SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT No.1 TO
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 April 30, 1999, there were outstanding 31,533,781 shares of Common Stock, par
value $0.01 per share, of the registrant (includes 1,367,618 shares of Common
Stock owned by a trust on behalf of the Company and excludes 742,520 shares of
Common Stock actually held in treasury).
<PAGE>
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Income - Three months ended
March 31, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
- Three months ended March 31, 1999 5
Consolidated Statements of Cash Flows
- Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Bonds at market value (amortized cost of $1,664,001 and $1,655,042) $ 1,700,075 $ 1,708,040
Equity investments at market value (cost of $57,160 and $64,292) 56,655 68,243
Short-term investments 140,730 98,554
----------- -----------
Total investments 1,897,460 1,874,837
Cash 10,488 3,490
Deferred acquisition costs 191,472 199,559
Prepaid reinsurance premiums 229,505 217,096
Reinsurance recoverable on unpaid losses 3,919 3,907
Receivable for securities sold 3,930 1,655
Other assets 153,343 143,662
----------- -----------
TOTAL ASSETS $ 2,490,117 $ 2,444,206
=========== ===========
LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Deferred premium revenue $ 741,888 $ 721,699
Losses and loss adjustment expenses 65,650 63,947
Deferred federal income taxes 80,805 87,254
Ceded reinsurance balances payable 19,714 31,502
Payable for securities purchased 135,556 105,859
Notes payable 230,000 230,000
Minority interest 20,973 20,388
Accrued expenses and other liabilities 106,776 117,421
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,401,362 1,378,070
----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK
Redeemable preferred stock (3,000,000 shares authorized; 2,000,000
issued and outstanding; par value of $.01 per share) 20 20
Additional paid-in capital - preferred 680 680
----------- -----------
700 700
----------- -----------
Common stock (50,000,000 shares authorized; 32,276,301
issued; par value of $.01 per share) 323 323
Additional paid-in capital - common 740,863 733,442
Accumulated other comprehensive income (net of
deferred income tax provision of $12,953 and $20,288) 24,056 37,678
Accumulated earnings 353,904 325,150
Deferred equity compensation 37,508 43,946
Less treasury stock at cost (2,110,138 and 2,372,839
shares held) (68,599) (75,103)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,088,055 1,065,436
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST, REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY $ 2,490,117 $ 2,444,206
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements. All periods have been
revised. See Note 6 "Restatements and Reclassifications."
3
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Net premiums written (net of premiums ceded of $28,424 and $16,391) $ 49,910 $ 37,947
Increase in deferred premium revenue (8,616) (6,026)
-------- --------
Premiums earned (net of premiums ceded of $15,441 and $13,120) 41,294 31,921
Net investment income 22,024 18,683
Net realized gains 824 2,733
Other income 58 230
-------- --------
TOTAL REVENUES 64,200 53,567
-------- --------
Expenses:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $194 and $(6,841)) 2,175 1,047
Interest expense 4,154 2,434
Policy acquisition costs 9,917 8,387
Other operating expenses 4,520 8,883
-------- --------
TOTAL EXPENSES 20,766 20,751
-------- --------
Minority interest and equity earnings (585)
--------
INCOME BEFORE INCOME TAXES 42,849 32,816
Provision for income taxes 10,692 8,501
-------- --------
NET INCOME 32,157 24,315
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (13,086) 2,419
Less: reclassification adjustment for gains
included in net income (536) (1,776)
-------- --------
Other comprehensive income (loss) (13,622) 643
-------- --------
COMPREHENSIVE INCOME $ 18,535 $ 24,958
======== ========
As based upon net income:
Basic earnings per common share $ 1.05 $ 0.84
======== ========
Diluted earnings per common share $ 1.01 $ 0.81
======== ========
</TABLE>
See notes to condensed consolidated financial statements. All periods have been
revised. See Note 6 "Restatements and Reclassifications."
