September 30, 1997
and for all periods presented have been made. The December 31, 1996 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 September 30, 1997 and 1996 are
not necessarily indicative of the operating results for the full year.
Certain amounts in the 1996 financial statements have been reclassed to
conform to the 1997 presentation.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("EPS")
("FAS No. 128"). FAS No. 128 specifies the computation presentation and
disclosure requirements for EPS and is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted.
FAS No. 128 is designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, (b) eliminating the modified treasury stock method
and the three percent materiality provision, and (c) revising the contingent
share provisions and the supplemental EPS data requirements. FAS No. 128
requires dual presentation of basic and diluted EPS on the face of the income
statements for all entities with complex capital structures regardless of
whether basic and diluted EPS are the same; it also requires a reconciliation of
the numerator and denominator used in computing basic and diluted EPS.
The impact of FAS No. 128 on the Company has not yet been determined.
7
<PAGE>
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
Reporting Comprehensive Income. FAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in stockholders' equity during a
period from transactions and other events and circumstances from non-owner
sources and includes net income and all changes in stockholders' equity except
those resulting from investments by owners and distributions to owners.
FAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by the nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position.
FAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Also in June 1997, the Financial Accounting Standards Board issued FAS No.
131, Disclosure about Segments of an Enterprise and Related Information. FAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements
and requires presentation of a measure of profit or loss, certain specific
revenue and expense items and segment assets. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers, superseding most of FAS No. 14, Financial Reporting for Segments of a
Business Enterprise.
FAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The enterprise must report information about revenues
derived, countries in which it earns revenues and holds assets and major
customers regardless of whether that information is used in making operating
decisions. However, FAS No. 131 does not require an enterprise to report
information that is not prepared for internal use if reporting would be
impracticable.
FAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. FAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application is to be reported in
financial statements of the interim periods in the third year of application.
4. LONG-TERM DEBT
On September 18, 1997, the Company sold a $130 million issue of 7.375%
Senior Quarterly Income Debt Securities due 2097 (Senior QUIDS) callable on or
after September 18, 2002. Interest on these notes is paid quarterly beginning on
December 31, 1997. Debt issuance costs of $4.3 million are being amortized over
the life of the debt. The Company used the proceeds to repay the $30 million of
outstanding debt assumed in connection with its 1995 acquisition of Capital
Guaranty Corporation, to augment the capital in its insurance company
subsidiaries and for general corporate purposes.
8
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
1997 and 1996 Third Quarter Results
The Company's 1997 third quarter net income was $27.2 million, compared with
$17.2 million for the same period in 1996, an increase of 58.2%. Core net income
(operating net income less the after-tax effect of refundings and prepayments)
was $22.5 million, compared with $19.7 million for the same period in 1996, an
increase of 13.9%. Total core revenues in the third quarter of 1997 increased
$6.2 million, from $37.1 million in 1996 to $43.3 million in 1997, while total
core expenses increased only $2.4 million. Operating net income (net income less
the after-tax effect of net realized capital gains or losses and the cost of the
performance share program and other non-operating items) was $23.5 million for
the third quarter of 1997 versus $20.3 million for the comparable period in
1996, an increase of $3.2 million or 15.7%.
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. 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 8.9%, to $42.5 million for the third quarter of
1997 from $39.0 million for the third quarter of 1996. Gross PV premiums written
decreased 18.0%, from $54.1 million in 1996 to $44.4 million in the third
quarter of 1997. The decrease in gross PV premiums written was due, in part, to
the normal quarterly fluctuations in the volume of new business written,
together with increased competition in the residential mortgage sector. The
Company is determined to maintain its credit and return standards in the face of
such competition. In the third quarter of 1997, asset-backed gross PV premiums
written were $18.5 million, compared with $27.5 million in 1996, a decrease of
32.7%. For the municipal business, gross PV premiums written in the third
quarter decreased from $26.7 million in 1996 to $25.9 million in 1997, a
decrease of 2.8%.
In the third quarter of 1997, the Company insured par value of bonds totaling
$7.2 billion, an 18.3% decrease compared with the same period in 1996. FSA's
third quarter asset-backed component declined 27.8% to $3.9 billion while its
municipal sector dropped 3.6% to $3.3 billion.
