SCHEDULE 14A
Information Required in Proxy Statement
Reg. ss. 240.14a-101
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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[x] Definitive Proxy Statement
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[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
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(Name of Registrant as Specified In Its Charter)
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1
<PAGE>
FSA
Financial Security Assurance Holdings Ltd.
350 Park Avenue, New York, New York 10022
March 23, 1998
Dear Shareholder:
I cordially invite you to attend the 1998 Annual Meeting of Shareholders
of Financial Security Assurance Holdings Ltd., which will be held at 9:00 a.m.
(New York City time) on Thursday, May 14, 1998, at the offices of the Company at
350 Park Avenue, 13th Floor, New York, New York 10022. I encourage you to join
us at the meeting, where you will have an opportunity to ask questions about our
business and operations.
This year, we are asking you to elect 12 directors and to approve the
Company's selection of independent auditors for 1998. We have described these
proposals in the attached proxy statement, which I encourage you to read fully.
Whether or not you plan to attend the meeting, you can ensure that your
shares are represented properly by completing, signing and dating your proxy
card and returning it in the enclosed envelope.
Sincerely,
Robert P. Cochran,
Chairman of the Board and
Chief Executive Officer
<PAGE>
Financial Security Assurance Holdings Ltd.
Notice of Annual Meeting of Shareholders
To the Shareholders of Financial Security Assurance Holdings Ltd.:
The annual meeting of the shareholders of Financial Security Assurance
Holdings Ltd. (the "Company") will be held at the offices of the Company at 350
Park Avenue, 13th Floor, New York, New York 10022, on Thursday, May 14, 1998, at
9:00 a.m., New York City time, for the following purposes:
Proposal 1: To elect 12 directors of the Company for terms expiring
at the 1999 Annual Meeting;
Proposal 2: To approve the appointment by the Board of Directors of
Coopers & Lybrand L.L.P., certified public accountants, as
independent auditors for the Company for the year 1998;
and to transact such other business as may properly come before the meeting or
any adjournment thereof.
Shareholders of record at the close of business on Thursday, March 26,
1998, will be entitled to vote at the meeting, whether in person or by proxy.
Please complete, sign and date the enclosed proxy card as soon as possible and
return it in the envelope provided. Shareholders who attend the meeting may
revoke their proxies and vote in person, if they wish to do so.
By order of the Board of Directors,
Bruce E. Stern,
Secretary
350 Park Avenue
New York, New York 10022
March 23, 1998
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
PROXY STATEMENT
We are soliciting your vote in our upcoming annual meeting of
shareholders. If you complete, sign and return the enclosed proxy, we will vote
your shares at the meeting, or any adjournment of the meeting, in the manner
that you have indicated or, if you have not specified how you wish to vote your
shares, we will vote them as recommended by our Board of Directors. You may
revoke your proxy at any time before it is used.
The record date for determining shareholders entitled to vote at the
meeting was March 26, 1998. We have two classes of outstanding voting
securities: common stock, par value $.01 per share ("Common Stock"), and Series
A Convertible Redeemable Preferred Stock, par value $.01 per share ("Preferred
Stock"). On the record date, 29,887,833 shares of Common Stock (including
1,133,379 shares owned by a trust on our behalf but excluding 2,388,468 shares
of treasury stock) and 2,000,000 shares of Preferred Stock were outstanding.
Each share is entitled to one vote, with the holder of the Preferred Stock
voting together as a single class with the holders of the Common Stock.
The mailing address of our principal executive offices is 350 Park Avenue,
New York, New York 10022. This Proxy Statement and the accompanying Notice of
Annual Meeting of Shareholders and proxy card are being mailed, on or about
March 26, 1998, to shareholders of record at the close of business on the record
date.
PROPOSAL 1: ELECTION OF DIRECTORS
All our directors are elected at each annual meeting of shareholders. At
the 1998 Annual Meeting, the shareholders will elect 12 directors to serve for a
term expiring at the 1999 Annual Meeting. Information about the nominees is set
forth below and under "Ownership of the Company".
If we receive your proxy, we will vote your shares for these nominees,
except to the extent that you withhold authority to do so on your proxy card. We
will vote all proxies received for the person, if any, designated by our Board
of Directors to replace any nominee who becomes unable or unwilling to serve (an
event not now anticipated).
The following abbreviations have been used in this proxy statement:
- --------------------------------------------------------------------------------
Term Company
---- -------
FSA Financial Security Assurance Inc., our principal
operating subsidiary
CGC Capital Guaranty Corporation, which we acquired on
December 20, 1995
CGIC Capital Guaranty Insurance Company, CGC's principal
operating subsidiary
Fund American Fund American Enterprises Holdings, Inc.
White Mountains White Mountains Holdings, Inc., a subsidiary of Fund
American
Source One Source One Mortgage Services Corporation, a subsidiary
of White Mountains
Fireman's Fund Fireman's Fund Insurance Company, formerly a subsidiary
of Fund American
Tokio Marine The Tokio Marine and Fire Insurance Co., Ltd.
U S WEST U S WEST, Inc.
USWCC U S WEST Capital Corporation, a subsidiary of U S WEST
- --------------------------------------------------------------------------------
1
<PAGE>
Fund American, Tokio Marine and USWCC own a majority of our Common Stock.
Fund American owns all our Preferred Stock. Further information regarding share
ownership, nominating privileges and voting arrangements among these three
companies appears under "Ownership of the Company" on page 6, "Compensation
Committee Interlocks and Insider Participation" on page 16 and "Certain
Relationships and Related Transactions" on page 18.
In November 1997, John J. Byrne stepped down as Chairman of the Board, and
Allan L. Waters, a director of the Company since August 1994, retired from the
Board in conjunction with his retirement from Fund American. Mr. Byrne has
agreed to become Vice Chairman of the Board and plans to remain an active Board
member for the foreseeable future. Mr. Waters now serves the Company as an
outside consultant on financial matters. Michael Djordjevich and Staats M.
Pellett, Jr., who have been directors since February 1996, are not standing for
re-election. The Board gratefully acknowledges the contributions of Messrs.
Djordjevich, Pellett and Waters during their years of service as directors of
the Company.
The Board recommends a vote FOR the election of all nominees for director.
John J. Byrne
Age 65............. Vice Chairman of the Board of Directors since November
1997 and a Director of the Company since May 1994. Mr.
Byrne was Chairman of the Board of Directors of the
Company from May 1994 to November 1997. He has been
Chairman of the Board of Directors of Fund American
since 1985, and was its Chief Executive Officer from
1985 to October 1997 and its President from 1990 to
October 1997. From 1989 through 1990, Mr. Byrne was
Chairman of the Board of Directors of Fireman's Fund.
Prior to joining Fireman's Fund, Mr. Byrne was Chairman
and Chief Executive Officer of GEICO Corporation. Mr.
Byrne is also a director of White Mountains, The
Travelers Property/Casualty Group and CCC Information
Services Group, and an honorary director of Terra Nova
(Bermuda) Holdings Ltd.
Robert P. Cochran
Age 48............. Chairman of the Board of Directors of the Company since
November 1997, and Chief Executive Officer and a
Director of the Company since August 1990. Mr. Cochran
served as President of the Company and FSA from August
1990 until November 1997. He has been Chief Executive
Officer of FSA since August 1990, Chairman of FSA since
July 1994, and a director of FSA since July 1988. From
September 1990 until December 1993, Mr. Cochran was a
director of USWCC. Prior to joining the Company in
1985, Mr. Cochran was managing partner of the
Washington, D.C. office of the Kutak Rock law firm. Mr.
Cochran is Vice Chairman of the Association of
Financial Guaranty Insurors, as well as a director of
Fund American and White Mountains.
Robert N. Downey
Age 62............. Director of the Company since August 1994. Mr. Downey
has been a limited partner since 1990, and was a
general partner from 1976 until 1990, of Goldman, Sachs
& Co. At Goldman, Sachs & Co., Mr. Downey served as
head of the Municipal Bond Department and Vice Chairman
of the Fixed Income Division. Mr. Downey was a Director
of the Securities Industry Association from 1987
through 1991 and served as its Chairman in 1990 and
Vice Chairman in 1988 and 1989. He was also formerly
Chairman of the Municipal Securities Division of the
Public Securities Association and Vice Chairman of the
Municipal Securities Rulemaking Board.
2
<PAGE>
Anthony M. Frank
Age 66............. Director of the Company since February 1996. Mr. Frank
was a director of CGC from February 1994 until December
1995. He has been Chairman of Belvedere Capital
Partners, General Partner of the California Community
Financial Institutions Fund, since 1994. He was
Postmaster General of the United States from 1988 to
1992 and, prior thereto, served as Chairman and Chief
Executive Officer of First Nationwide Bank from 1971 to
1988. Mr. Frank is a director of Charles Schwab Inc.;
Bedford Properties Inc.; Irvine Apartment Communities,
Inc.; General American Investors, Inc.; Temple-Inland,
Inc.; Crescent Real Estate Equities; and Cotelligent
Group, Inc.
