The provision for losses and loss adjustment expenses was $34.5 million, $65.6 million and $12.5 million in 2003, 2002 and 2001, respectively.
FSA's business includes insurance of CDS referencing diversified pools of corporate obligations. The Company had net par outstanding of $63.8 billion relating to these deals at December 31, 2003. Many of these transactions require periodic accounting adjustments to reflect an estimate of fair value under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS No. 133). These transactions have generally been underwritten with Triple-A or higher levels of credit protection provided by significant deductibles that must be exhausted prior to claims under FSA's guarantees. Adjustments required by SFAS No. 133 resulted in pre-tax income of $34.8 million and a charge to income of $50.2 million for the years ended December 31, 2003 and 2002, respectively. The benefit for 2003 resulted primarily from tightening credit spreads in the CDS market, while the charge for 2002 resulted primarily from widening credit spreads in that market. Neither of these adjustments indicate any material improvement or deterioration in the underlying credit quality of FSA's insured CDS portfolio. The gain or loss created by estimated fair-value adjustments will rise or fall each quarter based on estimated market pricing of highly rated swap guarantees and is not expected to be an indication of potential claims under FSA's guaranty. Fair value is defined as the price at which an asset or a liability could be bought or sold in a current transaction between willing parties. The fair value is determined based on quoted market prices, if available. If quoted market prices are not available, as is the case primarily with CDS on pools of assets, then the determination of fair value is based on internally developed estimates. Management applies judgment when developing these estimates and considers factors such as current prices charged for similar agreements, performance of underlying assets, changes in internal shadow ratings, the level at which the deductible has been set and FSA's ability to obtain reinsurance for its
At December 31, 2002, the Company held $212.9 million of surplus notes of FSA. During 2003, FSA repaid $60.0 million of those surplus notes. At December 31, 2003, the Company held $152.9 million of FSA surplus notes. Payments of principal or interest on such notes may be made only with the approval of the New York Superintendent. The Company employs surplus note purchases in lieu of capital contributions in order to allow the Company to withdraw funds from FSA through surplus note payments without reducing earned surplus.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Financial Security Assurance Holdings Ltd. and Subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with accounting standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Bonds at amortized cost of $8.9 million and $8.5 million at December 31, 2003 and 2002, respectively, were on deposit with state regulatory authorities as required by insurance regulations.
The change in net unrealized gains (losses) for the investment portfolio consisted of (in thousands):
•Insured CDS are considered to be insurance contracts, not derivative contracts recorded at fair value;
The Company applies APB Opinion 25 and related Interpretations in accounting for its performance shares. The Company estimates the final cost of these performance shares and accrues for this expense over the performance period. The expense for the performance shares was $63.1 million, $58.9 million and $48.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.
For obligations under the Company's Deferred Compensation Plan (DCP) and Supplemental Executive Retirement Plan (SERP), the Company generally purchases investments expected to perform similarly to the tracking investments chosen by the participants under the plans.
Cash, receivable for investments sold and payable for investments purchased-The carrying amount approximates fair value because of the short maturity of these instruments.
transferred to the general reserve $0.8 million representing recoveries received on prior-year transactions and transferred $45.8 million from the general reserve to case reserves. Giving effect to these transfers, the general reserve totaled $89.7 million at December 31, 2002.
Payments due under the VIE Debt (including $1,020.5 million of interest accretion on zero coupon obligations and excluding $155.2 million of hedge accounting adjustments) in each of the next five years ending December 31 and thereafter, are as follows (in thousands):