The principal executive offices of the Company and FSA are located at 350 Park Avenue, New York, New York 10022. The principal executive offices, which consist of approximately 75,700 square feet of office space, are under lease agreements which generally expire in 2005. The Company's telephone number at its principal executive offices is (212) 826-0100. FSA or its subsidiaries also maintain leased office space in San Francisco, Dallas, Hamilton (Bermuda), London (England), Madrid (Spain), Paris (France), Singapore, Sydney (Australia) and Tokyo (Japan). The Company and its subsidiaries do not own any real property.
- ---------- (a) Prepared in accordance with accounting principles generally accepted in the United States of America. Deferred premium revenue shown above is shown net of prepaid reinsurance premiums. Losses and loss adjustment expenses are shown net of reinsurance recoverables on unpaid losses. (b) The sum of statutory capital, statutory unearned premium reserve, present value of future net installment premiums, statutory loss reserve, and credit available under standby line of credit ("soft capital") facility. (c) $138.8 million of net income excluding merger-related costs.
Management and investors consider the following measures important in analyzing the financial results of the Company: adjusted book value, core net income, operating net income, core revenue, core expenses and gross present value of premiums written (gross PV premiums written). However, none of these measures are promulgated in accordance with accounting principles generally accepted in the United States of America and should not be considered as substitutes for shareholders' equity, net income, revenues, expenses and gross premiums written.
Adjusted book value per common share of the Company was $69.08 at December 31, 2001, up 17.7% including dividends since year-end 2000. Excluding realized and unrealized capital gains and losses, adjusted book value per share rose 18.4% including dividends. Management and some equity analysts use adjusted book value per common share as a proxy for the Company's intrinsic value, exclusive of franchise value. It is defined as book value plus the after-tax present value of all net deferred premium revenue less deferred expenses.
The Company discusses its financial results by breaking out various levels of its income statement in order to present a better analysis of underlying trends. OPERATING NET INCOME is net income less the after-tax effect of net realized capital gains or losses, the cost of equity-based compensation programs, changes in fair value of certain insurance products accounted for as derivatives as required by Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) and other non-operating items. CORE NET INCOME represents operating net income less the after-tax effects of refundings and prepayments. Core net income therefore represents the Company's normal operating results on a basis comparable to that of its industry peers. The distinction between core and operating net income is important because higher than normal volumes of refundings and prepayments disproportionately increase earned premiums and could suggest a stronger earnings trend than the pace of originations would warrant.
The Company's principal operating subsidiary, FSA, had an exceptional year in 2001, with strong results across
In the U.S. asset-backed market, FSA achieved record results, with business well balanced across the consumer, residential mortgage and structured finance sectors. In consumer finance, the Company enjoyed steady transaction flow from repeat issuers of asset-backed securities backed by automobile loans and credit card receivables. In the residential mortgage market, FSA developed new applications for its guaranty and, late in the year, saw increased demand for the guaranty as a way to enhance liquidity of mortgage-backed issues already rated Triple-A. In addition, funded and synthetic CDO business was strong because of a favorable credit spread environment. Fourth quarter 2001 gross PV premiums written were amplified by an unusually large residential mortgage transaction and a complex, high-premium structured financial institution obligation, which together contributed $90.0 million in gross PV premiums written. For the year, par value reached $56.7 billion and gross PV premiums written totaled $353.9 million, compared with $28.0 billion and $198.9 million, respectively, for 2000. Par insured increased more than gross PV premiums written primarily because of increased originations in the Triple-A shadow-rated CDO sector, which carries a low premium rate relative to par insured.