Net premiums written were $28.9 million for the third quarter of 1997, an
increase of 1.6% when compared with 1996. Net premiums earned for the third
quarter of 1997 were $27.2 million, compared with $21.6 million in the third
quarter of 1996, an increase of 25.7%. Premiums earned from refundings and
prepayments were $2.2 million for the third quarter of 1997 and $1.1 million for
the same period of 1996, contributing $1.0 million and $0.5 million,
respectively, to after-tax earnings. Net premiums earned for the quarter grew
21.8% relative to the same period in 1996 when the effects of refundings and
prepayments are eliminated.
Net investment income was $17.9 million for the third quarter of 1997 and $16.5
million for the comparable period in 1996, an increase of 8.8%. The Company's
effective tax rate on investment income was 20.6% for the third quarter of 1996
compared with 20.1% in 1997. In the third quarter of 1997, the Company realized
$5.3 million in net capital gains as compared with $3.3 million in net capital
losses for the same period in 1996. Capital gains and losses are a by-product of
the normal investment management process and will vary substantially from period
to period.
9
<PAGE>
Interest expense for the third quarter of 1997 was $1.8 million, an increase of
$1.3 million when compared with 1996. The increase was due to a prepayment
penalty and write-off of capitalized issuance costs totaling $1.0 million on the
refinancing of debt that was assumed by the Company in connection with its
acquisition of Capital Guaranty Corporation. For further discussion, see
Liquidity and Capital Resources below.
The provision for losses and loss adjustment expenses during the third quarter
of 1997 was $2.4 million compared with $1.5 million in 1996, representing
additions to the Company's general loss reserve. The additions to the general
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 September 30, 1997, the unallocated balance in the Company's
general loss reserve was $32.8 million.
Total policy acquisition and other operating expenses (excluding the cost of the
performance share program of $3.9 million for the third quarter of 1997 compared
with $1.4 million for the same period of 1996) were $10.1 million for the third
quarter of 1997 compared with $8.5 million for the same period in 1996, an
increase of 18.4%. Excluding the effects of refundings, total policy acquisition
and other operating expenses were $9.4 million for the third quarter of 1997
compared with $8.3 million for the same period in 1996, an increase of 13.9%.
The increase was the result of higher deferred acquisition costs amortization
due to a higher level of core premiums earned, along with higher personnel costs
and bank facility fees.
During the third quarter of 1997, the Company realized a $5.4 million net gain
from the sale of a subsidiary. The subsidiary was sold because its insurance
licenses were no longer required.
Income before income taxes for the third quarter of 1997 was $37.9 million, up
from $22.9 million, or 65.1%, for the same period in 1996.
The Company's effective tax rate for the third quarter of 1997 was 28.2%
compared with 25.0% for the same period in 1996.
The weighted average number of shares of common stock outstanding decreased to
29,897,000 for the quarter ended September 30, 1997, from 30,078,000 during the
third quarter of 1996. This decrease was due to shares repurchased by the
Company to fund obligations under employee benefit plans as discussed in
previous filings. Earnings per share increased to $0.91 for the third quarter of
1997 from $0.58 for the same period in 1996.
1997 and 1996 First Nine Months Results
The Company's 1997 first nine months net income was $72.7 million, compared with
$55.5 million for the same period in 1996, an increase of 31.0%. Core net income
was $65.1 million, compared with $57.4 million for the same period in 1996, an
increase of 13.4%. Total core revenues in the first nine months of 1997
increased $17.3 million, to $124.2 million in 1997 from $107.0 million in 1996,
while total core expenses increased only $6.1 million. Operating net income was
$68.6 million for the first nine months of 1997 versus $58.9 million for the
comparable period in 1996, an increase of $9.7 million or 16.5%.
Gross premiums written increased 28.0%, to $174.6 million for the first nine
months of 1997 from $136.3 million for the first nine months of 1996. Also,
gross PV premiums written increased 1.6%, to $174.1 million in 1997 from $171.4
million in the first nine months of 1996. In the first nine months of 1997,
asset-backed gross PV premiums written were $78.7 million, as compared with
$97.8 million in 1996, a decrease of 19.6%. This decrease is attributable to the
fact that several large, high premium transactions underwritten in Europe in the
first nine months of 1996 were written together with increased competition in
the residential mortgage sector. The Company is determined to maintain its
credit and return standards in the face of such competition. For the municipal
business, gross PV premiums written in the first nine months increased to $95.4
million in 1997 from $73.4 million in 1996, an increase of 29.7%.
