Assured Guaranty Ltd. Reports Results for Second Quarter 2013
Assured Guaranty Ltd. Reports Results for Second Quarter 2013
Second quarter 2013 operating income1was $98 million, or $0.52 per share, compared with second quarter 2012 operating income of $114 million, or $0.61 per share. Six months 2013 operating income was $358 million, or $1.87 per share, compared with six months 2012 operating income of $185 million, or $0.99 per share.
Second quarter 2013 net income was $219 million, or $1.16 per share, compared with second quarter 2012 net income of $377 million, or $2.01 per share. Six months 2013 net income was $75 million, or $0.39 per share, compared with six months 2012 net loss of $106 million, or $0.58 per share.
Common share repurchases resulted in per share increases of $1.65 to adjusted book value1, $0.66 to operating shareholders' equity1, and $0.20 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 June 30, 2013 ("second quarter 2013").
The Company reported operating income for second quarter 2013 of $98million, or $0.52 per share, bringing operating income for the six-month period ended June 30, 2013 ("six months 2013") to $358 million, or $1.87 per share. This compares to the three-month period ended June 30, 2012 ("second quarter 2012") operating income of $114 million or $0.61 per share, and for the six-month period ended June 30, 2012 ("six months 2012") operating income of $185 million or $0.99 per share. This represents a decrease in operating income of 14% as compared to second quarter 2012, and an increase of 94% as compared to six months 2012. Six months 2013 operating income benefited from settlement agreements with providers of representations and warranties, premium accelerations and terminations, and lower loss expense than in the prior year. In second quarter 2013, the decline in operating income was primarily due to lower net earned premiums. Common share repurchases increased operating income per share by $0.02 for second quarter 2013 and by $0.04 for six months 2013.
Second quarter 2013 net income was $219million, or $1.16per share, compared with second quarter 2012 net income of $377million, or $2.01per share. The main drivers of the decrease in second quarter 2013 net income are lower non-economic net unrealized fair value gains and lower net earned premiums, which were partially offset by lower loss expense. Six months 2013 net income was $75 million, or $0.39 per share, compared with six months 2012 net loss of $106 million, or $0.58 per share. The increase in net income for six months 2013 is primarily due to lower loss expense.
"We continued to produce significant operating earnings in a challenging environment, once again demonstrating the effectiveness of our alternative strategies, as well as the strength of Assured Guaranty's well-established business model," said Dominic Frederico, President and CEO. "We are optimistic about our prospects in a higher interest rate environment and as the market gets to know our new, 100% U.S. municipal insurance platform, Municipal Assurance Corp. We also look forward to growth in our international business, where we closed two important UK infrastructure transactions in July."
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
(in millions, except per share amounts)
Quarter Ended June 30, | ||||||||
2013 | 2012 | |||||||
Net income (loss) | $ | 219 | $ | 377 | ||||
Less after-tax adjustments: | ||||||||
Realized gains (losses) on investments | 2 | (4 | ) | |||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 28 | 160 | ||||||
Fair value gains (losses) on committed capital securities ("CCS") | (2 | ) | 3 | |||||
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and loss adjustment expense ("LAE") reserves | (3 | ) | 3 | |||||
Effect of consolidating financial guaranty variable interest entities ("FG VIEs") | 96 | 101 | ||||||
Operating income | $ | 98 | $ | 114 | ||||
Net income (loss) per diluted share | $ | 1.16 | $ | 2.01 | ||||
Operating income per diluted share | $ | 0.52 | $ | 0.61 | ||||
Diluted shares outstanding - GAAP | 188.8 | 187.0 | ||||||
Diluted shares outstanding - operating | 188.8 | 187.0 | ||||||
Ending shares outstanding | 182.9 | 194.0 | ||||||
New Business Production
Table 2: Present Value of New Business Production ("PVP")1
and Gross Par Written
(in millions)
Quarter Ended June 30, | |||||||||||
2013 | 2012 | ||||||||||
PVP | |||||||||||
Public finance - U.S. | $ | 15 | $ | 47 | |||||||
Public finance - non U.S. | — | 1 | |||||||||
Structured finance - U.S. | 1 | 2 | |||||||||
Total PVP | $ | 16 | $ | 50 | |||||||
Gross par written: | |||||||||||
Public finance - U.S. | $ | 2,276 | $ | 4,670 | |||||||
Public finance - non U.S. | — | 35 | |||||||||
Structured finance - U.S. | — | — | |||||||||
Gross par written | $ | 2,276 | $ | 4,705 | |||||||
__________________
1 PVP is a non-GAAP financial measure. See the "Explanation of Non-GAAP Financial Measures" section of this press release.
Public finance PVP declined in second quarter 2013 from its second quarter 2012 level primarily due to the continued low interest rate environment and tight credit spreads, and the decline in new issuance volume. Despite the challenging interest rate and market environment, the Company maintained average new business credit ratings in the single-A category.
