ACA Capital Reports Financial and Economic Results for the Second Quarter and Six Months Ended June 30, 2007.* ACA ACA - Application Control Architecture Capital's Board of Directors authorizes $20.0 million stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. * ACA Financial Guaranty's qualified statutory capital increases to $406.9 million and claims paying resources exceed $1.0 billion NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- ACA Capital Holdings, Inc. (NYSE NYSE See: New York Stock Exchange : ACA) today announced a second quarter 2007 net loss of ($93.3) million, or ($2.55) per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share. The net loss was primarily a result of impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. losses on bonds in certain consolidated CDOs and net unrealized mark-to-market losses on the Company's portfolio of Structured Credit transactions. These losses were directly attributable to the deterioration of second-lien and sub-prime residential mortgage-backed securities Residential mortgage-backed securities (RMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on residential rather than commercial real estate. occurring during the quarter. Included in the net loss are ($30.5) million of after tax impairments on bonds in consolidated CDOs in excess of the Company's economic investments. For the six months ended June 30, 2007, ACA Capital reported a net loss of ($81.9) million, or ($2.24) per diluted share. Net income and net income per diluted share are computed in accordance with accounting principles generally accepted in the United States of America UNITED STATES OF AMERICA. The name of this country. The United States, now thirty-one in number, are Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, ("GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). "). Additionally, to assist investors in their understanding of the Company's quarterly results and their measurement of the Company's growth and profitability, ACA Capital provides other non-GAAP information, including net economic income (loss) and base economic income (loss). The net economic loss for the second quarter of 2007 was ($13.2) million, or ($0.36) per diluted share as compared with second quarter 2006 net economic income of $14.9 million or $0.49 per diluted share. Net economic income for the first six months of 2007 was $2.5 million, or $0.07 per diluted share as compared with $26.0 million or $0.87 per diluted share for the same period in 2006. The base economic loss for the second quarter of 2007 was ($15.3) million, or ($0.42) per diluted share as compared with second quarter 2006 base economic income of $12.1 million or $0.40 per diluted share. The base economic income for the first six months of 2007 was $0.1 million, or $0.01 per diluted share as compared with base economic income of $23.0 million or $0.77 per diluted share for the same period in 2006. Alan S. Roseman, ACA Capital's President and Chief Executive Officer, said "ACA Capital remains extremely well capitalized relative to its risk exposure and is very much open for business. We have every reason to believe that the "A" rating of our insurance subsidiary, ACA Financial Guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. , will remain intact. In fact, the qualified statutory capital of ACA FG, increased $18.6 million during the second quarter to $406.9 million and its claims paying resources topped $1.0 billion. The risk exposure in our Structured Credit business is 99.8% 'super-AAA' and is not exposed to liquidity risk associated with mark-to-market volatility. While we are very disappointed that our profitability in 2007 will be less than originally planned, this earnings disappointment does not affect the financial strength of ACA Capital or ACA FG. ACA Capital's franchise rests upon our unique and established position in the structured finance and public finance markets. Our continued, long-term commitment to our investors, insured bondholders and counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. is steadfast and remains our priority." Additionally, ACA Capital Holdings announced today that its Board of Directors has authorized au·thor·ize tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es 1. To grant authority or power to. 2. To give permission for; sanction: the Company to purchase, from time to time, up to $20.0 million of its outstanding shares of common stock in open market transactions. The size and timing of the purchases will depend on price, market and business conditions and other factors. The stock repurchase program has a one-year term and may be suspended or discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: at any time without prior notice. Net Economic Income (Loss) In managing its business and measuring growth and profitability from a strategic and financial planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against perspective, in addition to GAAP net income results, ACA Capital's management and Board of Directors consider a supplemental measurement, net economic income. Net economic income (loss) excludes the net income impact of:
1. Unrealized gains (losses) on derivatives included in:
a. Net insured credit swap revenue;
b. Net realized and unrealized gains (losses) on derivative
instruments; and
c. Other net credit swap revenue;
2. Realized gains (losses) on non-CDO investments;
3. The portion of interest expense related to the principal payments
on borrowings financed with derivatives; and
4. Net realized losses related to the impairment of non-recourse CDO
assets.
