Fitch Rates FSA Holdings' $155 Million Debt Issue 'AA'

Business Wire, Nov 6, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 6, 2002

Fitch Ratings assigns an 'AA' long term debt rating to the 100-year, 6.25%, $155 million callable debt of Financial Security Assurance Holdings Ltd. (FSA Holdings). FSA Holdings is a wholly owned subsidiary of Dexia S.A. (Dexia), a Franco-Belgian banking group. Financial Security Assurance Inc. (FSA), a monoline financial guarantor whose insurer financial strength Fitch rates 'AAA', is FSA Holdings' principal operating subsidiary. FSA is issuing debt at this time because it believes current interest rates provide an attractive opportunity to inventory capital, given the growth it sees in its core markets. Of the proceeds, $100 million will be downstreamed to FSA and $55 million will partially redeem higher coupon outstanding debt.

The 'AA' rating is based on FSA Holdings' strong revenues and earnings, as well as adequate capitalization and coverage ratios. FSA Holdings' premiums earned increased 37.1% to $226.8 million for the first nine months of 2002 compared to $165.4 million during the prior year period. In addition, net investment income increased 8.4% to $103.0 million in the first nine months of 2002 compared to $95.5 million in the prior year period. As of September 30, 2002, the net present value of future installment premiums and unearned premium reserves were $596.6 million and $972.4 million, up 7.2% and 19.9% respectively from year end 2001. Also, at September 30, 2002 the market value of FSA's high quality, fixed income investment portfolio was $2.920 billion. These resources provide strong and predictable revenue flows.

FSA Holdings' operating earnings increased 36.2% to $74.6 million in the third quarter of 2002 over that of the third quarter of 2001. However, net income of $34.4 million in the third quarter 2002 was down 34.8% due in part to a $22.1 million pre-tax charge from FSA's termination of a single-name credit default swap program and a mark-to-market $32.2 million pre-tax loss on derivatives, mostly pooled credit default swap transactions. Year-to-date, operating income was up 29.2% to $202.4 million, while net income declined 12.1% to $133.9 million from the prior year period. The mark-to-market losses on the pooled credit default swaps were a result of the widening of credit spreads and to a lesser degree, downgrades in the underlying credit quality of some of the pooled transactions. However, FSA believes that the mark-to-market adjustments of its credit derivative portfolio do not represent a material change in the economic risk of the underlying transactions and that the mark-to-market losses will reverse themselves as the transactions run to term.

With the new debt offering, FSA Holdings' long term debt-to-capital ratio is 19.6%, which is somewhat higher than its peers, MBIA and Ambac. However, a long term debt-to-capital ratio of up to 20% is consistent with Fitch's guidelines for the holding company of a 'AAA' rated monoline financial guarantor. Earnings before interest and taxes is 12.0x greater than pre-tax interest expense, a ratio that is also slightly weaker than FSA's peers, but still consistent with its ratings. Full-year pro forma annualized interest expense is $29.2 million.

FSA is domiciled in New York, where it can pay annual dividends to FSA Holdings up to the lesser of: 10% of policyholders' surplus or 100% of the past 12 months adjusted net investment income without prior approval from the insurance commissioner. According to this formula, FSA can dividend approximately $109.2 million in 2002 without prior approval, resulting in a dividend-allowed to pre-tax interest expense plus debt amortization coverage ratio of 3.2x. This provides ample coverage at the 'AA' long-term debt rating level

Fitch's insurer financial strength rating of FSA reflects the company's highly experienced management team, conservative underwriting standards, strong capital adequacy and high quality investment portfolio. FSA is a leading provider of financial guaranties in domestic and international municipal bonds, asset and mortgage backed securities (ABS/MBS) and collateralized debt obligations (CDOs). As at September 30, 2002, FSA's net risk in force (principal and interest) was $352.8 billion, supported by claims-paying resources of $3.562, billion of which $1.728 billion was qualified statutory capital. The claims-paying ratio (net risk in force divided by total claims paying resources) is 99:1 and the policyholders' risk-to-capital ratio (net risk in force divided by qualified statutory capital) is 204:1.