- First quarter 2008 net loss of ($96.8) million, or ($1.51), per
common share, versus net income of $37.3 million, or $0.58, per
common share in the first quarter of 2007; HAMILTON, Bermuda, May 8
/PRNewswire-FirstCall/ -- Security Capital Assurance Ltd (NYSE:SCA)
("SCA" or the "Company") today announced results for the
three-month period ended March 31, 2008. The net loss in the first
quarter of 2008 was ($96.8) million, or ($1.51) per common share,
versus net income of $37.3 million, or $0.58 per common share, in
the first quarter of 2007. The net loss for the quarter was
primarily due to non-cash, unrealized mark-to-market losses on
financial guarantee obligations in credit derivative form of $187.2
million. As of March 31, 2008, the Company had total shareholders'
equity of $348.4 million and common shareholders' equity of $101.8
million, or $1.58 per common share. "The credit environment in the
first quarter of 2008 continued to be very difficult," said Paul S.
Giordano, SCA's President and Chief Executive Officer. "We are
focused on trying to restructure our Company. In the first quarter,
we also took steps to realign our operating costs with our present
situation of writing almost no new business." For the first quarter
of 2008, the Company reported an operating loss of ($2.7) million,
or ($0.04) per common share, compared to operating income of $44.1
million, or $0.68 per common share for the first quarter of 2007.
The deterioration in operating income was due to higher net losses
and loss adjustment expenses, credit impairment charges associated
with net credit default swap ("CDS") exposure, and restructuring
related expenses associated with severance, legal and advisory
fees, offset by higher net premiums earned and net investment
income. Operating income (loss) is a non-GAAP measure that is
calculated by taking net income excluding the after tax effect of:
(i) net realized gains (losses) on investments, (ii) unrealized
gains (losses) on derivatives net of credit impairment adjustments
included in unrealized gains (losses) on derivatives and (iii)
certain other items. The reconciliation of non-GAAP measures can be
found in Appendix A at the end of this release. The weighted
average number of shares used in the "per share" calculations was
64,213,908 for the first quarter of 2008. This compares to weighted
average shares of 64,342,897 for the first quarter of 2007. Net
Change in Fair Value of Credit Derivatives and Credit Impairment
Charges Associated with CDS Exposure. The net loss during the
quarter was primarily due to a $187.2 million, or $2.92 per common
share, net unrealized mark-to-market loss on financial guarantee
obligations executed in credit derivative form. This unrealized
mark-to-market charge was partially offset by net realized and
unrealized gains of $72.5 million, attributable to the exercise of
our option under XLFA's capital facility to issue XLFA Series B
Perpetual Preferred Shares during the quarter. Of the first quarter
2008 mark-to-market loss, $22.2 million, or $0.35 per common share,
represents credit impairment charges associated with our credit
derivative exposures. These credit impairment charges represent
accretion associated with the discounted amount of net anticipated
claims and recoveries recorded during the fourth quarter of 2007 on
our CDO of ABS portfolio and does not represent further adverse
developments. Net Change in Fair Value of Derivatives (Dollar
amounts in millions) Gains Losses Net XLFA capital facility put
option $179.5 $(107.0) $72.5 Net earned premiums from derivatives
18.4 18.4 Change in fair value of derivative exposures including
impairments of ($22.2) million (187.2) (187.2) Totals $197.9
$(294.2) $(96.3) Net Cash (Used) Provided by Operating Activities.
For the three months ended March 31, 2008, net cash used in
operating activities was ($44.6) million compared to net cash flows
provided by operating activities of $58.8 million in the comparable
three-month period in 2007. Net cash used in operating activities
during the first quarter of 2008 was primarily due to the Company's
decision to cease writing substantially all new business, combined
with higher expenses and claims payments made during the quarter.
Gross claims paid during the quarter totaled $63.3 million and does
not reflect receivables from affiliated and third-party reinsurers
of $50.1 million, including $44.9 million receivable under an
excess of loss reinsurance agreement with XL Insurance (Bermuda)
Ltd ("XLI"). Holding Company Liquidity. As of March 31, 2008, the
holding company parent, SCA, on a stand-alone, unconsolidated
basis, had cash and cash equivalents of $17.4 million. Common and
Preference Share Dividends. During the first quarter of 2008, SCA's
Board of Directors elected to not declare a quarterly dividend with
respect to our common shares and a semi-annual dividend with
respect to the SCA Series A Preference Shares. This election by the
Company's Board of Directors reduced cash outflow by approximately
$9.9 million for the three- month period ended March 31, 2008. Any
future dividends will be subject to applicable law and regulatory
requirements, as well as the discretion and approval of SCA's Board
of Directors. Merrill Lynch Litigation. As previously announced, on
Febuary 22, 2008 and March 6, 2008, the Company issued notices
terminating seven CDS contracts with Merrill Lynch International
("MLI"). The Company issued each of the termination notices on the
basis of MLI's repudiation of certain contractual obligations under
each of the CDS contracts ("MLI CDS contracts"). On March 19, 2008,
MLI filed a complaint in a New York federal court challenging the
effectiveness of the Company's terminations. On March 31, 2008, XL
Capital Assurance Inc. ("XCLA") filed a counterclaim seeking a
judgment from the court that its terminations were effective along
with an award of $28 million in damages for MLI's failure to make
certain termination payments under the MLI CDS contracts. On April
18, 2008, MLI filed a motion for summary judgment, which the
Company will oppose, and that is scheduled to be argued to the
court on June 4, 2008. The court has also entered a scheduling
order under which the case will be ready for trial in August 2008.
