10-Q 1 y42049e10-q.txt CGA GROUP, LTD. 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-49632 CGA GROUP, LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(441) 296-3165 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 28,005,648 AS OF NOVEMBER 10, 2000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 CGA GROUP, LTD. ------------------------ TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION

3 [THIS PAGE INTENTIONALLY LEFT BLANK] 4 CGA GROUP, LTD. CONSOLIDATED BALANCE SHEETS (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 1 5 CGA GROUP, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 2 6 CGA GROUP, LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 3 7 CGA GROUP, LTD. CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 8 CGA GROUP, LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 5 9 CGA GROUP, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN U.S. DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 6 10 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (EXPRESSED IN U.S. DOLLARS) 1. BUSINESS AND ORGANIZATION CGA Group, Ltd., a holding company, was incorporated in Bermuda on June 21, 1996. CGA Group has two wholly-owned subsidiaries. Commercial Guaranty Assurance, Ltd. was incorporated in Bermuda on October 16, 1996. Commercial Guaranty Assurance is licensed as a class 3 insurer under the Insurance Act 1978 (Bermuda), amendments thereto and related regulations ("the Act"), which authorizes it to carry on insurance business of all classes in or from within Bermuda, subject to its compliance with the solvency margin, liquidity ratio and other requirements imposed on it by the Act. Commercial Guaranty Assurance issues financial guaranty insurance policies, which are the functional equivalent of direct-pay letters of credit, to insure payment of interest, principal and other amounts payable in respect of notes, securities, and other financial obligations. Commercial Guaranty Assurance's "claims paying ability", also referred to as its financial strength, is rated "Triple-A" or the equivalent by Fitch, Inc. a nationally recognized statistical rating organization with U.S. and worldwide operations, Dominion Bond Ratings Service and Canadian Bond Ratings Service Inc., two Canadian rating agencies, and Japan Rating and Investment Information, Inc., the largest credit rating agency in Japan, in each case the highest rating category assigned by each of these rating agencies. On June 2, 2000, Fitch placed Commercial Guaranty Assurance's "Triple-A" rating on general review, on the basis that Commercial Guaranty Assurance does not meet Fitch's minimum capital requirements of approximately $350 million of equity capital and $150 million in "soft" capital for a "Triple-A" financial strength rating. CGA Group has engaged the investment banking firm of Donaldson, Lufkin & Jenrette Securities Corporation to act as its exclusive financial advisor for the purpose of raising additional capital sufficient to meet Fitch's requirements. As of September 30, 2000, no additional capital had been raised. At this time, no assurances can be given as to whether CGA Group will be successful in raising any additional capital, or whether it will be able to raise sufficient capital to meet Fitch's requirements. CGA Investment Management, Inc. was incorporated in the state of Delaware in July 1996. CGA Investment Management is registered as an investment advisor with the United States Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended. CGA Investment Management provides investment management and financial advisory services primarily to specialized investment vehicles and for the U.S. and international structured finance markets. CGA Investment Management and its employees are based in New York City, New York. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Rules and Regulations of the Securities and Exchange Commission and accordingly, do not include all of the information and disclosures required by generally accepted accounting principles. These financial statements include the accounts of CGA Group, Ltd. and its subsidiaries, and should be read in conjunction with the consolidated financial statements, and related notes thereto, included in CGA Group's 1999 Annual Report on Form 10-K. The accompanying financial statements have not been audited by independent auditors in accordance with generally accepted auditing standards. However, in the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 11 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. DETAIL OF OTHER ASSETS Other assets are comprised of the following at September 30, 2000 and December 31, 1999:

3. LOSSES AND LOSS EXPENSES The reserve for losses and loss adjustment expenses is established in an amount equal to Commercial Guaranty Assurance's estimate of general and case basis reserves and unallocated losses including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and loss adjustment expenses. The general reserve for losses and loss adjustment expenses established by management is based upon loss factors determined from an independent rating agency study of bond defaults. Management factors are applied to net par amount outstanding of the insured obligations. The reserve for losses and loss adjustment expenses is comprised of the following at September 30, 2000 and December 31, 1999:

The activity in the reserve for losses and loss adjustment expenses is as follows:

8 12 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On March 15, 2000, Commercial Guaranty Assurance made a claim payment in respect of asset-backed securities originated and serviced by Commercial Financial Services of $28.5 million, of which $21.8 was recovered from reinsurance. On April 18, 2000, Commercial Guaranty Assurance made an additional claim payment of $4.2 million, of which $3.2 million was recovered from reinsurance. At September 30, 2000, Commercial Guaranty Assurance's gross remaining potential exposure to these securities is approximately $34 million, of which $26 million is covered by reinsurance, resulting in a net remaining exposure of $8 million. This amount is not included in case basis reserves at this time. In April 2000, Commercial Guaranty Assurance elected to pay a $2.6 million claim in connection with a "Triple-B" rated tranche of a home equity loan securitization. Based on its ongoing surveillance, Commercial Guaranty Assurance concluded that this security was no longer investment grade risk and consequently, as insurer of the subsidiary's liabilities, Commercial Guaranty Assurance directed CGA Investment Management, as investment advisor to the subsidiary, to sell the security. The sale resulted in a shortfall of $2.6 million, which was included in the case basis reserve at March 31, 2000. The claim payment of $2.6 million was made on April 27, 2000. As a result of this claim, a clause in the contract is triggered whereby Commercial Guaranty Assurance will be entitled to share in the return on the underlying assets to partially mitigate this loss which is settled monthly as subrogation. In the quarter ended September 30, 2000, approximately $82,000 was received under this clause, and $0.2 million has been received in total. As the subrogation amounts to be received cannot be estimated with any degree of certainty, management is currently recording these recoveries as reported. 4. LOSS PER COMMON SHARE The following table sets forth the computation of basic and diluted loss per share for the nine months ended September 30, 2000 and 1999:

The total number of common share equivalents not included in the calculation of diluted loss per share was 46,738,516 because they were anti-dilutive. These common share equivalents are comprised of 44,971,346 shares of Series C Cumulative Convertible Preferred Stock, 847,729 sponsor warrants, 649,441 employee stock options, and warrants sold with the Series A Preferred Stock convertible into 270,000 common shares. 9 13 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INSURANCE IN FORCE The following table shows the net par outstanding of insured obligations, net of reinsurance, at September 30, 2000 and December 31, 1999, by asset type:

The following table presents the credit ratings of the above assets, based on net par outstanding at September 30, 2000 and December 31, 1999:

North America comprises 93% of the insured obligations' geographic exposure. Other countries include Turkey, Korea, Japan, Greece, Poland, Portugal and Venezuela, each of which comprises approximately 2% or less of the geographic exposure. 6. SEGMENT REPORTING CGA Group has two reportable segments: Commercial Guaranty Assurance and CGA Investment Management (see description of each segment in Note 1). CGA Group's management has identified the operating segments on the basis that they are separate entities with each entity carrying on a different type of business. Commercial Guaranty Assurance provides financial guaranty insurance, and CGA Investment Management provides investment management services. The tables below present financial information for each of the operating segments. 10 14 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of and for the nine months ended September 30, 2000:

--------------- (a) The "other" segment is comprised of CGA Group Ltd., the holding company, which does not meet any of the quantitative thresholds for determining a reportable segment. (b) Intersegment revenues are comprised of interest on intercompany loans and surveillance fees. 11 15 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of and for the nine months ended September 30, 1999:

The following are reconciliations of reportable segment revenues, expenses and assets to CGA Group's consolidated totals in the financial statements. Depreciation expense is included in operating expenses.

