Dexia Holding SA · EURONEXT:DEXB
Dexia Holding SA — Investor Presentation (May 2003)
69 slides from Dexia Holding SA's investor presentation, May 6, 2003
Slide 1: FSA: update on business and risks
FSA: update on business and risks Paris May 6, 2003
Slide 2: The Monoline Insurance Industry
The Monoline Insurance Industry
Slide 3: Industry Profile
Industry Profile ! Big Four: AMBAC (1971), MBIA (1973), FGIC (1983), FSA (1985) ! New entrants: XLCA (2000), CIFG (2002) ! All Triple-A rated companies ! Monitored closely by three rating agencies (Moody’s, S&P and Fitch) ! High barriers to entry (capital, experienced management and strong ownership
Slide 4: Monoline Bond Insurance Industry Par Originated
Monoline Bond Insurance Industry Par Originated International 414 $Bn U.S. ABS Par Originated Par Originated U.S. Muni CAGR: 14% 366 73,4 59,2 268 256 151,1 23,7 57,0 159,6 110 113 125 3,1 44,4 189,3 52 147,2 43 122,4 10 0,9 98,0 0,25 77,2 43,0 41,0 1985 1990 1995 1999 2000 2001 2002 Source: FSA, MB
Slide 5: US Municipal Bond Insurance Penetration Rate for Monoline Bond Insurers
US Municipal Bond Insurance Penetration Rate for Monoline Bond Insurers Insured Par insured 357 ($ Bn) 350 293 286 300 287 250 235 227 220 200 200 185 165 160 150 100 176 49 % 145 133 50 108 108 105 81 86 79 62 69 0 92 93 94 95 96 97 98 99 00 01 02 Source: Bond Buyer 5
Slide 6: Monoline Financial Guarantor Industry Market Shares for 2002
Monoline Financial Guarantor Industry Market Shares for 2002 (Gross Par Insured) (1) U.S. Municipal Market U.S. ABS Market (2) International (2) FGIC AMBAC 20,0% 21,0% FGIC AMBAC AMBAC 6% 34% 31% (3) Other 5,1% FSA 27% MBIA FSA 39% FSA 26% 27,3% MBIA MBIA 37% 26,6% Total Volume: $176.7Bn Total Volum
Slide 7: High Quality of Overall Insured Portfolio
High Quality of Overall Insured Portfolio Categorized by Shadow Rating (Net Par Insured) FSA AMBAC FGIC MBIA 53% AA or higher 31% AA or higher 18% AA or higher 39% AA or higher NIG AAA NIG NIG NIG AAA 1% 10% 1% 3% BBB 1% AAA BBB BBB 17% AA 12% 27% 12% 21% BBB 18% 23% AA AA 21% 22% A 34% A AA A A 37%
Slide 8: Monolines - Raison d’être
Monolines - Raison d’être ! Issuers ! Reduced borrowing cost ! Increased economic leverage through efficient structuring ! Broader funding sources ! Streamlined execution ! Investors ! Default protection ! Enhanced liquidity ! Reduced secondary-market price volatility ! Consolidated analysis, dilige
Slide 9: AAA Monolines Add Value to the bond market
AAA Monolines Add Value to the bond market ! Municipal business ! Ultimate holders of tax exempt municipal bonds seek – and are ready to pay for – highest level of security ! Asset Backed Securities ! Complex transactions imply close analysis and monitoring of risks. Bond holders rely on monoline in
Slide 10: FSA: a AAA-rated subsidiary of Dexia
FSA: a AAA-rated subsidiary of Dexia
Slide 11: Financial Security Assurance
Financial Security Assurance ! Founded in 1985 ! Rated Triple-A by Moody’s, S&P, Fitch and R&I (of Japan) ! Pioneered financial guarantees in the asset-backed securities market ! Entered municipal bond insurance market in 1990 ! Independent public company (NYSE) from 1994 to 2000 ! Acquired by Dexia
Slide 12: A triple-A business
A triple-A business ! Capital Resources ! Statutory Capital: $ 1.9 Bn as of December 2002 ! Total capital and other resources available to pay claims*: $ 3.8 Bn as of December 2002 ! Risk Management ! Investment grade underwriting standards ! Low-loss severity and high recovery potential ! Single an