Toshiki Kaneda
Age 49............. Director of the Company since November 1996 and FSA
since October 1996. Mr. Kaneda has been General Manager
of the Financial Planning Department of Tokio Marine
since July 1997. He was General Manager of the
Non-Marine Underwriting Department of Tokio Marine and
President of the Tokio Marine Loan Clerical Service
Co., Ltd. from July 1996 to July 1997. He was Deputy
General Manager of the Corporate Administration
Department of Tokio Marine from 1994 to June 1996, and
of the Non-Marine Underwriting Department of Tokio
Marine from 1991 to 1994.
K. Thomas Kemp
Age 57............. Director of the Company since August 1994. Mr. Kemp has
served as President and Chief Executive Officer of Fund
American since October 1997, and Executive Vice
President of Fund American from 1991 until October
1997. Mr. Kemp has served as Chairman of White
Mountains since February 1997, and as Chief Executive
Officer of White Mountains and Chairman of White
Mountains Insurance Company since 1995. Mr. Kemp was
Vice President of Fireman's Fund from 1990 to January
1991. Prior to joining Fireman's Fund, Mr. Kemp was
President of Resolute Reinsurance Company. Mr. Kemp is
a director of Fund American, Folksamerica Reinsurance
Holdings, Inc., Centricut, Inc., Main Street America
Holdings, Inc., Commerce Security BancCorp, Inc.,
Valley Insurance Group, Inc., White Mountains and White
Mountains Insurance Company.
David O. Maxwell
Age 67............. Director of the Company since August 1994. Mr. Maxwell
was Chairman and Chief Executive Officer of Federal
National Mortgage Association from 1981 until his
retirement in 1991. Mr. Maxwell is a director of
Potomac Electric Power Company (PEPCO), SunAmerica Inc.
and Corporate Partners, L.P.
James M. Osterhoff
Age 61............. Director of the Company since April 1992. Mr. Osterhoff
was a director of FSA from September 1993 until July
1994. He was Executive Vice President and Chief
Financial Officer of U S WEST from December 1991 until
his retirement in September 1995. Prior to joining U S
WEST, Mr. Osterhoff was Vice President--Finance and
Chief Financial Officer of Digital Equipment Corp., a
computer manufacturer. Mr. Osterhoff is a director of
GenCorp.
3
<PAGE>
James H. Ozanne
Age 54............. Director of the Company since January 1990 and director
of FSA from December 1989 until July 1994. Mr. Ozanne
is Chairman of Greenrange Partners. He has been
Chairman of Source One and President of Fund American
Enterprises, Inc. since March 1997 and a Director of
Source One since August 1996. He was Vice Chairman of
Source One from August 1996 until March 1997. He was
Chairman and Director of Nations Financial Holdings
Corporation from January 1994 to January 1996. During
December 1993, Mr. Ozanne was President and Chief
Operating Officer of Nations Financial Capital
Corporation. He was President and Chief Executive
Officer of USWCC from September 1989 until December
1993. Prior to joining USWCC, Mr. Ozanne was Executive
Vice President of General Electric Capital Corporation.
Richard A. Post
Age 39............. Director of the Company since April 1994. Mr. Post was
a director of FSA from April 1994 until July 1994. Mr.
Post is Executive Vice President and Chief Financial
Officer of U S WEST Media Group and President of USWCC
and U S WEST Financial Services Inc. Mr. Post had
previously served U S WEST in a number of other
positions. In addition, Mr. Post has been a director of
a number of U S WEST-affiliated companies.
Roger K. Taylor
Age 46............. Director of the Company since February 1995. Mr. Taylor
has been President of the Company since November 1997,
and Chief Operating Officer of the Company since May
1993. Mr. Taylor joined FSA as a consultant in January
1990 and became a Managing Director of FSA in January
1991 and its President in November 1997. He was a
director of the Company from August 1993 until August
1994 and has been a director of FSA since January 1992.
Prior to joining FSA, Mr. Taylor was Executive Vice
President of Financial Guaranty Insurance Company, a
financial guaranty insurer. Mr. Taylor is a director of
Source One.
Howard M. Zelikow
Age 63............. Director of the Company since February 1996. Mr.
Zelikow was a director of CGC from February 1994 until
December 1995. Mr. Zelikow has been a member of Kayne
Anderson Investment Management, Inc., an investment
management company, since 1988. Mr. Zelikow was Chief
Financial Officer and Executive Vice President of The
Progressive Corporation from 1976 to 1987. Mr. Zelikow
is a director of The Right Start, Inc. and Queensway
Financial Holdings Limited.
4
<PAGE>
THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 1997, our Board of Directors met four
times. At present, there are four Committees of the Board, whose activities are
discussed below. The Board of Directors does not have a nominating committee.
The Audit Committee is comprised entirely of directors who are not
officers or employees of the Company, any subsidiary of the Company, Fund
American, Tokio Marine or U S WEST. The Audit Committee, which at year end
consisted of Messrs. Frank, Ozanne and Zelikow, met once during 1997. The Audit
Committee recommends independent auditors for approval by the Board of Directors
and shareholders, reviews the independence of such auditors, approves the scope
of the annual audit activities of the independent auditors and reviews audit
results.
The Finance Committee, which at year end consisted of Messrs. Djordjevich
(Chairperson), Byrne, Downey, Kaneda, Maxwell, Osterhoff, Pellett, Post and
Zelikow, met once during 1997. The Finance Committee approves the general
investment policies and objectives of the Company, monitors investment
activities and portfolio performance for the Company, periodically reviews
sources and uses of capital, and reviews the Company's periodic and annual
financial statements. The Investment Subcommittee of the Finance Committee,
which at year end consisted of Messrs. Byrne, Djordjevich, Pellett and Zelikow,
met twice during 1997. The Investment Subcommittee reviews the investment
guidelines and practices of the Company.
The Human Resources Committee is comprised entirely of directors who are
not officers or employees of the Company or any subsidiary of the Company. The
Human Resources Committee has authority to establish and approve compensation
payments and policies for executives and other employees, including awards under
the Company's incentive and benefit plans. The Human Resources Committee, which
at year end consisted of Messrs. Kemp (Chairperson), Downey, Frank, Maxwell,
Osterhoff and Ozanne, met four times during 1997.
The Underwriting Committee, which at year end consisted of Messrs. Ozanne
(Chairperson), Djordjevich, Kaneda, Kemp, Pellett and Post, met four times
during 1997. The Underwriting Committee monitors the underwriting process in
order to assure general compliance with underwriting guidelines and reviews
significant changes in general underwriting policies and guidelines proposed by
management. The Underwriting Committee also reviews proposals to develop new
product lines.
Each non-management director of the Company receives an annual fee of
$26,000 for service as a director, plus an additional annual fee of $5,000 for
each chairperson of a Committee of the Board of Directors. Mr. Byrne was paid an
additional fee of $26,000 in 1997 for his services as Chairman of the Board of
Directors. Directors also receive $2,000 for each Board meeting and Committee
meeting attended and reimbursement for expenses for any such meeting attended.
All directors attended at least 75% of the meetings of the Board and Committees
on which they served, for the period for which they served, during 1997, other
than Mr. Frank, who missed the sole meeting of the Audit Committee and two
meetings of the Human Resources Committee.
5
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The Management Committee of the Company consists of Messrs. Cochran and
Taylor (who are described above as nominees for director) and the Company's
other executive officers, who are described below.
Name Age Position
- --------------------------------------------------------------------------------
Russell B. Brewer II 41 Managing Director, Chief Underwriting Officer and
Director of FSA
John A. Harrison 54 Managing Director and Chief Financial Officer
of the Company and FSA; Director of FSA
Sean W. McCarthy 39 Executive Vice President of the Company; Chief
Operating Officer, Managing Director and
Director of FSA
Bruce E. Stern 44 Managing Director, General Counsel and Secretary
of the Company and FSA; Director of FSA
The present principal occupations and five-year employment history of each
of the above-named executive officers of the Company, as well as other
directorships of publicly held corporations currently held by each such person,
are set forth below:
Mr. Brewer has been a Managing Director of FSA since March 1989 and the
Chief Underwriting Officer of FSA since September 1990. He has been a director
of FSA since September 1993. From March 1989 to August 1991, Mr. Brewer was
Managing Director, Asset Finance Group, of FSA. Prior to joining FSA in 1986,
Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.
