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Assured Guaranty Ltd. Reports Results For Third 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 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



Less: Operating






Income Results

GAAP Income

Statement As



Less: Operating






Income Results

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
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 2012 1


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.

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