Slide 13: FSA’s Financial Base is Growing Steadily
FSA’s Financial Base is Growing Steadily Evolution of total capital and other resources available to pay claims* $MM CAGR: 20% 3.819 3.217 2.805 2.592 2.120 1.696 1.372 1.157 822 1994 1995 1996 1997 1998 1999 2000 2001 2002 (*) Includes statutory capital + unearned premium reserve +PV future install
Slide 14: Rationale Dexia / FSA
Rationale Dexia / FSA ! Leadership in public finance in the United States, largest market of the world ! “one-stop” shopping for clients ! Credit enhancement and liquidity lines for U.S Municipal Issuers ! Alternative solutions for Infrastructure Finance ! Acquire expertise in a new technology (cred
Slide 15: FSA’s New Business Revenue Growth is Strong and Diverse
FSA’s New Business Revenue Growth is Strong and Diverse… 882 Investment Products $MM International 65,7 PV New U.S. ABS Business U.S. Muni 697 Revenue 199,3 3,8 Originated 120,3 517 196,1 448 391 133,8 109,3 350,1 23,2 250 226 147,7 200,4 198,9 54,3 420,7 56,1 80,4 77,5 220,3 222,3 183,0 115,6 140,1
Slide 16: Creating a Stable Revenue Base for FSA
…Creating a Stable Revenue Base for FSA Approximately 90% of any Year’s Revenues are Known at Start of that Year Revenues if FSA wrote no If FSA continues to write at 2002 levels, new business after 12/31/02. revenues will be substantially higher. 600 600 $MM Core Earned 500 500 Premiums & Investmen
Slide 17: FSA financial results
FSA financial results Net premiums earned Net investment income Operating expenses Losses 450 Net Income Revenues CAGR: 20% $MM 400 139 350 300 129 250 121 Net Income CAGR: 12% 95 200 79 315 150 66 231 100 192 209 175 9 12 181 138 4 9 125 139* 50 115 112 65 66 78* 82 0 1998 1999 2000 2001 2002 (*) e
Slide 18: Steady Growth in Shareholder Value
Steady Growth in Shareholder Value Since the Merger with Dexia, FSA’s ABV Has Grown at an Annualized Rate of 18.1%* $90 5-Year CAGR ABV pre-merger post-merger 3/31/98 – 3/31/03 per $80 Share ABV: 16.9%* Acquisition Price ABV as of 03/03: $83.24 $70 $60 $50 ABV CAGR Since Merger $40 7/1/00 – 3/31/03
Slide 19: FSA: business model and risks
FSA: business model and risks
Slide 20: Key risk characteristics of Municipal / ABS businesses
Key risk characteristics of Municipal / ABS businesses Municipals Asset-backed Low Default Frequency " Municipal " Bankruptcy remote bankruptcies structure and extremely rare overcollateralization make defaults rare Low Loss Severity " Rare defaults usually " Collateral cashflow lead to only keeps l
Slide 21: FSA’s Loss History vs. US Commercial Banks and Savings Banks
FSA’s Loss History vs. US Commercial Banks and Savings Banks (1) ! 1991-2002 Bank weighted average annual charge-offs = 70 bp (2) ! 1991-2002 FSA weighted average annual losses = 1.8 bp ! 1985-2002 FSA weighted average annual losses = 1.7 bp ! Despite the stressful economic environment and related p
Slide 22: FSA – Loss history
FSA – Loss history ! Proven track record in quality underwriting and loss mitigation control ! Net par insured since inception: $431,000 MM (1) ! Total losses incurred : $178 MM Losses paid: $120 MM Case reserve: $58 MM ! FSA losses since inception by product line (1) Net par insured Cumulative loss
Slide 23: FSA’s Portfolio of Insured Transactions is Highly Diversified
FSA’s Portfolio of Insured Transactions is Highly Diversified Collateralized Bond Obligations (CBOs) Other Municipal 8% 5% Transportation 3% Collateralized Loan 3% 2% Healthcare Obligations (CLOs) 9% Utility Credit Default Swaps (CDS) (1) 18% 2% Housing Tax-Supported 10% Non-General Obligations Cons
