- Fourth quarter 2007 net loss of $1,197.9 million versus net
income of $35.8 million in the fourth quarter of 2006. 2007 net
loss of $1,224.5 million versus net income of $117.4 million in
2006; HAMILTON, Bermuda, March 13 /PRNewswire-FirstCall/ --
Security Capital Assurance Ltd (NYSE:SCA) ("SCA" or the "Company")
today announced results for the three-month and full-year periods
ended December 31, 2007. The net loss in the fourth quarter of 2007
was $1,197.9 million, or $18.67 per share, versus net income of
$35.8 million, or $0.56 per share, in the fourth quarter of 2006.
For the full-year 2007, the Company reported a net loss of $1,224.5
million, or $19.09 per share, versus net income of $117.4 million,
or $2.18 per diluted share, for the full-year 2006. As of December
31, 2007, the Company had total shareholders' equity of $427.1
million and common shareholders' equity of $180.5 million, or $2.81
per share. "The extraordinary and rapid deterioration in U.S.
residential mortgage- related credits led us to incur record levels
of case reserves in the fourth quarter of last year," said Paul S.
Giordano, SCA's president and chief executive officer. "We are
continuing to explore our strategic options to generate or raise
capital and improve our ratings. In the interim, we are in the
process of realigning our cost structure to reflect the current
business conditions and have made the strategic decision to cease
writing new business for a period of time to preserve capital." For
the fourth quarter of 2007, the Company had an operating loss of
$678.1 million, or $10.57 per share, compared to operating income
of $37.1 million, or $0.58 per share for the fourth quarter of
2006. For the full-year 2007, the operating loss was $530.3
million, or $8.27 per share, compared to operating income of $141.9
million, or $2.64 per share, for the full year 2006. The fourth
quarter and full-year 2007 operating losses were primarily due to
the $651.5 million net case loss provision associated with the CDO
of ABS portfolio and the $37.2 million net case loss provision that
was incurred during the fourth quarter for HELOC and CES
transactions. The fourth quarter 2007 net case loss provisions
totaling $9.5 million, associated with the Company's third party
reinsurance business, also contributed to the operating loss.
Operating income (loss) is a non-GAAP measure that is calculated by
taking net income available to common shareholders, as determined
in accordance with GAAP, and excluding net realized gains (losses)
on investments and net realized and unrealized gains (losses) on
derivative financial instruments, after taxes. The reconciliation
of non-GAAP measures can be found in the attachments at the end of
this release. The weighted average diluted number of shares used in
the "per share" calculations was 64,169,788 for the fourth quarter
and 64,150,375 for the year ended December 31, 2007. This compared
to weighted average diluted shares of 64,237,292 for the fourth
quarter and 53,718,326 for the year ended December 31, 2006.
Weighted average diluted shares were higher for the full year 2007
because SCA was a public company for the entire twelve months of
2007 compared to only five months in 2006. Mark-to-Market and Case
Loss Provisions. The net loss during the quarter was primarily due
to a $518.8 million, or $8.09 per share, unrealized mark-to- market
adjustment on financial guarantee obligations executed in credit
derivative form, and additional net case loss provisions of $698.2
million, or $10.88 per share. The unrealized mark-to-market
adjustment is attributable to significant changes in the estimated
fair value of the Company's credit derivative exposures since the
quarter ended September 30, 2007. The following table summarizes
the gross and net case loss provisions that were incurred by the
Company during the fourth quarter of 2007: Q4 2007 Gross Case Q4
2007 Net Case Loss ($ in millions) Loss Provision Provision CDO of
ABS transactions $838.6 $651.5 HELOC and CES transactions $216.7
$37.2 3rd Party Reinsurance transactions $9.5 $9.5 Total $1,064.8
$698.2 The gross case loss reserve provisions of $838.6 million,
$651.5 million net of reinsurance, are related to thirteen of SCA's
high grade multi-sector CDO of ABS transactions. Reinsurance from
various subsidiaries of XL Capital Ltd ("XL") and other reinsurers
with respect to these CDO of ABS transactions is expected to result
in a $187.1 million recoverable. In addition, the Company recorded
a gross case loss provision of $216.7 million relating to insured
HELOC and CES transactions. Reinsurance from XL and other
reinsurers with respect to these HELOC and CES transactions is