During 2001, new issue volume in the U.S. municipal bond market reached $286.3 billion, the second highest level in history, due in part to a decline in interest rates that encouraged municipal borrowing, and insurance penetration increased to 46% from 40% in the prior year. In this positive environment, FSA held the leading market share for the first time, insuring approximately 27% of the insured new issues that were sold during the year. FSA's market share leadership does not reflect any change in business strategy, which is for FSA to insure all the transactions meeting its underwriting criteria that it can insure at appropriate returns. The U.S. municipal business contributed $222.3 million in gross PV premiums written in 2001, compared with $140.1 million in 2000. FSA's U.S. municipal par insured increased to $36.5 billion in 2001 from $21.5 billion in 2000.
FSA's gross premiums written increased 30.4% to $485.6 million for 2001 from $372.3 million for 2000. Net premiums written were $319.6 million during 2001, an increase of 46.5% compared with the 2000 result. Reinsurance cessions totaled 34.2% of 2001 gross premiums written, compared with 41.4% in 2000. The amount ceded decreased in 2001 primarily due to some large facultative cessions on health care business in 2000 to comply with new internal single-risk limits. Net premiums earned in 2001 were $237.7 million, compared with $192.1 million in 2000, an increase of 23.7%. Premiums earned from refundings and prepayments were $9.1 million for 2001 and $11.7 million for 2000, contributing $4.4 million and $5.5 million, respectively, to after-tax earnings. Excluding the effects of refundings, net premiums earned grew 23.0% over the comparable 2000 result. No assurance can be given that refundings and prepayments will continue at the level experienced in 2001 or 2000.
The provision for losses and loss adjustment expenses in 2001 was $12.5 million, compared with $9.4 million in 2000, representing additions to the Company's general reserve. The additions to the general reserve represent management's estimate of the amount required to cover the present value of the net cost of future claims. The Company will, on an ongoing basis, monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business, and future economic conditions. The Company evaluated its insured portfolio to assess the potential impact of the events of September 11, 2001, and does not expect to incur any losses as a direct result of the tragedy. The Company's insured portfolio, at the time of the event, included approximately $131.0 million of gross exposure (approximately $76.0 million after reinsurance) to Port Authority of New York and New Jersey Consolidated Revenue Bonds, which were backed by the Authority's general revenues, including those from bridges and tunnels, and not directly secured by lease payments or other payments related to the World Trade Center. In addition, the Company assessed the effects of several high-profile bankruptcies on its insured portfolio and does not expect to incur losses attributable to these bankruptcies. At December 31, 2001, the general reserve totaled $69.1 million.
Total policy acquisition and other operating expenses (excluding the cost of equity-based compensation programs, which was $25.2 million for 2001 and $27.1 million for 2000) were $56.9 million in 2001, compared with $51.2 million in 2000, an increase of $5.7 million. Further excluding the effect of refundings, total policy acquisition and other operating expenses were $54.5 million in 2001, compared with $47.9 million in 2000, an increase of $6.6 million. The increase resulted from higher personnel costs. The Company's core expense ratio (policy acquisition costs plus core other operating expenses divided by core earned premiums) fell to 24.5% from 26.5% in 2000 due to higher core premiums earned. In 2000, the Company recognized $105.5 million in merger-related expenses, of which $85.8 million represented an increase in equity-based compensation and $19.7 million was for various fees.
In the fourth quarter of 2001, the Company's newly formed asset management group began issuing FSA-insured GICs and had recorded $601.0 million of GICs as of December 31, 2001. These transactions resulted in a net interest margin of $0.1 million and a net capital loss of $0.3 million for the year ended December 31, 2001.
Income before income taxes for 2001 and 2000 was $269.5 million and $67.4 million ($172.9 million excluding merger-related costs), respectively.
The Company's effective tax rate for 2001 was 22.3%, compared with 6.1% for 2000. The effective tax rate increased because, in 2000, merger-related expenses reduced net income, resulting in a higher than normal proportion of income derived from the Company's tax-exempt investment securities. The increase was partially offset by higher income from FSA International, which, while subject to U.S. income taxes as a controlled foreign corporation, nonetheless benefits from a lower overall effective tax rate than the Company's domestic insurance company subsidiaries.
hypothetical increase in interest rates would result in an after-tax decrease of $115.6 million in the net fair value of the Company's fixed-income portfolio, excluding the GIC bond portfolio, and an after-tax decrease of $5.7 million for the GIC bond portfolio. Since the Company does not expect to trade investments prior to maturity, absent an unusually large demand for funds, it does not expect to recognize any material adverse impact to income or cash flows under the above scenario.
