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 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||$||222||$||(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||)||—|
|Financial guaranty insurance||90||1||89||215||(38||)||253|
|Amortization of deferred acquisition costs||4||—||4||4||—||4|
|Other operating expenses||48||—||48||46||—||46|
|Income (loss) before income taxes||179||(35||)||214||1,055||999||56|
|Provision (benefit) for income taxes||37||(11||)||48||294||276||18|
|Earnings per diluted share||$||0.73||$||0.85||$||4.13||$||0.21|
- 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.
|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”):|
|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|
|1. Includes $4 million of foreign exchange remeasurement.|