expected to result in a $179.5 million recoverable, which would
reduce this amount to a net loss provision of $37.2 million. The
$9.5 million net case loss provision in the Company's third party
reinsurance business represents a full-limit loss, and was
associated with two related transactions in the international
transportation sector. Cash Flow from Operations. For the twelve
months ended December 31, 2007, net cash flow from operations was
$285.5 million compared to $393.5 million in the comparable twelve
month period in 2006. The decline was driven by upfront insurance
premiums received, which decreased by approximately $55.4 million
for the full-year 2007 compared to the full-year 2006. Holding
Company Liquidity. As of December 31, 2007, our holding company
parent, Security Capital Assurance Ltd, on a stand alone basis, had
total assets of $434.1 million and total liabilities of $7.1
million. Cash and cash equivalents were $23.5 million while
investments in subsidiaries were $409.5 million. Common and
preference share dividends paid to shareholders were $13.5 million
for 2007 versus $1.3 million for 2006. The increase in dividends
was primarily due to the issuance of $250 million of the SCA Series
A Preference Shares in April of 2007. Common dividends were also
higher in 2007 versus 2006 because SCA paid four quarterly
dividends in 2007 versus one quarterly dividend in 2006. Election
Not to Declare Common and Preference Share Dividends. SCA's board
of directors elected not to declare either a quarterly dividend
with respect to our common shares or a semi-annual dividend with
respect to the SCA Series A Preference Shares. The Company expects
that this election by the Company's board of directors will reduce
cash outflow by approximately $9.9 million for the period ended
March 31, 2008. Any future dividends will be subject to the
discretion and approval of the board of directors, applicable law
and regulatory requirements. Update on Recent Events Ratings
Actions. During the fourth quarter of 2007, developments in the
credit and mortgage markets had a material adverse impact on the
insured portfolios and business, results of operations, and
financial condition throughout the financial guarantee insurance
industry, including SCA. As a result, the rating agencies have
updated their analyses and ratings models for the industry. Based
on their revised analysis, the following actions were taken with
respect to SCA and its subsidiaries, XL Capital Assurance Inc.
("XLCA"), XL Capital Assurance (UK) Limited ("XLCA-U.K.") and XL
Financial Assurance Ltd. ("XLFA"). On March 4, 2008, Moody's
Investors Service ("Moody's") announced that it placed the "A3"
(Negative outlook) insurance financial strength ("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"
financial strength, financial enhancement and issuer credit ratings
of XLCA, XLFA and XLCA-UK to "A-" (CreditWatch with negative
implications). On January 23, 2008, Fitch Ratings ("Fitch")
downgraded the insurer financial strength ratings of XLCA, XLFA and
XLCA-UK to "A" (Rating Watch Negative) from "AAA." The Company's
capital position has been determined by the rating agencies to be
insufficient to maintain our historic triple-A ratings. We require
additional capital, which may not be available or may be available
only on unfavorable terms. The IFS ratings downgrades have, and
will likely continue to have, material adverse effects on SCA's
business, including that, at the current time, the Company has
temporarily suspended writing substantially all new business. 10-K
Update. In the Company's filing with the SEC on February 29, 2008
for an extension of the due date to file our 10-K, the Company
indicated that SCA's independent auditors were evaluating whether
their opinion on SCA's financial statements would include a "going
concern" explanatory paragraph. The Company expects to file it's
Annual Report on Form 10-K on Monday, March 17, 2008. SCA expects
that the Company's independent auditors' opinion will not contain a
going concern explanatory paragraph. The Company also expects that
such opinion will be unqualified, but will include an explanatory
paragraph highlighting the Company's decision to cease writing new
business at the present time. Current Strategic Options and Plan.
As previously announced by the Company on March 3, 2008, as a
result of recent developments, SCA retained Goldman Sachs & Co.
as a financial advisor to assist the Company in evaluating
strategic alternatives, including raising new capital, structuring
reinsurance solutions and negotiating the commutation or
restructuring of certain of SCA's financial guarantee obligations.