The Company's losses and loss adjustment expenses comprise case basis reserves and a non-specific general reserve. A case basis reserve is recorded at the net present value of an estimated loss when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. A case basis reserve is determined using primarily cash flow or similar models and represents FSA's estimate of the net present value of the anticipated shortfall, net of reinsurance, between (i) scheduled payments on the insured obligation plus anticipated loss adjustment expenses and (ii) anticipated cash flow from and proceeds to be received on sales of any collateral supporting the obligation and other anticipated recoveries. The non-specific general reserve is available to be applied against future additions or accretions to existing case basis reserves or to new case basis reserves. The general reserve is calculated by applying a loss factor to the total net par amount outstanding of the Company's insured obligations over the term of such insured obligation and discounting the result at the then current risk-free rates. The loss factors used for this purpose are determined on the basis of an independent rating agency study of default rates and the Company's portfolio characteristics and history. The selection of loss factors and a discount rate involves judgment as to which factors to use and whether those factors are reflective of the Company's insured obligations. Management's judgments may also consider macroeconomic factors, political developments and changes in underwriting standards or mix of business.
Adjusted book value per common share of the Company was $59.52 at December 31, 2000, up 18.3% including dividends since year-end 1999. Excluding realized and unrealized capital gains and losses, adjusted book value per share rose 12.5% including dividends.
The Company's principal operating subsidiary, FSA, produced strong origination results despite a decline in U.S. municipal market volume and a generally slow first quarter caused by Year 2000 (Y2K) concerns. Anticipated computer problems associated with Y2K prompted many issuers to accelerate closing dates for their financings, which increased premium production in the fourth quarter of 1999 and reduced first quarter 2000 production. FSA wrote insurance policies generating $448.3 million of gross PV premiums written in 2000, 13.3% lower than the record $517.2 million in 1999. In 2000, the annual par value of obligations insured by FSA rose 4.8%, to $62.6 billion. Gross PV premiums written declined because FSA generally insured higher quality, lower premium transactions.
In the U.S. asset-backed securities market, strong CDO production and repeat business from auto loan and residential mortgage issuers contributed to FSA's 2000 results. FSA also increased its participation in other sectors, including franchise loans, sub-prime credit cards and manufactured housing. For the year, par value reached $28.0 billion and PV premiums totaled $198.9 million, compared with $24.8 billion and $200.4 million, respectively, for 1999.
In international markets, business was particularly strong in Europe, where FSA guaranteed public-private partnership (PPP) financings in the United Kingdom, synthetic CDOs and other transactions. A large market has developed in Europe for synthetics, which tend to be large-scale, high-quality transactions that produce attractive returns. Financial institutions use synthetics both to restructure their portfolios to achieve optimal allocations of regulatory capital and to take advantage of arbitrage opportunities. In synthetic transactions, FSA guarantees payment obligations of counterparties under credit default swaps referencing asset portfolios. Synthetics do not rely on new issues of public securities and therefore represent a growing business area that is not dependent on bond market variables. During 2000, FSA insured $13.2 billion of international par, compared with $8.7 billion in 1999, to generate gross PV premiums written of $109.3 million, compared with $133.8 million in 1999. In its international business, FSA focuses on Western Europe and on certain developed countries in the Asia Pacific region.
