SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-12644
Financial Security Assurance Holdings Ltd.
(Exact name of registrant as specified in its charter)
New York 13-3261323
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
350 Park Avenue
New York, New York 10022
(Address of principal executive offices)
(212) 826-0100
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
At October 31, 2000, there were 33,833,841 outstanding shares of Common Stock of
the registrant (includes 315,846 shares of Common Stock owned by a trust on
behalf of the Company).
<PAGE>
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Financial Security Assurance Holdings Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations and
Comprehensive Income - Three and nine months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statement of Changes in Shareholder's
Equity - Nine months ended September 30, 2000 5
Condensed Consolidated Statements of Cash Flows - Nine
months ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Bonds at market value (amortized cost of $1,979,296 and $1,919,677) $ 2,005,767 $ 1,852,669
Equity investments at market value (cost of $10,100 and $30,104) 9,748 23,606
Short-term investments 87,624 263,747
----------- -----------
Total investments 2,103,139 2,140,022
Cash 2,516 6,284
Deferred acquisition costs 192,623 198,048
Prepaid reinsurance premiums 343,374 285,105
Reinsurance recoverable on unpaid losses 11,310 9,492
Receivable for securities sold 31,611 40,635
Investment in unconsolidated affiliates 32,449 29,709
Other assets 303,745 196,349
----------- -----------
TOTAL ASSETS $ 3,020,767 $ 2,905,644
=========== ===========
LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDER'S EQUITY
Deferred premium revenue $ 914,834 $ 844,146
Losses and loss adjustment expenses 98,138 87,309
Deferred federal income taxes 64,823 43,341
Ceded reinsurance balances payable 42,768 36,387
Payable for securities purchased 50,235 243,519
Notes payable 230,000 230,000
Minority interest 35,692 32,945
Accrued expenses and other liabilities 216,867 135,313
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,653,357 1,652,960
----------- -----------
Redeemable preferred stock (20,000,000 shares authorized; 0 and
2,000,000 issued and outstanding; par value of $.01 per share) 20
Additional paid-in capital - preferred 680
-----------
REDEEMABLE PREFERRED STOCK 700
-----------
Common stock (200,000,000 shares authorized; 33,517,995 and
33,676,301 issued; par value of $.01 per share) 335 337
Additional paid-in capital - common 903,479 836,853
Accumulated other comprehensive income (loss) [net of deferred
income tax provision (benefit) of $8,284 and $(25,727)] 17,835 (47,779)
Accumulated earnings 445,761 436,417
Deferred equity compensation 52,670
Less treasury stock at cost (0 and 961,418 shares held) (26,514)
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 1,367,410 1,251,984
----------- -----------
TOTAL LIABILITIES AND MINORITY INTEREST, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDER'S EQUITY $ 3,020,767 $ 2,905,644
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written (net of premiums ceded
of $31,264, $41,106, $119,024 and $89,620) $ 43,909 $ 70,853 $ 153,548 $ 172,598
Increase in deferred premium revenue 1,775 (28,152) (15,598) (45,829)
--------- --------- --------- ---------
Premiums earned (net of premiums ceded of
$20,204, $16,431, $58,170 and $46,652) 45,684 42,701 137,950 126,769
Net investment income 30,741 24,432 88,580 69,192
Net realized gains (losses) (565) (6,022) (38,298) (15,652)
Other income 231 928 916 1,080
--------- --------- --------- ---------
TOTAL REVENUES 76,091 62,039 189,148 181,389
--------- --------- --------- ---------
Expenses:
Losses and loss adjustment expenses (net of
reinsurance recoveries of $1,609, $5,027,
$1,000 and $2,796) 2,281 1,950 7,139 5,950
Interest expense 4,154 4,154 12,461 12,461
Policy acquisition costs 8,996 9,604 28,436 30,197
Merger related expenses 105,541
Other operating expenses 7,610 7,270 27,381 20,647
--------- --------- --------- ---------
TOTAL EXPENSES 23,041 22,978 180,958 69,255
--------- --------- --------- ---------
Minority interest and equity in earnings (113) (665) (1,020) (1,593)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 52,937 38,396 7,170 110,541
Benefit (provision) for income taxes (11,145) (8,689) 10,050 (25,205)
--------- --------- --------- ---------
NET INCOME 41,792 29,707 17,220 85,336
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Holding gains (losses) arising during period 16,602 (27,742) 39,900 (76,082)
Less: reclassification adjustment for losses
included in net income (365) (4,301) (25,714) (10,949)
--------- --------- --------- ---------
Other comprehensive income (loss) 16,967 (23,441) 65,614 (65,133)
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 58,759 $ 6,266 $ 82,834 $ 20,203
