Assured Guaranty Ltd. Reports Results for First Quarter 2013
Assured Guaranty Ltd. Reports Results for First Quarter 2013
First quarter 2013 operating income1was $260 million, or $1.34 per share, a new record for quarterly operating income. In first quarter 2012, operating income was $71 million, or $0.38 per share.
First quarter 2013 net loss was $144 million, or $0.74 per share, compared with a first quarter 2012 net loss of $483 million, or $2.65 per share. Net loss was primarily due to non-economic fair value losses on credit derivatives (which are expected to reverse by contract maturity).
Settlement agreement with UBS resulted in a $142 million ($93 million after tax) net economic benefit, of which $109 million ($71 million after tax) was recorded in operating income, and $33 million ($22 million after tax) will reduce future loss expense.
Common share repurchases resulted in per share increases of $0.27 to adjusted book value1, $0.11 to operating shareholders' equity1and $0.04 to GAAP book value.
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 March 31, 2013 ("first quarter 2013").
The Company reported operating income for first quarter 2013 of $260 million, or $1.34 per share. This represents a 266% increase compared with the three-month period ended March 31, 2012 ("first quarter 2012"), due primarily to the $71 million ($0.36 per share) benefit attributable to the agreement entered into with UBS Real Estate Securities Inc. and affiliates ("UBS") that resolves Assured Guaranty's claims related to specified residential mortgage-backed transactions, and to higher premium accelerations.
First quarter 2013 net loss was $144 million, or $0.74 per share, compared with first quarter 2012 net loss of $483 million, or $2.65 per share. The main drivers of the decrease in GAAP net loss were the benefit attributable to the UBS agreement and the lower non-economic net unrealized fair value losses, which result primarily from the narrowing of credit spreads of AGL's insurance subsidiaries. Fair value adjustments in excess of credit impairment are deemed non-economic, and therefore are expected to reverse by contract maturity.
"Our record-high operating income demonstrates the success of our loss mitigation strategies and effective portfolio management," said Dominic Frederico, President and CEO. "Additionally, we continue to execute our capital management strategy and, as of May 6, had repurchased over 5.6 million shares."
1 These 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" and the tables reconciling the non-GAAP measures to GAAP measures in this press release.
Table 1: Reconciliation of Net Income (Loss) to Operating Income
(amounts in millions, except per share amounts)
Quarter Ended March 31, | ||||||||
2013 | 2012 | |||||||
Net income (loss) | $ | (144 | ) | $ | (483 | ) | ||
Less after-tax adjustments: | ||||||||
Realized gains (losses) on investments | 19 | (1 | ) | |||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (434 | ) | (517 | ) | ||||
Fair value gains (losses) on committed capital securities ("CCS") | (6 | ) | (9 | ) | ||||
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and loss adjustment expense ("LAE") reserves | (11 | ) | 7 | |||||
Effect of consolidating financial guaranty variable interest entities ("FG VIEs") | 28 | (34 | ) | |||||
Operating income | $ | 260 | $ | 71 | ||||
Net income (loss) per diluted share | $ | (0.74 | ) | $ | (2.65 | ) | ||
Operating income per diluted share | $ | 1.34 | $ | 0.38 | ||||
Diluted shares outstanding-GAAP | 193.9 | 182.4 | ||||||
Diluted shares outstanding-operating | 194.6 | 186.2 | ||||||
New Business Production
Table 2: Present Value of New Business Production ("PVP")1
and Gross Par Written (amounts in millions)
Quarter Ended March 31, | |||||||
2013 | 2012 | ||||||
PVP | |||||||
Public finance - U.S. | |||||||
Direct | $ | 16 | $ | 30 | |||
Assumed from Radian Asset Assurance Inc. ("Radian") | — | 22 | |||||
Structured finance - U.S. | 2 | 4 | |||||
Total PVP | $ | 18 | $ | 56 | |||
Gross par written: | |||||||
Public finance - U.S. | |||||||
Direct | $ | 1,580 | $ | 3,046 | |||
Assumed from Radian | — | 1,797 | |||||
Structured finance - U.S. | 14 | 38 | |||||
Gross par written | $ | 1,594 | $ | 4,881 | |||
1. PVP is a non-GAAP financial measure. See the "Explanation of Non-GAAP Financial Measures" section of this press release.
Direct public finance PVP declined in first quarter 2013 from its first quarter 2012 level primarily because of the low interest rate environment, tight credit spreads and the uncertainty of the Company's financial strength rating following Moody's downgrade. PVP for first quarter 2012 included $22 million from public finance business assumed from Radian. Despite the challenging interest rate and market environment, the Company maintained average new business credit ratings in the single-A category. In addition, premium rates in first quarter 2013 for municipal bond insurance were consistent with 2012 rates.