Net investment income was $121.1 million for 2000 and $94.7 million for 1999, an increase of 27.9%. This increase was due primarily to higher invested balances arising from the proceeds of an equity offering in the fourth quarter of 1999 and revenues from new business writings. The Company's effective tax rate on investment income was 13.1% for 2000, compared with 15.3% for 1999. In 2000, the Company realized $36.8 million in net capital losses, compared with $13.3 million of net capital losses in 1999. Capital losses in 2000 were affected by losses purposely incurred in order to apply expiring tax loss carry-back opportunities against previously realized capital gains. Capital gains and losses are a by-product of the normal investment management process and can vary substantially from period to period.
Total policy acquisition and other operating expenses (excluding the cost of equity-based compensation programs, which was $27.1 million for 2000 and $17.1 million for 1999) were $51.2 million in 2000, compared with $49.1 million in 1999, an increase of $2.1 million. Further excluding the effect of refundings, total policy acquisition and other operating expenses were $47.9 million in 2000, compared with $45.4 million in 1999, an increase of $2.5 million. The increase resulted from higher personnel costs. The Company's core expense ratio fell to 26.5% from 28.2% in 1999 due to higher core premiums earned. The Company recognized $105.5 million in merger-related expenses, of which $85.8 million represented an increase in equity-based compensation and $19.7 million was for various fees.
The Company's effective tax rate for 2000 was 6.1%, compared with 23.5% for 1999. The effective tax rate declined because merger-related expenses reduced net income, resulting in a higher than normal proportion of income derived from the Company's tax-exempt investment securities.
The Company's consolidated invested assets at December 31, 2001, net of unsettled security transactions, were $3,132.6 million, compared with the December 31, 2000 balance of $2,234.7 million. These balances include the change in the market value of the investment portfolio, which had an unrealized gain position of $92.4 million at December 31, 2001, compared with an unrealized gain position of $104.9 million at December 31, 2000. At December 31, 2001, the Company had, at the holding company level, an investment portfolio of $27.3 million available to fund the liquidity needs of its activities outside of its insurance operations. Because the majority of the Company's operations are conducted through FSA, the long-term ability of the Company to service its debt will largely depend upon its receipt of dividends from, or payment on surplus notes by, FSA.
FSA's ability to pay dividends is dependent upon FSA's financial condition, results of operations, cash requirements, rating agency approval and other related factors, and is also subject to restrictions contained in the Insurance Laws and related regulations of New York and other states. Under New York Insurance Law, FSA may pay dividends out of earned surplus, provided that, together with all dividends declared or distributed by FSA during the preceding 12 months, the dividends do not exceed the lesser of (i) 10% of policyholders' surplus as of its last statement filed with the Superintendent of Insurance of the State of New York (the New York Superintendent) or (ii) adjusted net investment income during this period. FSA paid no dividends in 2001 and 2000. Based upon FSA's statutory statements for the year ended December 31, 2001, and considering dividends that can be paid by its subsidiary, the maximum amount normally available for payment of dividends by FSA without regulatory approval over the following 12 months is approximately $77.1 million.
However, as a customary condition for approving the application of Dexia for a change in control of FSA, the prior approval of the New York Superintendent is required for any payment of dividends by FSA to the Company for a period of two years following the change in control, which occurred July 5, 2000. In 2001, FSA International paid a preferred dividend of $1.6 million to its minority interest owner.
Dividends paid by the Company to its shareholders were $31.1 million and $7.9 million in 2001 and 2000, respectively.
During the fourth quarter of 1999, the Company sold 2,583,764 shares at $54.20 per share for a total of $140.0 million. The Company issued 1,400,000 new shares and also sold 1,183,764 shares from its treasury and rabbi trust accounts. The proceeds were used to augment the Company's capital base for future growth and for anticipated employee compensation payments at the beginning of 2000.
On December 19, 2001, the Company issued $100.0 million of 6 7/8% Quarterly Income Bond Securities due December 15, 2101 and callable without premium or penalty on or after December 19, 2006. The Company used these proceeds to supplement the capital in its insurance company subsidiaries and for general corporate purposes. The Company has two other debt issues outstanding: $100.0 million of 6.950% Senior Quarterly Income Debt Securities due November 1, 2098 and callable on or after November 1, 2003; and $130.0 million of 7.375% Senior Quarterly Income Debt Securities due September 30, 2097 and callable on or after September 18, 2002.
