Assured Guaranty Ltd. Reports Results for Third Quarter 2012
Assured Guaranty Ltd. Reports Results for Third Quarter 2012
Third quarter 2012 operating income1was $166 million, or $0.85 per share
Third quarter 2012 net income was $142 million, or $0.73 per share
Third quarter 2012 new par written was $3.2 billion
HAMILTON, Bermuda--(BUSINESS WIRE)-- Assured Guaranty Ltd. (NYS: AGO) ("AGL" and, together with its subsidiaries, "Assured Guaranty" or the "Company") announced today its financial results for the three-month period ended September 30, 2012 ("third quarter 2012"). The Company reported operating income for third quarter 2012 of $166 million, or $0.85 per diluted share, bringing year-to-date operating income for the nine-month period ended September 30, 2012 ("nine months 2012") to $351 million, or $1.85 per diluted share. This compares with operating income of $38 million, or $0.21 per diluted share, for the three-month period ended September 30, 2011 ("third quarter 2011") and $429 million, or $2.30 per diluted share, for the nine-month period ended September 30, 2011 ("nine months 2011").
Third quarter 2012 net income of $142 million, or $0.73 per diluted share, includes non-economic net fair value losses of $28 million. Third quarter 2011 net income of $761 million, or $4.13 per diluted share, includes non-economic net fair value gains of $751 million. Nine months 2012 net income of $36 million, or $0.19 per diluted share, includes non-economic net fair value losses of $324 million. Nine months 2011 net income of $857 million, or $4.60 per diluted share, includes non-economic net fair value gains of $444 million.
The increase in operating income compared with third quarter 2011 was primarily due to higher refundings and accelerations of net earned premiums, lower loss expense, which was significantly higher in third quarter 2011 due mainly to changes in discount rates, and a lower effective tax rate.
"Our strong earnings and modest loss development during the third quarter attest to our consistent ability to create shareholder and policyholder value, even through extended periods of economic uncertainty," said Dominic Frederico, President and CEO. "Our ability to add value to municipal bonds was evident in both the primary and secondary markets. In the primary market, we guaranteed 197 transactions sold in the quarter. In the secondary market, we insured more par than in any quarter since 2008."
1These are financial measures that are not in accordance with accounting principles generally accepted in the United States of America ("GAAP") ("non-GAAP financial measures"). Please see the "Explanation of Non-GAAP Financial Measures" section of this press release and Table 1 for a reconciliation of net income (loss) to operating income.
Table 1: Reconciliation of Net Income (Loss) to Operating Income(1) | ||||||||
(amounts in millions, except per share amounts) | ||||||||
Quarter Ended September 30, | ||||||||
2012 | 2011 | |||||||
Net income (loss) | $ | 142 | $ | 761 | ||||
Less after-tax adjustments: | ||||||||
Realized gains (losses) on investments | 0 | (13 | ) | |||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (37 | ) | 800 | |||||
Fair value gains (losses) on committed capital securities ("CCS") | (2 | ) | 2 | |||||
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and loss adjustment expense ("LAE") reserves | 4 | (15 | ) | |||||
Effect of consolidating financial guaranty variable interest entities ("FG VIEs") | 11 | (51 | ) | |||||
Operating income | $ | 166 | $ | 38 | ||||
Net income (loss) per diluted share2 | $ | 0.73 | $ | 4.13 | ||||
Operating income per diluted share2 | $ | 0.85 | $ | 0.21 | ||||
Diluted shares outstanding-GAAP | 194.7 | 184.0 | ||||||
Diluted shares outstanding-operating | 194.7 | 184.0 | ||||||
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1. The Company adopted and retrospectively applied new guidance that changed the types and amount of costs that may be deferred. This had a de minimis effect on net income, operating income and income per share for third quarter 2011.
2. Income (loss) per diluted share is calculated by dividing income (loss) by diluted shares outstanding, which excludes the effects of securities that would be antidilutive.
New Business Production | |||||
Table 2: Present Value of New Business Production ("PVP")(1)and Gross Par Written | |||||
(amounts in millions) | |||||
Quarter Ended September 30, | |||||
2012 | 2011 | ||||
Public finance U.S. - Direct | $ | 30 | $ | 40 | |
Structured finance - U.S. | 5 | 11 | |||
Total PVP | $ | 35 | $ | 51 | |
Public finance U.S. - Direct | $ | 3,007 | $ | 4,342 | |
Structured finance - U.S. | 182 | 266 | |||
Gross par written | $ | 3,189 | $ | 4,608 | |
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1. PVP is a non-GAAP financial measure. See the "Explanation of Non-GAAP Financial Measures" section of this press release.
