10-Q 1 a07-19351_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-Q

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the Quarter Ended June 30, 2007

 

 

 

 

 

or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to         

Commission file number 1-33111

ACA Capital Holdings, Inc.

 (Exact name of registrant as specified in its charter)

Delaware

 

75-3170112

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

140 Broadway

New York, New York 10005

(212) 375-2000

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o

Accelerated filer  o

Non-accelerated filer  x

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o     No  x

As of August 10, 2007, 35,749,818 shares of Common Stock, par value $0.10 per share, were outstanding.

 




INDEX

 

 

 

PAGE

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements of ACA Capital Holdings, Inc. and Subsidiaries (Unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) — June 30, 2007 and December 31, 2006

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) — Three and six months ended June 30, 2007 and 2006

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) — Six months ended June 30, 2007 and 2006

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) — Six months ended June 30, 2007 and 2006

 

6

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7-18

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19-48

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48-50

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

50

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

51

 

 

 

 

 

Item 1A.

 

Risk Factors

 

51-53

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

53

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

53

 

 

 

 

 

Item 5.

 

Other Information

 

53

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

 

SIGNATURES

 

54

 

2




PART I — FINANCIAL INFORMATION

Item 1.        Financial Statements of ACA Capital Holdings, Inc. and Subsidiaries (Unaudited)

ACA CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF JUNE 30, 2007 AND DECEMBER 31, 2006

(Dollars in thousands)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed-maturity securities available for sale at fair value, amortized cost of $4,843,922 and $5,043,239, respectively

 

$

4,636,105

 

$

5,026,276

 

Fixed-maturity securities trading at fair value, amortized cost of $408,627 and $251,884, respectively

 

406,432

 

251,825

 

Securities purchased under agreements to resell

 

3,408

 

10,248

 

Guaranteed investment contract

 

119,340

 

119,340

 

Total investments

 

5,165,285

 

5,407,689

 

Cash:

 

 

 

 

 

Cash and cash equivalents

 

328,824

 

379,905

 

Restricted cash

 

46,155

 

67,061

 

Total cash

 

374,979

 

446,966

 

Accrued investment income

 

22,439

 

21,222

 

Derivative assets

 

232,267

 

19,730

 

Deferred policy acquisition costs, net

 

48,498

 

48,810

 

Deferred debt issuance costs, net

 

30,776

 

34,104

 

Receivable for securities sold

 

8,145

 

824

 

Prepaid reinsurance premiums

 

494

 

528

 

Deferred income taxes

 

126,363

 

 

Other assets

 

82,996

 

58,321

 

Total assets

 

$

6,092,242

 

$

6,038,194

 

 

 

 

 

 

 

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Unearned premiums

 

$

195,667

 

$

189,537

 

Reserve for losses and loss adjustment expenses

 

45,923

 

42,113

 

Short-term debt

 

2,779,513

 

2,677,828

 

Long-term debt

 

1,836,461

 

2,125,914

 

Related party debt

 

100,000

 

100,000

 

Securities sold under agreements to repurchase

 

372,936

 

232,227

 

Derivative liabilities

 

311,061

 

33,874

 

Accrued interest payable

 

15,797

 

17,900

 

Accrued expenses and other liabilities

 

76,058

 

61,855

 

Payable for securities purchased

 

2,110

 

9,628

 

Current income tax payable

 

15,765

 

7,056

 

Deferred income taxes

 

 

258

 

Total liabilities

 

5,751,291

 

5,498,190

 

MINORITY INTEREST

 

14,645

 

30,190

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock of 100,000,000 shares authorized at June 30, 2007 and December 31, 2006; 37,444,873 and 37,375,123 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively; par value of $0.10

 

3,744

 

3,737

 

Gross paid-in and contributed capital

 

441,545

 

438,935

 

Treasury stock at cost — 851,847 shares at June 30, 2007 and December 31, 2006

 

(12,088

)

(12,088

)

Notes receivable from stockholders

 

(3,121

)

(3,121

)

Deferred compensation

 

(290

)

(870

)

Accumulated other comprehensive loss — net of deferred income tax of $(57,420) and $(1,760) at June 30, 2007 and December 31, 2006, respectively

 

(106,594

)

(3,308

)

Retained earnings

 

3,110

 

86,529

 

Total stockholders’ equity

 

326,306

 

509,814

 

Total liabilities, minority interest and stockholders’ equity

 

$

6,092,242

 

$

6,038,194

 

 

See notes to unaudited condensed consolidated financial statements.