SCA has also engaged Rothschild, Inc. to assist the Company with a
comprehensive review of all strategic options. The Company has been
exploring various strategic options with our advisors and have been
in consultation with our regulators and the rating agencies
regarding the various strategies under consideration. While SCA
continues to evaluate the elements of the strategic plan with the
Company's advisors and regulators, the key elements of the
strategic plan primarily include the following: -- generating
capital for rating agency purposes by not writing new business for
a period of time pending clarification of SCA's strategic options;
-- pursuing the commutation, restructuring or settlement of certain
obligations insured or reinsured by us, particularly with the
Company's CDO counterparties, in order to mitigate uncertainty
around such exposure and generate capital for rating agency
purposes; -- exploring the commutation, restructuring or settlement
of ceded reinsurance or other arrangements for SCA's benefit to
generate capital for rating agency purposes or improve the
Company's liquidity position; -- seeking to raise new capital from
third parties under more favorable conditions than exist at the
present time; and -- examining ways to restructure the Company's
business to facilitate the creation or raising of capital by the
actions described above or by other means. There can be no
assurance that the Company's current strategic plan will not evolve
or change over time, will be successfully implemented or will
address the requirements of the rating agencies. Termination of
Seven CDS Contracts. On February 22, 2008 and March 6, 2008, the
Company issued notices terminating seven Credit Default Swap
("CDS") contracts with a certain counterparty under which the
Company had agreed to make payments to the counterparty on the
occurrence of certain credit events pertaining to particular CDOs
of ABS referenced in the agreements. The Company issued each of the
termination notices on the basis of the counterparty's repudiation
of certain contractual obligations under each of the agreements.
The Company has been advised by the counterparty that it disputes
the effectiveness of the terminations. The Company intends to
vigorously enforce the terminations. The notional amount of the CDS
contracts at December 31, 2007 aggregated $3.1 billion before
reinsurance ($3.0 billion after reinsurance). For the year ended
December 31, 2007, the Company recorded a charge of $632.3 million
relating to these CDS contracts of which $204.9 million represents
a net unrealized loss and is reflected in the Company's
consolidated statement of operations in the section captioned "Net
realized and unrealized losses on credit derivatives" and $427.4
million represents the provision of case basis reserves for losses
and loss adjustment expenses and is reflected in the Company's
consolidated statement of operations in the section captioned, "Net
losses and loss adjustment expenses." Set forth below is a
discussion of SCA's operating results for the three- and
twelve-month periods ended December 31, 2007, compared to the same
periods in 2006. Adjusted Gross Premiums. The Company has
temporarily suspended writing substantially all new business.
Accordingly, the description of adjusted gross premiums and
premiums written is historical and is not indicative the Company's
ability to generate similar results in the future. SCA's adjusted
gross premiums ("AGP"), as defined below, in the fourth quarter of
2007 declined 21% to $155.6 million from $197.2 million in the
fourth quarter of 2006. During the fourth quarter of 2007, U.S.
public finance AGP increased to $66.4 million, compared to $14.4
million in the fourth quarter of 2006. The increase was primarily
due to strong premium generation associated with credit enhancing
municipal transactions previously insured by other financial
guarantors. The Company's top-five public finance transactions
insured during the quarter generated AGP of $26.6 million. U.S.
structured finance AGP declined by 79% to $23.1 million in the
fourth quarter of 2007 from $107.6 million in the fourth quarter of
2006. SCA's structured finance volume declined significantly during
the quarter due to general credit market conditions combined with
the rating agency rating actions that began during the fourth
quarter of 2007. These events led to significantly less liquidity
in the structured markets during the fourth quarter of 2007 and
continue to impact the market in 2008. Additionally, several large
transactions that closed in the fourth quarter of 2006 in the
global infrastructure, collateralized debt obligation and
specialized risk sectors were not repeated in the fourth quarter of
2007. International AGP decreased 12% to $66.2 million in the
fourth quarter of 2007 versus $75.2 million in the fourth quarter
of 2006. This decrease was mostly due to the closing of several
large transportation infrastructure and utility transactions in key
markets abroad during the fourth quarter of 2006 that were not
repeated in the fourth quarter of 2007. AGP for the twelve months
ended December 31, 2007 was $549.1 million compared to $556.1
million in 2006, representing a decrease of 1% for the year. AGP in
the primary insurance segment fell 7% to $478.6 million from $514.1
million while the reinsurance segment's AGP increased 68% to $70.5
million in 2007 up from $41.9 million in 2006. The increase in the
reinsurance segment's AGP was primarily associated with
international business growth. AGP is a non-GAAP financial measure
of new business production that is calculated by adding the sum of
upfront premiums on business written during the period, installment
premiums due on business written during the period, and expected
future installment premiums on business written during the period
discounted at 7%. Because AGP includes premiums due on future
installment business written in the period, it allows management to
measure business production for the period and compare such
production to the production of prior periods on the same basis.