Slide 24: FSA Insured Portfolio
FSA Insured Portfolio Categorized by Shadow Rating (Net Par Outstanding) (1) (2) Overall Combined (1) (2) Municipal ABS (Incl. ABS & Muni) $137.2 Bn $128.5 Bn $265.7 Bn AAA AA AAA NIG <1% 28% 27% NIG NIG <1% 2% 1% AAA BBB BBB 56% BBB 14% 10% 12% A AA 9% 26% A AA A 56% 23% 34% The pie charts on this
Slide 25: Underwriting process
Underwriting process ! Each transaction must be investment grade and either asset-backed or municipal to mitigate loss ! Each transaction is subject to an extensive review by FSA of all potential risks ! Municipal: ability of obligor to meet debt service under adverse economic scenario ! Asset-Backe
Slide 26: Primary Business Lines
Primary Business Lines ! Financial guaranty insurance policies on municipal securities " Public Finance: bonds issued by governmental entities (general obligation, revenue bonds) " Other Municipal Finance: bonds issued by not-for- profit entities operating essential public services (e.g., healthcare
Slide 27: Municipal Finance
Municipal Finance Each transaction insured by FSA must be secured by either a pledge of taxing power by an investment- grade municipality or a dedicated, investment-grade revenue stream from an essential public service 27
Slide 28: Municipal finance
Municipal finance ! Underwriting Principles ! Investment-grade quality ! Providers of essential governmental services ! Low risk with strong security provisions ! No forced acceleration of payments ! Amortizing debt with no involuntary bankruptcy ! Loss experience ! FSA has had only four municipal c
Slide 29: Types and Quality of Municipal Transactions Insured by FSA
Types and Quality of Municipal Transactions Insured by FSA NIG AAA Utility 17% BBB <1% <1% 14% General AA Transportation Obligation 28% 6% 40% Infrastructure Finance 2% Hospital 4% Other 7% Housing Tax-Supported A 4% (Non-G.O.) 57% 20% Total Net Par Outstanding: $137.2 Billion Net par outstanding In
Slide 30: Asset-Backed Securities
Asset-Backed Securities Each individual transaction insured by FSA is written with sufficient protection, in the form of asset overcollateralization, excess cashflow and/or other protections, to withstand substantial deterioration before FSA would pay a claim 30
Slide 31: Key ingredients of the ABS business
Key ingredients of the ABS business ! Modeling ! Proprietary models to evaluate expected losses and appropriate levels of protection ! Structuring ! Bankruptcy protection ! Collateral coverage ! Monitoring – Surveillance ! Triggers allowing cash to be retained if the portfolio deteriorates ! Rights
Slide 32: Sources of collateral protection
Sources of collateral protection ! Overcollateralization ! Cash deposit ! Excess cash-flow received over time ! External credit support (Letters of Credit, reinsurance) 32
Slide 33: Asset-Backed Finance
Asset-Backed Finance Example: Financing of a $1,000 Asset-Backed Transaction Senior Tranche Insured by FSA ($850) Layered Loss Reinsurance (if utilized) Junior Tranche ($100) Equity Tranche ($50) The Junior and Equity tranches ($150) provide overcollateralization for the Senior Insured tranche ($850
Slide 34: Excess Spread Provide Further Protection
Excess Spread Provide Further Protection 10% Interest Rate (e.g) Available to cover defaults and remunerate equity investors 5% Total annual interest required by the Senior Insured Tranche = $43 per year Par Amount Senior Insured Tranche $850 $950 $1000 ($850) Junior Equity Tranche / Tranche Overcol