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Accumulated Deferred
Paid-In Other Comp- Equity
Common Capital- rehensive Accumulated Compen- Treasury
Stock Common Income (Loss) Earnings sation Stock Total
--------- ----------- ------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 $ 337 $ 836,853 $ (47,779) $ 436,417 $ 52,670 $ (26,514) $ 1,251,984
Net income 17,220 17,220
Net unrealized gain on investments,
net of tax 65,614 65,614
Dividends paid on common stock
($0.24 per share) (7,876) (7,876)
Deferred equity compensation 29,419 29,419
Deferred equity payout 6,524 (18,811) 7,564 (4,723)
Purchase of 2,989 shares of
common stock (152) (152)
Sale of 511,031 shares of treasury
stock 23,113 15,530 38,643
Settlement of forward shares 39,408 39,408
Settlement of stock options 446 (446) 0
Recharacterization of deferred
compensation (62,832) (62,832)
Retirement of treasury stock (2) (3,570) 3,572 0
Contribution of redeemable preferred
stock 700 700
Other 5 5
--------- ----------- --------- --------- --------- -------- -----------
BALANCE, September 30, 2000 $ 335 $ 903,479 $ 17,835 $ 445,761 $ 0 $ 0 $ 1,367,410
========= =========== ========= ========= ========= ========= ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Premiums received, net $ 157,166 $ 171,519
Policy acquisition, merger and other operating
expenses paid, net (239,374) (52,337)
Loss and LAE recovered (paid), net 1,723 (641)
Net investment income received 79,339 61,622
Recoverable advances paid (4,040) (10,889)
Federal income taxes paid (22,241) (30,872)
Interest paid (10,006) (12,172)
Other, net (984) (2,271)
----------- -----------
Net cash provided by (used for) operating
activities (38,417) 123,959
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 1,256,398 1,607,865
Purchases of bonds (1,517,243) (1,695,494)
Purchases of property and equipment (3,570) (686)
Net decrease (increase) in short-term securities 179,391 (37,188)
Other investments, net 2,519 911
----------- -----------
Net cash used for investing activities (82,505) (124,592)
----------- -----------
Cash flows from financing activities:
Dividends paid (7,876) (10,436)
Sale of treasury stock 38,644 12,393
Settlement of forward shares 39,408
Other 46,978 (49)
----------- -----------
Net cash provided by financing activities 117,154 1,908
----------- -----------
Net increase (decrease) in cash (3,768) 1,275
Cash at beginning of period 6,284 3,490
----------- -----------
Cash at end of period $ 2,516 $ 4,765
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2000 and 1999
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Holdings Ltd. (the Company) is an insurance
holding company domiciled in the State of New York. The Company is primarily
engaged (through its insurance subsidiaries, collectively known as FSA) in the
business of providing financial guaranty insurance on asset-backed and municipal
obligations. On July 5, 2000, the Company became an indirect wholly owned
subsidiary of Dexia S.A. (Dexia), a publicly held Belgian corporation (see Note
3).
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, accordingly, do not
include all of the information and disclosures required by accounting principles
generally accepted in the United States of America. These statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report to Shareholders filed on Form 10-K.
The accompanying financial statements have not been audited by independent
accountants in accordance with auditing standards generally accepted in the
United States of America but, in the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and cash flows at September 30, 2000
and for all periods presented, have been made. The December 31, 1999 condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. The results of operations for the periods ended
September 30, 2000 and 1999 are not necessarily indicative of the operating
results for the full year.
3. MERGER
On July 5, 2000, the Company completed the previously announced merger,
pursuant to which the Company became an indirect wholly owned subsidiary of
Dexia. At the merger date, each outstanding share of the Company's common stock
was converted into the right to receive $76.00 in cash. Dexia also indirectly
acquired the Company's redeemable preferred stock and caused such stock to be
contributed to the Company's capital. The Company has valued its liabilities
under the Company's equity-based compensation plans at the transaction price and
changed its assumption regarding those plans by assuming all future payments
will be settled in cash. It also reflected the settlement of its Forward Share
agreements at the merger price and the sale of 511,031 shares of the Company's
common stock to Dexia at the transaction price. The net effect of the merger is
to decrease net income for the nine months ended September 30, 2000 by $75.5
million and to decrease shareholder's equity at September 30, 2000 by $36.1
million.
