Assured Guaranty Ltd. (NYSE:AGO) ("AGL" and, together with its subsidiaries, "Assured Guaranty" or the "Company") announced today its financial results for the three-month period ended June 30, 2012 ("second quarter 2012"). The Company reported operating income for second quarter 2012 of $114.0 million, or $0.61 per diluted share, bringing year-to-date operating income for the six-month period ended June 30, 2012 ("six months 2012") to $185.2 million, or $0.99 per diluted share. This compares with operating income of $143.4 million, or $0.76 per diluted share for the three-month period ended June 30, 2011 ("second quarter 2011") and $390.8 million, or $2.09 per diluted share, for the six-month period ended June 30, 2011 ("six months 2011"). Second quarter 2012 net income of $376.5 million, or $2.01 per share, includes non-economic net fair value gains1 of $263.6 million. Second quarter 2011 net loss of $43.1 million, or $0.23 per diluted share, includes non-economic net fair value losses of $187.5 million. Six months 2012 net loss of $106.5 million, or $0.58 per share, includes non-economic net fair value losses of $296.4 million. Six months 2011 net income of $96.2 million, or $0.51 per share, includes non-economic net fair value losses of $306.7 million.
Interest rates, which were already at historically low levels, declined further in second quarter 2012, which resulted in a net increase in expected losses, that does not represent additional credit impairment, but rather a change in the risk-free rates used to discount losses. See "Economic Loss Development." The low interest rate environment also encouraged higher refundings of U.S. public finance insured obligations as issuers refinanced their obligations at more attractive rates, resulting in the acceleration of premium earnings. See "Second Quarter 2012 Operating Income Highlights."
"Our positive second-quarter results reflect our strategic versatility and the strength of Assured Guaranty´s business model," said Dominic Frederico, President and CEO. "In U.S. public finance, we continued to honor our value proposition by providing protection to holders of insured bonds, including those of distressed municipalities such as Harrisburg, Jefferson County and Stockton."
1 These are financial measures that are not in accordance with accounting principles generally accepted in the United States of America ("GAAP") ("non-GAAP financial measures"). Please see the "Explanation of Non-GAAP Financial Measures" section of this press release and Table 1 for a reconciliation of net income (loss) to operating income.
| Table 1: Reconciliation of Net Income (Loss) to Operating Income1 | ||||||||
| (amounts in millions, except per share amounts) | ||||||||
| Quarter Ended June 30, | ||||||||
| 2012 | 2011 | |||||||
| Net income (loss) | $ | 376.5 | $ | (43.1 | ) | |||
| Less after-tax adjustments: | ||||||||
| Realized gains (losses) on investments | (4.8 | ) | (2.8 | ) | ||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | 159.4 | (73.6 | ) | |||||
| Fair value gains (losses) on committed capital securities ("CCS") | 2.9 | 0.4 | ||||||
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and loss adjustment expense ("LAE") reserves | 3.7 | 3.8 | ||||||
| Effect of consolidating financial guaranty variable interest entities ("FG VIEs") | 101.3 | (114.3 | ) | |||||
| Operating income | $ | 114.0 | $ | 143.4 | ||||
| Net income (loss) per diluted share2 | $ | 2.01 | $ | (0.23 | ) | |||
| Operating income per diluted share2 | $ | 0.61 | $ | 0.76 | ||||
| Diluted shares outstanding "´ GAAP | 187.0 | 184.2 | ||||||
| Diluted shares outstanding "´ operating | 187.0 | 187.6 | ||||||
______________
1. The Company adopted and retrospectively applied new guidance that changed the types and amount of costs that may be deferred. This reduced net income and operating income by $0.5 million, or $0.01 per share, for second quarter 2011.
2. Income (loss) per diluted share is calculated by dividing income (loss) by diluted shares outstanding, which excludes the effects of securities that would be antidilutive.
| New Business Production | ||||||
| Table 2: Present Value of New Business Production ("PVP")1 and Gross Par Written | ||||||
| (amounts in millions) | ||||||
| Quarter Ended June 30, | ||||||
| 2012 | 2011 | |||||
| Public finance - U.S. "´ Direct | $ | 47.0 | $ | 44.8 | ||
| Public finance - non-U.S. | 1.1 | "” | ||||
| Structured finance - U.S. | 1.5 | 7.1 | ||||
| Total PVP | $ | 49.6 | $ | 51.9 | ||
| Public finance - U.S. "´ Direct | $ | 4,670 | $ | 3,648 | ||
| Public finance - non-U.S. | 35 | "” | ||||
| Structured finance - U.S. | "” | 725 | ||||
| Gross par written | $ | 4,705 | $ | 4,373 | ||
______________
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.