3




ACA CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Dollars and shares in thousands, except per share amounts)

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

REVENUES:

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

15,478

 

$

15,727

 

$

20,519

 

$

20,515

 

Less premiums ceded

 

(630

)

(61

)

(761

)

(186

)

Net premiums written

 

14,848

 

15,666

 

19,758

 

20,329

 

Increase in unearned premium reserve - net

 

(6,403

)

(7,191

)

(6,164

)

(6,972

)

Premiums earned

 

8,445

 

8,475

 

13,594

 

13,357

 

Net insured credit swap revenue

 

(44,183

)

7,931

 

(40,484

)

22,111

 

Net investment income

 

90,627

 

82,452

 

180,547

 

160,164

 

Net realized and unrealized losses on investments

 

(110,142

)

(1,256

)

(113,850

)

(3,223

)

Net realized and unrealized gains on derivative instruments

 

3,256

 

2,497

 

5,336

 

6,139

 

Other net credit swap revenue

 

3,851

 

2,631

 

16,157

 

5,544

 

Fee income

 

7,596

 

6,955

 

13,928

 

11,073

 

Other income

 

299

 

53

 

355

 

104

 

Total revenues

 

(40,251

)

109,738

 

75,583

 

215,269

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

1,859

 

1,661

 

3,232

 

3,682

 

Policy acquisition costs

 

3,042

 

2,768

 

4,519

 

4,160

 

Other operating expenses

 

15,564

 

12,681

 

31,717

 

23,294

 

Interest expense

 

76,337

 

70,964

 

152,745

 

137,383

 

Depreciation and amortization

 

2,278

 

2,225

 

4,537

 

4,717

 

Total expenses

 

99,080

 

90,299

 

196,750

 

173,236

 

Income of minority interest

 

(1,265

)

(1,074

)

(2,144

)

(2,229

)

Income (loss) before income taxes

 

(140,596

)

18,365

 

(123,311

)

39,804

 

Provision for income tax expense (benefit)

 

(47,260

)

6,323

 

(41,392

)

13,615

 

Net income (loss)

 

$

(93,336

)

$

12,042

 

$

(81,919

)

$

26,189

 

 

 

 

 

 

 

 

 

 

 

Share and Per Share Data

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.55

)

$

0.53

 

$

(2.24

)

$

1.15

 

Diluted

 

$

(2.55

)

$

0.40

 

$

(2.24

)

$

0.87

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

36,577

 

22,858

 

36,558

 

22,830

 

Diluted

 

36,577

 

30,085

 

36,558

 

29,846

 

 

See notes to unaudited condensed consolidated financial statements.

4




ACA CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

 (Dollars in thousands, except for share amounts)

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Notes

 

 

 

Accumulated

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid in and

 

 

 

Receivable

 

 

 

Other

 

 

 

Total

 

 

 

 

 

 

 

Par

 

Contributed

 

Treasury

 

from

 

Deferred

 

Comprehensive

 

Retained

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Value

 

Capital

 

Stock

 

Stockholders

 

Compensation

 

Income (Loss)

 

Earnings

 

Equity

 

BALANCE—January 1, 2006

 

2,786,857

 

$

226,460

 

6,442,950

 

$

644

 

$

125,184

 

$

(5,500

)

$

(1,355

)

$

(2,030

)

$

11,132

 

$

29,778

 

$384,313

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

26,189

 

26,189

 

Change in unrealized gain on investments, net of change in deferred income tax of $(1,528)

 

 

 

 

 

 

 

 

 

(3,999

)

 

(3,999

)

Change in derivative hedges, net of change in deferred income tax of $2,987

 

 

 

 

 

 

 

 

 

5,547

 

 

5,547

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

27,737

 

Vesting of Series B senior conv. prf stock to CEO

 

 

 

 

 

 

 

 

580

 

 

 

580

 

Exercise of stock options by former executives

 

 

 

663,540

 

66

 

8,024

 

 

 

 

 

 

8,090

 

Common stock purchased from former executive

 

 

 

 

 

 

(6,588

)

 

 

 

 

(6,588

)

Stock based compensation-stock options

 

 

 

 

 

350

 

 

 

 

 

 

350

 

Issuance of note receivable from stockholder

 

 

 

 

 

 

 

(2,262

)

 

 

 

(2,262

)

Discharge of note receivable from stockholders

 

 

 

 

 

 

 

496

 

 

 

 

496

 

Senior convertible preferred stock dividend

 

25

 

1,957

 

 

 

 

 

 

 

 

(1,957

)

 

BALANCE—June 30, 2006

 

2,786,882

 

$

228,417

 

7,106,490

 

$

710

 

$

133,558

 

$

(12,088

)

$

(3,121

)

$

(1,450

)

$

12,680

 

$

54,010

 

$

412,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE—January 1, 2007

 

 

$

 

37,375,123

 

$

3,737

 

$

438,935

 

$

(12,088

)

$

(3,121

)

$

(870

)

$

(3,308

)

$

86,529

 

$

509,814

 

Effect of adoption of FIN 48

 

 

 

 

 

 

 

 

 

 

(1,500

)

(1,500

)

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

(81,919

)

(81,919

)

Change in unrealized loss on investments, net of change in deferred income tax of $(56,453)

 

 

 

 

 

 

 

 

 

(104,841

)

 

(104,841

)

Change in derivative hedges, net of change in deferred income tax of $792

 

 

 

 

 

 

 

 

 

1,472

 

 

1,472

 

Foreign exchange unrealized gain

 

 

 

 

 

 

 

 

 

83

 

 

83

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

(185,205

)

Vesting of CEO restricted common stock

 

 

 

 

 

 

 

 

580

 

 

 

580

 

Offering costs

 

 

 

 

 

63

 

 

 

 

 

 

63

 

Stock based compensation—restricted stock

 

 

 

 

 

476

 

 

 

 

 

 

476

 

Stock based compensation—stock options

 

 

 

 

 

1,349

 

 

 

 

 

 

1,349

 

Exercise of common stock options

 

 

 

69,750

 

7

 

722

 

 

 

 

 

 

729

 

BALANCE—June 30, 2007

 

 

$

 

37,444,873

 

$

3,744

 

$

441,545

 

$

(12,088

)

$

(3,121

)

$

(290

)

$

(106,594

)

$

3,110

 

$

326,306

 

 

See notes to unaudited condensed consolidated financial statements.