4. EARNINGS PER SHARE
The Company did not calculate earnings per share for the three-month or
the nine-month periods ended September 30, 2000 since, due to the merger with
Dexia (see Note 3), shares of the Company's common stock are no longer publicly
held.
7
<PAGE>
5. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS No. 133). FAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
No. 133, as amended, is effective for fiscal years beginning on or after January
1, 2001. Management believes that the adoption of FAS No. 133 will not have a
material impact on the consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101, Revenue Recognition (SAB No. 101). An amendment in
June 2000 delayed the effective date until the fourth quarter of 2000.
Management believes that the adoption of SAB No. 101 will not have a material
impact on the consolidated financial statements.
8
<PAGE>
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
On July 5, 2000, the Company completed the previously announced merger in which
the Company became an indirect wholly owned subsidiary of Dexia S.A. (Dexia), a
publicly held Belgian corporation. At the merger date, each outstanding share of
the Company's common stock was converted into the right to receive $76.00 in
cash. Dexia also indirectly acquired the Company's redeemable preferred stock
and caused such stock to be contributed to the Company's capital. As a result of
this transaction, the Company has valued its liabilities under the Company's
equity-based compensation plans at the transaction price and changed its
assumption regarding those plans by assuming all future payments will be settled
in cash. It also reflected the settlement of its Forward Share agreements at the
merger price and the sale of 511,031 shares of the Company's common stock to
Dexia at the transaction price. The Company has reported the results of closing
the transaction in these financial statements. The net effect of the merger is
to decrease net income for the nine-month period ended September 30, 2000 by
$75.5 million and to decrease shareholder's equity at September 30, 2000 by
$36.1 million.
2000 and 1999 Third Quarter Results
The Company's 2000 third quarter net income was $41.8 million, compared with net
income of $29.7 million for the same period in 1999, an increase of 40.7%. Core
net income (operating net income less the after-tax effect of refundings and
prepayments) was $44.4 million, compared with $35.9 million for the same period
in 1999, an increase of 23.6%. Total core revenues in the third quarter of 2000
increased $8.0 million, from $66.2 million in 1999 to $74.2 million in 2000,
while total core expenses increased only $1.0 million. Operating net income (net
income less the after-tax effect of net realized capital gains or losses and the
cost of the equity-based compensation programs and other non-operating items)
was $45.4 million for the third quarter of 2000 versus $36.7 million for the
comparable period in 1999, an increase of $8.7 million, or 23.8%.
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 5.77% for 2000 and was 5.93%
for 1999. The discount rates represent the average pre-tax yield on the
Company's investment portfolio for the previous three years. Regardless of the
measure used, quarter to quarter comparisons are of limited significance because
originations fluctuate from quarter to quarter but historically have not
exhibited a seasonal pattern.
Gross premiums written decreased 32.9%, to $75.2 million for the third quarter
of 2000 from $112.0 million for the third quarter of 1999. Gross PV premiums
written decreased 40.3%, to $90.1 million in the third quarter of 2000 from the
record third quarter result of $150.8 million in 1999. In the third quarter of
2000, asset-backed gross PV premiums written were $38.5 million as compared with
$50.7 million in 1999, a decrease of 24.1%; international gross PV premiums were
$17.6 million as compared with $40.8 million, a decrease of 56.9%; and municipal
business gross PV premiums written were $34.0 million as compared with $59.3
million, a decrease of 42.7%. The decrease in asset-backed premiums resulted
from lower premium rates due to higher credit quality transactions. The decrease
in municipal business reflected lower overall new-issuance volume in the U.S.
municipal bond market. The decrease in international business occurred because
several high premium transactions closed in the third quarter of 1999.
9
<PAGE>
In the third quarter of 2000, the Company insured par value of bonds totaling
$14.3 billion, a decrease of 2.7% compared to the third quarter of 1999. FSA's
third quarter asset-backed component rose 16.2% to $6.9 billion and the
international sector rose 138.7% to $2.1 billion, while its municipal sector
declined 32.4% to $5.3 billion.
