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Assured Guaranty Ltd. Reports Results For Second Quarter 2012

Stocks in this article: AGO

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

Revenues:
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 )
Other income   4.3     6.0     (1.7 )   27.3     29.9     (2.6 )
 
Total revenues 759.5 392.1 367.4 116.3 (280.8 ) 397.1
Expenses:
Loss expense:
Financial guaranty insurance 122.5 0.5 122.0 123.9 (16.9 ) 140.8
Credit derivatives 0.6 (0.6 ) 8.5 (8.5 )
Amortization of deferred acquisition costs 4.5 4.5 5.8 5.8
Interest expense 25.4 25.4 24.7 24.7
Other operating expenses   53.5         53.5     53.2         53.2  
 
Total expenses   205.9     1.1     204.8     207.6     (8.4 )   216.0  
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  
Income (loss) $ 376.5   $ 262.5   $ 114.0   $ (43.1 ) $ (186.5 ) $ 143.4  
 
Diluted shares 187.0 187.0 184.2 187.6
 
Earnings per diluted share $ 2.01 $ 0.61 $ (0.23 ) $ 0.76
 

Where significant changes occurred, components of second quarter 2012 operating income are compared with the same item in second quarter 2011.

  • 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.

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

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

Before R&W:
U.S. RMBS $ 2,124.4 $ 96.2 $ (296.4 ) $ 1,924.2
Other   689.6     44.6     (3.0 )   731.2  
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
Other   1.9     (6.0 )       (4.1 )
Total $ 1,184.9   $ 89.2   $ (76.4 ) $ 1,197.7  
 

Total economic loss development was $89.2 million ($73.2 million after tax) in second quarter 2012, which includes a $6.0 million estimated recovery on a legacy life reinsurance transaction and a $15.6 million gain on foreign exchange rate remeasurement. The single largest driver of the economic loss development in second quarter 2012 was the decline in the risk-free rates used to discount expected losses, which contributed approximately $63 million to the economic loss development in U.S. RMBS and other long-dated structured finance transactions. U.S. RMBS contributed $50.6 million to the total economic loss development in second quarter 2012, most of which related to declines in the risk free rates plus a $15.0 million reduction in representations and warranties (“R&W”) benefit on three transactions due to updated assumptions as to the likelihood and amount of estimated recoveries. U.S. public finance losses also increased in second quarter 2012, contributing $35.5 million in loss development.

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