Also, included in net economic income (loss) are net recognized gains Recognized Gain The amount of gain reported for income tax purposes. Notes: You can defer recognizing some gains until the following year(s). See also: Capital Gain, Capital Loss, Deferred Income Tax, Drought Sale, Exempt Income, Exemption, Gain, Recognized Loss from credit protection purchased on the ABX ABX Antibiotics ABX Airborne Express ABX Abstracting ABX Albury, New South Wales, Australia - Albury (Airport Code) ABX Automatic Branch Exchange ABx Non-Antibiotics ABX Asset Backed Securities Index ABX Acoustic Bass Extension indices. This credit protection was purchased to moderate the effects of impairments on the Company's ABS (Automatic Backup System) See backup program. CDO (Collaborative Data Objects) A programming interface from Microsoft for accessing MAPI-based e-mail, calendaring and scheduling servers. Originally called "OLE Messaging" and "Active Messaging," CDO wraps the Enhanced MAPI library into a COM object that provides the equity and is included in the net economic income (loss) given the amount of impairments recorded in the second quarter of 2007. ACA Capital believes that net economic income (loss) enhances the understanding of the Company's results by highlighting income attributable to the Company's operating performance. Earnings measures reported by research analysts are typically reported on a net economic income (loss) basis. Base Economic Income (Loss) In assessing the period over period income growth on both a consolidated and segment basis, ACA Capital's management, Board of Directors, certain research analysts and investors consider and compare the Company's base economic income (loss). Base economic income (loss) excludes from net economic income (loss) the net income (loss) impact of accelerated revenues from premiums earned on guaranteed public finance obligations that have been refunded and any termination gains related to insured credit swaps ("accelerated earnings"). Table 1, below, provides a comparison of earnings for the periods indicated. [TABLE OMITTED] (1) Consensus earnings that are reported by earnings estimate services are on this basis. (2) See endnote See footnote. A for further explanation of non-GAAP measures of net economic income (loss) and base economic income (loss). Segment Highlights Table 2, below, provides a comparison of earnings by business segment for the periods indicated. [TABLE OMITTED] (1) "Other" encompasses specified transactions in areas in which ACA Capital is no longer active. (2) See endnote A for further explanation of non-GAAP measures of net economic income (loss) and base economic income (loss). CDO Asset Management CDO Asset Management recorded a net loss, net economic loss and base economic loss for the second quarter of 2007 of ($64.6) million, ($28.2) million and ($28.2) million, respectively. During the quarter, ACA Capital closed four CDO transactions and one ABS managed tranche Tranche One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics. tranche A class of bonds. program, adding over $2.8 billion in assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. ("AUM Aum (ä·ōōmˑ), n.pr 1. in Ayurveda, the subtle, noiseless cosmic vibration in which consciousness existed in the beginning, before the elements appeared. "). The four CDOs include a $1.0 billion high grade CDO squared, a $350 million U.S. collateralized loan obligation Collateralized loan obligation (CLO) A security backed by a pool of commercial or personal loans , structured so that there are several classes of bondholders with varying maturities, called tranches. Similar in structure to Collateralized Mortgage Obligations. ("CLO CLO See: Collateralized Loan Obligation. "), a EU400 million European CLO and a $750 million mezzanine mez·za·nine n. 1. A partial story between two main stories of a building. 2. The lowest balcony in a theater or the first few rows of that balcony. ABS CDO. ACA Capital invested $8.2 million, approximately 10% on average, of the equity tranches Tranches A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities. "Tranche" is the French word for "slice". in the two CLOs, and did not invest in the equity of either of the other two CDOs. Subsequent to the end of the quarter, ACA Capital closed a $350 million mezzanine ABS CDO in which it made no equity investment. Also, at the end of quarter, the underlying exposure in ACA CDS 2002-1, a $1.0 billion corporate credit CDO, matured and ACA Capital no longer had risk to its $18.7 million remaining investment in this transaction. As of June 30, 2007, the Company managed CDO assets in 22 fully distributed Fully distributed A new stock issue that has been completely resold to the investing public and is no longer held by dealers. fully distributed Of or relating to a new issue of securities that has been sold out. transactions and 6 managed tranche programs. Total AUM increased to $17.9 billion as of June 30, 2007, as compared to $16.3 billion as of March 31, 2007. The Company's weighted average asset management fee as of June 30, 2007 was 0.23% per annum Per annum Yearly. . During the quarter, the Company realized pre-tax impairment losses related to eight CDO equity positions totaling ($109.4) million. The large impairment losses on six of these eight CDOs are largely due to the deterioration of residential mortgage-backed securities containing second-lien mortgage loans, originated primarily in 2006. Two of these eight CDOs realized impairment losses on account of the increased speed, relative to original projections, at which the underlying mortgages prepaid pre·pay tr.v. pre·paid, pre·pay·ing, pre·pays To pay or pay for beforehand. pre·pay  ment n. . As mentioned earlier in this release, ($46.9) million of these