The notional amount of the MLI CDS contracts at March 31, 2008 and
December 31, 2007 aggregated $3.1 billion before reinsurance ($3.0
billion after reinsurance.) Discussion of SCA's First Quarter 2008
Financial and Operating Results. Set forth below is a discussion of
SCA's operating results for the three- month period ended March 31,
2008, compared to the same period in 2007. It is important to note
that in the first quarter of 2008 the Company substantially ceased
writing all new business, making year over year comparisons less
meaningful. Presentation of Credit Derivatives. In December 2006,
the Securities and Exchange Commission (the "SEC") contacted the
Association of Financial Guaranty Insurers ("AFGI"), of which the
Company is a member, and instructed its members to recommend a
uniform approach for presenting credit derivatives issued by
financial guarantee insurance companies in their financial
statements. The AFGI recommendation was developed in consultation
with the staff of the Office of the Chief Accountant and the
Division of Corporate Finance of the SEC and has been adopted by
the Company effective January 1, 2008 in accordance with the
transition AFGI discussed with the SEC. Although the new
presentation does not affect the Company's reported net income
(loss) or shareholders' equity, it changes the presentation of
revenues, expenses, assets and liabilities. Appendix B to this
press release highlights the reclassification adjustments that have
been made to better facilitate comparisons to prior periods.
Adjusted Gross Premiums. In the first quarter of 2008, the Company
ceased writing substantially all new business and realigned its
current staffing levels to reflect this development. Accordingly,
the presentation of adjusted gross premiums ("AGP") as a non-GAAP
financial measure of new business production has been suspended.
Net Premiums Earned. Net premiums earned increased 50% in the first
quarter of 2008 to $58.4 million compared to $38.9 million in the
first quarter of 2007. The previously referenced reclassification
of certain specific revenue, expense and balance sheet lines,
including net premiums earned, were associated with the accounting
treatment of the Company's CDS contracts. These adjustments reduced
net premiums earned by $18.4 million in the first quarter of 2008
and $7.5 million in the first quarter of 2007, when compared
against the prior method for presentation of net premiums earned.
Net premiums earned associated with the Company's CDS contracts are
now presented in the "realized gains and losses and other
settlements" line of the statements of operations. Net premiums
earned include accelerated premiums from refundings ("refunding
premiums"). Refunding premiums increased to $20.4 million in the
first quarter of 2008, compared to $1.3 million in the first
quarter of 2007. Refundings increased as a number of the Company's
insured auction rate and variable rate demand municipal bond
insurance policies were refinanced. The increase in net premiums
earned was primarily due to the significant increase in refunding
premiums. Set forth below is a summary of net premiums earned for
the three-month period ended March 31, 2008 and 2007: Net Premiums
Earned ($ in millions) Three Months Ended March 31, 2008 2007 % Chg
U.S. Public Finance $26.9 $13.6 98% U.S. Structured Finance 28.3
16.3 74% International 21.6 16.5 31% Reclassification Adjustments
(Earned Premiums associated with CDS contracts) (18.4) (7.5) 145%
Net Premiums Earned $58.4 $38.9 50% Net Losses and Loss Adjustment
Expenses. Net losses and loss adjustment expenses were $41.5
million in the first quarter of 2008, compared to a benefit of
($1.8) million in the first quarter of 2007. Additional case loss
provisions are primarily associated with adverse development on one
HELOC transaction and one CES transaction that experienced
additional credit deterioration during the first quarter of 2008.
The gain reported in the first quarter of 2007 was the result of a
$3.3 million reversal of a case reserve associated with a
residential mortgage-backed securities transaction which
experienced favorable development. Paid Claims. During the three
months ended March 31, 2008, the Company paid gross claims
aggregating $63.3 million on guarantees of obligations supported by
five HELOCs. These claims primarily relate to transactions for
which the Company has established gross and net case loss reserves
of $193.0 million and $62.8 million, respectively, at March 31,
2008. The gross paid claims do not reflect recoveries due from
affiliated and third-party reinsurers, including XLI, totaling
$50.1 million. From November 2007, through April 25, 2008, we paid
gross claims aggregating $112.0 million. Operating Expenses.