4
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Unrealized
Paid-In Gain Deferred
Common Capital - (Loss) on Accumulated Equity Treasury
Stock Common Investments Earnings Compention Stock Total
----- ------ ----------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 $ 323 $733,442 $ 37,678 $325,150 $ 43,946 $ (75,103) $ 1,065,436
Net income 32,157 32,157
Net unrealized gain on
investments (13,622) (13,622)
Dividends paid on common stock
($0.1125 per share) (3,403) (3,403)
Deferred equity compensation 4,886 4,886
Deferred equity payout 1,534 (11,324) 1,644 (8,146)
Purchase of 17,671 shares of
common stock (923) (923)
Sale of 221,100 shares of
treasury stock 5,887 5,783 11,670
-------- -------- -------- -------- -------- ----------- -----------
BALANCE, March 31, 1999 $ 323 $740,863 $ 24,056 $353,904 $ 37,508 $ (68,599) $ 1,088,055
======== ======== ======== ======== ======== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements. All periods have been
revised. See Note 6 "Restatements and Reclassifications."
5
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Cash flows from operating activities:
Premiums received, net $ 43,967 $ 44,043
Policy acquisition and other operating
expenses paid, net (50,390) (38,872)
Loss and LAE paid, net (723) (164)
Net investment income received 18,955 21,049
Recoverable advances received (paid) (1,265) 5,778
Federal income taxes paid (1,889) (2,128)
Interest paid (3,903) (2,424)
Other, net 707 (377)
--------- ---------
Net cash provided by operating activities 5,459 26,905
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 450,625 426,801
Purchases of bonds (422,458) (321,496)
Purchases of property and equipment (176) (389)
Net increase in short-term securities (41,255) (122,855)
Other investments, net 4,281
--------- ---------
Net cash used for investing activities (8,983) (17,939)
--------- ---------
Cash flows from financing activities:
Dividends paid (3,403) (3,213)
Treasury stock 13,974 83
Other (49) (172)
--------- ---------
Net cash provided by (used for) financing
activities 10,522 (3,302)
--------- ---------
Net increase in cash 6,998 5,664
Cash at beginning of period 3,490 12,475
--------- ---------
Cash at end of period $ 10,488 $ 18,139
========= =========
See notes to condensed consolidated financial statements. All periods have been
revised. See Note 6 "Restatements and Reclassifications."
6
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1999 and 1998
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance
holding company domiciled in the State of New York. The Company is primarily
engaged (through its insurance company subsidiaries, collectively known as FSA)
in the business of providing financial guaranty insurance on asset-backed and
municipal obligations. At March 31, 1999, the Company was owned 40.1% by
MediaOne Capital Corporation (MediaOne), 11.5% by Fund American Enterprises
Holdings, Inc. (Fund American), 6.4% by The Tokio Marine and Fire Insurance Co.,
Ltd. (Tokio Marine), 5.4% by XL Capital Ltd (XL) and 36.6% by the public and
employees. These percentages are calculated based upon outstanding shares, which
are reduced by treasury shares as presented in these financial statements.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and, accordingly, do not include all
of the information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report to Shareholders on Form 10-K, as amended. The accompanying financial
statements have not been audited by independent accountants in accordance with
generally accepted auditing standards but, in the opinion of management, all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1999 and for all periods presented have been made. The December 31,
1998 condensed balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles. The results of operations for the periods ended March 31, 1999 and
1998 are not necessarily indicative of the operating results for the full year.
3. PREMIUM REVENUE RECOGNITION
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. The amount of risk outstanding
is equal to the sum of the par amount of debt insured. Deferred premium revenue
and prepaid reinsurance premiums represent the portion of premium that is
applicable to coverage of risk to be provided in the future on policies in
force. When an insured issue is retired or defeased prior to the end of the
expected period of coverage, the remaining deferred premium revenue and prepaid
reinsurance premiums, less any amount credited to a refunding issue insured by
the Company, are recognized.
4. LITIGATION
During the ordinary course of business, the Company and FSA have become
parties to certain litigation. Management believes that these matters will be
resolved with no material impact on the Company's financial position, results of
operations or cash flows.
7
<PAGE>
5. LOSS RESERVE DISCOUNT RATES
The Company uses risk free interest rates to discount the additions to its
general reserve for new business originated. For case basis reserves, the
Company uses discount rates ranging from 5.5% to 6.1%.