pre-tax impairments ($30.5 million net of tax) were in excess of the
Company's economic investments. This impairment in excess of the
Company's equity investment ("over-impairment") is a
direct result of the consolidation of CDO assets and liabilities on ACA
Capital's balance sheet in accordance with FASB FASBSee: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). Interpretation No. 46R. As a result of consolidation, the Company records $4.4 billion of assets at fair value related to CDOs and $4.5 billion of related non-recourse debt Non-Recourse Debt A loan that is secured by some sort of collateral, usually property. The issuer can seize the collateral if the borrower defaults. Notes: These types of projects are characterized by high capital expenditures, long loan periods, and uncertain revenue on its balance sheet. Losses in excess of the Company's actual investment will reverse upon the deconsolidation of the CDOs, or alternatively, the CDO's maturity. Subsequent to the end of the quarter, the Company realized a $14.8 million gain on credit protection purchased against two representative market indices, ABX.HE ABX.HE Asset Backed Securities Index - Home Equity .BBB- 2006-1 and ABX.HE.BBB- 2006-2, to moderate the effects of the impairments of its ABS CDO equity investments. Based on the value of the contracts as of June 30, 2007, $11.6 million pre-tax, or $7.5 million after-tax, is included in the Company's net economic income (loss) for the second quarter and six months of 2007. Table 3, below, itemizes the total impairments, net equity exposure and net impairments by transaction during the quarter. [TABLE OMITTED] CDO Asset Management recorded a net loss, net economic loss and base economic loss for the first six months of 2007 of ($56.2) million, ($23.3) million and ($23.3) million, respectively. During the first six months, ACA Capital closed five CDO transactions and three managed tranche programs, adding over $4.4 billion in assets under management ("AUM"). Structured Credit Structured Credit recorded a net loss of ($32.7) million for the second quarter of 2007, and net economic income and base economic income of $11.1 million for the same period. The net loss was a direct result of net unrealized after-tax mark-to-market losses of ($43.9) million on the Company's portfolio of Structured Credit transactions. ACA Capital expects its Structured Credit business to experience periodic volatility on its income statement due to the GAAP accounting requirement (FAS Nos. 133/149) that the Company mark-to-market its Structured Credit transactions. The Company's business strategy is designed to pursue growth in Structured Credit regardless of the changes in the fair values of derivatives required to be recorded under GAAP since it intends to hold each transaction to maturity. As such, unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. and losses will revert re·vert v. 1. To return to a former condition, practice, subject, or belief. 2. To undergo genetic reversion. to zero once a transaction reaches contractual maturity, absent any credit losses. During the quarter, 31 new Structured Credit transactions were closed, and insured credit swap premiums earned for the second quarter of 2007 increased 128% to $22.8 million from $10.0 million for the same period in 2006. The total Structured Credit notional no·tion·al adj. 1. Of, containing, or being a notion; mental or imaginary. 2. Speculative or theoretical. 3. portfolio was $61.0 billion as of June 30, 2007, as compared to $50.2 billion as of March 31, 2007. As of June 30, 2007, the weighted average premium rate on the Company's Structured Credit portfolio was 0.17% per annum. Of the $61.0 billion of notional exposure, over 99.8% of the Company's insured credit swap portfolio was constructed of exposures attaching above the "AAA AAA: see American Automobile Association. (Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. " rated level of subordination. As of June 30, 2007, the Structured Credit business had 31 institutional counterparties. Structured Credit recorded a net loss of ($33.1) million for the first six months of 2007, and net economic income and base economic income of $19.1 million, respectively, for the same period. During the first six months of 2007, 67 new structured credit transactions were closed, and insured credit swap premiums earned increased 114% to $40.3 million from $18.8 million for the same period in 2006. Public Finance Public Finance recorded net income, net economic income and base economic income for the second quarter of 2007 of $3.5 million, $3.4 million and $1.3 million, respectively. Revenues for the period increased to $13.0 million from $11.7 million. Revenues included $4.4 million of refunded premiums for the second quarter of 2007 compared to $3.3 million for the same period in 2006. On a net basis (premiums earned less capitalized expenses and taxes), this refunding activity added $2.1 million to net income for the second quarter of 2007 compared to $1.6 million for the same period in 2006. During the quarter, gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. , which approximate net premiums written, were $15.4 million, an increase from $15.3 million