5




ACA CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Dollars in thousands)

 

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(81,919

)

$

26,189

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,537

 

4,717

 

Accrual of discount and amortization of premium on investment—net

 

194

 

(208

)

Income of minority interest

 

2,144

 

2,229

 

Net realized losses on fixed-maturity securities-available-for-sale

 

111,632

 

3,203

 

Net realized and unrealized losses on fixed-maturity securities- trading

 

2,219

 

20

 

Net realized and unrealized gains on derivative instruments

 

(5,336

)

(6,139

)

Net realized and unrealized (gains) losses on net insured credit swap revenue

 

82,846

 

(829

)

Net realized and unrealized gains on other net credit swap revenue

 

(10,627

)

(291

)

Net foreign exchange loss

 

43

 

 

Share based compensation expense

 

1,825

 

350

 

Discharge of note receivable from shareholders

 

 

496

 

Deferred compensation

 

580

 

580

 

Purchase of securities under agreement to resell

 

6,840

 

 

Purchases of fixed-maturity securities-trading

 

(222,150

)

 

Proceeds from sales of fixed-maturity securities- trading

 

64,183

 

 

Securities sold under agreement to repurchase

 

140,709

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Income taxes payable

 

8,709

 

343

 

Deferred income tax expense

 

(70,921

)

2,967

 

Prepaid reinsurance premiums

 

34

 

228

 

Derivative liabilities

 

307

 

(1,905

)

Accrued expenses and other liabilities

 

(7,298

)

(2,591

)

Deferred policy acquisition costs

 

312

 

(661

)

Unearned premium reserve

 

6,130

 

6,743

 

Loss and loss adjustment expenses

 

3,810

 

2,938

 

Interest payable

 

(2,103

)

632

 

Interest receivable

 

(1,217

)

(2,052

)

Other

 

5,472

 

1,272

 

Net cash provided by operating activities

 

40,955

 

38,231

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Net deposit of restricted cash

 

20,906

 

(3,881

)

Purchases of fixed maturity securities available for sale

 

(538,170

)

(519,582

)

Proceeds from sales of fixed maturity securities available for sale

 

78,568

 

83,662

 

Proceeds from maturities of fixed maturity securities available for sale

 

533,395

 

524,052

 

Net purchase of property and equipment

 

(2,759

)

(230

)

Net cash provided by investing activities

 

91,940

 

84,021

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Paydown of commercial paper—net

 

(361

)

(393

)

Paydown on long-term debt

 

(187,407

)

(72,507

)

Payment of issuance costs for debt

 

 

(308

)

Proceeds from issuance of equity in Credit Fund

 

3,000

 

 

Proceeds from exercise of common stock options

 

729

 

 

Purchase of treasury stock

 

 

(759

)

Offering costs

 

63

 

 

Net cash used in financing activities

 

(183,976

)

(73,967

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(51,081

)

48,285

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS—beginning of period

 

379,905

 

174,420

 

CASH AND CASH EQUIVALENTS—end of period

 

$

328,824

 

$

222,705

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES:

 

 

 

 

 

Federal and local income taxes paid

 

$

10,356

 

$

11,049

 

 

 

 

 

 

 

Interest paid

 

$

154,848

 

$

136,752

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

Common stock acquired in exchange for note receivable

 

$

 

$

2,262

 

 

See notes to unaudited condensed consolidated financial statements.

6




ACA CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

1.  BUSINESS, ORGANIZATION AND OPERATIONS

ACA Capital Holdings, Inc. (“ACA” or the “Company”), is a Delaware domiciled holding company that provides financial guaranty insurance products to participants in the global credit derivatives markets, structured finance capital markets and public finance capital markets, as well as providing asset management services.  The Company’s principal activities include financial guaranty insurance of public finance obligations, structured credit risk assumption through insured credit derivatives and collateralized debt obligation asset management.  ACA conducts its business through three principal wholly-owned indirect subsidiaries.  Its financial guaranty insurance business is conducted through ACA Financial Guaranty Corporation (“ACA Financial Guaranty”), a Maryland domiciled insurance company.  ACA Financial Guaranty is licensed to conduct financial guaranty insurance business, which provides credit enhancement on public finance and other debt obligations, in all 50 states, the District of Columbia, Guam, the U.S. Virgin Islands and Puerto Rico.  Standard & Poor’s Rating Services (“S&P”) has assigned a financial strength rating of “A” to ACA Financial Guaranty.  ACA Financial Guaranty also provides the credit support for the Company’s Structured Credit business activities.  The Company conducts its U.S.-based CDO Asset Management business primarily through ACA Service L.L.C. and ACA Management, L.L.C.  This business encompasses the origination (in collaboration with investment banks), structuring and management of collateralized debt obligations (including collateralized loan obligations and other similarly securitized asset classes, collectively “CDOs”).  In January 2007, the Company’s wholly-owned indirect subsidiary, ACA Capital Management (U.K.) Pte. Limited, became authorized and regulated by the Financial Services Authority as an investment manager to manage CDOs in the United Kingdom and most of Europe.