6. RESTATEMENTS AND RECLASSIFICATIONS
In May 1996, the Company entered into a forward share purchase agreement
with two financial institutions, under which it had the ability to acquire up to
1,750,000 shares of its stock for $26.50 plus accumulated financing charges. The
Company retained the economic interest in 1,000,000 shares and passed both the
economic risk and reward in the remaining 750,000 shares on to a group of the
Company's employees and directors, who were required to post collateral against
the risk of a decline in market value of the shares
The Company accounted for the 1,000,000 share obligation under the
"permanent equity" provisions of EITF 96-13, which resulted in no impact on the
Company's financial statements until the shares were acquired as treasury stock
in December 1997. With regard to the 750,000 shares made available to employees
and directors, of which 529,122 shares remain outstanding, the Company offset
the gain on the forward share agreement against the corresponding increased
liability to the employees and directors, resulting in no net impact on the
Company's financial statements until settlement. At settlement, the Company's
paid-in surplus is credited with the tax savings resulting from the transaction.
During a review of the Company's shelf registration statement in April
1999, the Securities and Exchange Commission (SEC) staff advised the Company
that, in its opinion, the gain on the forward purchase agreement should not be
used to offset the additional liability to the employees and directors. After
discussion with the SEC staff, the Company has revised its accounting to
recognize the liability as incurred and to recognize the offsetting gain on the
forward purchase agreement as an addition to paid-in surplus upon settlement
(assuming cash settlement).
The effect of this change in accounting for the forward share purchase
agreements as previously reported and as adjusted are shown below (in thousands,
except per share data):
Information as reported:
<TABLE>
<CAPTION>
1998 1999
------------------------------------------- -------
First Second Third Fourth First
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Income before taxes 36,094 38,203 42,450 42,999 40,228
Net income 26,446 28,049 30,988 31,495 30,453
Basic earnings per common share 0.91 0.97 1.08 1.06 1.00
Diluted earnings per common share 0.88 0.92 1.03 1.01 .96
Information as adjusted:
1998 1999
------------------------------------------- -------
First Second Third Fourth First
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Income before taxes 32,817 36,184 48,016 40,234 42,849
Net income 24,316 26,736 34,606 29,698 32,157
Basic earnings per common share 0.84 0.92 1.20 1.00 1.05
Diluted earnings per common share 0.81 0.88 1.15 0.96 1.01
</TABLE>
The effect on shareholders' equity was a decrease of $5,596,000 and
$7,300,000 at March 31, 1999 and December 31, 1998, respectively.
In addition, the Company reclassified the redeemable preferred stock
outside of shareholder's equity, which decreased shareholder's equity as of
March 31, 1999 and December 31, 1998 by $700,000. Historically, purchases of tax
and loss bonds were treated as charges to current tax expense with a
corresponding benefit to deferred taxes by setting up tax and loss bonds as a
deferred tax asset (i.e., reduction of the deferred tax liability). These
purchases have been reclassified to be treated as prepaid federal income taxes
and, as a consequence, tax and loss bonds have been classified as an asset on
the balance sheet and not as a reduction of the deferred tax liability.
Accordingly, the change had the effect of increasing both assets and liabilities
by $40,332,000 at March 31, 1999 and $38,726,000 at December 31, 1998. This
reclassification has no effect on the Company's net income or shareholders'
equity.
8
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
1999 and 1998 First Quarter Results
The Company's 1999 first quarter net income was $32.2 million, compared with
$24.3 million for the same period in 1998, an increase of 32.3%. Core net income
(operating net income less the after-tax effect of refundings and prepayments)
was $30.7 million, compared with $24.6 million for the same period in 1998, an
increase of 24.8%. Total core revenues in the first quarter of 1999 increased
$12.3 million, from $46.1 million in 1998 to $58.5 million in 1999, while total
core expenses increased only $4.6 million. Operating net income (net income less
the after-tax effect of net realized capital gains or losses, the cost of equity
based compensation programs and other non-operating items) was $33.1 million for
the first quarter of 1999 versus $26.8 million for the comparable period in
1998, an increase of $6.3 million or 23.3%.