Operating expenses in the first quarter of 2008 were $40.9 million,
a 70% increase compared to $24.1 million of operating expenses for
the same period in 2007. This quarter's operating expenses increase
was driven by a $10.3 million charge related to workforce
reductions. Professional fees, primarily legal expenses and
advisory fees, were $5.2 million and $1.8 million higher than in
the first quarter of 2007, respectively. The increase in
professional fees was primarily due to projects supporting
restructuring and remediation efforts. No costs were deferred in
the first quarter of 2008 because the Company ceased writing
substantially all new business, which led to a $7.8 million
unfavorable operating expenses variance in the first quarter of
2008 compared to the first quarter of 2007. Corporate expenses,
which are included in operating expenses and are associated with
SCA being a public holding company, were $7.5 million in the first
quarter of 2008 versus $3.8 million in the comparable period in
2007. The increase was primarily due to the higher expenses
associated with the Company's restructuring efforts, which were
partially offset by lower executive management compensation costs.
Acquisition Costs. Acquisition costs were $5.7 million for the
first quarter of 2008, a $1.7 million increase over the comparable
period in 2007. The increase in acquisition costs in the first
quarter of 2008 was primarily due to accelerated amortization of
acquisition costs in the insurance segment due to refundings, calls
and other accelerations which totaled $1.6 million. Net Investment
Income. Net investment income for the first quarter of 2008 was
$32.3 million, representing an increase of 24% from $26.1 million
in the comparable period of 2007. The increase in net investment
income was attributable to higher invested asset balances. Average
invested assets were $2.7 billion in the first quarter of 2008,
compared to $2.2 billion in the first quarter of 2007. The increase
was due to higher positive cash flows from investing activities and
cash flows from financing activities in 2007 and the investment of
$246.6 million of net proceeds associated with the issuance of the
SCA Series A Preference Shares in the second quarter of 2007 and
net proceeds of $200 million associated with the issuance of XLFA
Series B Perpetual Preferred Shares in the first quarter of 2008.
SCA''s average book yield decreased to 4.71% in the first quarter
of 2008 versus 4.75% in the first quarter of 2007. Income Taxes.
The Company has established a valuation allowance against the
entire deferred tax asset of the Company at March 31, 2008 and
December 31, 2007. The Company's cumulative loss in the most recent
three-year period represented negative evidence sufficient to
require a full valuation allowance under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". The Company intends to maintain a
full valuation allowance for its net deferred tax asset until
sufficient positive evidence exists to support reversal of all or a
portion of the valuation allowance. Until such time, except for
state, local and foreign tax provisions, the Company will have no
net deferred tax asset. Balance Sheet. The Company's net loss
reserves were $167.4 million at the end of the first quarter of
2008, versus $135.6 million at year-end 2007. The increase was
primarily due to the additional loss reserve provisioning and loss
reserve accretion which occurred during the first quarter of 2008
in connection with the Company's insured HELOC and CES portfolios.
During the first quarter of 2008, the credit impairment charges
associated with the Company's CDO of ABS portfolio were
reclassified as a derivative liability on the Company's balance
sheet in order to comply with the recommendations by AFGI and the
SEC and adopted by the Company. The gross credit impairment
associated with the Company's CDO of ABS portfolio, which is now
included as a derivative liability, totaled $837.1 million as of
March 31, 2008. As of year-end 2007, the comparable liability that
was previously reflected in the "unpaid loss and loss adjustment
expenses" line on the Company's balance sheet was $829.8 million.
The increase was primarily due to loss reserve accretion on insured
CDO of ABS transactions executed in derivative form. As of March
31, 2008, total assets were $3.8 billion, up 4.4% from $3.6 billion
in total assets as of December 31, 2007. Book value, or common
shareholders' equity, decreased to $101.8 million as of March 31,
2008, from $180.5 million at the end of 2007. Common shareholders'
equity per share was $1.58 as of March 31, 2008, versus $2.81 at
December 31, 2007. The Company's total shareholders' equity as of
March 31, 2008 was $348.4 million. SCA's adjusted book value was
$1.32 billion, or $20.54 per common share, as of March 31, 2008,
versus $1.50 billion, or $23.39 per common share, as of December
31, 2007. Adjusted book value is a non-GAAP financial measure
defined as common shareholders' equity, plus the after-tax value of
deferred premiums, net of prepaid reinsurance premiums and deferred
acquisition costs, plus the after-tax net present value of
estimated future installment premiums in force discounted at 7%.