The reconciliation of non-GAAP measures can be found in the
attachments at the end of this release. Set forth below is a
summary of AGP for the three- and twelve-month periods ended
December 31, 2007 and 2006: Adjusted Gross Premiums Three Months
Ended Twelve Months Ended December 31, December 31, 2007 2006 %Chg
2007 2006 %Chg ($ in millions) U.S. Public Finance $66.4 $14.4 361%
$156.4 $142.2 10% U.S. Structured Finance 23.1 107.6 -79% 175.3
208.0 -16% International 66.2 75.2 -12% 217.4 205.8 6% Total AGP
$155.6 $197.2 -21% $549.1 $556.1 -1% *Numbers may not add due to
rounding Total Premiums Written and Net Premiums Written. Total
premiums written, which are comprised of gross premiums written and
reinsurance premiums assumed, declined 31% to $91.9 million in the
fourth quarter of 2007 versus $133.6 million in the fourth quarter
of 2006. During 2007, total premiums written were $378.3 million,
8% lower than the premiums written during the year in 2006, which
totaled $409.0 million. Total premiums written fell in the fourth
quarter of 2007 primarily due to a decrease in "upfront" premium
business derived from several large International transactions
written during the fourth quarter of 2006, which were not repeated
in the fourth quarter of 2007. Upfront premium transactions
represented nearly 55% of total premiums written in the fourth
quarter of 2007, versus approximately 78% in the fourth quarter of
2006. Net premiums written, which comprise total premiums written
less ceded premiums written, decreased 38% to $74.0 million in the
fourth quarter of 2007 compared to $119.4 million in the fourth
quarter of 2006. Net premiums written decreased 23% to $306.1
million in the twelve months ended December 31, 2007, compared to
$395.9 million of net premiums written in the twelve months ended
December 31, 2006. Net Premiums Earned. Net premiums earned
increased 29% in the fourth quarter of 2007 to $57.0 million
compared to $44.3 million in the fourth quarter of 2006. Net
premiums earned include accelerated premiums from refundings
("refunding premiums"). Refunding premiums increased 44% to $2.6
million in the fourth quarter of 2007, compared to $1.8 million in
the fourth quarter of 2006. Core net premiums earned, a non-GAAP
measure which excludes refunding premiums, increased 28% to $54.3
million in the fourth quarter of 2007 from $42.5 million in the
fourth quarter of 2006. The reconciliation of non-GAAP measures can
be found in the attachments at the end of this release. For the
full-year ended December 31, 2007, net premiums earned increased
18% to $215.7 million compared to $183.1 million for the full-year
ended December 31, 2006. Refunding premiums declined 46% to $14.7
million in 2007 compared to $27.4 million in 2006. There were two
large refundings that occurred in the second quarter of 2006 that
were not repeated in 2007. Core net premiums earned, which excludes
refunding premiums, increased 29% to $201.0 million in 2007 from
$155.7 million in the prior full-year period. The increase in
earned premiums was primarily due to the Company's larger back book
of business in U.S. Public Finance and certain parts of Structured
Finance in 2007 versus 2006. Earned premiums from the reinsurance
segment also contributed to the increase in earned premiums. Set
forth below is a summary of net premiums earned for the three- and
twelve-month periods ended December 31, 2007 and 2006: Net Premiums
Earned Three Months Ended Twelve Months Ended December 31, December
31, 2007 2006 %Chg 2007 2006 %Chg ($ in millions) U.S. Public
Finance $16.5 $6.9 139% $54.5 $46.4 17% U.S. Structured Finance
14.8 17.8 -17% 80.2 70.2 14% International 25.6 19.6 31% 81.0 66.5
22% Total Net Premiums Earned $57.0 $44.3 29% $215.7 $183.1 18%
*Numbers may not add due to rounding Net Losses and Loss Adjustment
Expenses. Net losses and loss adjustment expenses were $710.9
million in the fourth quarter of 2007, compared to $3.6 million in
the fourth quarter of 2006. The increase was due to case loss
provisioning which totaled $1,064.8 million gross, and $698.2
million net of reinsurance. The case loss provisions are associated
with thirteen CDO of ABS transactions, five HELOC transactions and
one CES transaction that experienced credit deterioration during
the fourth quarter of 2007. There were also net case loss
provisions associated with the Company's third party reinsurance
business which totaled $9.5 million and was associated with two
related reinsured international transportation securitizations.