Slide 35: Loss Tolerance of an Asset-Backed Transaction
Loss Tolerance of an Asset-Backed Transaction 30% Cumulative 25.9% Losses Break Even Coverage = = 3.5x Expected Loss 7.4% (%) 25% 25.9% (e.g) 20% 15% 10% Trigger 7.4% 5% Expected (e.g) 0% Months 0 6 12 18 24 30 36 42 48 54 60 66 72 Protections must be built to withstand 2 to 5 times expected losses,
Slide 36: FSA’s ABS Loss History
FSA’s ABS Loss History ! From inception of the Company (1985) through 12/31/02, FSA has incurred only $169 MM* in cumulative losses & case reserves on $259,000 MM of net par insured (0.065%) ! FSA’s unallocated general loss reserve balance is $89.7 MM at 12/31/02. ! Losses have been minimal due to:
Slide 37: Types and Quality of Asset-Backed Transactions Insured by FSA
Types and Quality of Asset-Backed Transactions Insured by FSA NIG Residential BBB 2% Mortgages Consumer Super AAA* 10% 18% Receivables 24% 15% A Other Asset- 9% Backed (1) 7% CBOs 17% AA CDSs (2) 23% CLOs 37% 6% AAA 32% Total Net Par Outstanding: $128.5 Billion Net par outstanding Internal ratings e
Slide 38: Residential mortgages
Residential mortgages ! FSA is a leading provider of Credit Enhancement for securitization of mortgage loans ($23.4 billion of net exposure as of December 2002) ! In a study in Q4 2002 of sub-prime transactions aged over 18 months, FSA estimated its weighted average remaining break-even loss coverag
Slide 39: Consumer receivables
Consumer receivables ! FSA is a leading provider of Credit enhancement for securitization of auto loans and credit cards ($19.5 billion of net par exposure as of December 2002) ! Back-up servicing agreements in each transaction 39
Slide 40: CDO Portfolio by Type
CDO Portfolio by Type CLO CBO CDS Collateralized Loan Obligations Collateralized Bond Obligations Credit Default Swaps A AA 4% 14% NIG BBB 7% A BBB 12% AAA 13% 1% 38% AAA 18% Super AAA* A AAA 64% AA 55% 18% 31% AA 25% Net par outstanding: $7.9 Bn Net par outstanding: $21.3 Bn Net par outstanding: $4
Slide 41: FSA CBO reserves
FSA CBO reserves ! Reserves ($61.6 MM) are calculated with 1992 default curve on High Yield corporate bonds ! The 1992 default curve is based on an assumption of declining default rates similar to the experience after the 1991 peak ! At the end of March 2003, expected losses on the CBO portfolio are
Slide 42: Moody’s U.S One-Year High-Yield Default Rates
Moody’s U.S One-Year High-Yield Default Rates 11% 10% 2003 Projection 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% * 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 19 9 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 19 9 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 02 03 7 7 7 7 7 7 7 7 7 7 8 8 8 8 8
Slide 43: Sensitivity analysis of CBO Reserves
Sensitivity analysis of CBO Reserves ! Two stressed scenarios were run in November 2002 (see appendix C) ! Pessimistic scenario: additional provisions of $43 MM to the existing reserves ! Very pessimistic scenario: additional provisions of $102 MM to the existing reserves ! A new scenario has been d
Slide 44: Current CDO underwriting guidelines
Current CDO underwriting guidelines ! CDSs ! Pooled only (no single-name) ! 1.5x AAA/Aaa requirement ! CLOs ! AAA attachment point ! Experienced, high quality collateral managers ! Tighter structural requirements ! CBOs ! New production on hold pending better visibility on high-yield corporate bond
Slide 45: Investment Products