There are two measures of gross premiums originated for a given period. Gross
premiums written captures premiums collected in the period, whether collected
up-front for business originated in the period, or in installments for business
originated in prior periods. An alternative measure, the gross present value of
premiums written (gross PV premiums written) reflects future installment
premiums discounted to a present value, as well as up-front premiums, but only
for business originated in the period. The Company considers gross PV premiums
written to be the better indicator of a given period's origination activity
because a substantial part of the Company's premiums are collected in
installments, a practice typical of the asset-backed business. The discount rate
used to calculate the gross PV premiums written is 5.9% for 1999 and was 6.3%
for 1998. The discount rates represent the average pre-tax yield on the
Company's investment portfolio for the previous three years. Regardless of the
measure used, quarter to quarter comparisons are of limited significance because
originations fluctuate from quarter to quarter but historically have not
exhibited a seasonal pattern.
Gross premiums written increased 44.2%, to $78.3 million for the first quarter
of 1999 from $54.3 million for the first quarter of 1998. Also, gross PV
premiums written increased 140.8%, to $122.1 million in the first quarter of
1999 from $50.7 million in the first quarter of 1998. The increase in gross PV
premiums written is attributable to the higher levels in all sectors of the
asset-backed business, both domestic and international, and higher premium
pricing in the municipal business during the first quarter of 1999 when compared
to the same period in 1998. In the first quarter of 1999, asset-backed gross PV
premiums written were $37.7 million, as compared to $16.1 million in 1998, an
increase of 134.2%. For international business, gross PV premiums written in the
first quarter of 1999 was $40.7 million, as compared to no PV premiums written
in 1998. For the municipal business, gross PV premiums written in the first
quarter increased to $43.7 million in 1999 from $34.6 million in 1998, an
increase of 26.8%.
In the first quarter of 1999, the Company insured par value of bonds totaling
$12.9 billion, a 41.1% increase over the same period in 1998. FSA's first
quarter asset-backed insured par increased 90.3% to $5.6 billion, the
international sector had $1.7 billion of insured par, while the municipal sector
decreased 9.4% to $5.6 billion.
Net premiums written were $49.9 million for the first quarter of 1999, an
increase of $12.0 million or 31.5% when compared with $37.9 million in 1998. Net
premiums earned for the first quarter of 1999 were $41.3 million, compared with
$31.9 million in the first quarter of 1998, an increase of 29.4%. Premiums
earned from refundings and prepayments were $4.9 million for the first quarter
of 1999 and $4.7 million for the same period of 1998, contributing $2.3 million
and $2.2 million, respectively, to after-tax earnings. Net premiums earned for
the quarter grew 33.7% relative to the same period in 1998 when the effects of
refundings and prepayments are eliminated.
Net investment income was $22.0 million for the first quarter of 1999 and $18.7
million for the comparable period in 1998, an increase of 17.9%. This increase
was due primarily to higher invested assets. The Company's effective tax rate on
investment income was 15.4% for the first quarter of 1999 compared with 18.4% in
1998. In the first quarter of 1999, the Company realized $0.8 million in net
capital gains compared with $2.7 million for the same period in 1998. Capital
gains are a by-product of the normal investment management process and will vary
substantially
9
<PAGE>
from period to period.
The provision for losses and loss adjustment expenses during the first quarter
of 1999 was $2.2 million compared with $1.0 million in 1998, 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 discounted at risk-free rates. 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 March 31, 1999, the unallocated
balance in the Company's general loss reserve was $48.8 million and case
reserves were $12.9 million discounted at rates ranging from 5.5% to 6.1% .
Total policy acquisition and other operating expenses (excluding the cost of
equity based compensation programs of $2.1 million for the first quarter of 1999
compared with $6.6 million for the same period of 1998) were $12.4 million for
the first quarter of 1999 compared with $10.7 million for the same period in
1998, an increase of 15.9%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $11.1 million for the first
quarter of 1999 compared with $9.4 million for the same period in 1998, an
increase of 18.5%. The increase was the result of higher DAC amortization due to
a higher level of premiums earned and an increase in other operating expenses.