This $9.5 million net case loss provision represents a full-limit
loss. For the twelve months ended December 31, 2007, net losses and
loss adjustment expenses were $720.5 million as compared to $15.0
million in the comparable 2006 period. Through December 31, 2007,
we paid claims aggregating $7.5 million on our guarantees of
obligations supported by three HELOCs, $5.0 million of which
relates to transactions for which we have established a case basis
reserve at December 31, 2007. For the full year 2007 and through
February 15, 2008, we paid claims aggregating $39.2 million, $28.4
million of which relates to transactions for which we have
established a case basis reserve at December 31, 2007. There were
no paid claims in 2006. Operating Expenses. Net operating expenses
in the fourth quarter of 2007 were $22.7 million, a 4% decrease
compared to $23.6 million in operating expenses for the same period
in 2006. The decrease was primarily due to an $11.1 million
reduction in compensation expenses partially offset by higher legal
and consulting expenses incurred during the quarter. Operating
expenses for the twelve months ended December 31, 2007 were $98.9
million and represented a $19.9 million increase, or 25%, over
2006. The increase in operating expenses is primarily due to SCA
being a public holding company for five months in 2006 as compared
to a full twelve months in 2007. Corporate expenses, which are
included in operating expenses and are associated with SCA being a
public holding company, were $6.4 million in the fourth quarter of
2007 versus $3.6 million in the comparable period in 2006. The
increase was associated with higher legal and consulting expenses,
which were partially offset by lower executive management
compensation costs. Corporate expenses for the full-year 2007 were
$18.9 million compared with $6.4 million for the full-year 2006.
Acquisition Costs. Acquisition costs were $7.8 million for the
fourth quarter of 2007, a $4.6 million increase over the comparable
period in 2006. For the year, acquisition costs were $20.0 million,
an increase of $3.7 million, or 23%, as compared to 2006. The
increase in acquisition costs in the fourth quarter of 2007 was
primarily due to the acceleration of previously deferred costs due
to the loss provisions established on six HELOC and CES
transactions. The increase in the full-year costs was due to the
acceleration of previously deferred costs, as well as higher
premium taxes resulting from growth in our in-force business.