12 16 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of and for the three months ended September 30, 2000:

As of and for the three months ended September 30, 1999:

7. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), subsequently amended by SFAS No. 138, which the company is required to adopt effective January 1, 2001. SFAS 133 requires all derivatives to be recognized on the balance sheet as either assets or liabilities and measured at fair value. Upon implementation, credit default swaps will be valued at fair value in accordance with this statement. The impact of SFAS 133 on the company's financial statements will depend on a variety of factors, including 13 17 CGA GROUP, LTD. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) future interpretative guidance from the FASB, and the volume of credit default swaps written by Commercial Guaranty Assurance. Management is currently evaluating those factors and their impact. 8. SUBSEQUENT EVENTS On October 31, 2000, Standard & Poor's, a major rating agency, announced that it had acquired Canadian Bond Rating Service, and that it would work to "harmonize" outstanding ratings from Canadian Bond Rating Service with those of Standard & Poor's. Although Canadian Bond Rating Service currently rates Commercial Guaranty Assurance's claims paying ability as "A++" (triple-A), Commercial Guaranty Assurance is not rated by Standard & Poor's. It is currently unclear what rating would be assigned to Commercial Guaranty Assurance by Standard & Poor's as a result of this harmonization process, or what action Commercial Guaranty Assurance might take in connection therewith. It is possible that the rating assigned by Standard & Poor's to Commercial Guaranty Assurance will be less than "Triple-A". It is also possible that Commercial Guaranty Assurance will request that Canadian Bond Rating Service withdraw its rating of Commercial Guaranty Assurance's claims paying ability. Although the results of either of these actions cannot be predicted with certainty, it is possible that a downgrade of Commercial Guaranty Assurance or a withdrawal of its rating by Canadian Bond Ratings Service/Standard & Poor's will adversely affect Commercial Guaranty Assurance's financial guaranty business and its ability to write further business, especially with respect to Canadian securitizations and transactions. 14 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following is a discussion of CGA Group's results of operations, financial condition, liquidity and capital resources as of and for the three months and nine months ended September 30, 2000. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in CGA Group's 1999 Annual Report on Form 10-K. GENERAL CGA Group, Ltd., a holding company, was incorporated in Bermuda in June, 1996. CGA Group has two wholly-owned subsidiaries. Commercial Guaranty Assurance, Ltd., was incorporated in Bermuda in October, 1996. Commercial Guaranty Assurance is licensed as a class 3 insurer under the Insurance Act 1978 (Bermuda), amendments thereto and related regulations (the "Act"), which authorizes it to carry on insurance business of all classes in or from within Bermuda, subject to its compliance with the solvency margin, liquidity ratio and other requirements imposed on it by the Act. Commercial Guaranty Assurance issues financial guaranty insurance policies, which are the functional equivalent of direct-pay letters of credit, to insure payment of interest, principal and other amounts payable in respect of notes, securities, and other financial obligations. Commercial Guaranty Assurance's "claims paying ability", also referred to as its financial strength, is rated "Triple-A" or the equivalent by Fitch, a nationally recognized statistical rating organization with U.S. and worldwide operations, Dominion Bond Ratings Service and Canadian Bond Ratings Service Inc, two Canadian rating agencies, and Japan Rating and Investment Information, Inc., the largest credit rating agency in Japan, in each case the highest rating category assigned by each of these rating agencies. Commercial Guaranty Assurance's claims-paying ability had previously been rated "Triple A" by Duff & Phelps Credit Rating Agency. In April 2000, Fitch acquired and subsequently merged with Duff & Phelps, with Fitch as the surviving company. On June 2, 2000, Fitch placed Commercial Guaranty Assurance's "Triple-A" rating on general review, on the basis that Commercial Guaranty Assurance does not meet Fitch's minimum capital requirements of approximately $350 million of equity capital and $150 million in "soft" capital for a "Triple-A" financial strength rating. CGA Group has engaged the investment banking firm of Donaldson, Lufkin & Jenrette Securities Corporation to act as its exclusive financial advisor for the purpose of raising additional capital sufficient to meet Fitch's requirements. As of September 30, 2000, no additional capital had been raised. At this