The Company’s business is composed of three distinct continuing lines of business or segments.  They are Public Finance, Structured Credit and CDO Asset Management.  A fourth line of business, Other, includes business in areas and markets in which the Company is no longer active.  Although the Public Finance and Structured Credit businesses are reported in separate segments, together they form the Company’s financial guaranty insurance business.  Public Finance primarily provides financial guaranty insurance policies guaranteeing the timely payment of scheduled principal and interest on public finance and other debt obligations.  Structured Credit structures and sells credit protection, principally in the form of insured credit default swaps (“CDS” or “credit swaps”), against a variety of asset classes in the institutional fixed income markets.  CDO Asset Management focuses on CDO origination, structuring and management.  The Company will at times assume risk in the CDOs it manages through investment in some portion of the capital structure.

ACA was originally incorporated in Delaware on January 3, 1997.  On November 22, 2002, ACA changed its jurisdiction of incorporation from Delaware to Bermuda.  During 2004, the Board of Directors determined that re-domesticating to Delaware would eliminate certain adverse consequences of remaining in Bermuda, facilitate ACA’s access to U.S. capital markets, simplify its tax filings, accounting and operations, and reduce the costs of compliance with two sets of filing obligations and laws (as ACA stockholders are U.S. entities and individuals).  On September 15, 2004, therefore, ACA re-domesticated from Bermuda to Delaware through a process called a “discontinuation” under Bermuda law and “domestication” under Delaware law. As a result, it became a Delaware domiciled holding company and changed its name from American Capital Access Holdings, Ltd. to its current name.

On November 9, 2006, the Company priced its initial public offering of 6,875,000 shares of newly issued common stock and 23,541 shares of existing common stock.  The Company realized gross proceeds of $13 per share on the newly issued common stock, or $89.4 million.  Net proceeds to the Company were $79.2 million, after issuance costs.  On November 10, 2006, the Company’s common stock commenced trading on the New York Stock Exchange under the symbol “ACA.”  In conjunction with the initial public offering, the Company’s senior convertible preferred stock, convertible preferred stock and series B senior convertible preferred stock all converted to common stock concurrently with the closing of our offering on November 15, 2006 at their conversion ratios of 6,000:1 shares, 6,000:1 shares and 6:1 shares, respectively.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (“Form 10-K”), filed with the SEC on April 2, 2007.  These unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of our financial position and results of operations for these periods.  The preparation of financial statements in conformity with GAAP 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 periods.  Actual results could differ from those estimates.  Operating results for the three and six months ended

7




June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

In August 2006, the Company’s Board of Directors authorized a dividend of stock in order to effect a six-for-one stock split.  All prior share and per share amounts have been restated to reflect the stock split.

Valuation of Insured Credit Swap Transactions – The Company values its insured credit swap transactions either by obtaining market quotes from dealers or through the application of the Company’s valuation model.  During the quarter ended June 30, 2007, the Company refined its valuation model to estimate fair value of its insured credit swap transactions.  The change was implemented to be more consistent with models that the Company understands other market participants utilize, including many of ACA’s insured credit swap counterparties.  The relatively young market for credit swaps has continued to evolve over time and, while there is still substantial variance in valuation models among market participants, the trend is toward increasing convergence in this area.  Under its refined model, the Company fully uses market spread data as a proxy for default probabilities in the determination of fair value.  For transactions in which the underlying exposure is to corporate credits, the Company uses individual market spreads as proxies for defaults as they are readily available. For synthetic asset-backed transactions, the Company uses a current weighted average portfolio spread because individual spread information historically has not been consistently reliable and often has been unavailable. As the availability and quality of individual asset-backed spread data improves, the Company may make further refinements to its valuation model. The Company believes that its new model will inherently increase the volatility of these valuations, but provide a better estimate of the cost or benefit of unwinding the related transaction.

3.  RELEVANT RECENT ACCOUNTING PRONOUNCEMENTS

On April 18, 2007, the Financial Accounting Standards Board (“FASB”) released an exposure draft entitled “Accounting for Financial Guarantee Insurance Contracts—An Interpretation of FASB Statement No. 60” (the “Proposed Statement”).  While FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, sets out accounting standards for property and casualty and life insurance enterprises, it has historically not specifically considered financial guaranty insurance.  This new interpretation is intended to address the specific attributes of this type of insurance.  The principal items addressed in the exposure draft relate to revenue recognition, the establishment of claim reserves and disclosures around such reserves.  The Proposed Statement would be effective for financial statements issued for fiscal years beginning after December 15, 2007.  While certain provisions of the Proposed Statement are still being analyzed, management believes that the cumulative effect of initially applying the Proposed Statement could be material to the Company’s financial statements.  Until the final interpretation is issued by the FASB, the Company continues to apply the accounting policies as disclosed in its Form 10-K.