Acquisition costs in the reinsurance segment were $1.8 million
higher in the fourth quarter of 2007 versus the fourth quarter of
2006 due to higher earned premiums from reinsurance during the
current quarter, and higher associated expense amortization. Income
Tax Expense. Income tax expense increased in the fourth quarter of
2007 to $25.6 million versus $0.6 million in the fourth quarter of
2006. For the full year, SCA's income tax expense increased to
$16.4 million versus $3.1 million in the prior full year. This
increase was primarily due to a full write-down of our net deferred
tax asset due to cumulative net operating losses in our XLCA
subsidiary. Net Investment Income. Net investment income for the
fourth quarter of 2007 was $32.7 million, representing an increase
of 32% from $24.7 million in the comparable period of 2006. For the
year, net investment income was $120.7 million, an increase of
$43.0 million, or 55%, as compared to 2006. The increase in full
year investment income was attributable to higher invested asset
balances and higher average book yields. Average invested assets
increased to $2.6 billion in the fourth quarter of 2007 compared to
$2.1 billion in the fourth quarter of 2006. The increase was due to
positive operating cash flow, income reinvestment and the
investment of $247.0 million of net proceeds associated with the
issuance of the SCA Series A Preference Shares in the second
quarter of 2007. SCA's average book yield increased to 4.93% in the
fourth quarter of 2007 compared to 4.65% in the fourth quarter of
2006 as a result of the investment of operating, financing and
investment cash flows at higher interest rates. Balance Sheet. Due
to the significant case loss provisioning that occurred during the
fourth quarter of 2007, the Company's gross loss reserves,
including unallocated loss reserves, increased to $1,253.1 million
at year-end 2007, from $178.5 million at the prior year-end. Gross
case loss reserves were $1,141.7 million at year-end, versus $85.4
million at the end of 2006, while net case loss reserves were
$709.4 million versus $14.5 million, respectively. The difference
between gross case loss reserves and net case loss reserves are
amounts that the Company expects to recover under various
reinsurance contracts. Net unallocated loss reserves totaled $92.9
million at the year-end of 2007 versus $75.4 million at the
year-end of 2006. As of December 31, 2007, total assets were $3.604
billion, up 44% from $2.497 billion in total assets as of December
31, 2006. Book value, as measured by common shareholders' equity,
decreased to $180.5 million as of December 31, 2007, from $1.367
billion at the end of 2006. Book value attributable to common
shareholders per share was $2.81 as of December 31, 2007, versus
$21.31 at December 31, 2006. The company's total shareholder equity
as of December 31, 2007 was $427.1 million. SCA's adjusted book
value, defined below, was $1.501 billion, or $23.39 per share, as
of December 31, 2007, versus $2.448 billion, or $38.17 per share,
as of December 31, 2006. Adjusted book value is a non-GAAP
financial measure defined as shareholders' equity (book value),
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 the attachments at the end of this
release. Book value and adjusted book value per share as of
December 31, 2007, were based on the Company's issued and
outstanding shares of 64,169,788. This compares to 64,136,364
shares outstanding as of year-end 2006. Conference Call Information
SCA will host an earnings conference call to discuss the Company's
fourth quarter and full-year 2007 results on Friday, March 14, 2008
at 8:30 am Eastern Time. The Company will be accepting written
questions prior to, and during, 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 Q4 2007 Earnings Call" and provide the following passcode:
31103493. 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: 31103493. 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 fourth quarter and full-year 2007 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 Media Frank
Constantinople Michael Gormley +1 441-279-7450 +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: the outcome of the
ongoing rating assessments for SCA and its subsidiaries and for all
bond insurers, generally, by Fitch, Moody's and S&P, the
outcome of the Company's discussions with Fitch, Moody's and