Despite the challenging interest rate and market environment, the Company maintained average new business credit ratings in the A category. Pricing varies due to the mix of business; however, premium rates in third quarter 2012 were consistent by sector with rates in third quarter 2011.
Third Quarter 2012 Operating Income Highlights
Table 3 highlights the components of Assured Guaranty's operating income and provides reconciliations of GAAP income statements as reported to non-GAAP operating income results.
Table 3: Reconciliation of GAAP | |||||||||||||||||||||||
to Non-GAAP Income Results | |||||||||||||||||||||||
(amounts in millions, except per share amounts) | |||||||||||||||||||||||
Quarter Ended September 30, 2012 | Quarter Ended September 30, 2011 | ||||||||||||||||||||||
GAAP Income Statement As Reported | Less: Operating Income Adjustments | Non-GAAP Operating Income Results | GAAP Income Statement As Reported | Less: Operating Income Adjustments | Non-GAAP Operating Income Results | ||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Net earned premiums | $ | 222 | $ | (17 | ) | $ | 239 | $ | 211 | $ | (20 | ) | $ | 231 | |||||||||
Net investment income | 102 | 4 | 98 | 95 | (4 | ) | 99 | ||||||||||||||||
Net realized investment gains (losses) | 2 | 0 | 2 | (11 | ) | (12 | ) | 1 | |||||||||||||||
Net change in fair value of credit derivatives | (36 | ) | (69 | ) | 33 | 1,156 | 1,114 | 42 | |||||||||||||||
Fair value gains (losses) on CCS | (2 | ) | (2 | ) | — | 2 | 2 | — | |||||||||||||||
Fair value gains (losses) on FG VIEs | 38 | 38 | — | (99 | ) | (99 | ) | — | |||||||||||||||
Other income | 16 | 1 | 15 | (9 | ) | (21 | ) | 12 | |||||||||||||||
Total revenues | 342 | (45 | ) | 387 | 1,345 | 960 | 385 | ||||||||||||||||
Expenses: | |||||||||||||||||||||||
Loss expense: | |||||||||||||||||||||||
Financial guaranty insurance | 90 | 1 | 89 | 215 | (38 | ) | 253 | ||||||||||||||||
Credit derivatives | — | (11 | ) | 11 | — | (1 | ) | 1 | |||||||||||||||
Amortization of deferred acquisition costs | 4 | — | 4 | 4 | — | 4 | |||||||||||||||||
Interest expense | 21 | — | 21 | 25 | — | 25 | |||||||||||||||||
Other operating expenses | 48 | — | 48 | 46 | — | 46 | |||||||||||||||||
Total expenses | 163 | (10 | ) | 173 | 290 | (39 | ) | 329 | |||||||||||||||
Income (loss) before income taxes | 179 | (35 | ) | 214 | 1,055 | 999 | 56 | ||||||||||||||||
Provision (benefit) for income taxes | 37 | (11 | ) | 48 | 294 | 276 | 18 | ||||||||||||||||
Income (loss) | $ | 142 | $ | (24 | ) | $ | 166 | $ | 761 | $ | 723 | $ | 38 | ||||||||||
Diluted shares | 194.7 | 194.7 | 184.0 | 184.0 | |||||||||||||||||||
Earnings per diluted share | $ | 0.73 | $ | 0.85 | $ | 4.13 | $ | 0.21 | |||||||||||||||
Where significant changes occurred, components of third quarter 2012 operating income are compared with the same item in third quarter 2011.
Net earned premiums: Net earned premiums in third quarter 2012 operating income increased to $239 million, from $231 million in third quarter 2011, due primarily to higher refundings, accelerations and terminations, which generated $73 million in third quarter 2012, compared with $27 million in third quarter 2011. Approximately $22 million in net earned premiums in third quarter 2012 was due to accelerations and terminations. Refundings are generally higher in low interest rate environments as debt issuers refinance at more attractive rates, which results in the acceleration of premium earnings on insured transactions. This increase was offset, in part, by lower scheduled net earned premiums, which were higher in the prior year, reflecting a larger portfolio of in-force business at that time, particularly in the structured finance portfolio.
Credit derivative revenues: Credit derivative revenues included in third quarter 2012 operating income were $33 million. The comparable third quarter 2011 credit derivative revenues were $42 million, which was based on a larger portfolio of structured finance business at that time.
Loss expense: The Company's third quarter 2012 loss expense was $100 million ($66 million after tax, or $0.34 per diluted share), compared with $254 million ($191 million after tax, or $1.04 per diluted share) in third quarter 2011. The decrease was primarily due to lower loss expense in the U.S. residential mortgage-backed securities ("RMBS") sector, offset in part by higher international public finance losses attributable to Spanish sub-sovereign exposures. Third quarter 2011 loss expense was significantly affected by declining interest rates, which increased loss expense. See also "Economic Loss Development."
