ACA Capital Reports Financial and Economic Results for the Third Quarter and Nine Months Ended September 30, 2007.* Net economic income of $5.0 million and $7.5 million for the third quarter and nine months ended September 30, 2007 * ACA ACA - Application Control Architecture Financial Guaranty's qualified statutory capital increases to $425.5 million and claims paying resources exceed $1.1 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 third quarter 2007 net loss of ($1.0) billion, or ($29.42) per diluted share. The net loss was primarily a result of ($1.7) billion, or ($1.1) billion after tax, of net unrealized mark-to-market losses on the Company's portfolio of Structured Credit transactions. These unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. were a direct result of the ongoing turmoil in the 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. market and the resulting depressed market Depressed market Market in which supply overwhelms demand, leading to weak and lower prices. valuations. For the nine months ended September 30, 2007, ACA Capital reported a net loss of ($1.1) billion, or ($31.05) 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). Net economic income for the third quarter of 2007 was $5.0 million, or $0.14 per diluted share as compared with third quarter 2006 net economic income of $14.8 million or $0.49 per diluted share. Net economic income for the first nine months of 2007 was $7.5 million, or $0.21 per diluted share as compared with $40.8 million or $1.35 per diluted share for the same period in 2006. Net economic income for the third quarter and nine months ended September 30, 2007 decreased as compared to the same periods in 2006 primarily on account of asset impairments in the Company's 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 Asset Management business and unrealized losses in its credit fund. Base economic income for the third quarter of 2007 was $4.6 million, or $0.13 per diluted share as compared with third quarter 2006 base economic income of $12.9 million or $0.43 per diluted share. The base economic income for the first nine months of 2007 was $4.6 million, or $0.13 per diluted share as compared with base economic income of $35.9 million or $1.19 per diluted share for the same period in 2006. Alan S. Roseman, ACA Capital's President and Chief Executive Officer, said "ACA returned to profitability on a net economic basis in the third quarter. The extremely large net unrealized mark on our Structured Credit portfolio and the resulting volatility in our GAAP reported results detract from detract from verb 1. lessen, reduce, diminish, lower, take away from, derogate, devaluate << OPPOSITE enhance verb 2. ACA's positive economic performance and the underlying financial strength 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. . Given that our Structured Credit transactions were underwritten with significant cushions above the initial "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. " rating and even when taking into account the recent extensive ratings downgrades on mortgage backed securities, we remain comfortable with our risk portfolio and we believe we have adequate capital to maintain our "A" rating, which was confirmed by Standard and Poor's Noun 1. Standard and Poor's - a broadly based stock market index Standard and Poor's Index in its October 29, 2007 Industry Report Card. With our rating so confirmed, we are not exposed to liquidity calls based on the mark-to-market positions of our Structured Credit exposures. Further, ACA's net unrealized mark is based entirely on dealer quotes and/or modeled using full quoted market spreads on the underlying assets, which we believe reflects market consensus fair value." During the quarter, ACA Capital Holdings purchased 2.1 million shares or $14.9 million of its outstanding shares of common stock in open market transactions. The stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. program began on July 27, 2007 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 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: [TABLE OMITTED] Also, included in net economic income are net 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. 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. The Company realized this gain by terminating these contracts in third quarter of 2007. This credit protection was purchased to moderate the effects of impairments on the Company's ABS CDO equity recorded in the second quarter of 2007. The total realized gain on this credit protection was $9.6 million, after tax. The realized gain included in net economic income for the third quarter is $2.1 million. This is in addition to the $7.5 million included in net economic income for the previous quarter. ACA Capital believes that net economic income 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 basis. Base Economic Income 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. Base economic income excludes from net economic income the net income 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] [TABLE OMITTED] Segment Highlights Table 2, below, provides a comparison of earnings by business segment for the periods indicated. [TABLE OMITTED] [TABLE OMITTED] CDO Asset Management CDO Asset Management recorded net income, a