Mr. Harrison has been a Managing Director and the Chief Financial Officer
of FSA since August 1991 and the Chief Financial Officer of the Company since
February 1993. He has been a director of FSA since September 1993. From April
1987 through August 1991, Mr. Harrison was Chief Financial Officer of Citibank,
N.A.--U.S. Consumer Banking Group, and prior thereto was Managing Director, Real
Estate Finance Group, of Merrill Lynch & Co. Inc.
Mr. McCarthy has been Executive Vice President of the Company and Chief
Operating Officer of FSA since November 1997. He has been a Managing Director of
FSA since March 1989 and head of its Financial Guaranty Department since April
1993. He has been a director of FSA since September 1993. Prior to joining FSA
in 1988, Mr. McCarthy was a Vice President of PaineWebber Incorporated.
Mr. Stern has been a Managing Director, the Secretary and the General
Counsel of the Company since April 1993. Since April 1993, he has been the
Secretary of FSA, and since March 1989, he has been a Managing Director of FSA.
He has been a director of FSA since August 1990. Prior to joining FSA as General
Counsel in 1987, Mr. Stern was an attorney with Cravath, Swaine & Moore.
OWNERSHIP OF THE COMPANY
5% Shareholders
The following table sets forth certain information regarding actual,
beneficial and voting ownership of the Company's equity at February 20, 1998 as
to each person known by the Company to beneficially own, within the meaning of
the Securities Exchange Act of 1934, 5% or more of the outstanding shares of the
6
<PAGE>
Common Stock or Preferred Stock. In connection with the Company's initial public
offering in May 1994 (the "IPO"), the Company, Fund American and U S WEST
entered into certain arrangements affecting such ownership, which are summarized
in Notes (3) and (4) to the following table.
<TABLE>
<CAPTION>
Number of Shares Owned(1)
----------------------------------------- Voting
5% Shareholders Actual Beneficial(2) Power
- ---------------------------------------------------------------------------------------------------------
Number Percent Number Percent Percent(3)
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U S WEST Capital Corporation.................... 12,106,910 40.5% 12,106,910 40.5% 32.0%
c/o U S WEST, Inc.
7800 East Orchard Road
Englewood, CO 80111(4)(5)
Fund American Enterprises Holdings, Inc. ....... 3,460,200 11.6 8,020,807 25.2 23.1
80 South Main Street
Hanover, NH 03755(4)
The Tokio Marine and Fire Insurance Co., Ltd.... 1,929,000 6.5 1,929,000 6.5 6.1
2-1, Marunouchi 1-Chome
Chiyoda-ku, Tokyo 100 Japan
The Prudential Insurance Company of America..... 1,805,746 6.0 1,805,746 6.0 5.7
751 Broad Street
Newark, NJ 07102(6)
</TABLE>
(1) Number of shares owned is based on Schedules 13D or 13G filed by such
entities with the Securities and Exchange Commission (the "SEC"), except
as noted in the next sentence. The table reflects 3,750,000 fewer shares
actually and beneficially owned by USWCC than reported on the latest
amended Schedule 13G received by the Company from USWCC, due to certain
transactions entered into by USWCC in May 1996, as described under
"Certain Relationships and Related Transactions--Fund American, U S WEST
and Company Relationships" in the prior year's proxy statement. Ownership
percentages are calculated based on 29,887,833 shares of Common Stock
outstanding at February 20, 1998, which (a) includes 1,133,379 shares
purchased by a "rabbi trust" for purposes of funding in advance the
Company's obligations with respect to its 1993 Equity Participation Plan
and excludes 2,388,468 shares of other treasury stock and (b) excludes
2,000,000 shares of Preferred Stock outstanding at February 20, 1998,
except that such Preferred Stock is included for determining the
beneficial ownership percentage of Fund American (which holds such
Preferred Stock).
(2) A person is deemed to have "beneficial ownership" of any shares as of a
given date which such person has the right to acquire within 60 days after
such date or over which such person has voting or investment power. In
computing the percentage of outstanding shares beneficially held by each
shareholder listed above, any share of Common Stock which such shareholder
beneficially owns is deemed to be outstanding for such shareholder, but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other shareholder unless such share is actually
outstanding. Please see Notes (3) and (4) below for additional information
regarding shares beneficially owned by Fund American.
(3) Under a Voting Trust Agreement among Fund American, USWCC and The First
National Bank of Chicago, as voting trustee thereunder (the "Voting
Trustee"), 1,893,940 shares of Common Stock deliverable upon the exercise
in full of an option granted by USWCC to Fund American were deposited into
a voting trust administered by the Voting Trustee, and Fund American has
the right to direct the voting of such shares prior to the exercise of the
option. In addition, at any time that Fund American owns at least 35% of
the issued and then outstanding shares of Common Stock (including, for
this purpose, the 1,893,940 shares subject to such option), in order that
the Company be considered a majority owned subsidiary of Fund American,
USWCC will deposit into the voting trust an additional number of shares,
to the extent USWCC beneficially owns such shares, so that Fund American
will be able to vote 50.1% of the then issued and outstanding shares of
Common Stock. Percentages are calculated based on 31,887,833 shares of
Common Stock outstanding at February 20, 1998, which (a) includes
1,133,379 shares purchased by a "rabbi trust" for purposes of funding in
advance the Company's obligations with respect to its 1993 Equity
Participation Plan and excludes 2,388,468 shares of other treasury stock,
and (b) includes 2,000,000 shares of Preferred Stock outstanding at
February 20, 1998.
(4) Such shares are owned by Fund American or its subsidiaries. On February
20, 1998, Fund American or its subsiditiaries also owned (subject, in each
case, to anti-dilutive adjustment): (a) 2,000,000 shares of Preferred
Stock, constituting all the outstanding Preferred Stock, which are
convertible into an equal number of shares of Common Stock at the
conversion price of $29.65 per share; (b) an option, which expires on May
13, 1999 and entitles Fund American to purchase up to 666,667 shares of
Common Stock from USWCC at an exercise price of $23.50 per share; (c) an
option, which expires on November 2,
7
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2004 and entitles Fund American to purchase up to 1,893,940 shares of
Common Stock from USWCC at an exercise price of $26.40 per share; and (d)
certain voting rights with respect to certain shares of Common Stock as
described in Note (3) above.
(5) In May 1996, U S WEST sold to Salomon Inc ("Salomon") an issue of
Exchangeable Notes due May 15, 1999 (known as "Debt Exchangeable for
Common Stock" or "DECS", and herein referred to as the "USW DECS")
exchangeable for up to 9,796,303 of the shares of Common Stock held by
USWCC. Salomon, in turn, sold to third parties an issue of DECS which
mirror the terms of the USW DECS held by Salomon. Accordingly, most shares
of Common Stock owned by USWCC are either subject to stock options held by
Fund American or potentially deliverable by U S WEST in discharge of its
obligation under the USW DECS. However, the number of shares of Common
Stock deliverable by U S WEST in discharge of its obligations under the
USW DECS is a function of the market price per share of Common Stock. If,
at maturity of the USW DECS, the price per share of Common Stock equals or
exceeds $32.48, then 0.8197 shares of Common Stock are deliverable in
exchange for each of the 9,796,303 USW DECS (representing approximately
8,030,029 shares of Common Stock in the aggregate).
(6) According to the Schedule 13G filed on February 12, 1998, by The
Prudential Insurance Company of America ("Prudential") with the SEC,
Prudential held (as of December 31, 1997) 94,412 of the shares for the
benefit of its general account, and may have direct or indirect voting
and/or investment discretion over 1,711,334 shares which are held for the
benefit of its clients by its separate accounts, externally managed
accounts, registered investment companies, subsidiaries and/or other
affiliates. The Schedule 13G states that Prudential acquired these shares
in the ordinary course of business, and not with the purpose or effect of
changing or influencing control of the Company.
Directors and Executive Officers
The following table sets forth certain information regarding beneficial
ownership of the Company's equity at February 20, 1998 for (a) each director and
nominee for director of the Company, (b) each executive officer named under
"Executive Compensation--Summary Compensation Table" and (c) all such executive
officers and directors of the Company as a group. The table also provides
information regarding economic ownership. Voting power is less than 1% of voting
shares outstanding for each executive officer and director listed, individually
and as a group.
Number of Shares Owned(1)
-------------------------
Directors and Executive Officers Beneficial(2) Economic(3)
-------------------------------- ------------- -----------
John J.Byrne(4)...................... 35,000 35,000
Robert P. Cochran.................... 60,682 543,974
Michael Djordjevich.................. 7,000 20,667
Robert N. Downey..................... 50,000 67,252
Anthony M. Frank..................... 2,671 18,949
Toshiki Kaneda....................... -- --
K. Thomas Kemp(4).................... 1,600 18,993
David O. Maxwell..................... 869 15,869
James M. Osterhoff................... 1,000 17,484
James H. Ozanne...................... 5,300 24,687
Staats M. Pellett, Jr................ 3,350 20,861
Richard A. Post...................... 200 17,244
Roger K. Taylor...................... 26,246 295,163
Howard M. Zelikow.................... 5,037 20,037
Russell B. Brewer II................. 7,557 77,923
Sean W. McCarthy..................... 6,984 186,455
Bruce E. Stern....................... 6,114 82,316
All executive officers and directors
as a group (18 persons)............ 223,598 1,540,803
(Notes to table appear on the following page.)