Second 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
(in millions, except per share amounts)
Quarter Ended June 30, 2013 | Quarter Ended June 30, 2012 | |||||||||||||||||||||||
GAAP Income Statement As Reported | Less: Operating Income Adjustments | Non-GAAP Operating Income Results | GAAP Income Reported | Less: Operating Income Adjustments | Non-GAAP Operating Income Results | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Net earned premiums | $ | 163 | $ | (15 | ) | $ | 178 | $ | 219 | $ | (16 | ) | $ | 235 | ||||||||||
Net investment income | 93 | (1 | ) | 94 | 101 | 4 | 97 | |||||||||||||||||
Net realized investment gains (losses) | 2 | 3 | (1 | ) | (3 | ) | (5 | ) | 2 | |||||||||||||||
Net change in fair value of credit derivatives | 74 | 34 | 40 | 261 | 227 | 34 | ||||||||||||||||||
Fair value gains (losses) on CCS | (3 | ) | (3 | ) | — | 4 | 4 | — | ||||||||||||||||
Fair value gains (losses) on FG VIEs | 143 | 143 | — | 168 | 168 | — | ||||||||||||||||||
Other income | (7 | ) | (5 | ) | (2 | ) | 5 | 6 | (1 | ) | ||||||||||||||
Total revenues | 465 | 156 | 309 | 755 | 388 | 367 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Loss expense: | ||||||||||||||||||||||||
Financial guaranty insurance | 62 | (22 | ) | 84 | 118 | (4 | ) | 122 | ||||||||||||||||
Credit derivatives | — | (12 | ) | 12 | — | 0 | 0 | |||||||||||||||||
Amortization of deferred acquisition costs | 1 | — | 1 | 5 | — | 5 | ||||||||||||||||||
Interest expense | 21 | — | 21 | 25 | — | 25 | ||||||||||||||||||
Other operating expenses | 52 | — | 52 | 53 | — | 53 | ||||||||||||||||||
Total expenses | 136 | (34 | ) | 170 | 201 | (4 | ) | 205 | ||||||||||||||||
Income (loss) before income taxes | 329 | 190 | 139 | 554 | 392 | 162 | ||||||||||||||||||
Provision (benefit) for income taxes | 110 | 69 | 41 | 177 | 129 | 48 | ||||||||||||||||||
Income (loss) | $ | 219 | $ | 121 | $ | 98 | $ | 377 | $ | 263 | $ | 114 | ||||||||||||
Diluted shares | 188.8 | 188.8 | 187.0 | 187.0 | ||||||||||||||||||||
Earnings per share, diluted | $ | 1.16 | $ | 0.52 | $ | 2.01 | $ | 0.61 | ||||||||||||||||
Components of second quarter 2013 operating income are compared with the same items in second quarter 2012.
Net earned premiums: Net earned premiums on an operating income basis decreased to $178 million in second quarter 2013 from $235 million in second quarter 2012, primarily due to the scheduled amortization of the insurance portfolio and lower premium accelerations. Premium accelerations were $46 million in second quarter 2013, compared with $68 million in second quarter 2012. Approximately $17 million of the premium accelerations in second quarter 2013 resulted from negotiated terminations of exposure, and the remainder was attributable to refundings of insured municipal bond transactions.
Credit derivative revenues: Credit derivative revenues on an operating income basis increased to $40 million in second quarter 2013 from $34 million in second quarter 2012. The increase was primarily due to higher negotiated terminations resulting in accelerations of credit derivative revenue of $14 million in second quarter 2013 compared with $1 million in second quarter 2012, which was partially offset by lower scheduled revenues.
Loss expense: Second quarter 2013 loss expense was $96 million ($80 million after tax, or $0.42 per share), compared with loss expense of $122 million ($97 million after tax, or $0.52 per share) in second quarter 2012. The decrease was primarily due to lower U.S. residential mortgage-backed securities ("RMBS") and other structured finance losses, partially offset by higher public finance losses. See Economic Loss Development below.
Income taxes: Second quarter 2013 effective tax rate on operating income was 29.4%, compared with 29.9% in second quarter 2012. The effective tax rate was relatively high in second quarters 2013 and 2012 because of operating losses in Assured Guaranty Re Ltd. in both periods.
Economic Loss Development
Economic loss development represents the change in net expected loss to be paid attributable to 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
Quarter Ended June 30, 2013
(in millions)
Insurance Contracts and Credit Derivatives | Net Expected Loss to be Paid as of March 31, 2013 | Economic Loss Development During Second Quarter 2013 | Loss (Paid) Recovered Second Quarter 2013 | Net Expected Loss to be Paid as of June 30, 2013 | ||||||||||||
Before recoveries for breaches of representations and warranties ("R&W"): | ||||||||||||||||
U.S. RMBS | $ | 1,555 | $ | 70 | $ | (212 | ) | $ | 1,413 | |||||||
Other | 383 | 68 | (123 | ) | 328 | |||||||||||
Total before recoveries for R&W breaches | 1,938 | 138 | (335 | ) | 1,741 | |||||||||||
R&W recoveries for U.S. RMBS | (1,438 | ) | (51 | ) | 525 | (964 | ) | |||||||||
Total, net of R&W recoveries | 500 | 87 | 190 | 777 | ||||||||||||
Other | (13 | ) | — | 10 | (3 | ) | ||||||||||
Total | $ | 487 | $ | 87 | $ | 200 | $ | 774 | ||||||||
Total economic loss development was $87 million ($79 million after tax) in second quarter 2013 due primarily to higher U.S. public finance losses as a result of the Company's exposure to Detroit pension obligation and general obligation bonds, and higher U.S. RMBS losses, partially offset by an increase in projected R&W recoveries due to a settlement agreement, and the increase in risk free rates used for discounting.
Book Value Measurements and Share Repurchase Program
Adjusted book value ("ABV") per share as at June 30, 2013 increased compared with December 31, 2012 due primarily to the reduction in common shares outstanding at the end of the period as a result of share repurchases. Operating shareholders' equity per share was also positively affected by the share repurchases, and positive operating income for six months 2013. Shareholders' equity per share declined due primarily to the increase in Treasury yields in second quarter 2013, which resulted in a decline in the unrealized gains on the investment portfolio.
As of June 30, 2013, out of the total authorized amount of $315 million, the Company had repurchased a total of 11.5 million shares for approximately $244 million at an average price of $21.26 per share between March 5, 2013 and June 30, 2013.
Table 5: Reconciliation of Shareholders' Equity to
Operating Shareholders' Equity and Adjusted Book Value1
(in millions, except per share amounts)
