Business Context and Reporting Period
Company: Assured Guaranty Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A Bermuda-based holding company providing credit enhancement products (financial guarantees and credit derivatives) to public finance, structured finance, and mortgage markets. The company operates through four segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty, and other.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Earned Premiums | $148.4 million | $46.8 million |
| Total Revenues | $243.1 million | $(139.4) million |
| Net Income (Loss) | $85.5 million | $(169.2) million |
| EPS (Diluted) | $0.93 | $(2.09) |
| Total Assets | $5,588.3 million | $4,555.7 million |
| Total Shareholders' Equity | $2,025.6 million | $1,926.2 million |
| Cash and Cash Equivalents | $19.3 million | $12.3 million |
| Operating Cash Flow | $167.0 million | $149.0 million |
| Long-Term Debt | $347.2 million | $347.2 million |
Note: Debt consists of $197.5 million in Senior Notes and $149.8 million in Series A Enhanced Junior Subordinated Debentures.
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $85.5 million in Q1 2009, a significant improvement from a net loss of $169.2 million in Q1 2008. This $254.7 million swing was primarily driven by a $286.6 million improvement in the fair value of credit derivatives (a $27.0 million gain in 2009 vs. a $259.6 million loss in 2008) and a $66.9 million increase in underwriting gain.
- Premium Growth: Net earned premiums increased 217% to $148.4 million. This was largely due to $73.6 million in accelerated premiums from contract cancellations in the direct segment and increased refundings in the reinsurance segment.
- Accounting Change (FAS 163): Effective January 1, 2009, the company adopted FAS 163, which changed the methodology for recognizing premium revenue and measuring claim liabilities for financial guarantee insurance contracts. This resulted in a cumulative effect adjustment to retained earnings of $19.4 million and significant balance sheet reclassifications, including an increase in unearned premium reserves and premiums receivable.
- Investment Portfolio: The company recognized $18.5 million in other-than-temporary impairment (OTTI) losses on mortgage-backed and corporate securities in Q1 2009, compared to none in Q1 2008.
Guidance, Outlook, Risks, and Unusual Items
- Rating Downgrades: On May 4, 2009 (post-period end), Fitch Ratings downgraded the company's debt and insurer financial strength ratings. Moody's had previously downgraded ratings in November 2008. Further downgrades could trigger collateral posting requirements or contract terminations.
- Collateral Posting Risk: Due to the widening of the company's own credit spread (from 1,775 bps to 3,847 bps), the company posted approximately $177.9 million in collateral as of March 31, 2009. A further downgrade below A- could eliminate contractual thresholds, potentially requiring an additional $113.7 million in collateral. In May 2009, the company agreed to post up to $250 million in collateral to eliminate a counterparty's right to terminate specific CDS contracts.
- Acquisition of FSAH: The company is in the process of acquiring Financial Security Assurance Holdings Ltd. (FSAH) for approximately $722 million ($361 million cash and stock). Closing is expected in Q2 2009, contingent on rating agency reviews.
- Mortgage Exposure Risks: Significant exposure remains in Home Equity Line of Credit (HELOC) and Subprime/Alt-A RMBS transactions. While the company recorded a $4.9 million gain on direct Countrywide transactions in Q1 2009 due to reserve releases, cumulative incurred losses on these transactions remain high ($93.3 million). The company estimates a maximum probable development on loss reserves for structured finance credits of $306 million under stressed scenarios.
- Legal Proceedings: An arbitration regarding a mortgage insurance stop-loss reinsurance agreement is pending, with a decision expected. The company also sued J.P. Morgan Investment Management regarding the Orkney Re II transaction.
Investor Verification Checklist
- Rating Agency Actions: Monitor for further downgrades by S&P and Moody's, which could trigger immediate collateral calls or contract terminations.
- FSAH Acquisition Status: Verify the closing of the FSAH acquisition and the successful execution of the equity offering intended to fund the cash portion.
- Credit Derivative Valuation: Review the sensitivity of the $73.3 billion notional credit derivative portfolio to changes in the company's own credit spread versus market spreads.
- Mortgage Loss Development: Track actual loss experience on HELOC and RMBS portfolios against the company's modeled assumptions, particularly regarding Countrywide transactions.
- Liquidity Position: Assess the impact of potential additional collateral postings on the company's cash and cash equivalents ($19.3 million).