Explanation of Non-GAAP Financial Measures
The Company believes that the following non-GAAP financial measures included in this press release serve to supplement GAAP information and are meaningful to investors.
Operating income (loss):
The Company believes operating income (loss) is a useful measure because it measures income from operations, unaffected by non-operating items such as realized investment gains or losses, unrealized gains or losses on credit derivatives and foreign currency gains or losses. Operating income (loss) is typically used by research analysts and rating agencies in their analysis of the Company.
Operating book value per share and adjusted operating book value per share
: The Company believes the presentation of operating book value per share and adjusted operating book value per share to be useful because they give a measure of the value of the Company, excluding non-operating items such as unrealized gains and losses on credit derivatives. The Company derives operating book value by beginning with GAAP book value and adding back the unrealized gain or loss portion of its derivative liability, excluding the impact of credit impairments. Adjusted operating book value per share begins with operating book value as calculated above and then adding or subtracting the value of:
a. GAAP unearned premium reserves (on policies classified as financial guarantee);
b. Deferred acquisition costs;
c. Unearned premiums reserves and the present value of estimated future installment premiums net of ceding commissions on credit derivative policies (discounted at 0.77% at March 31, 2013, and 0.72% at December 31, 2012);
d. Unrealized appreciation or depreciation of investments; and
e. Noncontrolling interest in subsidiary – Class B preference shares.
Credit impairments on insured credit default swap ("CDS") contracts:
Management measures and monitors credit impairments on AORE's credit derivatives, which are expected to be paid out over the term of the CDS contracts. The credit impairments are a non-GAAP financial measure which management believes to be useful to analysts and investors in reviewing the results of our entire portfolio of policies. Management considers credit derivative policies as a normal extension of AORE's financial guarantee business and reinsurance in substance.
Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are set forth below.