The reconciliation of non-GAAP measures can be found in Appendix A
at the end of this release. Book value and adjusted book value per
common share as of March 31, 2008, were based on the Company's
issued and outstanding shares of 64,259,009. This compares to
64,169,788 shares outstanding as of December 31, 2007. Ratings
Actions. The following ratings actions were taken with respect to
SCA and its subsidiaries XLCA, XL Capital Assurance (UK) Limited
("XLCA-UK") and XLFA, during the first quarter of 2008. On March
26, 2008, Fitch Ratings ("Fitch") downgraded the IFS ratings of
XLCA, XLFA and XLCA-UK to "BB" (Outlook Negative) from "A" (Rating
Watch Negative). Previously, on January 23, 2008, Fitch downgraded
these IFS ratings from "AAA" to "A" (Rating Watch Negative). On
March 4, 2008, Moody's Investors Service ("Moody's") announced that
it placed the "A3" (Negative Outlook) IFS ratings of XLCA, XLCA-UK
and XLFA on review for downgrade. Previously, on February 7, 2008,
Moody's downgraded the IFS ratings of XLCA, XLCA-UK and XLFA from
"Aaa" to "A3" (Negative Outlook). On February 25, 2008, Standard
& Poor's ("S&P") downgraded the "AAA" IFS, financial
enhancement and issuer credit ratings of XLCA, XLFA and XLCA-UK to
"A" (CreditWatch with Negative Implications). NYSE Notice of
Non-Compliance of Listing Criteria. On April 3, 2008, the New York
Stock Exchange ("NYSE") advised SCA that its common shares were
"below criteria" for the average price of a security. According to
the NYSE's price criteria for common shares, a company is
considered to be below compliance standards if the average closing
price of a security is less than $1.00 over a consecutive 30
trading-day period. As of April 1, 2008, the Company's common
shares reached a 30 trading-day average closing price of $0.98. The
Company notified the NYSE on April 8, 2008 that it intends to seek
to cure the average price deficiency to maintain its listing. There
can be no assurance that the Company will be successful in
maintaining its listing on the NYSE. Annual General Meeting. The
Company's Board of Directors has set the 2008 Annual General
Meeting of common shareholders for Tuesday, May 20, 2008 at 8:30am
in Hamilton, Bermuda. The record date for determining shareholders
entitled to notice of, and to vote at, the Annual General Meeting
was March 25, 2008. Conference Call Information SCA will host an
earnings conference call to discuss the Company's first quarter
2008 results on Friday, May 9, 2008 at 8:30 am Eastern Time. The
Company will be accepting written questions prior to the conference
call via email at . To access the conference call, please dial +1
888-694-4702 (U.S.) or +1 973-582-2741 (International). Please ask
to be connected to "SCA's Q1 2008 Earnings Call" and provide the
following passcode: 45689498. SCA will also broadcast a live audio
webcast of the conference call. The webcast will be available by
visiting the "Investor Relations" section of the Company's website
located at http://www.scafg.com/. Following the earnings conference
call, an archive of the call will be available for 30 days by
dialing +1 800- 642-1687 (U.S.) or +1 706-645-9291 (International).
The passcode for replay participants is: 45689498. The audio
webcast of the conference call will also be archived for 30 days
following the call in the "Investor Relations" section of the
Company's website located at http://www.scafg.com/. An unaudited
financial supplement relating to the Company's first quarter 2008
results is available on SCA's website located at
http://www.scafg.com/. About Security Capital Assurance Security
Capital Assurance Ltd is a Bermuda-domiciled holding company whose
common shares are listed on the New York Stock Exchange (NYSE:SCA).
For more information please visit http://www.scafg.com/. Contact:
Investors Frank Constantinople +1 441-279-7450 Media Michael
Gormley +1 441-279-7450 Cindy Leggett-Flynn or Michele Loguidice +1
212-333-3810 or FORWARD-LOOKING STATEMENTS This release contains
statements about future results, plans and events that may
constitute "forward-looking" statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. You are cautioned that these statements are not
guarantees of future results, plans or events and such statements
involve risks and uncertainties that may cause actual results to
differ materially from those set forth in these statements.
Forward-looking statements are subject to a number of risks and
uncertainties, many of which are beyond the Company's control.