S&P, and the Company's ability to successfully address any
capital requirements within required timeframes; the impact of the
recent ratings actions on SCA's operating subsidiaries announced on
March 4, 2008 by Moody's, February 25, 2008 by S&P, and January
23, 2008 by Fitch, including the downgrades of the IFS ratings of
XLCA, XLCA-U.K. and XLFA; 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 default swaps;
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 Securities and
Exchange Commission, including in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, 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 STATEMENTS OF
OPERATIONS (U.S. dollars in thousands, except per share amounts)
(unaudited) Three Months Ended Year Ended December 31, December 31,
2007 2006 2007 2006 Revenues Gross premiums written $79,142
$118,516 $321,929 $353,728 Reinsurance premiums assumed 12,772
15,087 56,384 55,271 Total premiums written 91,914 133,603 378,313
408,999 Ceded premiums (17,911) (14,223) (72,254) (13,067) Net
premiums written 74,003 119,380 306,059 395,932 Change in net
deferred premium revenue (17,032) (75,074) (90,340) (212,817) Net
premiums earned (net of ceded premiums earned of $15,151, $3,157,
$31,117 and $22,957) 56,971 44,306 215,719 183,115 Net investment
income 32,701 24,698 120,710 77,724 Net realized (losses) gains on
investments (983) 376 (2,517) (16,180) Net realized and unrealized
losses on credit derivatives (518,838) (1,620) (690,917) (8,385)
Fee income and other 130 75 215 2,365 Total revenues (430,019)
67,835 (356,790) 238,639 Expenses Net losses and loss adjustment
expenses 710,940 3,635 720,532 14,958 Acquisition costs, net 7,828
3,192 19,971 16,240 Operating expenses 22,704 23,551 98,931 78,999
Total expenses 741,472 30,378 839,434 110,197 (Loss) income before
income tax and minority interest (1,171,491) 37,457 (1,196,224)
128,442 Income tax expense 25,563 574 16,389 3,133 (Loss) income
before minority interest (1,197,054) 36,883 (1,212,613) 125,309
Minority interest - dividends on redeemable preferred shares 804
1,077 3,527 7,954 Net (loss) income (1,197,858) 35,806 (1,216,140)
117,355 Dividends on perpetual non-cumulative preference shares - -
8,409 - Net (loss) income available to common shareholders
$(1,197,858) $35,806 $(1,224,549) $117,355 Net (loss) income per
common share: Basic $(18.67) $0.56 $(19.09) $2.19 Diluted $(18.67)
$0.56 $(19.09) $2.18 Weighted-average shares outstanding: (Shares
in thousands) Basic 64,170 64,136 64,150 53,676 Diluted 64,170
64,237 64,150 53,718 SECURITY CAPITAL ASSURANCE LTD CONSOLIDATED
BALANCE SHEETS (U.S. dollars in thousands) As of As of December 31,
December 31, 2007 2006 ASSETS Investments Debt securities available
for sale, at fair value $2,381,249 $1,736,462 Short-term
investments, at fair value 49,760 221,901 Total investments
2,431,009 1,958,363 Cash and cash equivalents 249,116 202,548
Accrued investment income 21,039 16,515 Deferred acquisition costs
108,117 93,809 Prepaid reinsurance premiums 101,122 59,983 Premiums
receivable 24,494 12,936 Reinsurance balances recoverable on unpaid
losses 450,733 88,616 Intangible assets - acquired licenses 11,529
11,529 Deferred income tax asset - 18,182 Derivative assets 168,364
11,976 Other assets 38,572 22,357 Total assets $3,604,095
$2,496,814 LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities Unpaid losses and loss adjustment expenses $1,253,088
$178,517 Deferred premium revenue 927,385 795,906 Derivative
liabilities 850,126 5,117 Reinsurance premiums payable 36,485
13,952 Payable for investments purchased - 5,435 Accounts payable,
accrued expenses and other liabilities 70,948 77,351 Total
liabilities 3,138,032 1,076,278 Minority interest - redeemable
preferred shares of subsidiary 39,000 54,016 Shareholders' Equity
Series A perpetual non-cumulative preference shares, at par 3 -
Common shares, at par 653 646 Additional paid-in capital,
preference shares 246,590 - Additional paid-in capital, common
shares 993,916 987,798 Total paid-in capital 1,241,162 988,444
(Accumulated deficit) retained earnings (831,900) 397,781
Accumulated other comprehensive income (loss) 17,801 (19,705) Total
shareholders' equity 427,063 1,366,520 Total liabilities, minority
interest and shareholders' equity $3,604,095 $2,496,814 Comment on
Regulation G This press release contains the presentation of AGP,
core net premiums earned, operating income, core income and ABV.