In February 2007, the FASB issued Financial Accounting Standard (“FAS”) 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”).  FAS 159 permits reporting entities to choose to remeasure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.  The fair value option may be applied instrument by instrument, is irrevocable and is applied only to entire instruments and not to portions of instruments.  FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years that begin after November 15, 2007.  The Company did not elect to early adopt FAS 159.  Management is currently evaluating the potential impact, if any, which the adoption of FAS 159 will have on the Company’s financial statements.

On January 1, 2007, the Company adopted FAS 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”), an amendment of FAS 133, “Accounting for Derivative Instruments and Certain Hedging Activities” (“FAS 133”) and FAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”).  The implementation of this statement did not have a material impact on the Company’s financial statements.

On January 1, 2007, the Company adopted FASB Interpretation No.  (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”).  The adoption of FIN 48 resulted in a decrease to stockholders’ equity as of January 1, 2007 of $1.5 million (see Note 6).

In September 2006, the FASB issued FAS 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 enhances existing guidance for measuring assets and liabilities using fair value, such as emphasizing that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets.  FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Management is currently evaluating the potential impact, if any, which the adoption of FAS 157 will have on the Company’s financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  The provisions of SAB 108 were put in effect at December 31, 2006.  The adoption of this statement did not have a material impact on the Company’s financial statements.

In April 2006, the FASB issued Staff Position (“FSP”) FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”).  FSP FIN 46(R)-6 addresses whether certain arrangements associated with variable interest entities (VIEs) should be treated as variable interests or considered as creators of variability, and indicates that the variability to be considered shall be on based on an analysis of the design of the entity.  FSP FIN 46(R)-6 was adopted on June 15,

8




2006.  The adoption of this statement did not have a material impact on the Company’s financial statements.

In March 2006, the FASB issued FAS 156, “Accounting for Servicing of Financial Assets” (“FAS 156”), an amendment of FAS 140.  FAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of FAS 140.  The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs.  FAS 156 is effective for an entity’s first fiscal year beginning after September 15, 2006.  The implementation of this statement did not have a material impact on the Company’s financial statements.

In September 2005, Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts”, (“SOP 05-1”), was issued.  This SOP provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacement of insurance and investment contracts other than those specifically described in FAS No. 97, “ Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”.  SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006.  The adoption of this SOP did not have a material impact on the Company’s financial statements.

4.  CDO ASSET MANAGEMENT BUSINESS

One of the ways the Company participates in the structured finance market is through structuring and managing CDOs originated in collaboration with investment banks.  CDOs can be issued in funded, unfunded or partially funded form.  Funded CDOs issue debt instruments and purchase investment assets, while unfunded CDOs synthetically acquire assets and issue liabilities (i.e., assets and liabilities are in derivative form). Partially funded CDOs are a combination of these two forms.  From an accounting perspective, funded and partially funded CDOs are determined to be VIEs.  Each time such CDOs are formed, the Company performs an analysis to determine whether it is the primary beneficiary and thus required to consolidate the CDO under the provisions of FSP FIN 46(R)-6.

The following table lists each of the Company’s CDOs outstanding as of June 30, 2007 (dollars in millions):

 

 

Year

 

 

 

 

 

 

 

 

 

Original

 

 

 

First

 

 

 

 

 

Deal

 

Transaction

 

 

 

Notional

 

 

 

Investment in

 

Retained

 

Optional

 

Maturity

 

CDO name

 

Closed

 

Type

 

Collateral Type (1)

 

Deal Size (3)

 

Consolidated

 

Retained Equity

 

Equity %

 

Call Date(4)

 

Date

 

Asset-Backed CDOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACA ABS 2002-1

 

2002

 

Funded

 

Investment Grade

 

$

404

 

Yes

 

$

18.0

 

100

 

8/2005

 

8/2037

 

ACA ABS 2003-1

 

2003

 

Funded

 

Investment Grade

 

400

 

Yes

 

18.0

 

100

 

6/2007

 

6/2038

 

Grenadier Funding

 

2003

 

Funded

 

High-Grade

 

1,500

 

Yes

 

22.5

 

100

 

8/2008

 

8/2038

 

ACA ABS 2003-2

 

2003

 

Funded

 

Investment Grade

 

725

 

Yes

 

33.5

 

100

 

12/2007

 

12/2038

 

ACA ABS 2004-1

 

2004

 

Funded

 

Investment Grade

 

450

 

Yes

 

10.0

 

61

 

7/2007

 

7/2039

 

Zenith Funding

 

2004

 

Funded

 

High-Grade

 

1,511

 

Yes

 

13.0

 

52

 

12/2009

 

12/2039

 

ACA ABS 2005-1

 

2005

 

Funded

 

Investment Grade

 

452

 

No

 

4.4

 

24

 

4/2008

 

4/2040

 

ACA ABS 2005-2

 

2005

 

Funded

 

Investment Grade

 

450

 

No

 

2.1

 

10

 

9/2009

 

12/2044

 

Khaleej II

 

2005

 

Partially funded

 

Investment Grade

 

750

 

No

 

4.5

 

14

 

9/2009

 

9/2040

 

Lancer Funding

 

2006

 

Funded

 

High-Grade

 

1,500

 

No

 

1.5

 

10

 

7/2010

 

4/2046

 

ACA Aquarius 2006-1

 

2006

 

Partially funded

 

Investment Grade

 

2,000

 

No

 

 