8
<PAGE>
(1) At February 20, 1998, (a) shares beneficially owned represented less than
1% of total shares of Common Stock outstanding for each executive officer
and director listed, individually and as a group, and (b) shares
economically owned represented the following percentages of total shares
of Common Stock outstanding: (i) 1.8% and 1.0%, respectively, for Mr.
Cochran and Mr. Taylor, (ii) less than 1% for each other executive officer
and director listed and (iii) 4.9% for all executive officers and
directors as a group. The foregoing percentages are calculated based on
29,887,833 shares of Common Stock outstanding at February 20, 1998, which
(a) includes 1,133,379 shares purchased by a "rabbi trust" for purposes of
funding in advance the Company's obligations with respect to its 1993
Equity Participation Plan and excludes 2,388,468 shares of other treasury
stock and (b) excludes 2,000,000 shares of Preferred Stock outstanding at
February 20, 1998. The table excludes fractional shares attributable to
participation in various benefit plans.
(2) All beneficially owned shares are actually outstanding and directly owned
by the listed directors and executive officers, except for (a) with
respect to Mr. Cochran, 1,275 shares which are held in trust for the
benefit of his children, and (b) with respect to Mr. Stern, 1,200 shares
which are held in trust for the benefit of his children.
(3) Shares economically owned by directors and executive officers include (a)
vested and unvested performance shares with each performance share treated
as one share of Common Stock, (b) equity bonus shares, (c) deemed
investments in Common Stock under the Company's plans ("Phantom Shares")
and (d) deemed investments in Forward Shares (defined below under
"Executive Compensation - Other Relationships") under the Company's plans
("Forward Shares"). Phantom Shares represent voluntary investments in
Common Stock by directors and executive officers. All such shares include
accrued dividends, except with respect to Forward Shares, which do not
accrue dividends. The table includes such shares economically owned by the
Chief Executive Officer and the other four most highly compensated
executive officers of the Company and its subsidiaries in the following
amounts:
o Robert P. Cochran--60,132 vested and 112,000 unvested performance
shares, 53,095 equity bonus shares, 112,813 Phantom Shares and 145,252
Forward Shares;
o Roger K. Taylor--37,653 vested and 80,000 unvested performance shares,
30,439 equity bonus shares, 65,825 Phantom Shares and 55,000 Forward
Shares;
o Sean W. McCarthy--24,939 vested and 85,500 unvested performance shares,
19,832 equity bonus shares and 49,200 Forward Shares;
o Russell B. Brewer II--18,689 vested and 30,000 unvested performance
shares, 9,362 equity bonus shares, 7,315 Phantom Shares and 5,000
Forward Shares;
o Bruce E. Stern--18,697 vested and 30,000 unvested performance shares,
10,530 equity bonus shares and 16,974 Phantom Shares; and
o All executive officers and directors as a group--178,807 vested and
373,667 unvested performance shares, 130,221 equity bonus shares,
235,059 Phantom Shares and 399,452 Forward Shares.
To the extent that shares economically owned by any non-officer director
exceed those beneficially owned, such economic ownership is attributable
to (i) 15,000 Forward Shares per director (5,000 in the case of Mr.
Djordjevich) and (ii) shares deemed invested under the Company's Deferred
Compensation Plan (together with accrued dividends).
(4) Mr. Byrne is the Chairman and a major shareholder of Fund American; and
Mr. Kemp is President and Chief Executive Officer of Fund American.
Messrs. Byrne and Kemp disclaim beneficial ownership of Common Stock and
Preferred Stock held by Fund American or its subsidiaries.
9
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth a summary of all compensation paid to the
chief executive officer of the Company and the other four most highly
compensated executive officers of the Company and its subsidiaries, in each case
for services rendered in all capacities to the Company and its subsidiaries for
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation(1)
-------------------------------------------- ----------------------------
Name and Principal All Other Annual LTIP All Other
Position Year Salary Bonus Compensation(2) Payouts(3) Compensation(4)
-------- ---- ------ ----- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Cochran 1997 $440,000 $560,000 $870,610 $2,958,727 $90,000
Chairman of the Board and 1996 400,000 593,080 537,566 1,706,627 90,000
Chief Executive Officer 1995 400,000 606,250 257,359 -- 90,000
Roger Taylor 1997 290,000 710,000 341,185 1,729,575 91,350
President and 1996 250,000 568,750 183,828 993,290 69,750
Chief Operating Officer 1995 250,000 262,500 308,831 -- 58,500
Sean W. McCarthy 1997 235,000 700,000 235,300 1,201,983 67,500
Executive Vice 1996 210,000 587,500 191,181 693,315 67,500
President 1995 210,000 404,250 159,709 -- 69,005
Russell B. Brewer II 1997 200,000 280,000 70,590 804,971 48,150
Managing Director and 1996 185,000 268,000 78,826 459,974 41,400
Chief Underwriting Officer 1995 185,000 192,500 97,061 -- 39,150
Bruce E. Stern 1997 200,000 272,500 67,649 824,910 45,000
Managing Director, General 1996 185,000 240,000 70,590 472,221 41,400
Counsel and Secretary 1995 185,000 192,500 97,061 -- 38,250
</TABLE>
(1) No awards of restricted stock or options/SARs were made to any of the
executives named in the table during the period covered by the table.
(2) Figures represent the value of phantom stock granted as "equity bonus"
awards under the Company's 1993 Equity Participation Plan and deferred for
a minimum of five years. Payment following the deferral period will be in
cash or Common Stock, at the Company's option.
(3) Payouts were made to or deferred by each named executive in January 1998
with respect to performance shares for the three-year performance cycle
ending December 31, 1997. Payouts were made in shares of Common Stock or
cash. For purposes of this table, shares of Common Stock are valued for
1997 and 1996 at $46.0625 and $35.50 per share, respectively, the NYSE
closing price per share on the day preceding approval of the payout by the
Human Resources Committee of the Board of Directors and the per share
value employed for those receiving cash payments.
(4) All Other Compensation includes contributions by the Company to a defined
contribution plan and supplemental retirement plan. The dollar value of
the respective contributions to such plans for each named executive was as
follows:
o Robert P. Cochran -- $14,400 and $75,600 for 1997; $13,500 and $76,500
for 1996; and $13,500 and $76,500 for 1995;
o Roger K. Taylor -- $14,400 and $76,950 for 1997; $13,500 and $56,250 for
1996; and $13,500 and $45,000 for 1995;
o Sean W. McCarthy -- $14,400 and $53,100 for 1997; $13,500 and $54,000
for 1996; and $13,500 and $43,650 for 1995;
o Russell B. Brewer II -- $14,400 and $33,750 for 1997; $13,500 and,
$29,700 for 1996; and $13,500 and $25,650 for 1995; and
o Bruce E. Stern -- $14,400 and $30,600 for 1997; $13,500 and $27,900 for
1996; and $13,500 and $24,750 for 1995.
In addition, the figure included in this column for Mr. McCarthy includes
$8,838 for 1997, $10,347 for 1996 and $11,855 for 1995, representing the
benefit conveyed to him under a loan provided to him by the Company at a
below market interest rate in connection with his relocation to New York.
See "Executive Compensation--Other Relationships."
10
<PAGE>
Employment Agreements and Arrangements; Change in Control Provisions
The Company is not currently party to employment agreements with any of
its executive officers. In the event of termination of employment by the Company
of the named executive officers without cause, Messrs. Cochran and Taylor would
be entitled to 18 months of compensation and Messrs. McCarthy, Brewer and Stern
would be entitled to 12 months of compensation, in each case based upon current
compensation (or, in certain events, prior compensation if higher) in accordance
with the Company's severance policy.
The Company's 1993 Equity Participation Plan includes provisions providing
for accelerated vesting and payment of stock options, equity bonus shares and
performance shares awarded thereunder upon the occurrence of certain change in
control transactions involving the Company. These provisions are generally
applicable to all participants in such plans. Each of the named executive
officers hold equity bonus shares and performance shares awarded under such
plans.
Other Relationships
In February 1992, the Company provided a loan in the principal amount of
$630,000 to Mr. McCarthy in connection with his relocation to New York City. In
December 1993, the loan agreement was amended to (i) reduce the principal
balance by $141,173 (an amount equal to the loss on the sale of his home in
connection with such relocation) and (ii) allow for the repayment of the
remaining principal balance of $362,827.06 at December 31, 1993 over a ten-year
period in equal installments at an interest rate of 5.20% per annum. Installment
payments were made in January 1998, 1997 and 1996.