These measures are "non-GAAP financial measures" as defined in
Regulation G. The reconciliations of total premiums written to AGP;
net premiums earned to core net premiums earned; net (loss) income
available to common shareholders to operating income and core
income; 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. Adjusted Gross Premiums
Adjusted gross premiums is a non-GAAP measure of new business
production that management uses to evaluate our business because it
provides comparability between upfront premiums and installment
premiums, unlike U.S. GAAP total premiums written. Because adjusted
gross premiums includes premiums due on future installment business
written in the period, management believes it provides an
additional, useful measure of new business production than only
U.S. GAAP total premiums written. Management uses this measure to
review trends in new business written because it views this method
as providing comparability between business written on an upfront
premium basis and business written on an installment basis. This
measure is viewed by management as an essential component of
information necessary to assess forward-looking earnings potential,
which is substantially dependent on the size of our in-force book
of business. Management also compares our adjusted gross premiums
production to industry figures on a quarterly basis and uses this
measure to assess employee productivity, as well as our market
share and competitive position. Also, AGP is considered among other
factors when determining compensation to employees. In addition to
presenting total premiums written, we believe that disclosure of
adjusted gross premiums enables investors and other users of our
financial information to analyze our performance in a manner
similar to the way in which management analyzes performance. In
this regard, we believe that providing only a GAAP presentation of
total premiums written makes it more difficult for users of our
financial information to evaluate our underlying business. Also, we
believe that analysts, investors and rating agencies who follow us
and our subsidiaries include these items in their analyses for the
same reasons, and they request that we and our subsidiaries provide
this non-GAAP financial information on a regular basis. Core Net
Premiums Earned Core net premiums earned, which is a non-GAAP
financial measure, is defined as net premiums earned excluding the
impact of refundings, calls and other accelerations. We believe
core net premiums earned is a useful measure for management, equity
analysts and investors because the presentation of core net
premiums excludes the impact of refundings, calls and other
accelerations that management cannot control or predict. Operating
Income (Loss) and Core Income (Loss) While operating income (loss)
and core income (loss) are not substitutes 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) and core income (loss) enhance 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 realized
and unrealized gains (losses) on derivative financial instruments,
and expenses related to XL Capital's secondary offering of SCA's
shares. Core income (loss) represents operating income (loss)
excluding the after-tax impact of refundings, calls and other
accelerations. The definitions of operating income (loss) and core
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 realized and unrealized gains and losses on
derivative financial instruments (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 as such expenses are not related to the
conduct of the Company's business. Adjusted Book Value 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. Reconciliation of Total Premiums Written to Adjusted
Gross Premiums (in millions) Three months ended Year ended
12/31/2007 12/31/2006 12/31/2007 12/31/2006 Total upfront premiums
written $50.2 $104.1 $222.9 $278.3 Total installment premiums
written 41.7 29.5 155.4 130.7 Total premiums written 91.9 133.6
378.3 409.0 Present value of future installments 63.7 63.6 170.8
147.1 Adjusted gross premiums $155.6 $197.2 $549.1 $556.1
Reconciliation of Net Premiums Earned to Core Net Premiums Earned
(in millions) Three months ended Year ended 12/31/2007 12/31/2006
12/31/2007 12/31/2006 Net premiums earned $57.0 $44.3 $215.7 $183.1
Earned premium recognized from refundings, calls and other
accelerations (2.6) (1.8) (14.7) (27.4) Core net premiums earned
$54.3 $42.5 $201.0 $155.7 Reconciliation of Net (Loss) Income
Available to Common Shareholders to Operating (Loss) Income and
Core (Loss) Income (in millions) Three months ended Year ended
12/31/2007 12/31/2006 12/31/2007 12/31/2006 Net (loss) income
available to common shareholders $(1,197.9) $35.8 $(1,224.5) $117.4
Effect of: Expenses incurred in secondary offering 0.0 0.0 0.8 0.0
Perpetual non-cumulative preference share dividend 0.0 0.0 Net
realized losses (gains) on investments 1.0 (0.4) 2.5 16.2 Net
realized and unrealized losses on credit derivatives 518.8 1.6
690.9 8.4 Operating income (678.1) 37.1 (530.3) 141.9 Effect of
refundings, calls and other accelerations (0.8) (1.7) (12.0) (24.5)
Core income $(678.9) $35.3 $(542.3) $117.4 Reconciliation of Total
Shareholders' Equity to Common Shareholders' Equity and Adjusted
Book Value (in millions) As of As of 12/31/2007 12/31/2006 Total
Shareholders' equity $427.1 $1,366.5 Series A perpetual non-
cumulative preference shares (246.6) 0.0 Common shareholders'
equity 180.5 1,366.5 After-tax value of : Deferred premium revenue
825.4 708.4 Present value of future installment premiums 681.4
509.8 Deferred acquisition costs (96.2) (83.5) Prepaid reinsurance
premiums (90.0) (53.4) Adjusted book value $1,501.1 $2,447.8
*Numbers may not add due to rounding. DATASOURCE: Security Capital
Assurance Ltd CONTACT: Investors, Frank Constantinople, ; Media,
Michael Gormley, , both of Security Capital Assurance Ltd,
+1-441-279-7450, Cindy Leggett-Flynn, , or Michele Loguidice, ,
both of Brunswick Group, +1-212-333-3810 Web site:
http://www.scafg.com/
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