In the first nine months of 1997, the Company insured par value of bonds
totaling $23.5 billion, an 8.5% increase over the same period in 1996. FSA's
first nine months asset-backed component dropped 1.2% to $12.7 billion while its
municipal sector rose 22.7% to $10.8 billion.
10
<PAGE>
Net premiums written were $123.6 million for the first nine months of 1997, an
increase of $30.3 million or 32.4% when compared with 1996. Net premiums earned
for the first nine months of 1997 were $79.5 million, compared with $64.1
million for the first nine months of 1996, an increase of 24.1%. Premiums earned
from refundings and prepayments were $7.8 million for the first nine months of
1997 and $5.6 million for the same period of 1996, contributing $3.6 million and
$1.6 million, respectively, to after-tax earnings. Net premiums earned for the
first nine months grew 22.6% relative to the same period in 1996 when the
effects of refundings and prepayments are eliminated.
Net investment income was $51.4 million for the first nine months of 1997 and
$48.1 million for the comparable period in 1996, an increase of 6.8%. The
Company's effective tax rate on investment income was 19.7% for both the first
nine months of 1997 and 1996. In the first nine months of 1997, the Company
realized $6.6 million in net capital gains as compared with net capital losses
of $1.8 million for the same period in 1996. 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 nine
months of 1997 was $6.9 million compared with $4.6 million in 1996, representing
additions to the Company's general loss reserve.
Total policy acquisition and other operating expenses (excluding the cost of the
performance share program of $7.4 million for the first nine months of 1997
compared with $3.5 million for the same period of 1996) were $29.2 million for
the first nine months of 1997 compared with $26.5 million for the same period in
1996, an increase of 10.0%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $26.9 million for the first nine
months of 1997 compared with $23.3 million for the same period in 1996, an
increase of 15.2%. The increase was the result of higher deferred acquisition
costs amortization due to a higher level of core premiums earned, along with
higher personnel costs and bank facility fees.
Income before income taxes for the first nine months of 1997 was $100.2 million,
up from $74.4 million, or 34.7%, for the same period in 1996.
The Company's effective tax rate for the first nine months of 1997 was 27.5%
compared with 25.4% for the same period in 1996.
The weighted average number of shares of common stock outstanding decreased from
30,739,000 during the first nine months of 1996 to 29,920,000 for the nine
months ended September 30, 1997. Earnings per share increased to $2.43 for the
first nine months of 1997 from $1.81 for the same period in 1996.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash equivalents at September 30,
1997, net of unsettled security transactions, was $1,365.1 million, compared
with the December 31, 1996 balance of $1,139.9 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized gain position of $14.0 million at December 31, 1996, compared with an
unrealized gain position of $34.0 million at September 30, 1997. The increase in
invested balances is due to investment of the funds flow from operations and the
net proceeds of $100.0 million from the Company's issuance of long-term debt. On
September 18, 1997, the Company sold a $130 million issue of 7.375% Senior
Quarterly Income Debt Securities due 2097 (Senior QUIDS) callable on or after
September 18, 2002. The Company used the proceeds to repay the $30 million of
outstanding debt assumed in connection with its 1995 acquisition of Capital
Guaranty Corporation, to augment the capital in its insurance company
subsidiaries and for general corporate purposes.
The Company has no plans for material capital expenditures within the next
twelve months.
Because the operations of the Company are conducted through FSA, the ability of
the Company to declare and pay dividends both on a short- and long-term basis
will be largely dependent upon FSA's ability to do so and upon external
financings.
11
<PAGE>
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 has
paid no dividends for the nine months ended September 30, 1997. Based upon FSA's
statutory statements for the quarter ended September 30, 1997 and considering
dividends which can be paid by its subsidiaries, the maximum amount available
for payment of dividends by FSA without regulatory approval over the following
12 months is approximately $52.1 million. In addition, the New York
Superintendent has approved the repurchase by FSA of up to $75.0 million of its
shares from the Company through December 31, 1998, pursuant to which FSA has
repurchased $10.8 million of its shares during the nine months ended September
30, 1997, and a total of $37.8 million between the initiation of the program and
September 30, 1997. Share repurchases pursuant to such program may not exceed
cumulative statutory net income beginning January 1, 1997.