These factors include, but are not limited to: recent and future
rating agency statements and ratings actions; the outcome of the
Company's dispute with MLI concerning the Company's termination of
seven CDS contracts; the Company's ability to successfully
implement its strategic plan; higher risk of loss in connection
with obligations guaranteed by the Company due to recent
deterioration in the credit markets stemming from the poor
performance of subprime residential mortgage loans; the suspension
of writing substantially all new business and the Company's ability
to continue to operate its business in its historic form; the
development and implementation of a strategic plan; developments in
the world's financial and capital markets that adversely affect the
performance of the Company's investments and its access to such
markets; the performance of invested assets, losses on credit
derivatives or changes in the fair value of credit derivatives; the
availability of capital and liquidity; the timing of claims
payments and the receipt of reinsurance recoverables; greater
frequency or severity of claims and loss activity including in
excess of the Company's loss reserves; changes in the Company's
reinsurance agreements with certain of its subsidiaries; the impact
of provisions in business arrangements and agreements triggered by
the ratings downgrades; the impact of other triggers in business
arrangements including CDS contracts; changes in regulation, tax
laws, legislation or accounting policies or practices; changes in
officers; general economic conditions; changes in the availability,
cost or quality of reinsurance or retrocessions; possible downgrade
of the Company's reinsurers; possible default by the counterparties
to the Company's reinsurance arrangements; the Company's ability to
compete; changes that may occur in Company operations and ownership
as the Company matures; and other additional factors, risks or
uncertainties described in Company filings with the SEC, including
in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2007, and also disclosed from time to time in
subsequent reports on Form 10-Q and Form 8-K. Readers are cautioned
not to place undue reliance on forward-looking statements which
speak only as of the date they are made. The Company does not
undertake to update forward-looking statements to reflect the
impact of circumstances or events that arise after the date the
forward-looking statements are made. Security Capital Assurance Ltd
Consolidated Statement of Operations (U.S. Dollars in thousands,
except per share amounts) Three months ended March 31, 2008 2007
Revenues Net premiums earned $58,353 $38,902 Net investment income
32,327 26,125 Net realized (losses) gains on investments (1,613)
112 Change in fair value of derivatives Realized gains and losses
and other settlements 197,938 7,477 Unrealized losses (294,244)
(7,946) Net change in fair value of derivatives (96,306) (469)
Total revenues (7,239) 64,670 Expenses Net losses and loss
adjustment expenses 41,488 (1,818) Acquisition costs, net 5,679
3,970 Operating expenses 40,903 24,070 Total expenses 88,070 26,222
(Loss) income before tax and minority interest (95,309) 38,448
Income tax expense - 79 (Loss) income before minority interest
(95,309) 38,369 Minority interest - dividends on preferred shares
of subsidiary 1,483 1,114 Net (loss) income (96,792) 37,255
Perpetual preference share dividends - - Net (loss) income
available to common shareholders $(96,792) $37,255 Net (loss)
income per share Basic $(1.51) $0.58 Diluted $(1.51) $0.58 Weighted
Average Shares Outstanding Basic 64,213,908 64,136,364 Diluted
64,213,908 64,342,897 Operating Income Net (loss) income available
to common shareholders $(96,792) $37,255 Realized gain on exercise
of put option (179,559) - Net realized losses (gains) on
investments 1,613 (112) Adjustment for unrealized losses (gains) on
derivatives, net of tax 294,244 7,946 Credit impairment adjustment
charge included in unrealized losses (gains) on derivatives
(22,196) (1,017) Total operating income available to common
shareholders $(2,690) $44,072 Operating income per common share
Basic $(0.04) $0.69 Diluted $(0.04) $0.68 Security Capital
Assurance Ltd Consolidated Balance Sheets (U.S. Dollars in
thousands, except As of As of share amounts) 03/31/2008 12/31/2007
Assets Investments Debt Securities $2,362,566 $2,381,249 Short term
investments 3,892 49,760 Total investments 2,366,458 2,431,009 Cash
and cash equivalents 480,374 249,116 Accrued investment income
17,911 21,039 Deferred acquisition costs 157,134 108,117 Prepaid
reinsurance premiums 96,878 101,122 Premiums receivable 22,114
24,494 Reinsurance balances receivable 50,066 - Reinsurance
balances recoverable on unpaid losses 227,041 266,945 Intangible
assets - acquired licenses 11,529 11,529 Derivative assets 293,757
354,596 Other assets 38,047 36,128 Total assets $3,761,309
$3,604,095 Liabilities and Shareholders' Equity Liabilities Unpaid
losses and loss adjustment expenses $394,409 $402,519 Deferred
premium revenue 890,913 927,385 Derivative liabilities 1,934,100
1,700,695 Reinsurance premiums payable 77,859 36,485 Accounts
payable, accrued expenses and other liabilities 56,632 70,948 Total
liabilities 3,353,913 3,138,032 Minority Interest, preferred shares
