Business context and reporting period
Assured Guaranty Ltd. is a Bermuda-based financial guaranty holding company protecting scheduled principal and interest payments on public finance, infrastructure and structured finance obligations. This Form 10-K covers the fiscal year ended December 31, 2011; quarterly figures below are unaudited. AGM and AGC remained the principal operating insurers. The company no longer writes new U.S. RMBS or new CDS business.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $1,819.3 million | $1,313.5 million |
| Net earned premiums | $920.1 million | $1,186.7 million |
| Net investment income | $391.0 million | $354.7 million |
| Loss and loss adjustment expenses | $461.9 million | $412.2 million |
| Net income | $775.6 million | $493.7 million |
| Diluted EPS | $4.18 | $2.61 |
| Non-GAAP operating income | $604.4 million | $664.1 million |
| Operating cash flow | $675.6 million | $129.2 million |
- Net income rose 57%, but included a $553.7 million unrealized credit-derivative gain; results also reflected lower fair-value losses on consolidated financial guaranty VIEs. Management’s non-GAAP operating income fell about 9%.
- Net earned premiums declined about 22%, principally as the structured finance book ran off. Management said premiums were expected to decline in future years unless replaced by new business. Net investment income increased about 10%.
- FY 2011 net economic loss development was $123.8 million, primarily reflecting Greek exposures and other structured finance risks. Higher projected RMBS losses were largely offset by increased estimated representation-and-warranty recoveries.
- Fourth-quarter net loss was $83.6 million, or $0.46 per diluted share, versus a net loss of $183.5 million, or $1.00 per diluted share, in fourth-quarter 2010. Quarterly results were affected by substantial fair-value movements.
- At year-end, total assets were $18.1 billion, total liabilities $13.4 billion, shareholders’ equity $4.7 billion and carrying-value long-term debt $1.04 billion. Principal debt was $1.35 billion. Cash was $214.5 million; investments and cash totaled $11.31 billion.
- Operating cash flow improved, while financing cash outflow was $1.13 billion, largely reflecting paydowns of consolidated VIE liabilities. Cash increased to $214.5 million from $108.4 million.
- Net insured par outstanding was $558.0 billion, down from $617.1 billion; $28.2 billion, or 5.1%, was internally rated below investment grade. Approximately 88.8% of net par was U.S. exposure.
Material changes versus the prior year
- Reported net income improved, while operating income and new-business production weakened: present value of new business production fell to $242.7 million from $362.7 million, and gross par written fell to $16.9 billion from $30.8 billion.
- U.S. municipal issuance fell 33.8% to $285.2 billion. Assured Guaranty’s public-finance market penetration was 12.1% by number of new issues and 5.3% by par.
- S&P lowered AGM and AGC to AA- in November 2011, with stable outlook; Moody’s ratings were Aa3 with negative outlook. The company said rating uncertainty harmed demand and market penetration.
- Net RMBS par fell to $21.6 billion from $25.1 billion. Total net expected loss to be paid across insurance, VIEs and credit derivatives increased to $1.10 billion from $1.06 billion; the mix and estimates of recoveries changed materially.
- Shareholders’ equity increased from $3.73 billion to $4.72 billion, supported by net income and unrealized investment gains. GAAP book value per share rose to $25.89 from $20.32.
Outlook, commentary, risks and unusual items
- Management said liquidity should be sufficient for the next 12 months and described a policy of holding liquid assets equal to 1.5 times projected operating-company cash needs over the next four quarters. This is management’s assessment, not a guarantee; subsidiary dividends and external financing are subject to restrictions and market conditions.
- In January 2012, AGC and AGM entered an aggregate excess-of-loss reinsurance facility covering a portion of the next $600 million of eligible losses above an aggregate $2 billion attachment point; reinsurers assume up to $435 million. Also in January, Assured Guaranty agreed to reacquire and reinsure Radian exposures and to acquire MIAC for $91 million, subject to regulatory approval.
- RMBS estimates remain sensitive to housing recovery, delinquencies, loss severity and the timing and collectability of representation-and-warranty recoveries. The Bank of America agreement covered 29 transactions: it provided $1.04 billion in 2011 for second-lien transactions, with $57.3 million still due, and 80% reimbursement of eligible first-lien claims subject to contractual limits. Future recoveries are uncertain.
- Greek debt restructuring presented a contingent claims risk. At year-end, expected Greek losses were estimated at $42.6 million net of reinsurance; subsequent exchange proposals and collective-action provisions could affect claims.
- The former AGMH financial-products business remains a material counterparty risk through Dexia support agreements. Year-end GIC liabilities were $4.7 billion; management reported supporting assets exceeded specified obligations after agreed valuation reductions, but Dexia’s ability and willingness to perform remains a risk.
- Other notable exposures and contingencies include Jefferson County’s Chapter 9 bankruptcy, leveraged-lease downgrade triggers, collateral-posting and termination provisions in CDS, reinsurer credit risk, and litigation. An adverse court ruling in an RMBS reimbursement dispute could result in up to approximately $144 million of additional unreimbursed claims over the transaction’s life, before specified offsets.
- GAAP earnings are volatile because credit derivatives and consolidated VIEs are marked to fair value using significant estimates. The filing also identifies a forthcoming accounting change to acquisition-cost capitalization, estimated to reduce opening 2012 retained earnings by $60–$80 million after tax.
Important facts for investors to verify
- How much of FY 2011 earnings reflected non-cash credit-spread and VIE fair-value movements, and how operating income compares with GAAP net income.
- Whether RMBS loss estimates and the $1.65 billion net representation-and-warranty recovery credit are supported by realized collections, enforceable agreements and counterparties’ capacity to pay.
- Current insurer ratings and outlooks, capital-model requirements, downgrade triggers, collateral needs and potential effects on claims, business production and reinsurance recapture.
- Liquidity and dividend capacity at the holding company and regulated subsidiaries, including the effect of the expired $300 million revolving facility and restrictions on subsidiary dividends.
- Developments in Greek restructuring, Jefferson County, RMBS reimbursement litigation, Dexia support arrangements, and the pending MIAC acquisition and Radian transactions.