EX-99.10 5 c25171_ex99-10.txt Exhibit 99.10 XL FINANCIAL ASSURANCE LTD. (Incorporated in Bermuda) CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 XL FINANCIAL ASSURANCE LTD. CONDENSED BALANCE SHEETS AS AT JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
2002 2001 ---------------------- ASSETS: Investments : Fixed maturities, at fair value (amortized cost: 2002 - $375,624; 2001 - $418,904) $378,514 $420,914 Short-term investments, at fair value (amortized cost: 2002 - $45,170; 2001 - $18,780) 45,298 18,769 ---------------------- Total investments available for sale 423,812 439,683 Cash and cash equivalents 61,975 50,243 Accrued investment income 3,266 3,088 Reinsurance balances receivable 52,425 22,171 Deferred acquisition costs 16,697 15,184 Prepaid reinsurance premiums 45,373 10,966 Unpaid losses & loss expenses recoverable 2,197 594 Amounts due from parent and affiliates 9,347 1,523 Other assets 105 87 ---------------------- TOTAL ASSETS $615,197 $543,539 ====================== LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities $ 901 $ 1,768 Derivative liabilities 10,429 17,939 Deferred premium revenue 149,208 83,756 Unpaid losses and loss expenses 18,954 11,831 Reinsurance premiums payable 25,350 4,863 Net payable for investments purchased 80,704 122,315 Dividend payable on preferred shares 7,632 1,932 ---------------------- TOTAL LIABILITIES $293,178 $244,404 ---------------------- REDEEMABLE PREFERRED SHARES: Redeemable preferred shares (par value of $120 per share; 10,000 shares authorized; 363 issued and outstanding as at June 30, 2002 and December 31, 2001, respectively) $ 44 $ 44 Additional paid-in capital 38,956 38,956 ---------------------- TOTAL REDEEMABLE PREFERRED SHARES $ 39,000 $ 39,000 ---------------------- SHAREHOLDERS' EQUITY: Common shares (par value of $120 per share; 10,000 shares authorized; 2,057 issued and outstanding as at June 30, 2002 and December 31, 2001, respectively) $ 247 $ 247 Additional paid-in capital 220,653 220,653 Accumulated other comprehensive income 3,018 1,998 Retained earnings 59,101 37,237 ---------------------- TOTAL SHAREHOLDERS' EQUITY $283,019 $260,135 ---------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY $615,197 $543,539 ======================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2002 2001 2002 2001 ----------------------------------------------- REVENUES : Net premiums earned $ 11,953 $ 6,953 $ 21,833 $ 12,510 Net investment income 5,048 4,875 9,704 9,661 Net realized gains (losses) on investments 2,231 (299) 4,028 5,067 Net realized and unrealized gains (losses) on derivative instruments 988 (231) 7,511 (585) ----------------------------------------------- Total revenues $ 20,220 $ 11,298 $ 43,076 $ 26,653 ----------------------------------------------- EXPENSES : Losses and loss expenses $ 3,032 $ 1,240 $ 5,519 $ 1,459 Acquisition costs 4,522 1,385 6,791 2,108 Operating expenses 1,439 1,752 3,201 2,895 ----------------------------------------------- Total expenses $ 8,993 $ 4,377 $ 15,511 $ 6,462 ----------------------------------------------- Net income before cumulative effect of accounting change $ 11,227 $ 6,921 $ 27,565 $ 20,191 Cumulative effect of accounting change -- -- -- (1,350) ----------------------------------------------- Net income before dividends on preferred shares $ 11,227 $ 6,921 $ 27,565 $ 18,841 Dividends on preferred shares (5,220) (1,143) (5,701) (1,624) ----------------------------------------------- NET INCOME FOR COMMON SHAREHOLDERS $ 6,007 $ 5,778 $ 21,864 $ 17,217 =============================================== COMPREHENSIVE INCOME Net income for common shareholders $ 6,007 $ 5,778 $ 21,864 $ 17,217 Unrealized gains (losses) 8,289 (2,893) 5,048 1,490 Less: reclassification for gains (losses) realized in income 2,231 (299) 4,028 5,067 ----------------------------------------------- Change in net unrealized appreciation (depreciation) of investments $ 6,058 (2,594) $ 1,020 $ (3,577) ----------------------------------------------- COMPREHENSIVE INCOME $ 12,065 $ 3,184 $ 22,884 $ 13,640 ===============================================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
ADDITIONAL PAID-IN ACCUMULATED CAPITAL - OTHER COMMON COMMON COMPREHENSIVE RETAINED SHARES SHAREHOLDERS INCOME (LOSS) EARNINGS TOTAL --------------------------------------------------------------- BALANCE, JANUARY 1, 2001 $ 247 $ 220,653 $3,932 $17,603 $242,435 Net income for common shareholders for the year 19,634 19,634 Other comprehensive loss (1,934) (1,934) --------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ 247 $ 220,653 $1,998 $37,237 $260,135 Net income for common shareholders for the period 21,864 21,864 Other comprehensive income 1,020 1,020 --------------------------------------------------------------- BALANCE, JUNE 30, 2002 $ 247 $ 220,653 $3,018 $59,101 $283,019 ---------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (U.S. DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------
2002 2001 ----------------------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $ 27,565 $ 20,191 Adjustments to reconcile net income to net cash provided by operating activities: Realized gains on investments (4,028) (5,067) Net realized and unrealized losses (gains) on derivative instruments (7,511) 585 Amortization of discount on fixed maturities (517) (496) Accrued investment income (178) 559 Reinsurance premiums receivable (30,254) (780) Deferred acquisition costs (1,513) (2,594) Prepaid reinsurance premiums (34,407) 255 Unpaid losses & loss expenses recoverable (1,603) (33) Amounts due from parent and affiliates (7,824) 515 Other assets and liabilities (18) (171) Accounts payable and accrued liabilities (867) (364) Reinsurance premiums payable 20,487 (201) Deferred premium revenue 65,452 10,597 Unpaid losses and loss expenses 7,123 1,847 Portfolio transfer -- 25,669 ----------------------------- Total adjustments $ 4,342 $ 30,321 ----------------------------- Net cash provided by operating activities $ 31,907 $ 50,512 ----------------------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES : Proceeds from sale of fixed maturities and short-term investments $ 1,040,503 $ 1,229,220 Proceeds from redemption of fixed maturities and short-term investments 19,663 6,783 Purchase of fixed maturities and short-term investments (1,080,341) (1,230,860) ----------------------------- Net cash provided by (used in) investing activities $ (20,175) $ 5,143 ----------------------------- CASH FLOWS USED IN FINANCING ACTIVITY Dividends paid on preferred shares $ -- $ (1,492) ----------------------------- INCREASE IN CASH AND CASH EQUIVALENTS $ 11,732 $ 54,163 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 50,243 17,154 ----------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 61,975 $ 71,317 =============================