Net premiums written were $43.9 million for the third quarter of 2000, a
decrease of 38.0% when compared with 1999. Net premiums earned for the third
quarter of 2000 were $45.7 million, compared with $42.7 million in the third
quarter of 1999, an increase of 7.0%. Premiums earned from refundings and
prepayments were $2.4 million for the third quarter of 2000 and $1.8 million for
the same period of 1999, contributing $1.1 million and $0.8 million,
respectively, to after-tax earnings. Net premiums earned for the quarter grew
5.8% relative to the same period in 1999 when the effects of refundings and
prepayments are eliminated.
Net investment income was $30.7 million for the third quarter of 2000 and $24.4
million for the comparable period in 1999, an increase of 25.8%. The Company's
effective tax rate on investment income was 12.5% for the third quarter of 2000
compared with 15.2% for the same period in 1999. In the third quarter of 2000,
the Company realized $0.6 million in net capital losses compared with $6.0
million for the same period in 1999. Capital gains and losses are generally a
by-product of the normal investment management process and will vary
substantially from period to period.
The provision for losses and loss adjustment expenses during the third quarter
of 2000 was $2.3 million compared with $1.9 million in 1999, representing
additions to the Company's general loss reserve. Additions to the general loss
reserve represent management's estimate of the amount required to adequately
cover the net cost of claims. The Company will, on an ongoing basis, monitor
these reserves and may periodically adjust such reserves based on the Company's
actual loss experience and future economic conditions. At September 30, 2000,
the unallocated balance in the Company's general loss reserve was $64.1 million.
Total policy acquisition and other operating expenses (excluding the cost of the
equity-based compensation programs of $4.9 million for the third quarter of 2000
compared with $4.0 million for the same period of 1999) were $11.7 million for
the third quarter of 2000 compared with $12.9 million for the same period in
1999, a decrease of 8.9%. Excluding the effects of refundings, total policy
acquisition and other operating expenses were $11.0 million for the third
quarter of 2000 compared with $12.3 million for the same period in 1999, a
decrease of 11.0%.
Income before income taxes for the third quarter of 2000 was $52.9 million,
compared with $38.4 million for the same period in 1999.
The Company's effective tax rate for the third quarter of 2000 was 21.1%,
compared with 22.6% for the same period in 1999. The effective tax rate differs
from the statutory tax rate of 35.0% due to tax-exempt interest income.
2000 and 1999 First Nine Months Results
The Company's 2000 first nine months of net income was $17.2 million, compared
with net income of $85.3 million for the same period in 1999. The decrease was
primarily due to $105.5 million of merger related expenses during the first nine
months of 2000. Core net income was $127.4 million, compared with $100.2 million
for the same period in 1999, an increase of 27.1%. Total core revenues for the
first nine months of 2000 increased $32.7 million, from $187.5 million in 1999
to $220.2 million in 2000, while total core expenses increased only $0.8
million. Operating net income was $130.7 million for the first nine months of
2000 versus $104.7 million for the comparable period in 1999, an increase of
$26.0 million, or 24.8%.
10
<PAGE>
Gross premiums written increased 3.9% to $272.6 million for the first nine
months of 2000 from $262.2 million for the first nine months of 1999. Gross PV
premiums written decreased 17.5%, from $389.9 million in the first nine months
of 1999 to $321.8 million in the first nine months of 2000. Asset-backed gross
PV premiums written were $137.2 million in the first nine months of 2000, as
compared with $155.0 million in the first nine months of 1999, a decrease of
11.5%. In the municipal business, for the first nine months gross PV premiums
written decreased 23.9% to $99.7 million in 2000 from $131.0 million in 1999.
For the international sector, gross PV premiums written in the first nine months
decreased to $84.9 million in 2000 from $103.9 million in 1999, a decrease of
18.3%.
In the first nine months of 2000, the Company insured par value of bonds
totaling $40.2 billion, a 10.0% decrease over the same period in 1999. FSA's
first nine months asset-backed and municipal sectors declined 2.0% to $18.4
billion and 27.1% to $14.8 billion, respectively, while its international sector
rose 24.9% to $7.0 billion.
Net premiums written were $153.5 million for the first nine months of 2000, a
decrease of $19.1 million, or 11.0%, when compared with 1999. Net premiums
earned for the first nine months of 2000 were $138.0 million, compared with
$126.8 million in the first nine months of 1999, an increase of 8.8%. Premiums
earned from refundings and prepayments were $7.3 million for the first nine
months of 2000 and $9.5 million for the same period of 1999, contributing $3.3
million and $4.5 million, respectively, to after-tax earnings. Net premiums
earned for the first nine months of 2000 grew 11.5% relative to the same period
in 1999 when the effects of refundings and prepayments are eliminated.