Income before income taxes for the first quarter of 1999 was $42.8 million, up
from $32.8 million, or 30.6%, for the same period in 1998.
The Company's effective tax rate for the first quarter of 1999 was 25.0%
compared with 25.9% for the same period in 1998.
The weighted average number of diluted shares of common stock outstanding
increased to 31.8 million during the first quarter of 1999 from 30.2 million for
the quarter ended March 31, 1998. This increase was primarily due to 1.6 million
shares the Company issued to XL Capital Ltd. in November 1998. Earnings per
share increased to $1.01 for the first quarter of 1999 from $0.81 for the same
period in 1998.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash equivalents at March 31,
1999, net of unsettled security transactions, was $1,765.8 million, compared
with the December 31, 1998, balance of $1,770.6 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized gain position of $35.6 million at March 31, 1999 and $56.9 million at
December 31, 1998.
At March 31, 1999, the Company had, at the holding company level, an investment
portfolio of $52.0 million available to fund the liquidity needs of its
activities outside of its insurance operations. Because the majority of the
Company's operations are conducted through FSA, the long-term ability of the
Company to service its debt and to declare and pay dividends will largely depend
upon the receipt of dividends or surplus note payments from FSA and upon
external financings.
FSA's ability to pay dividends is dependent upon FSA's financial condition,
results of operations, cash requirements, rating agency approval and other
related factors and is also subject to restrictions contained in the insurance
laws and related regulations of New York and other states. Under New York State
insurance law, FSA may pay dividends out of earned surplus, provided that,
together with all dividends declared or distributed by FSA during the preceding
12 months, the dividends do not exceed the lesser of (i) 10% of policyholders'
surplus as of its last statement filed with the New York Superintendent of
Insurance or (ii) adjusted net investment income during this period. FSA paid no
dividends in 1998. Based upon FSA's statutory statements for the quarter ended
December 31, 1998, and considering dividends that can be paid by its subsidiary,
the maximum amount available for payment of dividends by FSA without regulatory
approval over the following 12 months is approximately $65.7 million. In
addition, the Company holds $120 million of convertible surplus notes of FSA.
Payments of principal or interest on such notes may be made with the approval of
the New York Insurance Department.
Dividends paid by the Company to its shareholders increased to $3.4 million in
the first quarter of 1999 from $3.2 million in 1998 and to $0.1125 per common
share in 1999 from $0.1075 in 1998. In addition to paying dividends, the Company
uses funds to make debt service payments and to repurchase shares of the
Company's common stock
10
<PAGE>
to fund employee benefit plans.
The Company has outstanding $100.0 million of 6.950% Senior Quarterly Income
Debt Securities due November 1, 2098 and callable on or after November 1, 2003,
and $130.0 million of 7.375% Senior Quarterly Income Debt Securities due
September 30, 2097 and callable on or after September 18, 2002.
In May 1996, the Company entered into forward agreements with two financial
institutions (the Counterparties) in respect of 1,750,000 shares (the Forward
Shares) of the Company's common stock. Under the forward agreements, the Company
has the obligation either (i) to purchase the Forward Shares from the
Counterparties for a price equal to $26.50 per share plus carrying costs or (ii)
to direct the Counterparties to sell the Forward Shares, with the Company
receiving any excess or making up any shortfall between the sale proceeds and
$26.50 per share plus carrying costs in cash or additional shares, at its
option. The Company made the economic benefit and risk of 750,000 of these
shares available for subscription by certain of the Company's employees and
directors. When an individual participant exercises Forward Shares under the
subscription program, the Company settles with the participant but does not
necessarily close out the corresponding Forward Share position with the
Counterparties. At March 31, 1998, 562,200 Forward Shares remained in the
program. Of these, 33,078 shares were held for the benefit of the Company as a
result of the repurchase of Forward Shares from employees and directors, and
529,122 shares continued to be held for the benefit of employees and directors.
For each dollar change in the Company's share price, net income will be effected
by approximately $0.3 million, or $0.01 per share.