The accompanying notes are an integral part of these condensed financial statements. XL FINANCIAL ASSURANCE LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS XL Financial Assurance Ltd. (the "Company") was incorporated with limited liability under the Bermuda Companies Act 1981 on October 14, 1998 and is registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto and related regulations ("The Act"). At March 31, 2002 and 2001, the Company was approximately 85% owned by XL Insurance (Bermuda) Ltd (a wholly-owned subsidiary of XL Capital Ltd); 6% by FSA Insurance Company (a wholly-owned subsidiary of Financial Security Assurance Holdings Ltd) and 9% by Financial Security Assurance International Ltd. (owned 20% by XL Insurance (Bermuda) Ltd and 80% by FSA Insurance Company). The Company is an integral part of a joint venture agreement between XL Capital Ltd and Financial Security Assurance Holdings Ltd. The Company is primarily engaged in the business of providing reinsurance of financial guaranties on asset-backed and municipal obligations underwritten by XL Insurance (Bermuda) Ltd, FSA Insurance Company and XL Capital Assurance Inc. (a wholly-owned subsidiary of XL Capital Ltd) and other monoline and multiline insurance companies. This may be in the form of traditional financial guaranty insurance or via a credit default swap execution. The Company's underwriting policy is to provide reinsurance of asset-backed and municipal obligations that would be of a lower investment-grade quality without the benefit of the Company's reinsurance. The asset-backed obligations reinsured by the Company are generally issued in structured transactions and are backed by pools of assets such as residential mortgages loans, consumer or trade receivables, securities or other assets having ascertainable cash flows or market value. The municipal obligations reinsured by the Company consist primarily of general obligation bonds that are supported by the issuers' taxing power and of special revenue bonds and other special obligations of states and local governments that are supported by the issuers' ability to impose and collect fees and charges for public services or specific projects. Reinsurance written by the Company guarantees payment when due of scheduled payments on an issuers' obligation. In the case of a payment default on an insured obligation, the Company is generally required to pay the principal, interest or other such amounts due in accordance with the obligations' original payment schedule or, at its option, to pay such amounts on an accelerated basis. The Company conducts surveillance on its exposures to try and ensure early identification of any loss events. In addition, in the normal course of business, the Company seeks to reduce the loss that may arise from such events by reinsuring certain levels of risks in various areas of exposure with other insurance enterprises or reinsurers. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION The accompanying condensed financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at June 30, 2002 and for all periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company's December 31, 2001 financial statements and notes thereto. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended June 30, 2002 and 2001 are not necessarily indicative of the operation results for the full year. The preparation of condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Any such adjustments are reflected in income in the period in which the XL FINANCIAL ASSURANCE LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION (CONTINUED) adjustments are made. The financial statement estimates subject to most uncertainty are estimates for loss reserves and calculation of the fair value of credit default swap instruments. Certain comparative figures have been reclassified to conform with the current year's presentation. 3. DERIVATIVE INSTRUMENTS The following table summarizes the change in fair value of the Company's credit default swaps recognized in income for the six month period ended June 30, 2002. Net premiums earned $ 3,506 Losses and loss expenses (876) Net realized and unrealized (losses) gains on derivative instruments 7,511 -------- Total fair value adjustment $ 10,141 ======== 4. FACULTATIVE QUOTA SHARE REINSURANCE TREATY On October 6, 1999, the Company entered into a Facultative Quota Share Reinsurance Treaty ("Treaty") with XL Capital Assurance Inc. ("XLCA"). The Treaty was amended and restated on June 22, 2001. Under the terms of this agreement, the Company agrees to reinsure up to 90% of the XLCA's acceptable risks. The Company is subject to a 30% ceding commission on premiums assumed under the terms of this agreement. 5. SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both directly and indirectly in the normal course of the Company's business. The Company provides financial guaranty insurance of structured transactions backed by pools of assets of specified types, municipal obligations supported by the issuers' ability to charge fees for specified services or projects, and corporate risk obligations including essential infrastructure projects and obligations backed by receivables from future sales of commodities and other specified services. The obligations related to these transactions are often securitized through off-balance sheet special purpose vehicles by the transferors. In synthetic transactions, the Company guarantees payment obligations of counterparties, including special purpose vehicles, through credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance of these special purpose vehicles for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these special purpose vehicles are not consolidated.