In May 1996, the Company repurchased 1,000,000 shares of its common stock from U
S WEST for a purchase price of $26.50 per share. At the same time, the Company
also entered into forward agreements with National Westminster Bank Plc and
Canadian Imperial Bank of Commerce (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 right either to (a) purchase the Forward Shares
from the Counterparties for a price equal to $26.50 per share plus carrying
costs or (b) 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 is making the economic benefit of 562,200 of these
shares available for subscription by certain employees and its board of
directors. If the Company were to settle these Forward Shares by directing the
Counterparties to sell shares at the Company's September 30, 1997 market price
of $46.50, it would receive approximately 392,000 shares, net of the portion
allocable to employees and directors.
12
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) Financial statements of Financial Security Assurance Inc. for
the quarterly period ended September 30, 1997.
(2) Underwriting Agreement dated September 15, 1997 between the
Underwriters listed on Schedule I thereto and the Company.
(3) Indenture dated as of September 15, 1997 (the "Indenture")
between the Company and First Union National Bank, as Trustee.
(4) Form of 7.375% Senior Quarterly Income Debt Securities due
2097.
(5) Officers' Certificate pursuant to Section 2.01 and 2.03 of the
Indenture.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated September 15,
1997, with the Securities and Exchange Commission on September 19, 1997, which
incorporated by reference the documents included as Exhibits thereto into the
Registration Statement relating to the Company's 7.375% Senior Quarterly Income
Debt Securities due 2097 (Senior QUIDS).
13
<PAGE>
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, 1997 Jeffrey S. Joseph
Managing Director & Controller (Chief Accounting Officer)
14
<PAGE>
Exhibit Index
Exhibit No. Exhibit
- ----------- -------
1. Financial statements of Financial Security Assurance Inc. for the
quarterly period ended September 30, 1997
2. Underwriting Agreement dated September 15, 1997 between the
Underwriters listed on Schedule I thereto and the Company.
(Previously filed as Exhibit 1 to the Company's Current Report
on Form 8-K (Commission File No. 1-12644) dated September 15,
1997 (the "Form 8-K"), and incorporated herein by reference.)
3. Indenture dated as of September 15, 1997 (the "Indenture") between
the Company and First Union National Bank, as Trustee.
(Previously filed as Exhibit 2 to the Form 8-K, and
incorporated herein by reference.)
4. Form of 7.375% Senior Quarterly Income Debt Securities due 2097.
(Previously filed as Exhibit 3 to the Form 8-K, and
incorporated herein by reference.)
5. Officers' Certificate pursuant to Section 2.01 and 2.03 of the
Indenture.
EXHIBIT 1
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
September 30, 1997
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 1997 and 1996
INDEX
-----
FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
The New York State Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company, for determining its solvency under the New
York Insurance Law, and for determining where its financial condition warrants
the payment of a dividend to its stockholders. No consideration is given by the
New York State Insurance Department to financial statements prepared in
accordance with generally accepted accounting principles in making such
determinations.