of subsidiary 59,000 39,000 Shareholder's Equity Series A
perpetual, non-cumulative shares 3 3 Additional paid in capital,
preferred equity 246,590 246,590 Total paid in capital, preferred
equity 246,593 246,593 Common shares 652 653 Additional paid in
capital, common equity 996,339 993,916 Total paid in capital,
common equity 996,991 994,569 Accumulated deficit (928,692)
(831,900) Accumulated other comprehensive income 33,504 17,801
Total shareholders' equity 348,396 427,063 Total liablilities,
minority interest and shareholders' equity $3,761,309 $3,604,095
Comment on Regulation G This press release contains the
presentation of operating income (loss) and adjusted book value
("ABV"). These measures are "non-GAAP financial measures" as
defined in Regulation G. The reconciliations of net (loss) income
available to common shareholders to operating income (loss); and
total shareholders' equity to common shareholders' equity and ABV
(the most directly comparable GAAP financial measures) presented at
the end of this section are in accordance with Regulation G. We
present our operations in the way we believe will be most
meaningful and useful to investors, analysts, rating agencies and
others who use our financial information in evaluating our
performance. These non-GAAP financial measures are included herein
because investors in SCA-insured bonds and other users of our
financial information consider such measures important in analyzing
our financial performance. Operating Income (Loss) While operating
income (loss) is not a substitute for net income (loss) computed in
accordance with GAAP, they are useful measures of performance used
by management, equity analysts and investors. We believe operating
income (loss) enhances the understanding of our results of
operations by highlighting the underlying profitability of our
business. Operating income (loss) measures net (loss) income
available to common shareholders, as determined in accordance with
GAAP, excluding net realized gains (losses) on investments and the
after-tax impact of net unrealized gains (losses) on derivatives
(other than credit impairment adjustments), and expenses related to
XL Capital Ltd's secondary offering of SCA's shares. The definition
of operating income (loss) used by the Company may differ from
definitions of operating earnings and core earnings used by other
financial guarantors. Net realized gains (losses) on investments
and the after-tax impact of net unrealized gains and losses on
derivatives (other than credit impairment adjustments), which
principally consist of credit derivatives we issue and interest
rate swap contracts we guarantee, are excluded from operating
income (loss) because they are heavily influenced by, and
fluctuate, in part according to, market interest rates, credit
spreads and other factors that management cannot control or
predict. Although the investment of premiums to generate investment
income (loss) and realized gains (losses) on investments is an
integral part of our operations, the determination to realize gains
(losses) on investments is independent of the underwriting process.
In addition, under applicable GAAP accounting requirements, losses
can be created as the result of other than temporary declines in
value without actual realization. In this regard, certain users of
our financial information, including certain rating agencies,
evaluate earnings before tax and net gains (losses) on investments
to understand the profitability of the recurring sources of income
without the effects of these two variables. Furthermore, these
users believe that, for many companies, the timing of the
realization of gains (losses) on investments is largely
opportunistic. In addition, with respect to credit derivatives and
guaranteed interest rate swap contracts discussed above, because we
generally hold such contracts to maturity and, accordingly, will
not realize the periodic effect of the changes in fair value of
these instruments, therefore, we exclude such changes from
operating income (loss) (similar to other companies in the
financial guarantee industry) as the changes in fair value each
quarter are not indicative of underlying business performance of
our operations. Also, in determining operating income (loss) for
the twelve-month period ended December 31, 2007, we excluded from
operating income (loss) expenses incurred by the Company in
connection with the secondary offering of our common shares by XL
Capital Ltd, as such expenses are not related to the conduct of the
Company's business. Adjusted Book Value ABV represents GAAP book
value attributable to common shareholders plus the after-tax
effects of deferred premium revenue, net of prepaid reinsurance
premiums and deferred acquisition costs, plus the after-tax effect
of the net present value of future installment premiums. Since the
Company expects these items to affect future results and, in
general, they do not require any additional future performance
obligation on the Company's part, ABV provides an indication of the
Company's value in the absence of any new business activity. While
ABV is not a substitute for GAAP book value, the Company believes
the presentation of ABV provides another useful measure of the
value of the Company for management, equity analysts and investors.