time, no assurances can be given as to whether CGA Group will be successful in raising any additional capital, or whether it will be able to raise sufficient capital to meet Fitch's requirements. CGA Investment Management, Inc. was incorporated in Delaware, U.S.A. in July 1996. CGA Investment Management is registered as an investment advisor with the United States Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended. CGA Investment Management provides investment management and financial advisory services primarily to specialized investment vehicles and for the U.S. and international structured finance markets. CGA Group and its subsidiaries were inactive until June 17, 1997, on which date CGA Group's private placement offering was completed and CGA Group was recapitalized with (a) two classes of preferred stock totaling $105 million, (b) common stock totaling $45.5 million and (c) conditional commitments to purchase $60 million of additional preferred stock. On March 31, 1999, CGA Group sold 43,997,863 shares of its Series C preferred stock to existing shareholders for an aggregate sales price of approximately $51 million. Concurrent with the sale of the Series C preferred stock, all the outstanding shares of Series B preferred stock were converted to shares of common stock. On April 26, 1999, CGA Group sold 973,483 shares of Series C preferred stock to employees of CGA Group and its subsidiaries for an aggregate sales price of approximately $1.2 million. 15 19 RESULTS OF OPERATIONS Total revenues for the quarter ended September 30, 2000 were $5.7 million, of which $3.5 million was from financial guaranty insurance premiums, $0.6 million was from investment management and advisory fees, and $2.3 million was from investment income, less $0.7 million from net realized losses on the sale of investments. Total revenues for the quarter ended September 30, 1999 were $5.1 million, of which $2.3 million was from financial guaranty insurance premiums, $0.5 million was from investment management and advisory fees, and $2.4 million was from investment income, less $0.1 million from net realized losses on the sale of investments. Total revenues for the nine months ended September 30, 2000 were $17.2 million, compared to $17.4 million for the nine months ended September 30, 1999. The $0.2 million decrease is primarily attributable to the $1.6 million of realized losses incurred on the sale of investments during the nine months ended September 30, 2000. Commercial Guaranty Assurance's revenue growth has slowed as a result of its "Triple A" rating being under review by Fitch. Commercial Guaranty Assurance has limited its efforts to write new insurance policies within certain lines of business until the capital raising and rating review process is complete. Premiums Net premiums earned in the quarter ended September 30, 2000 were derived from $3.3 million of gross premiums written, of which $0.1 million were ceded under reinsurance agreements. Net premiums earned in the quarter ended September 30, 1999 were derived from $3.3 million of gross premiums written, of which $1.1 million were ceded under reinsurance agreements. The $1.0 million increase in net premiums written during the three months ended September 30, 2000 compared to September 30, 1999 resulted from the decrease in ceded premiums as well as net insurance in force increasing from $2.0 billion at September 30, 1999 to $2.3 billion at September 30, 2000, offset by a 30.5% premium discount provided to three subsidiaries of St. George Holdings, Ltd. This premium discount totaled $0.5 million for the quarter ended September 30, 2000. The discount was provided to assist clients which are continuing to resolve liquidity issues that arose during the fourth quarter of 1998. Ceded premiums for the three months ended September 30, 2000 were $0.1 million, compared to $1.1 million for the three months ended September 30, 1999. The decrease of approximately $1.0 million is a result of a $0.9 million charge during the quarter ended September 30, 1999, which represented the recognition of a portion of the prepaid reinsurance premium related to the Commercial Financial Services securities. As a result of a claim payment in September 1999 relating to the Commercial Financial Services securities of approximately $45.1 million by Commercial Guaranty Assurance's reinsurer, the reinsured exposure decreased from $126.4 million to $33.2 million, thereby requiring recognition of the $0.9 million charge. Commercial Guaranty Assurance paid an up-front premium of $1.3 million for the reinsurance in October 1998. Insurance in force The amount of Commercial Guaranty Assurance's insured portfolio was $2.3 billion net par as of September 30, 2000. The weighted average term of the insured securities at September 30, 2000 is 16 20 approximately 7.6 years. The following table shows the net par insured obligations at September 30, 2000 and December 31, 1999, by asset type:

The following table presents the credit ratings of the above assets, as assigned by one or more nationally recognized credit rating agencies, based on net par outstanding at September 30, 2000 and December 31, 1999:

Insurance in force decreased by $389.2 million during the third quarter of 2000 primarily as a result of a resecuritization by clients of Commercial Guaranty Assurance. The resecuritization resulted in the net sale of $334 million of assets that had been held within investment vehicles whose credit facilities were insured by Commercial Guaranty Assurance Investment income Net investment income was $2.3 million for the quarter ended September 30, 2000 and $2.4 million for the same period in 1999. Net investment income was $6.9 million for the nine months ended September 30, 2000 and $6.4 million for the same period in 1999. The value of investments and cash equivalents at September 30, 2000 was $151 million, compared to $145 million at September 30, 1999. The average yield to maturity at September 30, 2000 on the investment portfolio was 6.7%, compared with an average yield to maturity of 6.5% as of September 30, 1999. Unrealized losses on the investment portfolio as of September 30, 2000 were $2.8 million, compared to $6.5 million of unrealized losses as of December 31, 1999. During the nine months ended September 30, 2000, several securities were sold which resulted in approximately $1.6 million of unrealized losses at December 31, 1999 being realized during the period. Yields on U.S. Treasuries with comparative maturities decreased by approximately 30 basis points during the quarter ended September 30, 2000, which resulted in the reduction of unrealized losses. 17 21 Management fees Management fees earned for the quarter ended September 30, 2000 were $0.6 million, compared with the same period in 1999 of $0.5 million. At September 30, 2000 the par value of CGA Investment Management's assets under management was $3.0 billion compared with $2.0 billion at September 30, 1999. The increase in management fees attributable to the increase in assets under management is offset by the discounts given to the St. George subsidiaries. Operating expenses Operating expenses for the quarter ended September 30, 2000 were $3.2 million, compared to $3.4 million for the quarter ended September 30, 1999. Operating expenses for the nine months ended September 30, 2000 were $10.2 million, compared with $9.9 million for the same period in 1999. These costs are primarily personnel, legal, and administrative. Losses and loss adjustment expenses As of September 30, 2000, cumulative claim payments made in respect of the securities originated and serviced by Commercial Financial Services total $150.7 million, of which $115.2 million was covered by reinsurance. At September 30, 2000, Commercial Guaranty Assurance's gross remaining exposure to these securities is approximately $34 million, of which $26 million is covered by reinsurance, resulting in a net remaining exposure of $8 million. In April 2000, Commercial Guaranty Assurance elected to pay a $2.6 million claim in connection with a "Triple-B" rated tranche of a home equity loan securitization owned by a subsidiary of St. George Holdings, Ltd. Based on its ongoing surveillance, Commercial Guaranty Assurance concluded that this security was no longer investment grade risk and consequently, as insurer of the subsidiary's liabilities, Commercial Guaranty Assurance directed CGA Investment Management, as investment advisor to the subsidiary, to sell the security. The sale resulted in a shortfall of $2.6 million, which was included in the case basis reserve at March 31, 2000. The claim payment of $2.6 million was made on April 27, 2000. As a result of this claim, a clause in the contract is triggered whereby Commercial Guaranty Assurance will be entitled to a share in the return on the underlying assets to partially mitigate this loss which is settled monthly as subrogation. In the quarter ended September 30, 2000, approximately $83,000 was received under this clause, and $0.2 million has been received in total. As the subrogation amounts to be received cannot be estimated with any degree of certainty, management is currently recording these recoveries as reported. The balance of Commercial Guaranty Assurance's case basis reserves is approximately $0.3 million at September 30, 2000, which represents the balance of expected loss adjustment expenses relating to the Commercial Financial Services securities. Preferred dividends For the quarter ended September 30, 2000, the pay-in-kind dividends on preferred stock and accretion on preferred stock totaled $3.4 million, compared to $3.0 million for the quarter ended September 30, 1999. SUMMARY OF OPERATING SEGMENTS CGA Group has two reportable segments, Commercial Guaranty Assurance and CGA Investment Management. Commercial Guaranty Assurance issues financial guaranty insurance policies and CGA 18 22 Investment Management provides investment management and advisory services. The tables below present selected financial information for each of the operating segments: As of and for the nine months ended September 30, 2000:

--------------- (a) The "other" segment is comprised of CGA Group, Ltd., the holding company, which does not meet any of the quantitative thresholds for determining a reportable segment. (b) Intersegment revenues are comprised of interest on intercompany loans and surveillance fees. 19 23 As of and for the nine months ended September 30, 1999:

LIQUIDITY AND CAPITAL RESOURCES Commercial Guaranty Assurance's investment portfolio, which is managed by Alliance Capital Management Corporation, is available to fund the liquidity needs of Commercial Guaranty Assurance and to provide intercompany loans to CGA Group. These funds are invested in foreign corporate and government debt securities which are rated "Double-A" or higher by a nationally recognized rating agency and are denominated in U.S. dollars. The portfolio maintains a weighted average duration of two to five years. As of September 30, 2000, the duration of the portfolio was 3.2 years. The investment portfolio had a return of 3.14% for the quarter ended September 30, 2000, while the Merrill Lynch Eurodollar High Quality 3-5 year Index, against which CGA Group's investment portfolio is measured, returned 3.25%. CGA Group does not expect to pay cash dividends to its shareholders. Commercial Guaranty Assurance's Board of Directors has passed a resolution that Commercial Guaranty Assurance will not declare or pay cash dividends during its first five years of operations. After such five-year period, which ends in June 2002, Commercial Guaranty Assurance intends to comply with dividend restrictions, if any, imposed by Fitch, subject to covenants contained in the subscription agreements for the various classes of CGA Group's stock. In addition, Commercial Guaranty Assurance's dividend payments are subject to certain limitations under Bermudian insurance regulations that require minimum solvency margins and liquidity ratios. CGA Investment Management required additional funding for operations from CGA Group during the quarter ended September 30, 2000 totaling $4.45 million. Intercompany loans between CGA Group and CGA Investment Management bear interest at a rate of 6% per annum with interest paid annually. CGA Investment Management is expected to require additional funding in 2000 while it continues to build its assets under management to generate sufficient fee income to cover its operations. On a consolidated basis, CGA Group used $6.9 million of cash from operating activities during the nine months ended September 30, 2000, compared to using $21.4 million for the nine months ended September 30, 1999. Cash flows from operations are affected by claim payments, which due to the nature of CGA Group's 20 24 operations, may comprise large loss payments on a limited number of claims and therefore can fluctuate significantly from period to period. CGA Group used $2.0 million of net cash in investing activities during the nine months ended September 30, 2000, compared to $26.2 million in the first nine months of 1999. In March 1999, CGA Group sold Series C Preferred Stock for net proceeds of approximately $50 million which were invested in fixed maturity securities. During the nine months ended September 30, 1999, Commercial Guaranty Assurance paid claims in respect of Commercial Financial Services in the amount of $27.9 million, which necessitated the sale of fixed maturity securities. Commercial Guaranty Assurance has a $20 million excess of loss reinsurance facility agreement and may also arrange reinsurance on an as needed basis to manage its exposure. CGA Group also has commitments which expire June 17, 2002, from certain institutional shareholders to purchase an aggregate of $60 million of Series B preferred stock which would pay quarterly dividends in kind at 7% per annum. Should those commitments be called upon, the proceeds would likely be used to increase the capital of Commercial Guaranty Assurance. The commitments must be funded in the event that Fitch notifies CGA Group at least 45 days prior to June 17, 2002 that Commercial Guaranty Assurance's rating will otherwise be downgraded below a "Triple-A" rating. On June 2, 2000 Fitch announced that it was placing Commercial Guaranty Assurance's "Triple-A" rating on general review, on the basis that Commercial Guaranty Assurance does not meet Fitch's minimum capital requirements of approximately $350 million of equity capital and $150 million in "soft" capital for a "Triple-A" financial strength rating. CGA Group has engaged the investment banking firm of Donaldson, Lufkin & Jenrette Securities Corporation to act as its exclusive financial advisor for the purpose of raising