 

9/2010

 

9/2046

 

ACA ABS 2006-1

 

2006

 

Funded

 

Investment Grade

 

750

 

No

 

1.4

 

5

 

12/2009

 

6/2041

 

ACA ABS 2006-2

 

2006

 

Funded

 

Investment Grade

 

750

 

No

 

3.5

 

11

 

1/2011

 

1/2047

 

ACA ABS 2007-1

 

2007

 

Partially funded

 

Investment Grade

 

1,500

 

No

 

1.4

 

5

 

3/2010

 

5/2047

 

Millbrook

 

2007

 

Unfunded

 

Investment Grade

 

62

 

No

 

 

 

3/2010

 

10/2052

 

Abacus

 

2007

 

Unfunded

 

Investment Grade

 

192

 

No

 

 

 

6/2010

 

3/2038

 

ACA ABS 2007-2

 

2007

 

Partially funded

 

Investment Grade

 

750

 

No

 

 

 

7/2011

 

7/2045

 

Lancer II

 

2007

 

Partially funded

 

High-Grade

 

1,000

 

No

 

 

 

7/2011

 

7/2047

 

Total Asset-Backed CDOs

 

 

 

 

 

 

 

15,146

 

 

 

133.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Credit CDOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACA CDS 2002-2

 

2003

 

Unfunded

 

Investment Grade

 

1,000

 

No

 

25.0

 

100

 

N/A

 

3/2008

 

Argon 49

 

2005

 

Funded

 

Investment Grade

 

67

(2)

No

 

 

 

N/A

 

6/2015

 

Argon 57

 

2006

 

Funded

 

Investment Grade

 

67

(2)

No

 

 

 

N/A

 

6/2013

 

Tribune

 

2006

 

Unfunded

 

Investment Grade

 

356

(5)

No

 

 

 

N/A

 

9/2016

 

Dolomite

 

2007

 

Unfunded

 

Investment Grade

 

66

(2)

No

 

 

 

N/A

 

7/2014

 

Total Corporate Credit CDOs

 

 

 

 

 

 

 

1,556

 

 

 

25.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leveraged Loan CDOs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACA CLO 2005-1

 

2005

 

Funded

 

Non-Investment Grade

 

300

 

No

 

5.0

 

21

 

10/2009

 

10/2017

 

ACA CLO 2006-1

 

2006

 

Funded

 

Non-Investment Grade

 

350

 

No

 

 

 

7/2009

 

7/2018

 

ACA CLO 2006-2

 

2006

 

Funded

 

Non-Investment Grade

 

300

 

No

 

2.2

 

10

 

1/2011

 

1/2021

 

ACA CLO Euro 2007-1

 

2007

 

Funded

 

Non-Investment Grade

 

555

(2)

No

 

5.5

 

10

 

6/2010

 

6/2024

 

ACA CLO 2007-1

 

2007

 

Funded

 

Non-Investment Grade

 

350

 

No

 

2.7

 

10

 

6/2011

 

6/2022

 

Total Leveraged Loan CDOs

 

 

 

 

 

 

 

1,855

 

 

 

15.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

$

18,557

 

 

 

$

174.2

 

 

 

 

 

 

 

 

Note: As of June 30, 2007, the Company’s risk under corporate credit CDO ACA CDS 2002-1 expired.


(1)             Investment grade collateral is rated “BBB-” or better; however certain of our investment grade CDOs include the ability to invest a minority portion (20% or less) in non-investment grade assets. High-grade is “A-” or better.

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(2)             The original notional deal sizes for Argon 49 and Argon 57 were €50 million each, and that for Dolomite was €49 million and $1 million. The original deal size for ACA CLO Euro 2007-1 was €400 million.  For purposes of this chart, we have converted the amounts to U.S. dollars at the prevailing currency exchange rate on June 30, 2007.

(3)             Notional deal size is defined as total liabilities at the deal’s inception.

(4)             Cash flow CDOs are generally callable once per quarter by a majority or greater vote of the equity holders on a specific date as negotiated, which is referred to as the First Optional Call Date.

(5)             Tribune is comprised of 13 distinct trades some of which are denominated in Euros or Yen.  For purposes of this chart, we have converted the respective amounts to U.S. dollars at the prevailing currency exchange rates on June 30, 2007.

As of June 30, 2007 and December 31, 2006, consolidated liabilities include non-recourse debt from consolidated CDOs of $4,525.9 million and $4,711.8 million, respectively.  Also, as of June 30, 2007 and December 31, 2006, consolidated assets include investments in CDO related fixed maturity securities and guaranteed investment contracts of $4,193.3 million and $4,656.0 million, respectively, and cash of $238.0 million and $265.0 million, respectively.

5.  NET INSURED CREDIT SWAP REVENUE AND OTHER NET CREDIT SWAP REVENUE

Net insured credit swap revenue includes insured credit swap premiums received for credit protection the Company has sold under its insured credit swaps as well as realized and unrealized gains and losses related to those transactions.  Realized losses arise upon the occurrence of credit events requiring payment by the Company under the related credit swap and, additionally, realized gains or losses could occur if a transaction is terminated in advance of its scheduled termination date.  Unrealized gains and losses represent the adjustments for changes in fair value that are recorded in each reporting period, under FAS 133.  The fair value of the Company’s insured credit swaps are recorded as either a derivative liability or derivative asset in the consolidated balance sheets.