The net present value of future installment premiums included in
ABV may differ materially from actual future installment premiums
collected due to changes in market interest rates, refinancing
activity, pre-payment speeds, defaults and other factors that
management cannot control or predict. In summary, we believe that
presenting both GAAP and the aforementioned non-GAAP financial
measures enable investors and other users of our financial
information to analyze our performance in a manner similar to how
our management analyzes performance. Also, as stated above, we
believe that analysts, investors and rating agencies that follow us
(and the financial guarantee insurance industry as a whole) include
these items in their analyses for the same reasons previously
discussed, and they request that we provide this non-GAAP financial
information on a regular basis. Appendix A (U.S. Dollars in
Millions) Net Loss and Loss Adjustment Expenses Reconciliation
Three Months Ended 03/31/2008 03/31/2007 Net losses and loss
adjustment expenses $41.5 $(1.8) Credit impairment adjustment
included in unrealized losses (gains) on derivatives 22.2 1.0 Net
losses and loss adjustment expenses including credit impairment
adjustments included in unrealized gains (losses) on derivatives
$63.7 $(0.8) Reconciliation of Net (Loss) Income to Operating
(Loss) Income and Core (Loss) Income Three Months Ended 03/31/2008
03/31/2007 Net (loss) income available to common shareholders
$(96.8) $37.3 Effect of: Realized gain on exercise of put option
(179.6) - Net realized (gains) losses on investments 1.6 (0.1)
Adjustment for unrealized (gains) losses on derivatives, net of tax
294.2 7.9 Credit impairment adjustment included in unrealized
losses (gains) on derivatives (22.2) (1.0) Operating (loss) income
(2.7) 44.1 Effect of refundings, calls and other accelerations
(18.7) (1.0) Core (loss) income $(21.4) $43.1 Reconciliation of
Total Shareholders' Equity to Common Shareholders' Equity and
Adjusted Book Value (ABV) As of 03/31/2008 12/31/2007 Total
shareholders' equity $348.4 $427.1 Series A perpetual
non-cumulative preference shares (246.6) (246.6) Common
shareholders' equity 101.8 180.5 After-tax value of: Deferred
premium revenue 792.9 825.4 Present value of future installment
premiums(1) 651.4 681.4 Deferred acquisition costs (139.8) (96.2)
Prepaid reinsurance premiums (86.2) (90.0) Adjusted book value
$1,320.0 $1,501.1 1) Excludes $99.5 million at March 31, 2008 and
$95.1 million at December 31, 2007 of NPVFIP that is netted against
certain of our case-basis reserves for losses and loss adjustment
expenses. *Numbers may not add due to rounding. Balance Sheets
Showing Reclassifications (U.S. Dollars in thousands, except share
amounts) 03/31/2008 12/31/2007 12/31/2007 As Amount Assets Current
reclassified reclassified As reported Investments Debt Securities
$2,362,566 $2,381,249 $- $2,381,249 Short term investments 3,892
49,760 - 49,760 Total investments 2,366,458 2,431,009 - 2,431,009
Cash and cash equivalents 480,374 249,116 - 249,116 Accrued
investment income 17,911 21,039 - 21,039 Deferred acquisition costs
157,134 108,117 - 108,117 Prepaid reinsurance premiums 96,878
101,122 - 101,122 Premiums receivable 22,114 24,494 - 24,494
Reinsurance balances receivable 50,066 - - - Reinsurance balances
recoverable on unpaid losses 227,041 266,945 (183,788)(1)(2)450,733
Intangible assets - acquired licenses 11,529 11,529 - 11,529
Derivative assets 293,757 354,596 186,232 (1) 168,364 Other assets
38,047 36,128 (2,444)(2) 38,572 Total assets $3,761,309 $3,604,095
$- $3,604,095 Liabilities and Shareholders' Equity Liabilities
Unpaid losses and loss adjustment expenses $394,409 $402,519
$(850,569)(1)$1,253,088 Deferred premium revenue 890,913 927,385 -
927,385 Derivative liabilities 1,934,100 1,700,695 850,569 (1)
850,126 Reinsurance premiums payable 77,859 36,485 - 36,485
Accounts payable, accrued expenses and other liabilities 56,632
70,948 - 70,948 Total liabilities 3,353,913 3,138,032 - 3,138,032
Minority Interest, preferred shares of subsidiary 59,000 39,000 -
39,000 Shareholders' Equity Series A perpetual, non-cumulative
shares 3 3 - 3 Additional paid in capital, preferred equity 246,590
246,590 - 246,590 Total Paid in capital, preferred equity 246,593
246,593 246,593 Common shares 652 653 - 653 Additional paid in
capital, common equity 996,338 993,916 - 993,916 Total paid in
capital, common equity 996,991 994,569 994,569 Accumulated deficit
(928,692) (831,900) - (831,900) Accumulated other comprehensive
income 33,504 17,801 - 17,801 Total shareholders equity 348,396
427,063 - 427,063 Total liablilities, minority interest and
shareholders' equity $3,761,309 $3,604,095 $3,604,095 (1) Credit
impairment component of derivative fair value (2) Other
reclassification to conform to current year presentation Statements
of Operations Showing Reclassifications Quarter ended (U.S. Dollars
in thousands) March 31, 2008 Prior Current Reclassifications