Book Value Measurements
The drivers of the year-to-date increase in shareholders´ equity, operating shareholders´ equity and adjusted book value were: (1) the issuance of common shares as described below, and (2) the re-assumption of previously ceded unearned premium reserve and related commutation gains, both of which were offset in part by loss development, dividends and share repurchases. Shareholders´ equity was also affected by net fair value losses on credit derivatives and the consolidation of FG VIEs, which do not affect operating shareholders´ equity or adjusted book value. The present value of new business development, as well as the additional future earnings from the reassumptions of previously ceded books of business in the first quarter 2012, increased adjusted book value, which includes the estimated future earnings on the Company´s in-force book of business.
Per share amounts declined due to an additional 13.4 million common shares outstanding following the issuance of common shares to settle the forward purchase contracts that constituted a portion of the Company´s 2009 equity units. The purchase price was $12.85 per share, for a total of $172.5 million. This was offset in part by the repurchase of 2.1 million common shares at an average price of $11.76 per share or $24.3 million.
| Table 5: Reconciliation of Shareholders´ Equity to | ||||||||
| Operating Shareholders´ Equity and | ||||||||
| Adjusted Book Value1 | ||||||||
| (amounts in millions, except per share amounts) | ||||||||
| As of | ||||||||
| June 30, 2012 | December 31, 2011 | |||||||
| Shareholders´ equity | $ | 4,724.1 | $ | 4,651.6 | ||||
| Less after-tax adjustments: | ||||||||
| Effect of consolidating FG VIEs | (339.3 | ) | (405.2 | ) | ||||
| Non-credit impairment unrealized fair value gains (losses) on credit derivatives | (862.2 | ) | (498.0 | ) | ||||
| Fair value gains (losses) on CCS | 28.8 | 35.0 | ||||||
| Unrealized gain (loss) on investment portfolio excluding foreign exchange effect | 386.2 | 318.4 | ||||||
| Operating shareholders´ equity | 5,510.6 | 5,201.4 | ||||||
| After-tax adjustments: | ||||||||
| Less: Deferred acquisition costs | 170.9 | 174.1 | ||||||
| Plus: Net present value of estimated net future credit derivative revenue | 258.2 | 302.3 | ||||||
| Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed | 3,516.1 | 3,658.0 | ||||||
| Adjusted book value | $ | 9,114.0 | $ | 8,987.6 | ||||
| Shares outstanding at the end of period | 194.0 | 182.2 | ||||||
| Per share: | ||||||||
| Shareholders´ equity | $ | 24.36 | $ | 25.52 | ||||
| Operating shareholders´ equity | 28.41 | 28.54 | ||||||
| Adjusted book value | 46.99 | 49.32 | ||||||
______________
1. Operating shareholders´ equity and adjusted book value are non-GAAP financial measures. See the "Explanation of Non-GAAP Financial Measures" section of this press release.
Conference Call and Webcast Information:
The Company will host a conference call for investors at 9:00 a.m. Eastern Time (10:00 a.m. Atlantic Time) on Friday, August 10, 2012. The conference call will be available via live and archived webcast in the Investor Information section of the Company´s website at http://www.assuredguaranty.com or by dialing 1-877-317-6789 (in the U.S.), 1-866-605-3852 (Canada) or 1-412-317-6789 (International). A replay of the call will be available until October 9, 2012. To listen to the replay, dial 1-877-344-7529 (in the U.S.) or 1-412-317-0088 (International), passcode 10016994. The replay will be available one hour after the conference call ends.
Please refer to Assured Guaranty´s June 30, 2012 Financial Supplement, which is posted on the Company´s website at http://www.assuredguaranty.com/investor-information/by-company/assured-guaranty-ltd/financial-information, for more information on the Company´s financial guaranty portfolios, investment portfolio and other items. The Company is also posting on the same page of its website:
- "Public Finance Transactions in 2Q 2012," which lists the new issue U.S. public finance transactions sold in second quarter 2012 that the Company has insured, and
- "Structured Finance Transactions at June 30, 2012," which lists the Company´s structured finance exposure as of that date.
In addition, the Company is posting at http://www.assuredguaranty.com/presentations the "June 30, 2012 Equity Investor Presentation." Furthermore, when the Company´s separate-company subsidiary financial supplements and its Fixed Income Presentation for the current quarter are available to b