Investment Products Using its credit and market expertise in the asset-backed and municipal sectors, FSA raises funds at sub-market rates (municipal and structured finance guaranteed investment contracts or GICs) and purchases asset-backed and other high-quality securities, generating attractive net
Slide 46: Guaranteed Investment Contracts (GICs)
Guaranteed Investment Contracts (GICs) ! Combine low cost of funds with investments in high quality, liquid ABS/MBS to earn an attractive Net Interest Margin (NIM) ! Two primary funding channels ! Municipal GICs – low-cost funding available because of municipal issuers’ need for reliable investment
Slide 47: FSA’s GIC Business
FSA’s GIC Business Portfolio Size: $2.45Bn Average Target Net Interest Margin: 40-50 bps Assets Liabilities/Funding Source Other Muni GICs 6% BBB 1% Debt Service Construction Reserve Fund Fund 10% A 41% AAA 1% Credit Linked 97% Notes AA 16% 1% Structured Lease Other Non-Muni GICs GICs 7% 20% • Avera
Slide 48: Special Purpose Entities (SPEs)
Special Purpose Entities (SPEs) ! Active Management of assets under FSA Guarantee in order to: ! refinance FSA-insured transactions that experience difficulty meeting debt service obligations (“Canadian Global Funding”) ! benefit from arbitrage opportunities on FSA-insured bonds (“FSA Global Funding
Slide 49: Appendices
Appendices Appendix A: FSA activity and financial results Q1 2003 Appendix B: Rating agencies oversight Appendix C: Sensitivity analysis of CBO reserves Appendix D: Americredit program Appendix E: Reinsurance
Slide 50: Appendix C: FSA activity and financial results Q1 2003
Appendix C: FSA activity and financial results Q1 2003 50
Slide 51: PV Originations
PV Originations 882 $MM Investment Products 65.7 PV New International Business U.S. ABS Revenue U.S. Muni 697 199.3 Originated 3.8 120.3 517 196.1 448 133.8 109.3 350.1 200.4 198.9 420.7 175 18.7 23.3 222.3 102 3.0 57.2 183.0 21.4 13.3 140.1 75.6 64.2 1999 2000 2001 2002 Q1 '02 Q1 '03 51
Slide 52: Summary of Q1 2003 Results
Summary of Q1 2003 Results (M $ ) Q 1 03 Q 1 02 ∆ % Revenues 1 2 6 .6 9 9 .1 + 2 7 .7 % P r e m iu m s e a r n e d 8 0 .1 6 9 .7 + 1 4 .9 % N e t In v e s tm e n t In c o m e 3 6 .5 3 3 .4 + 9 .4 % G IC N e t In te re s t In c o m e 7 .9 3 .0 x 2 .6 N e t r e a liz e d a n d u n r e a liz e d g a in
Slide 53: Appendix B: Rating agencies oversight / Capital adequacy
Appendix B: Rating agencies oversight / Capital adequacy 53
Slide 54: Rating Agencies Oversight
Rating Agencies Oversight ! Transaction level " Shadow rating on each transaction by sector specialist " Capital charges assigned for each specific exposure ! Insurance company level " Continuous review of operations, risk management practices, profitability, liquidity and quality of management " Re
Slide 55: S&P Model
S&P Model Based on a scenario S&P Depression Model Format: ! Simulates losses in a 4-year “AAA” depression (i.e. only AAA underlying credits are certain to survive without a claim on the insurer) ! Depression begins 3 years in the future ! Each insurer is assumed to grow its originations by 15% annu
Slide 56: Capital adequacy Measurement S&P Model
Capital adequacy Measurement S&P Model ! Capital charges calculated as: Muni ABS % of average 13,12 12,81 annual debt service % of par insured 9,30 2,63 7,50 2,20 2,11 0,90 FSA AMBAC FGIC MBIA FSA AMBAC FGIC MBIA ! Capital must be sufficient to survive the depression scenario with 25% more claims-pa
Slide 57: Moody’s Portfolio Risk Model