for the same period in 2006. Public Finance recorded net income, net economic income and base economic income for the first six months of 2007 of $6.4 million, $5.7 million and $3.3 million, respectively. Revenues for the period increased to $23.4 million from $19.7 million. Revenues included $5.0 million of refunded premiums for the first six months of 2007 compared to $3.5 million for the same period in 2006. On a net basis (premiums earned less capitalized expenses and taxes), this refunding activity added $2.4 million to net income for the first six months of 2007 compared to $1.7 million for the same period in 2006. During the period, gross premiums written, which approximate net premiums written, were $20.0 million, an increase from $19.4 million for the same period in 2006. Balance Sheet Highlights Total assets as of June 30, 2007 and December 31, 2006 were $6.1 billion and $6.0 billion, respectively. Book value, as measured by stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. , decreased to $326.3 million as of June 30, 2007, from $509.8 million at the end of 2006. Book value per share was $8.92 as of June 30, 2007, versus $13.96 at December 31, 2006. Stockholders' equity, excluding accumulated other comprehensive income In 1997 the Financial Accounting Standards Board issued a Statement on Financial Accounting Standards entitled “Comprehensive Income”. This statement required all income statement items to be reported either as a regular item in the income statement and or a special item as (loss), was $432.9 million as of June 30, 2007, from $513.1 million at the end of 2006. Book value per share, excluding accumulated other comprehensive income (loss), was $11.83 as of June 30, 2007, versus $14.05 at December 31, 2006. The significant decrease in stockholders' equity is a result of the ($163.5) million (($106.3) million net of tax) decline in fair value of fixed maturity securities related to the Company's six consolidated asset-backed CDOs and the pre-tax ($46.9) million (($30.5) million, net of tax) of over-impairments on two of those consolidated CDOs. Stockholders' equity excluding accumulated other comprehensive income (loss) and the aforementioned over-impairments was $463.4 million, or $12.66 per share. Stockholders' equity is also impacted, through retained earnings Retained Earnings The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. , by the cumulative $77.1 million of unrealized pre-tax mark-to-market losses ($50.1 million, net of tax) on the Company's Structured Credit portfolio. Adjusted book value was $921.3 million, or $25.18 per share, as of June 30, 2007, versus $837.5 million, or $22.93 per share at December 31, 2006. See endnote B for the definition of adjusted book value (a non-GAAP measure) and its reconciliation from stockholders' equity. Table 4, below, provides June 30, 2007 and December 31, 2006 stockholders' equity, adjusted book value and the resulting book value and adjusted book value per share information. [TABLE OMITTED] (1) See endnote B for the reconciliation from stockholders' equity to adjusted book value. Statutory Results ACA Capital's financial guaranty insurance subsidiary, ACA Financial Guaranty Corporation ("ACA FG") also announced financial results for the second quarter and six months ended June 30, 2007. Financial information for ACA FG is prepared on a statutory accounting basis. Statutory net income for the second quarter of 2007 was $17.6 million as compared with second quarter 2006 statutory net income of $8.3 million, an increase of 112%. Statutory net income for the first six months of 2007 was $20.4 million as compared with $13.3 million for the same period in 2006, an increase of 53%. Qualified statutory capital, which is the sum of surplus as regards policyholders and contingency reserve, was $406.9 million as of June 30, 2007 an increase of $19.8 million from $387.1 million as of December 31, 2006. Claims paying resources, which adds unearned premiums and the present value of future installment premiums to qualified statutory capital, increased to $1.1 billion as of June 30, 2007 as compared to $882.5 million as of December 31, 2006. Earnings Guidance Based on the second quarter 2007 financial results and the current market environment, ACA Capital has revised its net economic income per share estimates for the full year 2007. The Company now expects to earn net economic income in the range of $1.00 to $1.20 per diluted share. Conference Call ACA Capital will hold a conference call for investors on Wednesday, August 1, 2007 at 8:00 a.m. EDT EDT abbr. Eastern Daylight Time EDT Eastern Daylight Time EDT n abbr (US) (= Eastern Daylight Time) → hora de verano de Nueva York EDT . The conference call will consist of brief comments by Mr. Alan S. Roseman, President and Chief Executive Officer, and Mr. Edward U. Gilpin, Executive Vice President and Chief Financial Officer, followed by a question and answer session with Messrs. Roseman and Gilpin. The dial-in number for the call is 866-356-4279 (domestic) and 617-597-5394 (international). The conference call passcode is 80825592. A live broadcast of the conference call will also be available via ACA Capital's website at www.aca.com. The Company has also prepared a supplemental presentation to assist readers of this press release and conference call participants to understand the information presented in a more detailed basis. The slide presentation is available on ACA Capital's website, under Presentations and Webcasts