The following table disaggregates net insured credit swap revenue into its component parts for the three months and six months ended June 30, 2007 and 2006:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Net insured credit swap revenue

 

 

 

 

 

 

 

 

 

Insured credit swap premiums earned

 

$

23,600

 

$

11,218

 

$

42,362

 

$

21,282

 

Unrealized losses on insured credit swaps

 

(67,783

)

(5,075

)

(82,846

)

(1,180

)

Realized gains on insured credit swaps

 

 

1,788

 

 

2,009

 

Total net insured credit swap revenue

 

$

(44,183

)

$

7,931

 

$

(40,484

)

$

22,111

 

 

Of the $(67.8) million unrealized loss recorded in the three months ended June 30, 2007, $(67.5) million was related to valuation changes in the Company’s Structured Credit transactions.  The residential mortgage-backed securities (“RMBS”) portion of the Structured Credit portfolio incurred valuation losses of $253.0 million for the three months ended June 30, 2007.  However, no realized or actual losses were incurred on this portfolio based on its very high credit quality, with over 99.8% of the portfolio constructed of exposures attaching above the “AAA” rated level of subordination.  These valuation losses were precipitated by the severe level of delinquencies and defaults that have occurred in the residential mortgage market, particularly in the sub-prime and second lien segments, which constitute a significant portion of the assets underlying the RMBS included in the pools of assets referenced by certain of our Structured Credit transactions.  Partially offsetting the valuation losses on the Structured Credit RMBS portfolio was an unrealized gain in the amount of $185.5 million on Structured Credit’s corporate credit portfolio. The valuation gains on the corporate portfolio resulted from tighter spreads at June 30, 2007, on a portion of the portfolio, compared to spreads when the transactions were originated, and the refinement in the Company’s valuation model to fully use market spread data as a proxy for default probabilities (see Note 2). In addition, pricing declined as more seasoned transactions reached maturity without experiencing losses, resulting in unrealized gains. As a result of the Company’s intention to generally hold its insured credit swaps to term, absent credit losses, these unrealized amounts will revert to $0 at contract expiration.

Other net credit swap revenue includes revenues received from a partially funded CDS CDO, which sells credit protection under credit swaps for which it receives fixed quarterly fees as well as the residual returns on two synthetic equity participations.  Other net credit swap revenue also includes net realized and unrealized gains and losses associated with these transactions, if any.  As of June 30, 2007, the Company’s risk to the partially funded CDS CDO and one of the synthetic equity participation had expired.  These revenues are included in the Company’s consolidated statement of operations.

The following table disaggregates other net credit swap revenue into its component parts for the three months and six months ended June 30, 2007 and 2006:

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Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Other net credit swap revenue

 

 

 

 

 

 

 

 

 

Credit swap fees earned

 

$

1,643

 

$

2,534

 

$

5,811

 

$

5,253

 

Unrealized gain on credit protection purchased

 

3,110

 

 

11,565

 

 

Unrealized gains (losses) on credit swaps

 

(902

)

97

 

(1,219

)

291

 

Total other net credit swap revenue

 

$

3,851

 

$

2,631

 

$

16,157

 

$

5,544

 

 

6.  INCOME TAXES

Effective January 1, 2007, the Company adopted the provisions of FIN 48.  As a result of the implementation of FIN 48, the Company recorded a $1.5 million reserve for uncertain tax positions and a corresponding decrease to the 2007 opening retained earnings.  The Company’s effective tax rate would be increased if $1.5 million of unrecognized tax expense were recognized.  It is unlikely that the unrecognized tax expense will significantly change in the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.

The Company records interest and penalties related to unrecognized tax benefits in income taxes.  $470,000 in accrued interest and penalties is included in the $1.5 million reserve for uncertain tax positions related to our adoption of FIN 48.

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate.  The 2007 effective tax rate is estimated to be lower than the 35% statutory rate primarily due to the Company’s investment in securities for which the interest payable is exempt from federal income tax.

7.  LITIGATION

In May 2006, the Company paid a judgment in the amount of $3.7 million in satisfaction of a damages award in connection with an employment contract dispute with a former executive of the Company plus accrued interest through the date of payment.  Also in May 2006, the Company settled the former executive’s attorney’s fees at an additional amount of $0.6 million.  The Company had recorded a reserve of $4.2 million to cover these costs in December 2005.  A judicial satisfaction of the judgment has been filed and the Company has no additional liability with respect to this matter.

The Company is not aware of any pending or threatened litigation that it believes could reasonably be likely to result in a material adverse effect on the Company’s financial position, results of operations or cash flows.

8.  SEGMENT INFORMATION

The Company’s reportable segments are as follows:

(1)           Structured Credit, which structures and sells credit protection, principally in the form of insured credit swaps, against a variety of asset classes in the institutional fixed income markets;

(2)           Public Finance, which provides insurance guaranteeing the timely payment of principal and interest on public finance and other debt obligations;

(3)           CDO Asset Management, which originates, structures and manages assets, primarily corporate obligations or asset-backed securities, in funded, partially funded or synthetic CDOs; and

(4)           Other, which primarily includes trade credit insurance business and financial guaranty insurance on certain other sectors, each of which the Company is no longer engaged in.