In May 1996, the Company entered into forward purchase agreements (the
"Forward Agreements") with two financial institutions (the "Counterparties") in
respect of 1,750,000 shares of Common Stock (the "Forward Shares"). Under the
Forward Agreements, the Company has the obligation to either (a) purchase the
Forward Shares from the Counterparties for a price equal to $26.50 per share
plus carrying costs (less dividends paid on the Common Stock) or (b) direct the
Counterparties to sell the Forward Shares, receiving any excess or making up any
shortfall in cash or additional shares, at its option. Of the initial 1,750,000
Forward Shares, 750,000 were initially for the account of the Company's
management and directors, who had parallel investments in phantom Forward Shares
under the Company's Deferred Compensation Plan or Supplemental Executive
Retirement Plan. 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. By December 1997, such exercises by participants had increased
the number of shares allocated to the Company from 1,000,000 shares to 1,187,800
shares. In December 1997, the Company repurchased 1,187,800 shares under the
Forward Agreements for an aggregate purchase price of $33.9 million. The Forward
Agreements remain in effect for the 562,200 shares that remain allocated to the
management and directors subscription program.
Performance Shares
Performance shares are awarded under the Company's 1993 Equity
Participation Plan, as amended (the "Plan"). The Plan authorizes the
discretionary grant of performance shares by the committee administering the
Plan (the Human Resources Committee) to key employees of the Company and its
subsidiaries. Each performance share potentially represents the economic value
of up to two whole shares of Common Stock, and not just appreciation, as is the
case with a stock option. The number of shares of Common Stock actually earned
for each performance share depends upon the attainment by the Company and its
subsidiaries (on a consolidated basis) of "performance objectives" during the
time period specified by the Committee at the time an award of performance
shares is made.
11
<PAGE>
The following table sets forth (a) a summary of performance shares awarded
to the chief executive officer of the Company and the other four most highly
compensated executive officers of the Company and its subsidiaries, in each case
for the year ended December 31, 1997 (which awards were made in January 1998),
(b) the applicable performance period until payout and (c) the related estimated
future payouts at the stated assumed annual rates of adjusted book value per
share and stock price appreciation.
LONG-TERM INCENTIVE PLANS - AWARDS IN 1997(1)
<TABLE>
<CAPTION>
Estimated Future Payouts (3)
Performance -------------------------------------------------
Performance Period Until Threshold Target Maximum
Name Shares Granted Payout (no. of shares) (no. of shares) (no. of shares)
- ---- -------------- ------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert P. Cochran......... 40,000 (2) 0 40,000 80,000
Roger K. Taylor........... 30,000 (2) 0 30,000 60,000
Sean W. McCarthy.......... 30,000 (2) 0 30,000 60,000
Russell B. Brewer II...... 10,000 (2) 0 10,000 20,000
Bruce E. Stern............ 10,000 (2) 0 10,000 20,000
</TABLE>
(1) These performance shares were awarded under the Plan in January 1998 for
the year ended December 31, 1997. The table excludes performance shares
awarded in January 1997 for the year ended December 31, 1996, which are
set forth in a table in the prior year's proxy statement.
(2) One-third of each award relates to the three-year performance cycle ending
December 31, 2000; and two-thirds of each award relates to the three-year
performance cycle ending December 31, 2001. Awards are payable shortly
following completion of the applicable performance cycle, subject to
earlier payment in certain circumstances. Such performance shares vest at
the completion of the applicable performance cycle, subject to rules
established at the time of grant pertaining to the recipient's death,
disability, retirement or termination of employment without cause, or
change-in-control transactions.
(3) The actual dollar value received by a holder of performance shares, in
general, varies in accordance with the annual rate of growth in adjusted
book value per share ("ROE") of Common Stock and the stock price
appreciation during an applicable "performance cycle." At the election of
the holder at the time of the award, ROE may be determined including or
excluding realized and unrealized capital gains and losses in the
Company's investment portfolio. With respect to the performance shares
described in the table above, if ROE is 7% or less per annum for any
performance cycle, no shares of Common Stock will be earned for the
performance cycle; if ROE is 13% per annum for any performance cycle, a
number of shares of Common Stock equal to 100% of the number of
performance shares will be earned for that performance cycle; and if ROE
is 19% per annum or higher for any performance cycle, a number of shares
of Common Stock equal to 200% of the number of performance shares will be
earned for that performance cycle. If ROE is between 7% and 19%, the
payout percentage will be interpolated. Recipients of performance share
awards may elect to receive cash in lieu of shares of Common Stock, in
which event they receive an amount equal to the product of (i) the number
of shares of Common Stock that would be distributed absent an election to
receive cash, multiplied by (ii) the New York Stock Exchange ("NYSE")
closing price per share of Common Stock on the trading day prior to the
date that the Human Resources Committee approves the payout percentage for
the applicable performance cycle. However, notwithstanding an election to
receive cash, the Company may deliver shares of Common Stock if available
under the Plan.
12
<PAGE>
- --------------------------------------------------------------------------------
Report of
The Human Resources Committee of The Board Of Directors
of Financial Security Assurance Holdings Ltd.
February 25, 1998
The Human Resources Committee of the Board of Directors (the "Committee")
determines the compensation of the Chief Executive Officer, the Chief Operating
Officer and the Executive Vice President of the Company, and reviews and
approves management's compensation recommendations for other employees of the
Company. The Committee is comprised entirely of independent directors.
Compensation of executive officers of the Company is comprised primarily
of salary, cash bonus, equity bonus awards and performance share awards, as well
as employee benefits such as retirement and health benefits. The Committee
adheres to a compensation philosophy aimed at aligning the interests of
management with those of the owners, reflected by an emphasis on equity-based
rather than cash-based compensation.
Salaries. Generally, salaries of executive officers are reviewed by the
Committee every other year. Salaries of executive officers were last reviewed
for 1997 and, accordingly, were not reviewed again in 1998 and remain unchanged
from the prior year. The Company, like other participants in the financial
services sector, allocates most of executive officer compensation to year-end
bonuses rather than salaries, with annual bonuses (including equity bonuses)
exceeding annual salaries for each of the five most highly compensated executive
officers of the Company.
Cash Bonuses. At its April 1997 meeting, the Committee determined the
bonus pool and bonus volatility guidelines to be applied in determining 1997
bonuses. The Committee determined a target return on equity ("ROE") based upon
growth in adjusted book value ("ABV") per share (including dividends but
excluding realized and unrealized gains and losses) of 13.0% for 1997, up from
an 11.6% target ROE for 1996. Growth in ABV is determined after all operating
expenses, including the cost of the bonus plan itself. The target bonus pool for
1997 was approximately $14.3 million, equal to approximately 7% of after-tax
adjusted book value growth at a 13% ROE. The 1997 target bonus pool of $14.3
million was less than the actual 1996 bonus pool accrual of $15.25 million, of
which $14.9 million was awarded. The bonus pool established by the Committee
differed from the target bonus pool based upon whether the Company's actual ROE
for 1997 was over or under the target ROE, with the bonus pool limited to $10.3
million at a 9% or lower actual ROE and $18.3 million at a 17% or higher actual
ROE, with adjustments interpolated based on the actual ROE achieved. By
comparison, the 1996 target bonus pool ranged from $9.0 million at a 9% ROE to
$16.0 million at a 16% ROE. The bonus pool range was increased from the prior
year to reflect an increase in head count and in recognition of a substantially
higher target ROE hurdle.
In addition, the Committee for the first time made the bonus pool subject
to a further adjustment based upon the quality of return of capital deployed.
This adjustment was intended to motivate management to use the Company's capital
prudently in building adjusted book value per share. Under this guideline, the
bonus pool would be unchanged so long as transactions insured by the Company's
subsidiaries had a weighted average return on equity under the Company's ROE
model ("Transaction ROE") equal to a specified target Transaction ROE, provided
that a Transaction ROE 1% or more above such target would
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
result in a 1% increase in ABV per share, while a Transaction ROE 1% or more
below such target would result in a 1% decrease in ABV per share, with
Transaction ROE's within such range interpolated on a straight-line basis.
The effect of the 1997 target bonus pool was to require a substantial
increase in ROE from prior year performance to maintain the bonus pool at the
level paid in the prior year. In establishing these guidelines, the Committee
recognized that compensation matters in connection with new ventures would be
handled outside the bonus pool, and that adjustments to the target bonus pool
may be recommended by management, subject to approval of the Committee, to
reflect changes in circumstances.
