Business Context and Reporting Period
This Form 8-K filing by Assured Guaranty Ltd. (Bermuda) covers events occurring on July 16, 2013, with a report date of July 22, 2013. The filing details the capitalization of a new subsidiary, Municipal Assurance Corp. ("MAC"), a New York domiciled financial guaranty insurer, and regulatory approvals regarding the reassumption of contingency reserves by existing subsidiaries.
Key Financial Metrics and Transactions
- Capitalization of MAC: MAC was capitalized with approximately $800 million through a series of transactions involving cash, marketable securities, and surplus notes.
- Capital Structure:
- Policyholders' surplus increased to approximately $400 million via contributions from MAC Holdings.
- MAC Holdings purchased a $300 million surplus note (0% interest, no final maturity).
- Assured Guaranty Municipal Corp. ("AGM") purchased a $100 million surplus note (5% interest, 20-year term).
- Reinsurance Cession: AGM and Assured Guaranty Corp. ("AGC") ceded investment-grade U.S. municipal bond portfolios to MAC.
- AGM paid approximately $463 million (statutory) / $468 million (GAAP).
- AGC paid approximately $246 million (statutory) / $249 million (GAAP).
- Contingency Reserve Reassumption:
- AGM Group notified of NY DFS approval to reassume 33% of a $250 million reserve base in 2013 (approx. $82 million).
- AGC notified of Maryland Insurance Administration approval to reassume 33% of a $267 million reserve base in 2013 (approx. $88 million).
- Estimated release of assets from trust accounts due to these reassumptions is approximately $140 million.
Material Changes and Regulatory Status
The primary material change is the establishment of MAC as a distinct, capitalized entity to insure select categories of U.S. municipal bonds. MAC is licensed in 37 U.S. states and D.C., with authorization to write business in 30 jurisdictions immediately. Regulatory approvals were also secured for AGM and AGC to reassume contingency reserves previously ceded to Assured Guaranty Re Ltd. ("AG Re"), a process scheduled to occur in phases through 2015.
Outlook, Ratings, and Management Commentary
- Credit Ratings:
- Standard & Poor's assigned MAC a financial strength rating of AA- (stable outlook) on July 17, 2013.
- Kroll Bond Rating Agency assigned MAC a financial strength rating of AA+ (stable outlook) on July 22, 2013.
- Future Operations: MAC expects to receive regulatory approval to write business in the remaining 8 licensed states and intends to pursue licenses in other states via the REACAP Program.
- Capital Impact: The reassumption of contingency reserves by AGM and AGC will increase their contingency reserves and decrease policyholders' surplus by the same amount, with no impact on statutory or rating agency capital.
Investor Verification Checklist
- Verify the exact composition of the $800 million capitalization of MAC, specifically the fair market value of securities contributed.
- Confirm the timeline for MAC receiving regulatory approval to write business in the 8 remaining licensed states.
- Monitor the actual release of the estimated $140 million from AG Re trust accounts in Q3 2013.
- Review the specific terms of the surplus notes issued by MAC to ensure understanding of the 0% and 5% interest rate structures.
- Check for any subsequent updates on the phased reassumption of contingency reserves in 2014 and 2015.