1. PVP is a non-GAAP financial measure. See the “Explanation of Non-GAAP Financial Measures” section of this press release.
Despite record-low bond yields on new issuances, direct U.S. public finance PVP and par written increased in second quarter 2012 compared with second quarter 2011. Penetration in the single-A target market was 29% of transactions sold and 10% of par. This is a strong result considering the low interest rate environment and continued uncertainty over the financial strength ratings of Assured Guaranty. Pricing varies due to the mix of business; however, premium rates in second quarter 2012 were consistent by sector with rates in second quarter 2011. The volume of structured finance business varies significantly from period to period and no new structured finance transactions were insured in second quarter 2012.
Second Quarter 2012 Operating Income Highlights
Table 3 highlights the components of Assured Guaranty’s operating income and provides reconciliations of reported GAAP net income to non-GAAP operating income.
|Table 3: Reconciliation of GAAP Income as Reported|
|to Non-GAAP Operating Income Results|
|(amounts in millions, except per share amounts)|
|Quarter Ended June 30, 2012||Quarter Ended June 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|
|Net earned premiums||$||219.3||$||(15.5||)||$||234.8||$||230.0||$||(18.3||)||$||248.3|
|Net investment income||101.6||3.8||97.8||102.6||(0.4||)||103.0|
|Net realized investment gains (losses)||(3.1||)||(5.4||)||2.3||(5.1||)||(5.1||)||—|
|Net change in fair value of credit derivatives||260.7||226.5||34.2||(64.8||)||(113.2||)||48.4|
|Fair value gains (losses) on CCS||4.3||4.3||—||0.6||0.6||—|
|Fair value gains (losses) on FG VIEs||172.4||172.4||—||(174.3||)||(174.3||)||—|
|Financial guaranty insurance||122.5||0.5||122.0||123.9||(16.9||)||140.8|
|Amortization of deferred acquisition costs||4.5||—||4.5||5.8||—||5.8|
|Other operating expenses||53.5||—||53.5||53.2||—||53.2|
|Income (loss) before income taxes||553.6||391.0||162.6||(91.3||)||(272.4||)||181.1|
|Provision (benefit) for income taxes||177.1||128.5||48.6||(48.2||)||(85.9||)||37.7|
|Earnings per diluted share||$||2.01||$||0.61||$||(0.23||)||$||0.76|
- Net earned premiums: Net earned premiums included in second quarter 2012 operating income were $234.8 million. The comparable second quarter 2011 net earned premiums were $248.3 million, which reflected a larger portfolio of in-force business at that time, particularly in the structured finance portfolio. Net earned premiums from refundings were $68.2 million in second quarter 2012, of which $22.0 million related to the termination of certain international infrastructure transactions. 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. Net earned premiums from refundings were $21.0 million in second quarter 2011.
- Credit derivative revenues: Credit derivative revenues included in second quarter 2012 operating income were $34.2 million. The comparable second quarter 2011 credit derivative revenues were $48.4 million, which was based on a larger portfolio of structured finance business at that time and included $6.1 million in accelerations due to terminations in second quarter 2011.
- Loss expense: The Company’s second quarter 2012 loss expense was $121.4 million ($97.1 million after tax, or $0.52 per diluted share), compared with $132.3 million ($90.2 million after tax, or $0.49 per diluted share) in second 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 public finance and other structured finance loss expense. See also “Economic Loss Development.”
- Income taxes: The second quarter 2012 effective tax rate on operating income was 29.9%, compared with 20.9% in second quarter 2011, due to higher operating losses in Assured Guaranty Re Ltd.
|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 March 31, 2012||Economic Loss Development During Second Quarter 2012||Loss (Paid) Recovered Second Quarter 2012||Net Expected Loss to be Paid as of June 30, 2012|
|Total before R&W||2,814.0||140.8||(299.4||)||2,655.4|
|R&W for U.S. RMBS||(1,631.0||)||(45.6||)||223.0||(1,453.6||)|
|Total, net of R&W||1,183.0||95.2||(76.4||)||1,201.8|
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