in the Investor Relations Investor relations The process by which the corporation communicates with its investors. section, and will be referred to during the conference call. Those unable to participate in the call may listen to a replay using the following dial-in numbers 888-286-8010 (domestic) and 617-801-6888 (international), passcode 71238023. A replay of the webcast will also be available on ACA Capital's website approximately two hours after the end of the conference call for one year. The Company will post its current Quarterly Operating Supplement to its website, www.aca.com, today. The Quarterly Operating Supplement contains additional information about results for the period covered in this release. ACA Capital is a holding company that provides asset management services and credit protection products to participants in the global credit derivatives Credit Derivative Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private markets, structured finance capital markets and municipal finance capital markets. ACA Capital's asset management services are provided through its asset management subsidiaries, ACA Management, L.L.C. and ACA Capital Management (U.K.) Pte. Limited, and its credit protection products are provided through its "A" rated financial guaranty insurance subsidiary, ACA Financial Guaranty Corporation. ACA Capital Management (U.K.) Pte. Limited is authorized and regulated by the Financial Services Authority The Financial Services Authority ("FSA") is an independent non-departmental public body and quasi-judicial body that regulates the financial services industry in the United Kingdom. Its main office is based in Canary Wharf, London, with another office in Edinburgh. . ACA Capital's common stock is listed on the New York Stock Exchange New York Stock Exchange (NYSE) World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. under the symbol "ACA". More information can be found at www.aca.com. The information on our website is not included or incorporated by reference into this release. Cautionary Statement Regarding Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. This press release, the slide presentation and the Company's Quarterly Operating Statement operating statement See income statement. contain statements that may be considered "forward-looking statements" under the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. Such statements reflect management's current expectations based on its current views and assumptions regarding future events and economic performance and are subject to risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. For example, the Company's forward looking statements, including its President and Chief Executive Officer's remarks, statements regarding certain business strategies and objectives and projections of revenues and expenses, and ACA Capital's prospects as a whole, could be affected by many events. These events include difficulties with the execution of the Company's business strategy, changes in the economic, credit spread or interest rate environment in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. and overseas, rating actions with respect to the financial strength rating of ACA Financial Guaranty Corporation, prolonged pro·long tr.v. pro·longed, pro·long·ing, pro·longs 1. To lengthen in duration; protract. 2. To lengthen in extent. disruptions of the markets that the Company participates, the failure of the Company to accurately estimate the potential severity of defaults or downgrades in the pool of assets referenced by its insured credit default swaps Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. , decreased demand for the Company's insurance products or asset management services, or increased competition in the Company's markets, loss of key personnel, changes in regulation or tax laws, governmental action, changes in accounting policies or practices, other risks and uncertainties not identified at this time, management's response to these factors, and other risk factors identified in the Company's filings with the Securities and Exchange Commission. The Company cautions that forward-looking statements made by the Company speak only as of the date on which they are made, and, except as required by law, the Company does not undertake any obligation to update or revise such statements if the Company's expectations change or the Company becomes aware that any forward-looking statement is not likely to be achieved. Endnotes: (A) Net economic income and base economic income are not substitutes for net income computed in accordance with GAAP; however, they are useful measures of performance used by ACA Capital's management, Board of Directors, certain research analysts and investors. In managing its business and assessing growth and profitability from a strategic and financial planning perspective, ACA Capital's management and Board of Directors consider GAAP net income results as well as net economic income. ACA Capital believes that net economic income enhances the understanding of its results by highlighting income attributable to the Company's operating performance. However, net economic income is not a measurement of financial performance or liquidity under GAAP. It should not be considered in isolation or as a substitute for net income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with GAAP. Net economic income (loss) is defined as net income excluding the after-tax effects of: 1. Unrealized gains (losses) on derivatives included