First Quarter 2013 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 March 31, 2013 | Quarter Ended March 31, 2012 | |||||||||||||||||||||||
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 | $ | 248 | $ | (18 | ) | $ | 266 | $ | 194 | $ | (17 | ) | $ | 211 | ||||||||||
Net investment income | 94 | 0 | 94 | 98 | 2 | 96 | ||||||||||||||||||
Net realized investment gains (losses) | 28 | 29 | (1 | ) | 1 | (1 | ) | 2 | ||||||||||||||||
Net change in fair value of credit derivatives | (592 | ) | (620 | ) | 28 | (691 | ) | (720 | ) | 29 | ||||||||||||||
Fair value gains (losses) on CCS | (10 | ) | (10 | ) | — | (14 | ) | (14 | ) | — | ||||||||||||||
Fair value gains (losses) on FG VIEs | 70 | 70 | — | (41 | ) | (41 | ) | — | ||||||||||||||||
Other income | (14 | ) | (17 | ) | 3 | 91 | 3 | 88 | ||||||||||||||||
Total revenues | (176 | ) | (566 | ) | 390 | (362 | ) | (788 | ) | 426 | ||||||||||||||
Expenses: | ||||||||||||||||||||||||
Loss expense: | ||||||||||||||||||||||||
Financial guaranty insurance | (48 | ) | 7 | (55 | ) | 242 | (7 | ) | 249 | |||||||||||||||
Credit derivatives | — | (10 | ) | 10 | — | 2 | (2 | ) | ||||||||||||||||
Amortization of deferred acquisition costs | 3 | — | 3 | 5 | — | 5 | ||||||||||||||||||
Interest expense | 21 | — | 21 | 25 | — | 25 | ||||||||||||||||||
Other operating expenses | 60 | — | 60 | 62 | — | 62 | ||||||||||||||||||
Total expenses | 36 | (3 | ) | 39 | 334 | (5 | ) | 339 | ||||||||||||||||
Income (loss) before income taxes | (212 | ) | (563 | ) | 351 | (696 | ) | (783 | ) | 87 | ||||||||||||||
Provision (benefit) for income taxes | (68 | ) | (159 | ) | 91 | (213 | ) | (229 | ) | 16 | ||||||||||||||
Income (loss) | $ | (144 | ) | $ | (404 | ) | $ | 260 | $ | (483 | ) | $ | (554 | ) | $ | 71 | ||||||||
Diluted shares | 193.9 | 194.6 | 182.4 | 186.2 | ||||||||||||||||||||
Earnings per share, diluted | $ | (0.74 | ) | $ | 1.34 | $ | (2.65 | ) | $ | 0.38 | ||||||||||||||
Components of first quarter 2013 operating income are compared with the same items in first quarter 2012.
Net earned premiums: Net earned premiums on an operating income basis increased to $266 million in first quarter 2013 from $211 million in first quarter 2012, due primarily to higher accelerations. Premium accelerations were $113 million in first quarter 2013, compared with $37 million in first quarter 2012. Approximately $61 million of the premium accelerations in first quarter 2013 resulted from terminations of exposure, and the remainder was attributable to refundings of insured municipal bond transactions.
Other income: There were no reinsurance commutations in first quarter 2013. Other income in first quarter 2012 included $83 million of reinsurance commutations gains related to reassumptions of previously ceded books of business.
Loss expense: First quarter 2013 loss expense was a benefit of $45 million ($25 million after tax, or $0.13 per share), compared with loss expense of $247 million ($173 million after tax, or $0.93 per share) in first quarter 2012. The decrease was primarily due to the UBS agreement recognized in first quarter 2013 and to higher loss expense related to Greek sovereign exposures in first quarter 2012.
Income taxes: First quarter 2013 effective tax rate on operating income was 25.8%, compared with 17.9% in first quarter 2012, due to higher pretax operating income in U.S. taxable jurisdictions.
Economic Loss Development
Economic loss development represents the change in net expected loss to be paid attributable to all factors other than loss and LAE payments. It includes the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. Economic loss development 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 insurance 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)
Quarter Ended March 31, 2013
Insurance Contracts and Credit Derivatives | Net Expected Loss to be Paid as of December 31, 2012 | Economic Loss Development During First Quarter 2013 | Loss (Paid) Recovered First Quarter 2013 | Net Expected Loss to be Paid as of March 31, 2013 | ||||||||||||
Before recoveries for breaches of representations and warranties ("R&W"): | ||||||||||||||||
U.S. RMBS | $ | 1,652 | $ | 57 | $ | (154 | ) | $ | 1,555 | |||||||
Other | 398 | 12 | (27 | ) | 383 | |||||||||||
Total before recoveries for R&W breaches | 2,050 | 69 | (181 | ) | 1,938 | |||||||||||
R&W recoveries for U.S. RMBS | (1,370 | ) | (157 | ) | 89 | (1,438 | ) | |||||||||
Total, net of R&W recoveries | 680 | (88 | ) | (92 | ) | 500 | ||||||||||
Other | (3 | ) | (10 | ) | — | (13 | ) | |||||||||
Total | $ | 677 | $ | (98 | ) | $ | (92 | ) | $ | 487 | ||||||
Total economic loss development was a favorable development of $98 million ($64 million after tax) in first quarter 2013 due primarily to the UBS agreement, which increased the benefit for R&W recoveries by $142 million ($93 million after tax).
Book Value Measurements and Share Repurchase Program
Adjusted book value ("ABV") per share increased due to the UBS agreement and the reduction in common shares outstanding at the end of the period due to the share repurchases. Operating shareholders' equity per share was also positively affected by the UBS agreement and share repurchases, as well as premium accelerations. The Company had repurchased 1.9 million shares as of March 31, 2013 at an average price of $20.46 per share. Through May 6, 2013, the Company had repurchased 5.6 million shares at an average price of $20.29 per share. On May 8, 2013, the Company's board of directors authorized an additional $115 million of repurchases of the Company's common shares, bringing the 2013 authorization to $315 million.
Table 5: Reconciliation of Shareholders' Equity to
Operating Shareholders' Equity and Adjusted Book Value1
(amounts in millions, except per share amounts)
As of | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
Shareholders' equity | $ | 4,724 | $ | 4,994 | ||||
Less after-tax adjustments: | ||||||||
Effect of consolidating FG VIEs | (322 | ) | (348 | ) | ||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (1,447 | ) | (988 | ) | ||||
Fair value gains (losses) on CCS | 17 | |||||||