Presentation Net premiums earned $58,353 $18,379 (1) $76,732 Net
investment income 32,327 32,327 Net realized gains (losses) on
investments (1,613) (1,613) Change in fair value of derivatives
Realized gains and losses and other settlements 197,938
(197,938)(1)(3) - Unrealized losses (294,244) 201,755 (2)(3)
(92,489) Net change in fair value of derivatives (96,306) 3,817
(92,489) Fee income and other - - - Total revenues (7,239) 22,196
14,957 Expenses Net losses and loss adjustment expenses 41,488
22,196 (2) 63,684 Acquisition costs, net 5,679 5,679 Operating
expenses 40,903 40,903 Total expenses 88,070 22,196 110,266 (Loss)
income before tax and minority interest (95,309) - (95,309) Income
tax (benefit) expense - - (Loss) income before minority interest
(95,309) - (95,309) Minority interest - dividends on preferred
shares of subsidiary 1,483 1,483 Net (loss) income (96,792) -
(96,792) Perpetual preference share dividends - - Net (loss) income
available to common shareholders $(96,792) $- $(96,792) (1)
Premiums from credit derivative contracts (2) Credit impairment
adjustments on credit derivative contracts (3) Settlement value of
credit facility put option of $179,559 Statements of Operations
Showing Reclassifications Quarter ended (U.S. Dollars in thousands)
March 31, 2007 Prior Current Reclassifications Presentation
Revenues Net premiums earned $38,902 $7,477 (1) $46,379 Net
investment income 26,125 26,125 Net realized gains (losses) on
investments 112 112 Change in fair value of derivatives Realized
gains and losses and other settlements 7,477 (7,477)(1) -
Unrealized losses (7,946) 1,017 (2) (6,929) Net change in fair
value of derivatives (469) (6,460) (6,929) Fee income and other - -
Total revenues 64,670 1,017 65,687 Expenses Net losses and loss
adjustment expenses (1,818) 1,017 (2) (801) Acquisition costs, net
3,970 3,970 Operating expenses 24,070 24,070 Total expenses 26,222
1,017 27,239 (Loss) income before tax and minority interest 38,448
- 38,448 Income tax (benefit) expense 79 79 (Loss) income before
minority interest 38,369 - 38,369 Minority interest - dividends on
preferred shares of subsidiary 1,114 1,114 Net (loss) income 37,255
- 37,255 Perpetual preference share dividends - - Net (loss) income
available to common shareholders $37,255 $- $37,255 (1) Premiums
from credit derivative contracts (2) Credit impairment adjustments
on credit derivative contracts (3) Settlement value of credit
facility put option of $179,559 EPS and Operating Income Quarter
ended Presentation March 31, 2008 Prior (U.S. Dollars in thousands)
Current Reclassifications Presentation Net (loss) income available
to common shareholders $(96,792) $- $(96,792) Earnings Per Share
Data: Basic $(1.51) $(1.51) Diluted (1.51) (1.51) Operating Income
Net (loss) income available to common shareholders $(96,792) $-
$(96,792) Less: Realized gain on exercise of credit facility put
option (179,559) 179,559 (3) - Add: Net realized losses (gains) on
investments 1,613 1,613 Add: Adjustment for unrealized losses
(gains) on derivatives 294,244 (201,755)(2)(3) 92,489 Less: Credit
impairment adjustment included in unrealized losses (gains) on
derivatives (22,196) 22,196 (2) - Total operating income available
to common shareholders $(2,690) $- $(2,690) Operating income per
common share Basic $(0.04) $(0.04) Diluted (0.04) (0.04) (1)
Premiums from credit derivative contracts (2) Credit impairment
adjustments on credit derivative contracts (3) Settlement value of
credit facility put option of $179,559 EPS and Operating Income
Quarter ended Presentation March 31, 2007 Prior (U.S. Dollars in
thousands) Current Reclassifications Presentation Net (loss) income
available to common shareholders $37,255 $- $37,255 Earnings Per
Share Data: Basic $0.58 $0.58 Diluted 0.58 0.58 Operating Income
Net (loss) income available to common shareholders $37,255 $-
$37,255 Less: Realized gain on exercise of credit facility put
option Add: Net realized losses (gains) on investments (112) (112)
Add: Adjustment for unrealized losses (gains) on derivatives 7,946
(1,017) (2) 6,929 Less: Credit impairment adjustment included in
unrealized losses (gains) on derivatives (1,017) 1,017 (2) - Total
operating income available to common shareholders $44,072 $-
$44,072 Operating income per common share Basic $0.69 $0.69 Diluted
0.68 0.68 (1) Premiums from credit derivative contracts (2) Credit
impairment adjustments on credit derivative contracts (3)
Settlement value of credit facility put option of $179,559
DATASOURCE: Security Capital Assurance Ltd CONTACT: Investors,
Frank Constantinople, +1-441-279-7450, , or Media, Michael Gormley,
+1-441-279-7450, , or Cindy Leggett-Flynn, , or Michele Loguidice,
, both of Brunswick Group, +1-212-333-3810, for Securty Capital
Assurance Ltd Web site: http://www.scafg.com/
Copyright
Stellus Capital Investment (NYSE:SCA)
Historical Stock Chart
From Jun 2024 to Jul 2024
Stellus Capital Investment (NYSE:SCA)
Historical Stock Chart
From Jul 2023 to Jul 2024