Bonus participants were broken into three groups, each with a different
volatility of bonus (upwards or downwards) depending on Company and/or group
performance as set forth below:
Guidelines for Bonus Volatility--Variable Percentage of Bonus Award
Group Variability
----- -----------
CEO, COO and EVP Up to 50%
Other Management Committee members
and senior front line officers Up to 20%
All others Up to 10%
Management and the Committee retained discretion as to allocation of bonus
amounts to individuals based upon performance, with the understanding that the
guidelines were directional and indicative of bonus pool distribution assuming
good to above average employee performance. In the case of permanent members of
the Management Committee, the base bonus amounts were equal to the average of
the prior two years' bonuses.
The actual ROE and Transaction ROE for 1997 resulted in a 1997 bonus pool
of approximately $17.8 million under the guidelines described above. Of this
amount, approximately $17 million was paid for 1997, with the balance carried
over to 1998. The actual bonus pool for 1996 was approximately $14.9 million.
The 1997 bonus (including equity bonus) for the Chief Executive Officer
increased approximately 24% from 1996, reflective of the increased variability
factor (50%) assigned to the CEO under the guidelines. The Committee found this
bonus amount to be warranted in view of the record level of premium production
at well above the target Transaction ROE and other accomplishments which
contributed substantially to shareholder value in 1997.
Equity Bonuses. 1997 was the fourth year that bonuses were paid part in
cash and part as equity bonus awards under the Company's 1993 Equity
Participation Plan (the "Equity Plan"). Equity bonuses represent "phantom
shares" of the Company's common stock. Each bonus is determined as discussed
above under the caption "Cash Bonuses", and a specified percentage of such bonus
is paid in the form of an equity bonus in lieu of cash. Equity bonus awards are
deemed invested in the Company's common stock at 85% of fair market value, and
payment of such awards is deferred for a minimum of five years. For 1997, as in
the prior year, each employee had the option, exercisable approximately six
months prior to year-end, to increase his or her equity bonus percentage to up
to 50% of his or her total bonus, subject to Committee approval. The Committee
also determined that bonuses to senior executives would be paid in the form of
an equity bonus to the extent that such bonus, if paid in cash, would result in
the loss of any material federal income tax deduction under Section 162(m) of
the Internal Revenue Code of 1986.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
The minimum equity bonus percentages employed in 1997 (unchanged from
1996) are set forth below:
Equity Bonus Award as a Percentage of Total Bonus
Total Bonus (in thousands) Marginal Rate
-------------------------- -------------
$0 to $50 10% (optional for bonuses below $50,000)
$51 to $150 15%
$151 to $300 20%
Over $300 25%
The amount of the Chief Executive Officer's bonus paid in the form of an
equity bonus for 1997 was $740,000, representing approximately 57% of his total
bonus.
Performance Shares. The Equity Plan provides for the award of performance
shares. Each performance share represents a right to receive up to two shares of
the Company's common stock, with the actual number of common shares receivable
determined on the basis of the increase in adjusted book value per share (or
commencing in 1998, in the case of employees of the Company's investment
management group, investment returns measured against a benchmark index) over a
specified performance cycle. The performance shares were designed to provide
less compensation to participants than stock options if the Company performs
poorly and more compensation to participants if the Company performs well. In
particular, the performance shares were designed to have no value if the Company
fails to generate a return on equity in excess of the risk-free yield of
treasury securities (or commencing in 1998, in the case of employees of the
Company's investment management group, if investment returns are less than the
benchmark index). The Committee's approach generally has been to refrain from
awarding performance shares to the same individuals in successive years. The
Chief Executive Officer, who last received an award of performance shares in
January 1996, received an award of 40,000 performance shares in January 1998.
Like other 1998 performance share awards (other than those to employees of the
Company's investment management group), the performance shares were allocated
1/3 to a 1998/1999/2000 performance cycle and 2/3 to a 1999/2000/2001
performance cycle. The Company has implemented a program of share purchases
through a "rabbi trust" for the purpose of funding in advance its obligations in
respect of outstanding performance shares.
Stock Ownership Guidelines. The Committee has implemented stock ownership
guidelines for senior executives, including the five most highly compensated
executive officers, of the Company. The guidelines establish share ownership
objectives for senior executives, with the expectation that senior executives
would retain at least 50% of the net after-tax shares from Company compensation
plans until the objective has been met (absent any hardship situation). The
Committee considers adherence to the ownership guidelines a significant factor
in sizing future long-term incentive awards for senior executives. The share
ownership objective calls for ownership of Company shares having a market value,
(i) in the case of the Chief Executive Officer and Chief Operating Officer,
equal to the sum of three times annual compensation up to $500,000 and four
times additional compensation and (ii) in the case of other senior executives,
equal to the sum of two times annual compensation up to $300,000 and three times
additional compensation. For purposes of the guidelines, share ownership (i)
includes common stock owned, vested equity bonus shares, and common stock
deferred and phantom common stock investments under the Company's benefit plans
and (ii) excludes outstanding performance shares or stock options.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
In arriving at its compensation decisions, the Committee received advice
from Johnson Associates, Inc., professional compensation consultants, and
considered practices and compensation levels of competitors in the financial
guaranty industry.
The Committee reviewed compliance with Section 162(m) of the Internal
Revenue Code of 1986, relating to the deductibility of compensation paid to the
Chief Executive Officer and the other most highly compensated officers of the
Company. Equity bonus and performance share awards under the Equity Plan were
designed, on advice of counsel, to comply with the requirements of Section
162(m). Given the Committee's intention to continue employment of equity bonus
awards in lieu of a portion of cash bonuses in determining 1998 compensation for
the Company's senior management or to develop an alternative approach to
maintain the availability of federal income tax deductions for executive
compensation, the Committee has determined that it is unlikely that the Company
will pay compensation in 1998 that would result in the loss of any material
federal income tax deduction under Section 162(m) and has not recommended that
any other action be taken as a consequence of such provision.
Human Resources Committee
K. Thomas Kemp (Chairperson)
Robert N. Downey
Anthony M. Frank
David O. Maxwell
James M. Osterhoff
James H. Ozanne
- --------------------------------------------------------------------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and executive officer of the Company, and each beneficial
owner of more than 10% of the Common Stock and Preferred Stock, is required
under Section 16 of the Exchange Act to report to the Securities and Exchange
Commission (the "SEC"), the New York Stock Exchange (the "NYSE") and the
Company, by a specified date, all transactions in the Company's equity
securities. Based solely upon a review of the reports furnished to it pursuant
to Section 16, the Company believes that all of its directors, executive
officers and greater than 10% equity security holders complied with the filing
requirements applicable to them with respect to transactions occurring during
1997, except that Messrs. Djordjevich, Joseph (the Company's Controller and
principal accounting officer) and McCarthy each filed one Form 4, relating to
one transaction, late.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Human Resources Committee consisted of Messrs. Kemp,
Downey, Frank, Maxwell, Osterhoff and Ozanne. None of such persons is currently
or has ever been an officer or employee of the Company or any subsidiary of the
Company. Mr. Kemp is President and Chief Executive Officer of Fund American and
Chairman of White Mountains. Mr. Cochran, Chairman and Chief Executive Officer
of the Company, is a director of Fund American and White Mountains, and a member
of the compensation committee of Fund American. Mr. Taylor, President and Chief
Operating Officer of the Company, is a director and member of the compensation
committee of Source One, a subsidiary of Fund American. Mr. Ozanne is Chairman
of Source One.
16
<PAGE>
STOCK PRICE PERFORMANCE
The following graph compares the cumulative total percent return for the
Company's Common Stock with the comparable cumulative percent returns of two
indices for equal investment amounts made on May 6, 1994 (the effective date of
registration of the Company's Common Stock). The graph assumes that all
dividends were reinvested.
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
Cumulative Total Return on Common Stock compared to
Standard & Poor's 500 Composite Index and NYSE Financials Index
(May 6, 1994 to December 31, 1997)
Financial Security Standard & Poor's New York Stock Exchange
Assurance Holdings Ltd. 500 Composite Index Financials Index
----------------------- ------------------- -----------------------
May 6 100 100 100
Jun 30 106.79 99.34 99.99
Sep 30 105.33 104.6 98.59
Dec 31 104.49 104.59 93.73
Mar 31 107.4 114.76 103.08
Jun 30 125.33 125.72 112.91
Sep 30 127.59 135.71 126.81
Dec 31 126.09 145.35 132.74
Mar 31 128.39 151.6 139.97
Jun 30 138.9 158.41 141.62
Sep 30 149.54 163.4 150.68
Dec 31 167.86 180.72 171.24
Mar 31 169.59 185.67 177.97
Jun 30 199.59 213.88 203.56
Sep 30 240 228.85 224.39
Dec 31 237.34 227.58 229.03
PROPOSAL 2: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P. currently serve as the Company's independent
auditors. They have served in that capacity since January 1990. During 1997,
Coopers & Lybrand L.L.P. examined the accounts of the Company and its
subsidiaries and also provided other audit services to the Company in connection
with SEC filings. In February 1998, the Company's Board of Directors appointed
Coopers & Lybrand L.L.P. as the independent auditors of the Company for 1998.