Moody’s Portfolio Risk Model Based on Statistics ! Monte Carlo estimate of the probability distribution of potential credit losses on the existing portfolio ! Each (obligor-based) exposure is defined by its " Net par (adjusted for benefit from reinsurance) " Expected default rate (rating, maturity,
Slide 58: Capital adequacy Measurement Moody’s
Capital adequacy Measurement Moody’s ! Capital resources relative to the maximum amount of credit losses (present value) ! with 99.9% confidence (=Hard Capital) Hard Capital 1,91 99.9 Percentile 1,58 1,60 Industry Losses 1,39 Average (1.56) Capital sufficient to cover losses to 99.9% (1.00) FSA AMBA
Slide 59: Recent Rating Agencies Comments on Potential Monoline Concerns
Recent Rating Agencies Comments on Potential Monoline Concerns S&P on Monoline CDO Portfolios (12/19/2002) ! “High levels of corporate default over the past several years have weakened the industry’s CDOs book of business. The few transactions initially rated A or BBB have lost much of their loss pr
Slide 60: Appendix C: Sensitivity analysis of CBO reserves
Appendix C: Sensitivity analysis of CBO reserves 60
Slide 61: Sensitivity analysis of CBO reserves
Sensitivity analysis of CBO reserves ! Pessimistic Scenario (Nov 2002) We created a pessimistic default rate curve by rating category (the “Pessimistic Curve”) that extends the default rate experienced during the first six months of 2002 (for B ratings we took the rate observed during 2001 which is
Slide 62: Sensitivity analysis of CBO Reserves
Sensitivity analysis of CBO Reserves Historical B Default Rate vs. November pessimistic, very pessimistic and 1992 curve Historical Default Rate 1992 Curve Pessimistic Curve Very Pessimistic Curve 10% 9% 8% 7% 6% 5% 4% 3% 2% Actual Q1 03 Default Rate 1% 0% Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q
Slide 63: Sensitivity analysis of CBO Reserves
Sensitivity analysis of CBO Reserves Historical B Default Rate vs. 1992, November very pessimistic and new April curve Historical Default Rate 1992 Curve Very pessimistic Scenario New scenario 10% 9% 8% 7% 6% 5% 4% 3% 2% Actual Q1 03 Default Rate 1% 0% Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02
Slide 64: Appendix D: Americredit program
Appendix D: Americredit program 64
Slide 65: Overview of the 15 AmeriCredit Transactions
Overview of the 15 AmeriCredit Transactions Current Report (April)* Quota Share Reinsurance ($1.25B) $6.45B Outstanding Auto Loan Retained $8.34B Pool = Risk $9.03B $0.64B $0.69B Overcollateralization Layered Loss Reinsurance Protection $0.48B Cash deposit & SAR** Notes issued and insured by FSA = $
Slide 66: Summary of AmeriCredit Reinsurance
Summary of AmeriCredit Reinsurance Current Report (April) • The program benefits from significant quota share and layered loss reinsurance. • The program has a gross credit gap (the difference between first loss exposure and the original AAA level) of 14% or $1.16 billion, of which FSA retains appro
Slide 67: Appendix E: Reinsurance
DEXIA Appendix E: Reinsurance 67
Slide 68: Reinsurance
Reinsurance ! Total par amount reinsured: $92 Bn (as of 12/31/2002) ! Main reinsurers: Par reinsured ($Bn) ! Tokio Marine (Aa2/AA-) 25.6 ! ACE Guaranty Corp (Aa2/AAA) 21.2 ! Radian Reinsurance Inc. (Aa2/AA) 16.6 ! Exposures on reinsurers are closely monitored by rating agencies ! In case of downgrad
Slide 69: FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS Financial Security Assurance Holdings Ltd. (the Company) relies upon the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. This safe harbor requires that the Company specify important factors that could cause actua