in: * Net insured credit swap revenue; * Net realized and unrealized gains (losses) on derivative instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. ; and * Other net credit swap revenue; 2. Realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. (losses) on non-CDO investments; 3. The portion of interest expense related to the principal payments on borrowings financed with derivatives; and 4. Net realized losses Realized Loss A loss recognized when assets are sold for a price lower than the original purchase price. Notes: A portion of the realized loss may be applied against a capital gain or realized profit to reduce taxes. related to the impairment of non-recourse CDO assets. Also, included in net economic income (loss) are net recognized gains from credit protection purchased on the ABX indices. This credit protection was purchased to moderate impairments on the Company's ABS CDO equity and is included in the net economic results given the amount of impairments recorded in the second quarter of 2007. Unrealized gains (losses) on derivatives are excluded because (i) they widely vary with changes in the credit market and interest rate environment and are not necessarily indicative of the performance of ACA Capital's underlying businesses and (ii) the Company intends to hold the positions to the derivative contracts' expiration, at which time the mark to market values would revert to zero, to the extent no realized derivative gains or losses had occurred. Realized gains (losses) on non-CDO investments are excluded because the Company's investment strategy is focused on the preservation of capital Preservation of Capital An investment strategy whose primary goal is to prevent the loss of an investment's total value. Notes: For investors using the capital preservation strategy to achieve their goal, they must ensure their portfolio is producing a return that is at and generation of current income as opposed to the generation of trading gains and losses. ACA Capital includes the unrealized gains (losses) on derivatives and investments generated by trading activity, if any. Also excluded is a portion of interest expense on borrowings that were financed with interest rate swaps Interest Rate Swap A deal between banks or companies where borrowers switch floating-rate loans for fixed rate loans in another country. These can be either the same or different currencies. to pay the upfront issuance costs of some of ACA Capital's consolidated CDOs. FAS 133 requires that all payments made under the interest rate swaps, representing both principal and interest, be recorded as interest expense. In order to approximate the economic expense on these borrowings, the portion of interest expense that is excluded is related to what would be principal payments if these borrowings had been financed with debt obligations. Net realized losses related to the impairment of non-recourse CDO assets in excess of the Company's equity investment in the CDO are excluded because they do not represent economic losses to the Company, rather result from the effects of consolidation as required under FIN 46R. In order to assess the period over period income growth on both a consolidated and segment basis, ACA Capital's management, Board of Directors and certain research analysts and investors consider and compare base economic income (loss). Base economic income (loss) excludes from net economic income (loss) the net income (loss) impact of accelerated revenues from premiums earned on guaranteed public finance obligations that have been refunded and any termination gains related to insured credit swaps. [TABLE OMITTED] (B) Adjusted book value ("ABV ABV Above ABV Alcohol By Volume ABV Abuja, Nigeria (airport code) ABV Assault Breacher Vehicle ABV Accredited Business Valuation specialist ABV Auxiliary Building Ventilation ABV Annual Buy Value ABV Air Bleed Valve ") is used by ACA Capital's management, Board of Directors, certain research analysts and investors as a measure of the Company's estimated intrinsic value Intrinsic Value 1. The value of a company or an asset based on an underlying perception of the value. 2. For call options, this is the difference between the underlying stock's price and the strike price. based on its current book of business with no benefit given to ongoing business activity. Management derives adjusted book value by beginning with GAAP stockholders' equity, excluding accumulated other comprehensive income (loss), and adding or subtracting the after-tax value of unearned premiums and credit swap revenues, prepaid reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. premiums, deferred policy acquisition costs, deferred debt issuance costs, the present value of estimated net future installment premiums and credit swap revenues (discounted at 4.9% at June 30, 2007 and 4.7% at December 31, 2006) and the present value of estimated future asset management fees (discounted at 4.9% at June 30, 2007 and 4.7% at December 31, 2006). The definition of ABV used by the Company may differ from definitions of ABV used by other financial guarantors. The adjustments described above will not be realized until future periods and may differ materially from the amounts used in calculating ABV. [TABLE OMITTED] (1) Discounted at 4.9% and 4.7% at June 30, 2007 and December 31, 2006, respectively. Note: Amounts may not foot due to rounding. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] |
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