The shareholders are asked to approve this action of the Board. Representatives
of Coopers & Lybrand L.L.P. are expected to be present at the Annual Meeting
with an opportunity to make a statement if they so desire, and will be available
to answer appropriate questions.
The Board recommends a vote FOR ratification of the selection of Coopers &
Lybrand L.L.P. as independent auditors of the Company for 1998.
17
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fund American, U S WEST and Company Relationships
In 1994, Fund American acquired (i) 2,000,000 shares of Common Stock
directly from USWCC, (ii) 2,000,000 shares of the Series A Convertible
Redeemable Preferred Stock of the Company (the "Preferred Stock") from the
Company which are convertible into an equal number of shares of Common Stock at
a price of $29.65 per share until the redemption date thereof, May 13, 2004, and
(iii)(A) options to acquire 666,667 shares of Common Stock from USWCC at an
exercise price of $23.50 per share until May 13, 1999 (the "Five-Year Option")
and (B) options to acquire 1,893,940 shares of Common Stock from USWCC at an
exercise price of $26.40 per share until September 2, 2004 (the "Ten-Year
Option" and, together with the Five-Year Option, the "USWCC Options"; the number
of shares and price per share contained in the USWCC Options are, in each case,
subject to anti-dilutive adjustment). The Preferred Stock and the USWCC Options
remain outstanding and their terms have not since been amended.
In connection with the acquisitions, the Company entered into a
Registration Rights Agreement with USWCC and Fund American. Under this
Agreement, at any time prior to May 13, 2004, each of Fund American and USWCC is
entitled to four demand registrations, and the right to register certain shares
on a "piggyback" basis on an unlimited number of occasions if the Company
proposes to have a public offering of Common Stock. The Company has agreed to
indemnify Fund American and USWCC for certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments Fund American or
USWCC may be required to make in respect thereof, in connection with sales by
such person of Common Stock in a registration statement prepared by the Company
under the Registration Rights Agreement.
Fund American Shareholders Agreement
In connection with the acquisitions in 1994 described above, Fund American
entered into (i) a Voting Trust Agreement with USWCC and The First National Bank
of Chicago, as voting trustee thereunder, and (ii) a Shareholders Agreement (the
"Fund American Shareholders Agreement") with USWCC and the Company. Pursuant to
the Voting Trust Agreement, Fund American has the right to direct the voting of
the 1,893,940 shares of Common Stock deliverable upon the exercise in full of
the Ten-Year Option prior to the exercise of the Ten-Year Option. In addition,
under certain circumstances, Fund American may require USWCC to deposit
additional shares into the voting trust, to the extent USWCC beneficially owns
such shares, so that Fund American will be able to vote 50.1% of the then issued
and outstanding shares of Common Stock.
The Fund American Shareholders Agreement provides that the parties will
use their best efforts to cause the Board of Directors of the Company to consist
of 11 directors and the persons nominated to serve on the Board of Directors to
include (i) two independent directors (within the meaning of the rules of the
NYSE), (ii) the President or Chief Executive Officer of the Company, (iii) one
person who is a senior employee of Tokio Marine, for the period that such person
is required to be designated as a director of the Company in accordance with the
Tokio Marine Stockholders Agreement (as defined below), and (iv) seven persons
designated by Fund American, of whom U S WEST must approve a number based on the
"voting power" held by Fund American and U S WEST as of the date of the
nominations as set forth in the following table:
(Table appears on the following page.)
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Fund American Voting Power as a
Percentage of Fund American and Designees to be Approved by
U S WEST Combined Voting Power U S WEST
------------------------------- --------
0% through 14.29%................................. 6
Above 14.29% through 28.58%....................... 5
Above 28.58% through 50.00%....................... 4
Above 50.00% through 57.16%....................... 3
Above 57.16% through 71.45%....................... 2
Above 71.45% through 90.00%....................... 1
Above 90.00%...................................... 0
The Company, U S WEST and Fund American are free to alter the foregoing
arrangements from time to time, and have done so.
Under the Fund American Shareholders Agreement, "voting power" means the
number of shares held outright by a party or its affiliates, except that shares
of Common Stock deliverable to Fund American upon exercise of the Ten-Year
Option, and any additional shares deposited by U S WEST in the voting trust
described above, will be deemed to be owned by Fund American and not by U S
WEST, provided that the votes attributed to the Preferred Stock will be excluded
from Fund American's "voting power." The Fund American Shareholders Agreement
requires Fund American and U S WEST to vote all shares of Common Stock over
which they exercise voting control in favor of the election of all persons
nominated as provided in such agreement.
The Fund American Shareholders Agreement terminates upon the earliest to
occur of (i) the cessation of the existence of the Company, (ii) September 2,
1999, (iii) the consent of US WEST and Fund American, (iv) the sale, disposition
or other transfer of any shares of Common Stock by U S WEST that causes U S WEST
to own outright (excluding shares of Common Stock deliverable to Fund American
and its majority owned subsidiaries upon exercise of the Ten-Year Option) less
than 15% of the outstanding shares of Common Stock, or (v) such time as U S
WEST, Fund American and their permitted transferees own less than 50% of the
outstanding shares of Common Stock.
Other Fund American and Company Relationships
During 1997, FSA Portfolio Management Inc. ("FSA Portfolio Management"), a
wholly owned subsidiary of the Company, provided investment management services
to an affiliate of Fund American in exchange for payment of an investment
management fee equal to 15 basis points per annum on the principal amount of
funds under management. In addition, as described on page 16 under "Compensation
Committee Interlocks and Insider Participation", certain directors and executive
officers of the Company are directors of Fund American or its subsidiaries, and
certain executive officers of Fund American and its subsidiaries are directors
of the Company.
U S WEST and Company Relationships
In December 1993, the Company completed a restructuring (the
"Restructuring") which significantly reduced its risk of loss from its insured
portfolio of obligations backed by commercial mortgages (the "Commercial
Mortgage Portfolio"). As part of the Restructuring, FSA obtained reinsurance
from Commercial Reinsurance Company ("Commercial Re") in respect of the
Commercial Mortgage Portfolio. Commercial Re is an insurance company organized
for the purpose of the Restructuring that is owned
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approximately 91.6% by USWCC and 8.4% by Tokio Marine. Various agreements were
entered into among the Company and its subsidiaries, Commercial Re and U S WEST
in connection with the Restructuring, all of which remain in force and have not
since been amended. These agreements include (i) a quota share reinsurance
agreement, (ii) an investment management agreement providing for the management
by FSA Portfolio Management of Commercial Re's investment portfolio and other
matters in exchange for a fee initially ranging from 15 to 30 basis points per
annum on the market value of Commercial Re's investment portfolio and (iii) a
management agreement pursuant to which the Company provides management services
to Commercial Re, including regulatory compliance and accounting services, for a
fixed fee of $100,000 per annum.
Tokio Marine and Company Relationships
Tokio Marine, the Company and FSA entered into a Cooperation Agreement
dated as of December 27, 1990 (the "Cooperation Agreement") in connection with
Tokio Marine's investment in the Company. The Cooperation Agreement contains
reinsurance provisions (discussed below) and reciprocal marketing provisions.
The Cooperation Agreement also entitles Tokio Marine to select one director of
the Company and of FSA and to place up to three of its employees in FSA's New
York offices. The term of the Cooperation Agreement is automatically renewed
each year unless notice is given, subject to earlier termination by one party
upon default by the other, or upon 90 days' prior written notice by one party to
the other. Pursuant to the Cooperation Agreement, FSA has entered into a Master
Reinsurance Placement Memorandum (the "Memorandum") by which FSA has agreed to
cede and Tokio Marine has agreed to accept reinsurance equal to a specified
percentage of the principal amount of new business written by FSA in each
calendar year, with the cessions to be composed of treaty participations and
facultative cessions, including an automatic facility by which FSA at its option
may make quota share cessions, subject to certain conditions. Pursuant to the
Memorandum, Tokio Marine participates in FSA's non-municipal and municipal
treaties and has provided facultative reinsurance to FSA. The Company ceded
premiums of $21.2 million, $19.9 million and $13.1 million to Tokio Marine for
the years ended December 31, 1997, 1996 and 1995, respectively. In the opinion
of the management of the Company and FSA, the terms of the Cooperation Agreement
and reinsurance with Tokio Marine are no less favorable to FSA than the terms
that could be obtained from unaffiliated parties.