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Bonds at market value (amortized cost of $1,208,318 and
$1,054,678) $1,240,194 $1,068,677
Equity investments at market value (cost of $19,553 and
$1,000) 19,689 1,000
Short-term investments 144,930 55,699
---------- ----------
Total investments 1,404,813 1,125,376
Cash 7,587 7,517
Deferred acquisition costs 161,038 146,233
Prepaid reinsurance premiums 172,859 151,224
Reinsurance recoverable on unpaid losses 30,126 29,875
Receivable for securities sold 46,417
Other assets 76,717 69,705
---------- ----------
TOTAL ASSETS $1,899,557 $1,529,930
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Deferred premium revenue $ 575,750 $ 511,196
Losses and loss adjustment expenses 73,112 72,079
Deferred federal income taxes 54,890 41,682
Ceded reinsurance balances payable 11,668 12,599
Payable for securities purchased 169,070 14,142
Long-term debt 50,000
Accrued expenses and other liabilities 70,606 62,900
---------- ----------
TOTAL LIABILITIES 1,005,096 714,598
---------- ----------
Common stock (624 and 660 shares authorized, issued and
outstanding; par value of $24,032 and $22,727 per share) 15,000 15,000
Additional paid-in capital 646,620 654,470
Unrealized gain on investments (net of deferred income
tax provision of $11,204 and $4,899) 20,808 9,099
Accumulated earnings 212,033 136,763
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 894,461 815,332
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,899,557 $1,529,930
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
REVENUES:
Net premiums written (net of premiums ceded of
$50,986 and $43,021) $ 123,590 $ 93,314
Increase in deferred premium revenue (44,051) (29,193)
--------- ---------
Premiums earned (net of premiums ceded of
$28,791 and $28,854) 79,539 64,121
Net investment income 50,226 45,950
Net realized gains (losses) 6,329 (2,488)
Other income 10,490 162
--------- ---------
TOTAL REVENUES 146,584 107,745
--------- ---------
EXPENSES:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $2,881 and $1,947) 6,867 4,637
Policy acquisition costs 20,714 18,081
Other operating expenses 14,843 10,834
--------- ---------
TOTAL EXPENSES 42,424 33,552
--------- ---------
INCOME BEFORE INCOME TAXES 104,160 74,193
Provision for income taxes 28,890 18,870
--------- ---------
NET INCOME $ 75,270 $ 55,323
========= =========
See notes to condensed consolidated financial statements.
2
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Premiums received, net $ 119,152 $ 97,506
Policy acquisition and other operating expenses
paid, net (36,373) (29,996)
Recoverable advances received (paid) (6,242) 6,373
Loss and LAE paid, net (7,131) (9,700)
Net investment income received 46,738 46,444
Federal income taxes paid (20,683) (25,292)
Other, net 2,601 (14,693)
--------- ---------
Net cash provided by operating activities 98,062 70,642
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 787,914 843,083
Purchases of bonds (845,072) (833,810)
Sale of subsidiaries 9,486
Purchases of property and equipment (2,469) (1,502)
Net increase in short-term securities (87,101) (39,036)
--------- ---------
Net cash used for investing activities (137,242) (31,265)
--------- ---------
Cash flows from financing activities:
Stock repurchase (10,750) (15,000)
Surplus notes 50,000
Dividends paid (18,000)
--------- ---------
Net cash provided by (used for) financing
activities 39,250 (33,000)
--------- ---------
Net increase in cash 70 6,377
Cash at beginning of period 7,517 555
--------- ---------
Cash at end of period $ 7,587 $ 6,932
========= =========
See notes to condensed consolidated financial statements.
3
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), an indirect wholly owned
subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an
insurance company domiciled in the State of New York. The Company is primarily
engaged in the business of providing financial guaranty insurance on
asset-backed financings and municipal obligations.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated 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
September 30, 1997 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These statements should be read in
conjunction with the Company's December 31, 1996 consolidated 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 generally accepted accounting principles. The results of operations for the
periods ended September 30, 1997 and 1996 are not necessarily indicative of the
operating results for the full year.
Certain amounts in the 1996 financial statements have been reclassed to
conform to the 1997 presentation.
3. SURPLUS NOTES
On September 21, 1997, the Company borrowed $50 million from its Parent in
the form of Surplus Notes. These notes carry a simple interest rate of 5.0% per
annum. Principal of and interest on the Surplus Notes may be paid at any time at
the option of the Company, subject to prior approval of the New York Insurance
Department. The borrowed funds will be used for general corporate purposes.