In December 2000, FSA International contributed $24.0 million of additional capital to XLFA to maintain the Company's 15% ownership. In December 1999, FSA International received $50.0 million of additional capital. FSA contributed $40.0 million, and XL contributed the remaining $10.0 million to maintain its minority ownership interest percentage in the subsidiary.
FSA has a standby line of credit in the amount of $240.0 million with a group of international banks to provide loans to FSA after it has incurred, during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $240.0 million or the average annual debt service of the covered portfolio multiplied by 5.75%, which amounted to $653.7 million at December 31, 2001. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations in the covered portfolio, including certain installment premiums and other collateral. This commitment has a term that will expire on April 30, 2008 and contains an annual renewal provision subject to approval by the banks. No amounts have been utilized under this commitment as of December 31, 2001.
The Financial Accounting Standards Board (FASB) is currently addressing financial reporting issues relating to SPEs. Until the FASB has completed this project, the Company cannot determine the impact on its financial statements of any new accounting standards that may be issued regarding SPEs.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 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 auditing 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.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries, FSA Portfolio Management Inc., Transaction Services Corporation, Financial Security Assurance Inc. (FSA), FSA Insurance Company, Financial Security Assurance International Ltd. (International), FSA Capital Markets Services LLC, FSA Capital Management Services LLC, FSA Asset Management LLC (AMC), FSA Services (Australia) Pty Limited and Financial Security Assurance (U.K.) Limited (collectively, the Subsidiaries). All intercompany accounts and transactions have been eliminated. Certain prior-year balances have been reclassified to conform to the 2001 presentation.
A case basis reserve for unpaid losses and loss adjustment expenses is recorded at the net present value of the estimated loss when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is discounted using the then current risk-free rates ranging from 5.79% to 6.1%.
Deferred acquisition costs comprise those expenses that vary with, and are primarily related to, the production of business (including GICs), including commissions paid on reinsurance assumed, compensation and related costs of underwriting and marketing personnel, certain rating agency fees, premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Deferred acquisition costs and the cost of acquired business are amortized over the period in which the related premiums are earned. Recoverability of deferred acquisition costs is determined by considering anticipated losses and loss adjustment expenses.
Bonds at amortized cost of $14,579,000 and $11,690,000 at December 31, 2001 and 2000, respectively, were on deposit with state regulatory authorities as required by insurance regulations.
Consolidated net investment income, excluding income attributable to the GIC bond portfolio and the GIC short-term investment portfolio (collectively the GIC Portfolio), consisted of the following (in thousands):
The amortized cost and estimated market value of bonds, excluding the GIC bond portfolio, were as follows (in thousands):
Acquisition costs deferred for amortization against future income and the related amortization charged to expenses are as follows (in thousands):
o A contingency reserve (rather than a general reserve) is computed based on the following statutory requirements:
1) For all policies written prior to July 1, 1989, an amount equal to 50% of cumulative earned premiums less permitted reductions plus
o Certain assets designated as "non-admitted assets" are charged directly to statutory surplus but are reflected as assets under GAAP;
o For New York domiciled insurance companies, federal income taxes are provided only on taxable income for which income taxes are currently payable;
o Surplus notes are recognized as surplus rather than a liability.
A reconciliation of net income for the calendar years 2001, 2000 and 1999 and shareholders' equity at December 31, 2001 and 2000, reported by the Company on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory basis, is as follows (in thousands):
No valuation allowance was necessary at December 31, 2001 or 2000.
The Company was party to forward share agreements with certain counterparties and made the economic benefit and risk of a number of these shares available for subscription by certain of the Company's employees and directors. As part of the merger, the Company settled all of its forward share agreements and corresponding employee and director subscriptions at the merger price. The Company recognized compensation expense of $30,324,000 as a result of the settlement. In addition, in 2000, the Company recognized an increase to additional paid-in capital of $39,408,000, reflecting the amounts received from the counterparties.