Income taxes: The third quarter 2012 effective tax rate on operating income was 22.5%, compared with 32.4% in third quarter 2011, due to the high percentage of operating income generated by Assured Guaranty Re Ltd. in third quarter 2012, compared with operating losses in third quarter 2011.
Economic Loss Development
Economic loss development, which measures (i) the change in total expected loss to be paid due to changes in assumptions based on observed market trends; (ii) changes in discount rates; (iii) accretion of discount on expected loss to be paid; and (iv) the effects of loss mitigation efforts, is the principal measure that Assured Guaranty uses to evaluate the loss experience in its insured portfolio. Expected loss to be paid includes all transactions insured by the Company, whether written in financial guaranty or credit derivative form, regardless of the accounting model prescribed under GAAP. Table 4 provides a roll forward of net expected loss to be paid.
Table 4: Roll Forward of Net Expected Loss to be Paid on | ||||||||||||||||
Insurance Contracts and Credit Derivatives | ||||||||||||||||
(amounts in millions) | ||||||||||||||||
Insurance Contracts and Credit Derivatives | Net Expected Loss to be Paid as of June 30, 2012 | Economic Loss Development During Third Quarter 20121 | Loss (Paid) Recovered Third Quarter 2012 | Net Expected Loss to be Paid as of September 30, 2012 | ||||||||||||
Before representations and warranties ("R&W"): | ||||||||||||||||
U.S. RMBS | $ | 1,925 | $ | 34 | $ | (255 | ) | $ | 1,704 | |||||||
Other | 731 | 42 | (349 | ) | 424 | |||||||||||
Total before R&W | 2,656 | 76 | (604 | ) | 2,128 | |||||||||||
R&W for U.S. RMBS | (1,454 | ) | (12 | ) | 95 | (1,371 | ) | |||||||||
Total, net of R&W | 1,202 | 64 | (509 | ) | 757 | |||||||||||
Other | (4 | ) | — | — | (4 | ) | ||||||||||
Total | $ | 1,198 | $ | 64 | $ | (509 | ) | $ | 753 | |||||||
1. Includes $4 million of foreign exchange remeasurement. | ||||||||||||||||
Total economic loss development was $64 million ($41 million after tax) in third quarter 2012, which was primarily driven by the establishment of losses on Spanish exposures, higher expected LAE as the Company continues to pursue loss mitigation strategies, and modest development in RMBS exposures. The Company reflected a slightly higher probability of loss on certain Spanish sub-sovereign exposures as a result of including scenarios reflecting recent downgrades in Spain's sovereign and sub-sovereign ratings. As of September 30, 2012, no claims have been paid on any Spanish exposures.
Book Value Measurements
The primary drivers of the year-to-date increase in shareholders' equity, operating shareholders' equity and adjusted book value were the issuance of common shares as described below, and the reassumption of previously ceded unearned premium reserve and related commutation gains, both of which were offset in part by loss development, dividends and share repurchases. Shareholders' equity was also affected by net fair value losses on credit derivatives and gains related to FG VIEs, which do not affect operating shareholders' equity or adjusted book value. The present value of new business development, as well as the additional future earnings from the reassumptions of previously ceded books of business in the first quarter 2012, increased adjusted book value, which includes the estimated future earnings on the Company's in-force book of business.
Per share amounts were affected by an additional 13.4 million common shares outstanding following the issuance of common shares to settle the forward purchase contracts that constituted a portion of the Company's 2009 equity units. The purchase price was $12.85 per share, for a total of $173 million. This was offset in part by the repurchase of 2.1 million common shares at an average price of $11.76 per share, or $24 million.
Table 5: Reconciliation of Shareholders' Equity to | ||||||||
Operating Shareholders' Equity and Adjusted Book Value(1) | ||||||||
(amounts in millions, except per share amounts) | ||||||||
As of | ||||||||
September 30, 2012 | December 31, 2011 | |||||||
Shareholders' equity | $ | 4,952 | $ | 4,652 | ||||
Less after-tax adjustments: | ||||||||
Effect of consolidating FG VIEs | (335 | ) | (405 | ) | ||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (901 | ) | (498 | ) | ||||
Fair value gains (losses) on CCS | 27 | 35 | ||||||
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | 496 | 319 | ||||||
Operating shareholders' equity | 5,665 | 5,201 | ||||||
After-tax adjustments: | ||||||||