Net investment income was $88.6 million for the first nine months of 2000 and
$69.2 million for the comparable period in 1999, an increase of 28.0%. The
Company's effective tax rate on investment income was 13.0% for the first nine
months of 2000 compared with 15.0% in 1999. In the first nine months of 2000,
the Company realized $38.3 million in net capital losses as compared with $15.7
million for the same period in 1999. Capital gains and losses are generally a
by-product of the normal investment management process and will vary
substantially from period to period. However, the Company intentionally incurred
above normal realized losses during the first half of 2000 in order to take
advantage of various federal tax loss carrybacks which were available to the
Company.
The provision for losses and loss adjustment expenses during the first nine
months of 2000 was $7.1 million compared with $5.9 million for the same period
in 1999, representing additions to the Company's general loss reserve.
Total policy acquisition and other operating expenses (excluding the cost of the
equity-based compensation programs of $18.3 million for the first nine months of
2000 compared with $12.4 million for the same period of 1999) were $37.6 million
for the first nine months of 2000 compared with $38.4 million for the same
period in 1999, a decrease of 2.2%. Excluding the effects of refundings, total
policy acquisition and other operating expenses were $35.4 million for the first
nine months of 2000 compared with $35.8 million for the same period in 1999, a
decrease of 1.0%. The Company recognized $105.5 million in merger related
expenses, of which $85.8 million represented an increase in equity-based
compensation and $19.7 million was for various fees related to the merger.
Income before income tax benefits for the first nine months of 2000 was $7.2
million, compared with income before income taxes of $110.5 million for the same
period in 1999.
The Company's effective tax rate for the first nine months of 2000 differed from
the statutory tax rate of 35.0% due to the non-deductibility of certain merger
related expenses and tax-exempt interest. The effective tax rate of 22.8% for
the same period in 1999 differs from the statutory tax rate of 35.0% due to
tax-exempt interest.
Liquidity and Capital Resources
The Company's consolidated invested assets and cash equivalents at September 30,
2000, net of unsettled security transactions, was $2,084.5 million, compared
with the December 31, 1999 balance of $1,937.1 million. These balances include
the change in the market value of the investment portfolio, which had an
unrealized gain position of $26.1 million at September 30, 2000 and $73.5
million in unrealized losses at December 31, 1999.
11
<PAGE>
At September 30, 2000, the Company had, at the holding company level, an
investment portfolio of $15.0 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 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 1999. Based upon FSA's statutory statements for the quarter ended
September 30, 2000, and considering dividends that can be paid by its
subsidiary, the maximum amount normally available for payment of dividends by
FSA without regulatory approval over the following 12 months is approximately
$77.5 million. However, as a customary condition for approving the application
of Dexia for a change in control of FSA, the prior approval of the
Superintendent of the New York State Insurance Department is required for any
payment of dividends by FSA to the Company for a period of two years following
such change in control, beginning July 5, 2000. In addition, the Company holds
$120 million of convertible surplus notes of FSA. Payments of principal and
interest on such notes may be made with the approval of the New York Insurance
Department. In the first nine months of 2000, FSA paid $4.5 million in interest
on such notes, compared with $6.7 million for the first nine months of 1999.
In the first nine months of 1999, the Company paid $10.4 million, $0.345 per
common share, in dividends to its shareholders. In 2000, the Company paid $7.9
million, $0.240 per common share, in dividends. The amounts are not comparable
as the dividends paid in 2000 represent only six months of regular quarterly
dividends, which were discontinued after the merger.
In connection with the merger, FSA repurchased $55.0 million of its stock from
the Company, and the Company sold 511,031 of its shares held in a rabbi trust to
Dexia for $38.6 million. The proceeds from these transactions were used to fund
the Company's obligations under certain of its long-term, equity-based
compensation programs.
In 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
had 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 (net of dividends) 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 exercised Forward Shares under the
subscription program, the Company settled with the participant but did not
necessarily close out the corresponding Forward Share position with the
Counterparties. In the fourth quarter of 1999, the Company entered into
additional forward agreements with two Counterparties to purchase 750,000
Forward Shares at an initial cost of $53.50 per share. These agreements were
similar to the Forward Share agreements described above, and the economic
benefit and risk of these shares were for the account of the Company's employees
and directors as described above. All of the Company's forward agreements were
settled in connection with the merger with Dexia and, at June 30, 2000, the
Company recognized a $39.4 million increase in the Company's additional paid-in
capital reflecting the amounts received from the Counterparties.