Under New York Insurance Law, FSA may pay a dividend to the Company without the prior approval of the Superintendent of Insurance of the State of New York (the New York Superintendent) only from earned surplus subject to the maintenance of a minimum capital requirement. In addition, the dividend, together with all dividends declared or distributed by FSA during the preceding twelve months, may not exceed the lesser of 10% of its policyholders' surplus shown on FSA's last filed statement, or adjusted net investment income, as defined, for such twelve-month period. As of December 31, 2001, FSA had $77,052,000 available for the payment of dividends over the next twelve months. However, as a customary condition for approving the application of Dexia for a change in control of FSA, the prior approval of the New York Superintendent is required for any payment of dividends by FSA to the Company for a period of two years following the change in control, which occurred July 5, 2000. In 2001, International paid a preferred dividend of $1,589,000 to its minority interest owner. In addition, at December 31, 2001, the Company held $144,000,000 of surplus notes of FSA. Payments of principal or interest on such notes may be made with the approval of the New York Superintendent. In 2001, with the approval of the New York Superintendent, FSA repaid $26,000,000 of principal on such notes and subsequently issued an additional $50,000,000 of notes to the Company. In July 2000, in connection with the merger, FSA repurchased $55,000,000 of its stock from the Company.
FSA has a credit arrangement aggregating $125,000,000 at December 31, 2001, which is provided by commercial banks and intended for general application to transactions insured by the Subsidiaries. At December 31, 2001, there were no borrowings under this arrangement, which expires on April 26, 2002, if not extended. In addition, there are credit arrangements assigned to specific insured transactions. In August 1994, FSA entered into a facility agreement with Canadian Global Funding Corporation and Hambros Bank Limited. Under the agreement, which expires in August 2004, FSA can arrange financing for transactions subject to certain conditions. The amount of this facility was $186,911,000, of which $124,261,000 was unutilized at December 31, 2001.
On November 13, 1998, the Company issued $100,000,000 of 6.950% Senior QUIDS due November 1, 2098 and callable without premium or penalty on or after November 1, 2003. Interest is paid quarterly beginning on February 1, 1999. Debt issuance costs of $3,375,000 are being amortized over the life of the debt.
The Company and its Subsidiaries maintain both qualified and non-qualified, non-contributory defined contribution pension plans for the benefit of all eligible employees. The Company and its Subsidiaries' contributions are based upon a fixed percentage of employee compensation. Pension expense, which is funded as accrued, amounted to $3,570,000, $3,521,000 and $1,788,000 (net of forfeitures of $1,316,000 in 1999) for the years ended December 31, 2001, 2000 and 1999, respectively.
For obligations under the Company's Deferred Compensation Plan (DCP) and Supplemental Executive Retirement Plan (SERP), the Company generally purchases investments, which should perform similarly to the tracking investments chosen by the participants under the plans. In the fourth quarter of 2000, the Company purchased 304,757 shares of its common stock from Dexia Holdings, Inc. for $24,004,000. This purchase was intended to fund obligations relating to the Company's Director Share Purchase Program (DSPP), which enables its participants to make deemed investments in the Company's common stock under the DCP and SERP. Under the DSPP, the deemed investments in the Company's stock are irrevocable, settlement of the deemed investments must be in stock and, after receipt, the participants must generally hold the stock for at least six months. In 2001, $288,000 of restricted treasury stock was distributed to a Director as a deferred equity plan payout.
The Subsidiaries obtain reinsurance to increase their policy-writing capacity on both an aggregate-risk and a single-risk basis; to meet rating agency, internal and state insurance regulatory limits; to diversify risk; to reduce the need for additional capital; and to strengthen financial ratios. The Subsidiaries reinsure portions of their risks with affiliated (see Note 15) and unaffiliated reinsurers under quota share, first-loss and excess-of-loss treaties and on a facultative basis.