FSA's primary uses of funds are to pay operating expenses and to pay dividends
or make surplus note payments to its parent. FSA's funds are also required to
satisfy claims, if any, under insurance policies in the event of default by an
issuer of an insured obligation and the unavailability or exhaustion of other
payment sources in the transaction, such as the cash flow or collateral
underlying the obligations. FSA seeks to structure asset-backed transactions to
address liquidity risks by matching insured payments with available cash flow or
other payment sources. The insurance policies issued by FSA provide, in general,
that payments of principal, interest and other amounts insured by FSA may not be
accelerated by the holder of the obligation but are paid by FSA in accordance
with the obligation's original payment schedule or, at FSA's option, on an
accelerated basis. These policy provisions prohibiting acceleration of certain
claims are mandatory under Article 69 of the New York Insurance Law and serve to
reduce FSA's liquidity requirements.
The Company believes that FSA's expected operating liquidity needs, both on a
short- and long-term basis, can be funded from its operating cash flow. In
addition, FSA has a number of sources of liquidity that are available to pay
claims on a short- and long-term basis: cash flow from written premiums, FSA's
investment portfolio and earnings thereon, reinsurance arrangements with
third-party reinsurers, liquidity lines of credit with banks, and capital market
transactions.
FSA has a credit arrangement, aggregating $150.0 million, that is provided by
commercial banks and intended for general application to transactions insured by
FSA and its insurance company subsidiaries. At March 31, 1999, there were no
borrowings under this arrangement, which expires on November 23, 1999, unless
extended. In addition, there are credit arrangements assigned to specific
insured transactions. In August 1994, FSA entered into a facility agreement with
Canadian Global Funding Corporation and Hambros Bank Limited. Under the
agreement, FSA can arrange financing for transactions subject to certain
conditions. The amount of this facility was $186.9 million, of which $75.8
million was unutilized at March 31, 1999.
FSA has a standby line of credit commitment in the amount of $240.0 million with
a group of international Aaa/AAA-rated banks to provide loans to FSA after it
has incurred, during the term of the facility, cumulative municipal losses (net
of any recoveries) in excess of the greater of $230.0 million or 5.75% of
average annual debt service of the covered portfolio. The obligation to repay
loans made under this agreement is a limited recourse obligation payable solely
from, and collateralized by, a pledge of recoveries realized on defaulted
insured obligations in the covered portfolio, including certain installment
premiums and other collateral. This commitment has a term beginning on April 30,
1999 and expiring on April 30, 2006 and contains an annual renewal provision
subject to approval by the banks. No amounts have been utilized under this
commitment as of March 31, 1999.
The Company has no plans for material capital expenditures within the next
twelve months.
11
<PAGE>
Year 2000 Readiness Disclosure
The Company established its Year 2000 (Y2K) committee in 1997. The committee has
investigated potential effects on FSA of the Y2K problem arising from the
inability of some computers to properly recognize dates in the year 2000 and
later. The Company has examined its hardware, software, network and customer and
vendor interdependencies in FSA's information systems and has found no material
problems with any mission-critical FSA systems. It has conducted appropriate
tests on its larger hardware and networking components, personal computers and
material systems software, and all such systems are considered to be Y2K
compliant. By mid-1999, the Company expects to have completed verification of
Y2K compliance with outside vendors from which the Company purchases software.
These are generally large vendors with active Y2K programs. The cost of the
Company's Y2K compliance has been immaterial.
FSA's financial guaranty policies do not contain an exclusion for Y2K problems.
Each guaranty policy is customized for its individual transaction, so the actual
policy and other transaction documents should be consulted regarding questions
about the effect of Y2K problems of specific parties on specific policies. For
example, if an issuer fails to make an insured payment due to a Y2K problem,
FSA's insurance policy generally would cover such failure. On the other hand, if
the issuer made the payment and the trustee failed to distribute it to
bondholders due to a Y2K problem, FSA's insurance policy generally would not
cover such failure. To investigate whether certain entities connected with
transactions it insures have Y2K problems that could affect insured payments,
FSA has surveyed the servicers and trustees for FSA-insured asset-backed
transactions and has also surveyed certain companies that operate in a trustee,
paying agent or securities depository capacity for a large component of FSA's
public finance book of business. Responses to date have generally indicated
active Y2K testing and remediation programs. FSA plans to continue to query the
companies during 1999 to measure their progress.