EXHIBIT 5
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
7.375% Senior Quarterly Income Debt Securities due 2097
Officers' Certificate Pursuant to Section 2.01
and 2.03 of the Indenture
Pursuant to Section 2.03 of the Indenture, dated as of September 15,
1997 (the "Indenture"), between Financial Security Assurance Holdings Ltd. (the
"Company") and First Union National Bank (the "Trustee"), the undersigned
officers of the Company hereby certify that the Board of Directors of the
Company has, pursuant to Board resolutions dated August 14, 1997, authorized the
establishment of a series of Securities and further certify that the terms of
the Securities of such series shall be as follows:
(1) Title: 7.375% Senior Quarterly Income Debt Securities due 2097;
(2) Aggregate Principal Amount: $130,000,000;
(3) Principal Payment Date: September 30, 2097;
(4) (a) Interest Rate: 7.375% per annum (on the basis of a 360-day
year consisting of twelve 30-day months);
(b) Interest Payment Dates: March 31, June 30, September 30 and
December 31 of each year, commencing December 31, 1997;
(c) Regular Record Date: the March 15, June 15, September 15 or
December 15, as the case may be, next preceding each Interest
Payment Date; and
(d) Interest Accrual Date: September 18, 1997;
(5) Place of Payment: Initially, the Trustee's office at 40 Broad
Street, Suite 550, New York, NY 10004;
(6) Optional Redemption: The Debt Securities are not redeemable prior to
September 18, 2002 and are not subject to any sinking fund. The Debt
Securities are redeemable after September 18, 2002 at the option of
the Company, in whole at any time or in part from time to time,
without premium or penalty;
<PAGE>
Page 2
(7) Mandatory Redemption: Not applicable;
(8) Denominations: $25 and integral multiples thereof. Market makers
expect to trade in Debt Securities in round lots of 100 units
(representing $2,500 aggregate principal amount);
(9) Currency: United States Dollars;
(10) (a) Global Securities: The Debt Securities shall be represented by
a single Global Security as provided for in the Indenture; and
(b) Depositary: The Depository Trust Company;
(11) Additional Events of Default: Not Applicable;
(12) Principal on Acceleration: Not Applicable;
(13) Defeasance Provisions: Section 13.02 and Section 13.03 of the
Indenture shall be applicable to the Debt Securities;
(14) Ranking: The Debt Securities shall be senior unsecured obligations
of the Company and shall rank pari passu with all other senior
unsecured debt of the Company;
(15) Conversion: Not Applicable;
(16) Other Terms: Not Applicable; and
(17) Trustee: First Union National Bank.
Pursuant to Section 11.05 of the Indenture, each of the undersigned
officers of the Company hereby further certifies that (i) he has read the
applicable conditions precedent in the Indenture relating to the establishment
of a series of Debt Securities and the issuance thereof; (ii) he has examined
the appropriate documentation and made such further investigation as he has
deemed to be necessary; (iii) he is of the opinion that he has made such
examination and investigation as is necessary to enable him to express an
informed opinion with respect to whether or not such conditions precedent have
been complied with; and (iv) he is of the opinion that as of the date hereof,
all conditions precedent set forth in the Indenture relating to the
establishment of the series of Debt Securities designated as the 7.375% Senior
Quarterly Income Debt Securities due 2097 have been
<PAGE>
Page 3
complied with and upon delivery by the Company of instructions to the Trustee
directing the Trustee to authenticate Securities of such series from time to
time, subject to the limitations set forth in the company order to authenticate
dated the date hereof, all conditions precedent for the issuance thereof shall
have been complied with.
Capitalized terms used and not otherwise defined herein shall have
the meanings set forth in the Indenture.
IN WITNESS WHEREOF, the undersigned Managing Director and Secretary
of the Company have executed this certificate as of the 18th day of September,
1997.
/s/ John A. Harrison
-------------------------------
Name: John A. Harrison
Title: Managing Director
/s/ Bruce E. Stern
-------------------------------
Name: Bruce E. Stern
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Financial
Security Assurance Holdings, Ltd. and is qualified in its' entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,459,712
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23,190
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,487,902
<CASH> 8,410
<RECOVER-REINSURE> 30,126
<DEFERRED-ACQUISITION> 161,038
<TOTAL-ASSETS> 1,968,221
<POLICY-LOSSES> 73,112
<UNEARNED-PREMIUMS> 575,750
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 130,000
0
700
<COMMON> 695,088
<OTHER-SE> 187,204
<TOTAL-LIABILITY-AND-EQUITY> 1,968,221
79,539
<INVESTMENT-INCOME> 51,402
<INVESTMENT-GAINS> 6,648
<OTHER-INCOME> 9,022
<BENEFITS> 6,867
<UNDERWRITING-AMORTIZATION> 20,714
<UNDERWRITING-OTHER> 18,810
<INCOME-PRETAX> 100,220
<INCOME-TAX> 27,512
<INCOME-CONTINUING> 72,708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,708
<EPS-PRIMARY> 2,043
<EPS-DILUTED> 0
<RESERVE-OPEN> 72,079
<PROVISION-CURRENT> 6,867
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 5,834
<RESERVE-CLOSE> 73,112
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