additional capital sufficient to meet Fitch's requirements. As of September 30, 2000, no such additional capital had been raised. At this time, no assurances can be given as to whether CGA Group will be successful in raising any additional capital, or whether it will be able to raise sufficient capital to meet Fitch's requirements. At September 30, 2000, Commercial Guaranty Assurance's claims paying resources were $231.4 million, compared to $227.8 million at September 30, 1999. On October 31, 2000, Standard & Poor's, a major rating agency, announced that it had acquired Canadian Bond Rating Service, and that it would work to "harmonize" outstanding ratings from Canadian Bond Rating Service with those of Standard & Poor's. Although Canadian Bond Rating Service currently rates Commercial Guaranty Assurance's claims paying ability as "A++" (triple-A), Commercial Guaranty Assurance is not rated by Standard & Poor's. It is currently unclear what rating would be assigned to Commercial Guaranty Assurance by Standard & Poor's as a result of this harmonization process, or what action Commercial Guaranty Assurance might take in connection therewith. It is possible that the rating assigned by Standard & Poor's to Commercial Guaranty Assurance will be less than "Triple-A". It is also possible that Commercial Guaranty Assurance will request that Canadian Bond Rating Service withdraw its rating of Commercial Guaranty Assurance's claims paying ability. Although the results of either of these actions cannot be predicted with certainty, it is possible that a downgrade of Commercial Guaranty Assurance or a withdrawal of its rating by Canadian Bond Ratings Service/Standard & Poor's will adversely affect Commercial Guaranty Assurance's financial guaranty business and its ability to write further business, especially with respect to Canadian securitizations and transactions. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), subsequently amended by SFAS No. 138, which CGA Group is required to adopt effective January 1, 2001. SFAS 133 requires all derivatives to be recognized on the balance sheet as either assets or liabilities and measured at fair value. Upon implementation, credit default swaps will be valued at fair value in accordance with this statement. The impact of SFAS 133 on CGA Group's financial statements will depend on a variety of factors, including future interpretative guidance from the FASB, and the volume of credit default swaps written by Commercial Guaranty Assurance. Management is currently evaluating those factors and their impact. 21 25 FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report on Form 10-Q or any other written or oral statements made by or on behalf of CGA Group may include forward-looking statements which reflect CGA Group's current views with respect to future events and financial performance. The forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail herein and in other documents filed by CGA Group with the Securities and Exchange Commission) include, but are not limited to, (i) financial difficulties encountered by an insured of CGA Group's insurance company subsidiary, (ii) uncertainties relating to government and regulatory policies (such as subjecting the company and/or its subsidiaries to insurance regulation or taxation in additional jurisdictions), (iii) the legal environment, (iv) the uncertainties of the reserving process, (v) the risks relating to the claims-paying ability rating of CGA Group's insurer subsidiary, (vi) loss of the services of any of CGA Group's executive officers, (vii) changing rates of inflation and other economic conditions (viii) ability to collect reinsurance recoverables, (ix) developments in global financial markets which could affect CGA Group's investment portfolio, and (x) risks associated with the development of new products and services. The words "believe", "anticipate", "considered to be", "project", "plan", "expect", "intend", "will likely result" or "will continue" and similar expressions identify forward-looking statements, whether as a result of new information, future events or otherwise. 22 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this Report. (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the three months ended September 30, 2000. II-1 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CGA GROUP, LTD. Registrant /s/ JAMES R. REINHART -------------------------------------- JAMES R. REINHART CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) Date: November 14, 2000 II-2 28 INDEX TO EXHIBITS

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CGA GROUP LTD 10-Q