While none of the parties that the Company has surveyed have informed the
Company of any material issues regarding Y2K readiness, there can be no
assurance that each party will be Y2K compliant. Failure by an issuer or
servicer in an FSA-insured transaction to be Y2K compliant may result in
unanticipated claims upon FSA. While FSA generally would be entitled to
reimbursement for any such claims paid, the liquidity and credit exposure to FSA
from such claims could be material. As a result, management is assessing the
need to increase its available liquidity facility at year end 1999 in order to
meet presently unanticipated demand for claims payments. FSA provides additional
information about its Y2K compliance program on its website at www.fsa.com/y2k.
12
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial data schedules.
(99) Financial statements of Financial Security Assurance Inc. for
the quarterly period ended March 31, 1999.
(b) Reports on Form 8-K
None
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
----------------------------------------
August 5, 1999 Jeffrey S. Joseph
Managing Director & Controller
(Chief Accounting Officer)
14
<PAGE>
Exhibit Index
Exhibit No. Exhibit
- - ----------- -------
27. Financial data schedule
99. Financial statements of Financial Security Assurance Inc. for the
quarterly period ended March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,840,805
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 56,655
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,897,460
<CASH> 10,488
<RECOVER-REINSURE> 3,919
<DEFERRED-ACQUISITION> 191,472
<TOTAL-ASSETS> 2,490,117
<POLICY-LOSSES> 65,650
<UNEARNED-PREMIUMS> 741,888
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 230,000
0
700
<COMMON> 740,863
<OTHER-SE> 346,869
<TOTAL-LIABILITY-AND-EQUITY> 2,490,117
41,294
<INVESTMENT-INCOME> 22,024
<INVESTMENT-GAINS> 824
<OTHER-INCOME> 58
<BENEFITS> 2,175
<UNDERWRITING-AMORTIZATION> 9,917
<UNDERWRITING-OTHER> 8,674
<INCOME-PRETAX> 42,849
<INCOME-TAX> 10,692
<INCOME-CONTINUING> 32,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,157
<EPS-BASIC> 0
<EPS-DILUTED> 1.01
<RESERVE-OPEN> 63,947
<PROVISION-CURRENT> 2,175
<PROVISION-PRIOR> 472
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 65,650
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
EXHIBIT 99
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
Condensed Consolidated Financial Statements
March 31, 1999
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 1998
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)
March 31, December 31,
ASSETS 1999 1998
---- ----
Bonds at market value (amortized cost of
$1,644,284 and $1,631,094) $1,680,746 $1,683,928
Equity investments at market value (cost of
$27,118 and $34,250) 29,029 37,268
Short-term investments 133,151 92,241
---------- ----------
Total investments 1,842,926 1,813,437
Cash 9,299 2,729
Deferred acquisition costs 191,472 199,559
Prepaid reinsurance premiums 229,505 217,096
Reinsurance recoverable on unpaid losses 3,919 3,907
Receivable for securities sold 3,930 1,656
Other assets 151,799 144,105
---------- ----------
TOTAL ASSETS $2,432,850 $2,382,489
========== ==========
LIABILITIES AND MINORITY INTEREST AND
SHAREHOLDER'S EQUITY
Deferred premium revenue $ 741,888 $ 721,699
Losses and loss adjustment expenses 65,650 63,947
Deferred federal income taxes 89,181 95,398
Ceded reinsurance balances payable 19,714 31,502
Payable for securities purchased 133,549 105,749
Long-term debt 120,000 120,000
Minority interest 20,973 20,388
Accrued expenses and other liabilities 103,154 119,215
---------- ----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,294,109 1,277,898
---------- ----------
Common stock (500 shares authorized,
issued and outstanding; par value of
$30,000 per share) 15,000 15,000
Additional paid-in capital 706,117 694,788
Accumulated other comprehensive income
(net of deferred income tax provision
of $13,935 and $19,904) 25,879 36,964
Accumulated earnings 391,745 357,839
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 1,138,741 1,104,591
---------- ----------
TOTAL LIABILITIES AND MINORITY INTEREST AND
SHAREHOLDER'S EQUITY $2,432,850 $2,382,489
========== ==========
See notes to condensed consolidated financial statements.