Tokio Marine Stockholders Agreement
Pursuant to a Stockholders Agreement dated December 27, 1990, as amended
(the "Tokio Marine Stockholders Agreement"), among Tokio Marine, the Company and
USWCC, USWCC has agreed to vote all stock in the Company owned by it to nominate
and to elect a senior employee of Tokio Marine designated by Tokio Marine to the
Board of Directors of the Company so long as Tokio Marine owns at least 5% (9.9%
in the event the Cooperation Agreement is terminated as a result of a breach by
Tokio Marine) of the outstanding Common Stock or the Cooperation Agreement is in
effect. As long as such conditions are met, to the extent permitted by law, the
Company has agreed to cause a senior employee of Tokio Marine to be nominated as
a director of the Company. So long as Tokio Marine owns any Common Stock, USWCC
has agreed to use commercially reasonable efforts to cause the maximum cash
dividends to be paid each year with respect to the Common Stock to the extent
payable without violating applicable law, causing the rating agencies to lower
or consider lowering the triple-A claims-paying ability ratings of FSA or
reducing the cash of the Company and its subsidiaries below the amount needed to
satisfy their reasonably anticipated business needs.
The Tokio Marine Stockholders Agreement contains certain restrictions on
the ability of Tokio Marine, USWCC and the Company to sell or otherwise transfer
any stock of the Company or any subsidiary of the Company (and, under certain
circumstances, the stock of USWCC), or all or substantially all the
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assets of the Company or FSA. Certain of the rights granted to Tokio Marine
under the Tokio Marine Stockholders Agreement may make it more difficult for
USWCC to sell additional shares of Common Stock or for the Company to dispose of
certain assets or raise funds from the sale of Common Stock and therefore might
be deemed to restrict a change in control of the Company.
Reinsurance Agreements with Enhance Reinsurance Company
Enhance Reinsurance Company ("Enhance"), a subsidiary of Enhance Financial
Services Group, Inc. ("EFS") which was 29.1% owned by a subsidiary of U S WEST
at December 31, 1997, provides reinsurance to FSA by participating in the
asset-backed and municipal reinsurance treaties and through facultative
cessions. On December 11, 1995, U S WEST issued Exchangeable Notes due December
15, 1998 (the "Enhance DECS"). At maturity of the Enhance DECS, U S WEST may, at
its option, deliver to holders of the Enhance DECS the shares of common stock of
Enhance owned by U S WEST's subsidiary.
For 1997, Enhance participated in two of FSA's reinsurance treaties, one
of which covered U.S. municipal business and one of which covered asset-backed
and non-U.S. municipal business. In addition, pursuant to automatic facultative
facilities, FSA at its option ceded a quota share portion, subject to specified
limits, of policies issued in 1997 and may do so for policies issued in 1998.
The Company ceded to Enhance and Asset Guaranty Insurance Company, a subsidiary
of EFS, premiums of $16.5 million, $15.0 million and $6.9 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In the opinion of the
management of the Company, the terms of the existing reinsurance agreements with
Enhance are no less favorable to FSA and its subsidiaries than the terms that
could be obtained from unaffiliated parties.
Offering of QUIDS
In September 1997, the Company sold $130 million principal amount of
7-3/8% Senior Quarterly Income Debt Securities ("QUIDS") due September 2097 and
callable on or after September 18, 2002. Goldman, Sachs & Co. was the lead
manager for the QUIDS offering. Mr. Downey, a director of the Company since
1994, is a limited partner of Goldman, Sachs & Co.
OTHER MATTERS
We know of no other business to be brought before the Annual Meeting other
than as set forth above. The persons named in the enclosed proxy card intend to
vote on any other matter which properly comes before the Annual Meeting in
accordance with their best judgment.
SHAREHOLDER PROPOSALS
Shareholder proposals for the 1999 Annual Meeting of Shareholders must be
received at the principal executive offices of the Company, 350 Park Avenue, New
York, New York 10022, Attention: General Counsel, no later than December 1,
1998, in order to be considered for inclusion in the Company's Proxy Statement
for such meeting.
ADDITIONAL INFORMATION
Solicitation of Proxies
The Company is making this proxy solicitation. The Company may solicit
proxies by mail, telephone, telecopy or in person, and will pay all solicitation
costs. Directors, officers and regular
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employees of the Company may solicit proxies by such methods without additional
compensation. Banks, brokerage houses and other institutions, nominees and
fiduciaries will be requested to forward the soliciting material to their
principals and to obtain authorizations for the execution of proxy cards. Upon
request, the Company will reimburse them for their reasonable expenses.
Voting Procedures
The shares represented by all valid proxies received will be voted as
specified in the proxies. Where specific choices are not indicated, the shares
represented by all valid proxies received will be voted as recommended by the
Board of Directors as follows: (1) FOR the election of all nominees for director
and (2) FOR ratification of the selection of independent auditors for 1998.
Vote Required
Proposal 1: Election of Directors. A plurality of the votes cast at the
Annual Meeting in person or by proxy is required to elect each director. Shares
present in person at the meeting that are not voted for a particular nominee,
and shares represented by proxy as to which authority to vote for such nominee
is properly "withheld," will not be counted either "for" or "against" in
determining a plurality for such nominee.
Proposal 2: Ratification of the Selection of Independent Auditors. The
ratification of the selection of Coopers & Lybrand L.L.P. as independent
auditors of the Company is being submitted to the shareholders because the Board
believes that such action follows sound corporate practice and is in the best
interest of the Company and its shareholders. If the shareholders do not ratify
the selection by the affirmative vote of a majority of the votes cast at the
Annual Meeting in person or by proxy, the selection of independent auditors will
be reconsidered by the Board. If the shareholders ratify the selection, the
Board, in its discretion, may still direct the appointment of new independent
auditors at any time during the year if the Board believes that such a change
would be in the best interest of the Company and its shareholders.
Both Fund American and USWCC have advised the Company that they intend to
vote all shares over which they have voting control on the record date for each
nominee for director proposed hereby, and in favor of Proposal 2. As of the
record date, these shareholders together had voting control over more than a
majority of the outstanding shares entitled to vote at the Annual Meeting.
Cost
The Company will pay the cost of preparing and mailing this notice and
statement and the enclosed proxy card.
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed by the Company with the SEC, is available on request by
writing to Peter E. Hoey, Managing Director, Investor Relations, Financial
Security Assurance Holdings Ltd., 350 Park Avenue, New York, New York 10022, and
may also be reviewed at the Company's website: [email protected].
By Order of the Board of Directors,
Bruce E. Stern,
Secretary
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1. Election of Directors
FOR all nominees |_| WITHHOLD authority to vote |_| *EXCEPTIONS |_|
listed below for all nominees listed below.
Nominees: John J. Byrne, Robert P. Cochran, Robert N. Downey, Anthony M. Frank,
Toshiki Kaneda, K. Thomas Kemp, David O. Maxwell, James M. Osterhoff,
James H. Ozanne, Richard A. Post, Roger K. Taylor and Howard M.
Zelikow.
*Exceptions ____________________________________________________________________
INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the
"Exceptions" box and write the name(s) of the excluded nominee(s) in the space
provided.
2. To ratify and approve the selection by the Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors for the Company for the fiscal year
ending December 31, 1998.
FOR |_| AGAINST |_| ABSTAIN |_|
In their discretion, the Proxies are authorized to vote upon such other matters
as may properly come before the meeting or any adjournment or postponement
thereof.
Change of address or comments: Mark here and indicate |_|
changes to the name and address as printed to the left.
The signature on this Proxy should correspond exactly with the shareholder's
name as printed to the left. In the case of joint tenancies, co-executors or
co-trustees, both should sign. Persons signing as attorney, executor,
administrator, trustee or guardian should give their full title.
Dated: ____________________, 1998
_________________________________
Signature
_________________________________
Signature
Votes must be indicated
(x) in Black or Blue ink. |X|
(Please sign, date and return this proxy in the enclosed postage prepaid
envelope.)
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FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
Annual Meeting of Shareholders
May 14, 1998
PROXY/VOTING INSTRUCTION CARD
This proxy is solicited on behalf of the Board of Directors of Financial
Security Assurance Holdings Ltd. for the Annual Meeting of Shareholders on May
14, 1998
The undersigned appoints Robert P. Cochran, Roger K. Taylor and Bruce E.
Stern, and each of them, with full power of substitution in each, the proxies of
the undersigned, to represent the undersigned and vote all shares of Financial
Security Assurance Holdings Ltd. Common Stock which the undersigned may be
entitled to vote at the Annual Meeting of Shareholders to be held on May 14,
1998, and at any adjournment or postponement thereof, as indicated on the
reverse side, hereby revoking all proxies heretofore given with respect to such
shares.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is given, this proxy will
be voted FOR proposals 1 and 2.
(Continued, and to be signed and dated, on the reverse side.)
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
P.O. BOX 11008
NEW YORK, N.Y. 10203-0008
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