In the event that any or all of the reinsuring companies are unable to meet their obligations to the Subsidiaries, or contest such obligations, the Subsidiaries would be liable for such defaulted amounts. Certain of the reinsuring companies have provided collateral to the Subsidiaries to secure their reinsurance obligations. The Subsidiaries have also assumed reinsurance of municipal obligations from unaffiliated insurers.
The principal amount ceded as of December 31, 2001 and 2000 and the terms to maturity are as follows (in millions):
The Company seeks to maintain a diversified portfolio of insured municipal obligations designed to spread its risk across a number of geographic areas. The following table sets forth those states in which municipalities located therein issued an aggregate of 2% or more of the Company's net par amount outstanding of insured municipal securities as of December 31, 2001:
The Subsidiaries ceded premiums of $30,701,000 and $28,388,000 to Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine), a partial owner of the Company prior to the merger, for the years ended December 31, 2000 and 1999, respectively. The amount included in prepaid reinsurance premiums at December 31, 2000 for reinsurance ceded to Tokio Marine was $89,574,000. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was $7,675,000 at December 31, 2000. The Subsidiaries ceded losses and loss adjustment expenses of $2,935,000 and $3,376,000 to Tokio Marine for the years ended December 31, 2000 and 1999, respectively. The Subsidiaries ceded premiums of $12,795,000, $22,581,000 and $19,840,000 to subsidiaries of XL, a partial owner of the Company prior to the merger, for the years ended December 31, 2001, 2000 and 1999, respectively. The amounts included in prepaid reinsurance premiums at December 31, 2001 and 2000 for reinsurance ceded to subsidiaries of XL were $27,509,000 and $26,893,000, respectively.
The Subsidiaries had premiums written of $54,295,000 and $4,412,000 in 2001 and 2000, respectively, relating to the guaranty of debt issued and of debt obligations purchased by FSA Global Funding Limited (FSA Global), in which the Company holds a 29% ownership interest (see Note 19). The amounts included in deferred premium revenue relating to FSA Global transactions are $40,090,000 and $431,000 at December 31, 2001 and 2000, respectively.
Bonds, equity investments and GIC bond portfolio - The carrying amount represents fair value. The fair value is based upon quoted market price.
Activity in the liability for losses and loss adjustment expenses, which consists of the case basis and general reserves, is summarized as follows (in thousands):
The amount of discount taken was approximately $29,578,000, $28,748,000 and $31,113,000 at December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001 and 2000, the Company's retained earnings included $3,237,000 and $(679,000) respectively, of accumulated undistributed earnings (losses) of Fairbanks (net of goodwill amortization).
In November 1998, International sold to XL $20,000,000 of preferred shares representing a minority interest in International, which is a Bermuda-based financial guaranty subsidiary of FSA (see Note 7). In December 1999, International sold to XL an additional $10,000,000 of preferred shares to maintain its minority ownership percentage. The preferred shares are Cumulative Participating Voting Preferred Shares, which in total have a minimum fixed dividend of $1,500,000 per annum. For the years ended December 31, 2001, 2000 and 1999, the Company recognized minority interest of $8,929,000, $5,295,000 and $2,715,000, respectively.
The obligations under GICs may be called at various times prior to maturity based upon certain agreed-upon events. As of December 31, 2001, the interest rates on these GICs were between 1.81% and 5.68% .
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill, and requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized). These provisions are effective for business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. Certain SFAS No. 141 provisions also apply to purchase business combinations for which the acquisition date was before July 1, 2001. SFAS No. 142 addresses how intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in the financial statements. This statement requires that goodwill no longer be amortized and instead be subject to an impairment test performed at least annually. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 31, 2001. Management believes that the implementation of these standards, on January 1, 2002, will not have a material effect on the Company's financial position, results of operations or cash flows.