The Company’s reportable segments are strategic business units that offer different products and services.  They are managed separately since each business requires different marketing strategies, personnel skill sets and technology.

Where determinable, the Company specifically assigns assets to each segment, otherwise, the Company allocates assets based on estimates.  In general, allocation percentages for assets are determined based on each line’s estimated capital utilization from a rating agency perspective.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  The Company evaluates segment performance based on its income (loss) before income taxes.  Reportable segment results are presented net of material inter-segment transactions.  The following tables summarize the Company’s operations and allocation of assets as of and for the three months and six months ended June 30, 2007 and 2006 (dollars in thousands):

11




 

 

 

Three Months Ended June 30, 2007

 

 

 

Structured

 

Public

 

CDO Asset

 

 

 

Consolidated

 

 

 

Credit

 

Finance

 

Management

 

Other

 

Totals

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

47

 

$

15,371

 

$

 

$

60

 

$

15,478

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$

47

 

$

8,228

 

$

 

$

170

 

$

8,445

 

Net insured credit swap revenue

 

(44,628

)

284

 

161

 

 

(44,183

)

Net investment income

 

6,973

 

4,266

 

78,337

 

1,051

 

90,627

 

Net realized and unrealized gains (losses) on investments

 

(714

)

2

 

(109,430

)

 

(110,142

)

Net realized and unrealized gains on derivative instruments

 

292

 

 

2,964

 

 

3,256

 

Other net credit swap revenue

 

(237

)

 

4,088

 

 

3,851

 

Fee and other income

 

230

 

253

 

7,412

 

 

7,895

 

Total revenues

 

(38,037

)

13,033

 

(16,468

)

1,221

 

(40,251

)

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

1,614

 

 

245

 

1,859

 

Policy acquisition costs

 

 

2,841

 

 

201

 

3,042

 

Other operating expenses

 

6,408

 

2,832

 

6,322

 

2

 

15,564

 

Interest expense

 

4,475

 

391

 

71,378

 

93

 

76,337

 

Depreciation and amortization

 

159

 

132

 

1,987

 

 

2,278

 

Total expenses

 

11,042

 

7,810

 

79,687

 

541

 

99,080

 

Income of minority interest

 

(141

)

 

(1,124

)

 

(1,265

)

Income (loss) before income taxes

 

(49,220

)

5,223

 

(97,279

)

680

 

(140,596

)

Provision for income tax expense (benefit)

 

(16,520

)

1,736

 

(32,702

)

226

 

(47,260

)

Net income (loss)

 

$

(32,700

)

$

3,487

 

$

(64,577

)

$

454

 

$

(93,336

)

 

 

 

 

 

 

 

 

 

 

 

 

Segment Assets

 

$

661,100

 

$

598,761

 

$

4,701,093

 

$

131,288

 

$

6,092,242

 

 

 

 

Three Months Ended June 30, 2006

 

 

 

Structured

 

Public

 

CDO Asset

 

 

 

Consolidated

 

 

 

Credit

 

Finance

 

Management

 

Other

 

Totals

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

192

 

$

15,301

 

$

 

$

234

 

$

15,727

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

 

$

210

 

$

7,575

 

$

 

$

690

 

$

8,475

 

Net insured credit swap revenue

 

7,699

 

(30

)

262

 

 

7,931

 

Net investment income

 

882

 

4,133

 

76,482

 

955

 

82,452

 

Net realized and unrealized losses on investments

 

(35

)

(81

)

(1,120

)

(20

)

(1,256

)

Net realized and unrealized gains on derivative instruments

 

 

 

2,497

 

 

2,497

 

Other net credit swap revenue

 

(11

)

 

2,642

 

 

2,631

 

Fee and other income

 

153

 

54

 

6,801

 

 

7,008

 

Total revenues

 

8,898

 

11,651

 

87,564

 

1,625

 

109,738

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

 

1,539

 

 

122

 

1,661

 

Policy acquisition costs

 

 

2,518

 

 

250

 

2,768

 

Other operating expenses

 

4,746

 

2,292

 

5,643

 

 

12,681

 

Interest expense

 

90

 

427

 

70,359

 

88

 

70,964

 

Depreciation and amortization

 

161

 

121

 

1,943

 

 

2,225

 

Total expenses

 

4,997

 

6,897

 

77,945

 

460

 

90,299

 

Income of minority interest

 

(7

)

 

(1,067

)

 

(1,074

)

Income before income taxes

 

3,894

 

4,754

 

8,552

 

1,165

 

18,365

 

Provision for income tax expense

 

1,351

 

1,633

 

2,941

 

398

 

6,323

 

Net income

 

$

2,543

 

$

3,121

 

$

5,611

 

$

767

 

$

12,042

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Assets

 

$

56,390

 

$

452,947

 

$

5,139,289

 

$

96,877

 

$

5,745,503

 

 

12




 

 

 

 

Six Months Ended June 30, 2007

 

 

 

Structured

 

Public

 

CDO Asset

 

 

 

Consolidated

 

 

 

Credit

 

Finance

 

Management

 

Other

 

Totals

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

134

 

$

20,043

 

$