net economic loss and a base economic loss for the third quarter of 2007 of $23.6 million, ($4.9) million and ($4.9) million, respectively. During the quarter, ACA Capital closed one mezzanine ABS CDO. As of September 30, 2007, the Company managed CDO assets in 23 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 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. programs. Total 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. ") increased to $18.0 billion as of September 30, 2007, as compared to $17.9 billion as of June 30, 2007. The Company's weighted average asset management fee as of September 30, 2007 was 0.23% per annum Per annum Yearly. . Net economic income for the quarter was negative on account of $12.7 million of 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. inclusive of inclusive of prep. Taking into consideration or account; including. other than temporary impairments. During the quarter, the Company sold a portion of its equity investment in three ABS CDOs. As a result of these sales, the Company was able to deconsolidate these transactions, which were previously consolidated on its balance sheet in accordance with FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). Interpretation No. 46R. As a result, ACA Capital deconsolidated approximately $1.0 billion in assets and liabilities that were previously recorded on its balance sheet. Also as a result of deconsolidation, $39.6 million, or $25.7 after tax, was realized as a gain on assets that were previously over-impaired in the second quarter of 2007. During the quarter, the Company realized a $3.2 million gain, or $2.1 million after tax, 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. This gain is included in net economic income and is in addition to the $11.6 million, or $7.5 million after tax gain that was included in the Company's net economic income for the second quarter of 2007. CDO Asset Management recorded a net loss, net economic loss and base economic loss for the first nine months of 2007 of ($32.7) million, ($28.3) million and ($28.3) million, respectively. During the first nine months, ACA Capital closed six CDO transactions and three managed tranche programs, adding over $4.7 billion in AUM. Structured Credit Structured Credit recorded a net loss, net economic income and base economic income for the third quarter of 2007 of ($1.1) billion, $6.7 million and $6.7 million, respectively. The net loss in the quarter was a direct result of unrealized mark-to-market losses of ($1.7) billion 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 fact that GAAP accounting (FAS Nos. 133/149) requires the Company to mark-to-market its Structured Credit transactions. The Company's business strategy is designed to pursue growth on the basis of the fundamental credit strength of its transactions, despite 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 to zero once a transaction reaches contractual maturity, absent any credit losses. Table 3, below, provides a summary of the Company's Structured Credit portfolio valuation as of September 30, 2007. [TABLE OMITTED] During the quarter, 14 new Structured Credit transactions closed, and insured credit swap premiums earned for the third quarter of 2007 increased 118% to $27.3 million from $12.5 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 $69.1 billion as of September 30, 2007, as compared to $61.0 billion as of June 30, 2007. As of September 30, 2007, the weighted average premium rate on the Company's Structured Credit portfolio was 0.17% per annum. Based on current external ratings, over 99% of the Company's insured credit swap portfolio is constructed of exposures attaching above the "AAA" rated level of subordination. These ratings are actively under review, both internally and externally. As of September 30, 2007, the Structured Credit business had 31 institutional 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. . Structured Credit recorded a net loss, net economic income and base economic for the first nine months of 2007 of ($1.1) billion, $25.9 million and $25.9 million, respectively. During the first nine months of 2007, 81 new structured credit transactions were closed, and insured credit swap premiums earned increased 116% to $67.7 million from $31.3 million for the same period in 2006. Public Finance Public Finance recorded net income, net economic income and base economic income for the third quarter of 2007 of $2.2 million, $2.7 million and $2.3 million, respectively. During the third quarter, the Company's direct new issue activity slowed, however, over $700 million of high-grade municipal par outstanding was assumed via a facultative facultative /fac·ul·ta·tive/ (fak´ul-ta?tiv) not obligatory; pertaining to the ability to adjust to particular circumstances or to assume a particular role. fac·ul·ta·tive adj. 1. 