FSA's primary uses of funds are to pay operating expenses and to pay dividends
to, or repay surplus notes held by, 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.
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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 at September 30, 2000,
provided by commercial banks and intended for general application to
transactions insured by FSA and its insurance company subsidiaries. At September
30, 2000, there were no borrowings under this arrangement, which expires on
April 27, 2001, 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
$113.4 million was unutilized at September 30, 2000.
FSA has a standby line of credit in the amount of $240.0 million with a group of
international banks to provide loans to FSA after it has incurred, during the
term of the facility, cumulative municipal losses (net of any recoveries) in
excess of the greater of $240.0 million or 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 that began on April 30, 1999 and
will expire on April 30, 2007 and contains an annual renewal provision subject
to approval by the banks. No amounts have been utilized under this commitment as
of September 30, 2000.
The Company has no plans for material capital expenditures within the next
twelve months.
Forward-Looking Statements
This quarterly report contains forward-looking statements regarding, among other
things, the Company's plans and prospects. Important factors, including general
market conditions and the competitive environment, could cause actual results to
differ materially from those described in such forward-looking statements.
Certain of these factors are described in more detail under the heading
"Forward-Looking Statements" in Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 1999. Forward-looking statements in this
report are expressly qualified by all such factors. The Company undertakes no
obligation to revise or update any forward-looking statements to reflect changes
in events or expectations or otherwise.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Merger of PAJY Inc. into Financial Security
Assurance Holdings Ltd. under Section 904 of the Business
Corporation Law of the State of New York (effective July 5, 2000)
3.2 Certificate of Merger of White Mountains Holdings, Inc. and
Financial Security Assurance Holdings Ltd. into Financial Security
Assurance Holdings Ltd. under Section 904 of the Business
Corporation Law (effective July 5, 2000)
3.3 Amended and Restated Bylaws of Financial Security Assurance
Holdings Ltd. as amended and restated on July 5, 2000
10.1++ Financial Security Assurance Holdings Ltd. Deferred Compensation
Plan (Amended and Restated as of July 10, 2000)
10.2++ Financial Security Assurance Holdings Ltd. Supplemental Executive
Retirement Plan As Amended and Restated as of July 10, 2000
10.3++ Share Purchase Program Agreement dated as of September 4, 2000,
among Dexia Public Finance Bank, Dexia Holdings, Inc. and
Financial Security Assurance Holdings Ltd.
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended September 30, 2000.
++ Management contract or compensatory plan or arrangement required
to be filed.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 5, 2000
(the "July 5, 2000 Form 8-K"), with the Securities and Exchange
Commission. The July 5, 2000 Form 8-K (1) announced that the Company
and Dexia S.A. had consummated the previously announced merger
pursuant to which the Company became an indirect wholly owned
subsidiary of Dexia; (2) reported that pursuant to the merger, each
common share of the Company had been converted into the right to
receive $76 in cash; and (3) attached a copy of the press release
dated July 5, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
By /s/ Jeffrey S. Joseph
---------------------------------------------------------
November 13, 2000 Jeffrey S. Joseph
Managing Director & Controller (Chief Accounting Officer)
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Exhibit Index
Exhibit No. Exhibit
----------- -------
3.1 Certificate of Merger of PAJY Inc. into Financial Security
Assurance Holdings Ltd. under Section 904 of the Business
Corporation Law of the State of New York (effective July 5, 2000)
3.2 Certificate of Merger of White Mountains Holdings, Inc. and
Financial Security Assurance Holdings Ltd. into Financial Security
Assurance Holdings Ltd. under Section 904 of the Business
Corporation Law (effective July 5, 2000)
3.3 Amended and Restated Bylaws of Financial Security Assurance
Holdings Ltd. as amended and restated on July 5, 2000
10.1 Financial Security Assurance Holdings Ltd. Deferred Compensation
Plan (Amended and Restated as of July 10, 2000)
10.2 Financial Security Assurance Holdings Ltd. Supplemental Executive
Retirement Plan As Amended and Restated as of July 10, 2000
10.3 Share Purchase Program Agreement dated as of September 4, 2000,
among Dexia Public Finance Bank, Dexia Holdings, Inc. and
Financial Security Assurance Holdings Ltd.
27 Financial Data Schedules.
99 Financial statements of Financial Security Assurance Inc. for the
quarterly period ended September 30, 2000.