1
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
REVENUES:
Net premiums written (net of premiums ceded of
$28,424 and $16,391) $ 49,910 $ 37,947
Increase in deferred premium revenue (8,616) (6,026)
-------- --------
Premiums earned (net of premiums ceded of
$15,441 and $13,120) 41,294 31,921
Net investment income 21,491 17,546
Net realized gains 3,468 3,944
Other income 43 235
-------- --------
TOTAL REVENUES 66,296 53,646
-------- --------
EXPENSES:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $194 and $(6,841)) 2,175 1,047
Policy acquisition costs 9,917 8,387
Other operating expenses 8,145 5,716
-------- --------
TOTAL EXPENSES 20,237 15,150
-------- --------
Minority interest and equity earnings (584)
--------
INCOME BEFORE INCOME TAXES 45,475 38,496
Provision for income taxes 11,570 10,488
-------- --------
NET INCOME 33,905 28,008
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during period (8,831) (704)
Less: reclassification adjustment for gains
included in net income (2,254) (2,564)
-------- --------
Other comprehensive income (loss) (11,085) (3,268)
-------- --------
COMPREHENSIVE INCOME $ 22,820 $ 24,740
======== ========
See notes to condensed consolidated financial statements.
2
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Cash flows from operating activities:
Premiums received, net $ 43,967 $ 44,043
Policy acquisition and other operating expenses
paid, net (34,990) (37,084)
Recoverable advances received (paid) (1,265) 5,778
Loss and LAE paid, net (723) (164)
Net investment income received 20,633 19,881
Federal income taxes paid (1,889) (487)
Other, net (1,903) (3,062)
--------- ---------
Net cash provided by operating activities 23,830 28,905
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 395,309 408,342
Purchases of bonds (372,420) (318,471)
Purchases of property and equipment (154) (359)
Net increase in short-term securities (40,005) (107,782)
Other investments, net 10
--------- ---------
Net cash used for investing activities (17,260) (18,270)
--------- ---------
Cash flows from financing activities:
Stock repurchase (4,250)
---------
Net cash used for financing activities (4,250)
---------
Net increase in cash 6,570 6,385
Cash at beginning of period 2,729 11,235
--------- ---------
Cash at end of period $ 9,299 $ 17,620
========= =========
See notes to condensed consolidated financial statements.
3
<PAGE>
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), a 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 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
March 31, 1999 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, 1998 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 March 31, 1999 and 1998 are not necessarily indicative of the
operating results for the full year.
3. PREMIUM REVENUE RECOGNITION
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. The amount of risk outstanding
is equal to the sum of the par amount of debt insured. Deferred premium revenue
and prepaid reinsurance premiums represent the portion of premium that is
applicable to coverage of risk to be provided in the future on policies in
force. When an insured issue is retired or defeased prior to the end of the
expected period of coverage, the remaining deferred premium revenue and prepaid
reinsurance premiums, less any amount credited to a refunding issue insured by
the Company, are recognized.
4. LITIGATION
During the ordinary course of business, the Company has become party to
certain litigation. Management believes that these matters will be resolved with
no material impact on the Company's financial position, results of operations or
cash flows.
5. LOSS RESERVE DISCOUNT RATES
The Company uses risk free interest rates to discount the additions to its
general reserve for new business originated. For case basis reserves, the
Company uses discount rates ranging from 5.5% to 6.1%.
6. RECLASSIFICATION
Historically, purchases of tax and loss bonds were treated as charges to
current tax expense with a corresponding benefit to deferred taxes by setting up
tax and loss bonds as a deferred tax asset (i.e., reduction of the deferred tax
liability). These purchases have been reclassified to be treated as prepaid
federal income taxes and, as a consequence, tax and loss bonds have been
classified as an asset on the balance sheet and not as a reduction of the
deferred tax liability. Accordingly, the change had the effect of increasing
both assets and liabilities by $40,332,000 at March 31, 1999 and $38,726,000 at
December 31, 1998. This reclassification has no effect on the Company's net
income or shareholders' equity.
4