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. agreement. Revenues for the period were $9.2 million as compared to $12.3 million for the same period in 2006. Revenues included $0.9 million of refunded premiums for the third quarter of 2007 compared to $3.8 million for the same period in 2006. On a net basis (premiums earned less capitalized expenses and taxes), this refunding activity added $0.4 million to net income for the third quarter of 2007 compared to $1.9 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. were $7.0 million, an increase from $5.3 million for the same period in 2006. Public Finance recorded net income, net economic income and base economic income for the first nine months of 2007 of $8.6 million, $8.5 million and $5.6 million, respectively. Public Finance insured par activity increased nearly three-fold for the first nine months of 2007 when compared to the same period in 2006. Revenues for the period were $32.6 million as compared to $32.0 million for the same period in 2006. Revenues included $5.9 million of refunded premiums for the first nine months of 2007 compared to $7.3 million for the same period in 2006. On a net basis (premiums earned less capitalized expenses and taxes), this refunding activity added $2.9 million to net income for the first nine months of 2007 compared to $3.6 million for the same period in 2006. During the period, gross premiums written were $27.0 million, an increase from $24.7 million for the same period in 2006. Balance Sheet Highlights Total assets as of September 30, 2007 and December 31, 2006 were $5.0 billion and $6.0 billion, respectively. The decrease in total assets was driven by the deconsolidation of three ABS CDOs, which were previously consolidated on the Company's balance sheet in accordance with FASB Interpretation No. 46R, and the decline in fair value of the remaining CDO assets. 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 ($883.3) million as of September 30, 2007, from $509.8 million at the end of 2006. Book value per share was ($24.98) as of September 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 ($622.1) million as of September 30, 2007, from $513.1 million at the end of 2006. Book value per share, excluding accumulated other comprehensive income (loss), was ($17.60) as of September 30, 2007, versus $14.05 at December 31, 2006. The significant decrease in stockholders' equity during 2007 is a result of the impact, 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. , of the cumulative ($1.7) billion, or ($1.1) billion net of tax, of unrealized mark-to-market losses on the Company's Structured Credit portfolio and the ($396.8) million, or ($257.9) million after tax, decline in other comprehensive income which was principally due to the decline in the fair value of fixed maturity securities related to our consolidated asset-backed CDOs. Economic stockholders' equity, or stockholders' equity excluding accumulated other comprehensive income and cumulative marks on the Structured Credit portfolio, was $500.9 million, or $14.17 per share. Adjusted book value was $1,003.2 million, or $28.37 per share, as of September 30, 2007, versus $830.5 million, or $22.74 per share at December 31, 2006. See endnote See footnote. B for the definition of adjusted book value (a non-GAAP measure) and its reconciliation from stockholders' equity. Table 4, below, provides September 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] [TABLE OMITTED] Statutory Results ACA Capital's financial guaranty insurance subsidiary, ACA Financial Guaranty Corporation ("ACA FG") also announced financial results for the third quarter and nine months ended September 30, 2007. Financial information for ACA FG is prepared on a statutory accounting basis. Statutory net income for the third quarter of 2007 was $19.7 million as compared with third quarter 2006 statutory net income of $11.8 million, an increase of 66.9%. Statutory net income for the first nine months of 2007 was $40.1 million as compared with $25.1 million for the same period in 2006, an increase of 59.8%. Qualified statutory capital, which is the sum of surplus as regards policyholders and contingency reserve, was $425.5 million as of September 30, 2007, an increase of $38.4 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 September 30, 2007 as compared to $882.5 million as of December 31, 2006. Conference Call ACA Capital will hold a conference call for investors on Thursday, November 8, 2007 at 8:00 a.m. EST EST electroshock therapy. EST abbr. electroshock therapy . 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 866-510-0712 (domestic) and 617-597-5380 (international). The conference call passcode is 84595033. A live broadcast of the conference call will also be available via ACA Capital's website at www.aca.com. 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 48621927. 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. Also, the Company will post and maintain a current list of its top public finance exposures on its website. 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 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: 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 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 in which 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 (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 (gains) losses related to the 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. 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 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 and third quarters 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] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] |
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