Assured Guaranty Ltd. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a quarterly report; the filing also provides unaudited fourth-quarter results. Assured Guaranty is a Bermuda-based financial guaranty insurer focused on U.S. public finance, infrastructure and structured finance.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $973 million | $1.819 billion |
| Net earned premiums | $853 million | $920 million |
| Net investment income | $404 million | $396 million |
| Net income | $110 million | $773 million |
| Diluted EPS | $0.57 | $4.16 |
| Non-GAAP operating income | $535 million | $601 million |
| Operating cash flow | $(165) million | $676 million |
| Cash at year-end | $138 million | $215 million |
| Long-term debt, carrying value | $836 million | $1.038 billion |
| Shareholders’ equity | $4.994 billion | $4.652 billion |
- Net income fell sharply, principally because the change in fair value of credit derivatives shifted to a $585 million loss from a $560 million gain, alongside higher loss and loss adjustment expenses. These derivative fair-value changes can be volatile and are not necessarily indicative of realized credit losses.
- Loss and loss adjustment expenses were $523 million, versus $462 million. Net economic loss development was $438 million; net expected loss to be paid declined to $677 million from $1.106 billion.
- Net par insured outstanding fell to $519.9 billion from $558.0 billion. Below-investment-grade exposure was $23.4 billion, or 4.5% of net par, compared with $26.8 billion, or 4.8%.
- Year-end investments and cash were $11.223 billion. The investment portfolio’s fair value was $10.873 billion; its reported overall pre-tax book yield was 3.85% at year-end, versus 4.00% a year earlier.
- Quarterly results: fourth-quarter 2012 revenue was $229 million and net income was $74 million, compared with $79 million revenue and an $84 million net loss in fourth-quarter 2011.
- Conventional profit margins are not presented as key measures in this insurer’s filing; GAAP results are substantially affected by insurance accounting, derivative marks and variable-interest-entity consolidation.
Material changes versus prior year
- New-business production measured by present value of production (PVP), a non-GAAP measure, declined to $210 million from $243 million. U.S. municipal market penetration by par decreased to 3.6% from 5.3%; low rates, tight credit spreads and ratings uncertainty weighed on demand.
- The company acquired MAC for $91 million in May 2012 and announced plans in January 2013 to launch it as a U.S. public-finance-only insurer.
- Commutations and reassumptions produced $82 million of pre-tax gains in 2012. Reassumed and reinsured Radian and Tokio portfolios represented approximately $19.1 billion of par.
- The company issued 13.4 million shares in June 2012 through settlement of equity units, raising $173 million, and repurchased 2.1 million shares for $24 million. Adjusted book value per share, a non-GAAP measure, declined to $47.17 from $49.32.
- AGUS retired $173 million of 8.5% senior notes; total principal debt outstanding fell to $1.141 billion from $1.350 billion. The annual common dividend increased to $0.36 per share from $0.18.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management describes continued pressure from historically low interest rates, narrow credit spreads, subdued insurance demand and ratings uncertainty, while noting potential future demand if rates rise or spreads widen.
- Moody’s January 17, 2013 downgrades, subsequent to year-end, lowered financial strength ratings to A2 for AGM, A3 for AGC and Baa1 for AG Re. The filing identifies further downgrades as a risk to new business, pricing, collateral needs and liquidity.
- Refinancing risk on three large infrastructure exposures could require claims totaling about $1.4 billion, anticipated mainly during 2014–2017; recoveries could take 20–45 years and are uncertain.
- RMBS loss estimates rely on uncertain collateral performance and recoveries from representations-and-warranties providers. The company reported $1.4 billion of estimated net R&W recovery benefits in loss estimates and approximately $2.9 billion paid or agreed to be paid by providers; actual recoveries may differ materially.
- Greece-related claims were paid in 2012, eliminating direct Greek sovereign exposure at year-end. European sub-sovereign and other exposures remained; net exposure to selected European countries totaled $4.596 billion, including $1.411 billion rated below investment grade.
- AGM’s January 2013 downgrade could prompt withdrawals or collateral requirements on insured guaranteed investment contracts. Dexia-related agreements and facilities support the legacy business, but create counterparty and liquidity risk.
- Litigation includes RMBS recovery actions, municipal-bond-related lawsuits and legacy municipal derivatives investigations. Management says litigation outcomes are uncertain and that losses generally cannot be estimated for several matters. The auditor issued an unqualified opinion and found internal control over financial reporting effective as of year-end.
Important facts for investors to verify
- How much of the $677 million expected loss to be paid and the $1.4 billion estimated R&W recovery benefit is ultimately realized, and on what timetable.
- Liquidity and collateral capacity under ratings stress, including infrastructure refinancing claims, derivative collateral provisions and AGM-insured GIC obligations.
- Current ratings and any further agency actions, and their effects on business production, reinsurance recapture rights, capital requirements and dividend capacity.
- Underlying assumptions and sensitivities in Level 3 derivative and VIE valuations, which materially affected GAAP earnings in 2012.
- Progress and outcomes in material RMBS recovery litigation and municipal bankruptcy matters, including Jefferson County and Stockton.