Business Context and Reporting Period
Company: Assured Guaranty Ltd. (AGL)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Key Event: On July 1, 2009, AGL completed the acquisition of Financial Security Assurance Holdings Ltd. (FSAH) for approximately $822 million ($546 million cash and 22.3 million shares). This acquisition significantly expanded AGL's public finance portfolio and claims-paying resources. The financial statements reflect the consolidation of FSAH for the three months ended September 30, 2009.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Net Earned Premiums | $329.97 million | $557.05 million | $184.03 million |
| Total Revenues | $285.55 million | $359.12 million | $733.09 million |
| Total Expenses | $313.64 million | $568.43 million | $310.92 million |
| Net Income (Loss) Attributable to AGL | $(35.03) million | $(119.55) million | $312.67 million |
| Diluted EPS | $(0.22) | $(1.05) | $3.54 |
| Total Assets | $16.20 billion | N/A (Balance Sheet Item) | |
| Total Liabilities | $13.41 billion | ||
| Shareholders' Equity | $2.80 billion | N/A (Balance Sheet Item) | |
| Cash and Short-term Investments | $1.75 billion | ||
| Long-term Debt | $915.24 million | N/A (Balance Sheet Item) | |
| Operating Cash Flow (9 Months) | $293.58 million |
Material Changes vs. Prior Period
- Revenue Composition: Total revenues for the nine months ended September 30, 2009, decreased significantly compared to the prior year ($359 million vs. $733 million). This decline is primarily due to a massive reduction in unrealized gains on credit derivatives, which swung from a $422 million gain in 2008 to a $313 million loss in 2009. Conversely, Net Earned Premiums increased substantially ($557 million vs. $184 million) due to the inclusion of FSAH premiums.
- Profitability: The company reported a net loss of $119.5 million for the nine months of 2009, a reversal from the $312.7 million net income reported in the same period in 2008. The loss was driven by unrealized losses on credit derivatives ($432.6 million), increased loss and loss adjustment expenses ($251.1 million vs. $175.8 million), and $80.2 million in FSAH acquisition-related expenses.
- Balance Sheet Expansion: Total assets grew from $4.56 billion at December 31, 2008, to $16.20 billion at September 30, 2009, largely due to the acquisition of FSAH's investment portfolio and assets. Long-term debt increased from $347 million to $915 million, reflecting debt assumed in the FSAH acquisition.
- Investment Portfolio: The investment portfolio expanded to $9.94 billion, with fixed maturity securities increasing from $3.15 billion to $8.45 billion.
Guidance, Outlook, Risks, and Unusual Items
- Rating Agency Actions: In late 2009, Moody's and Fitch downgraded several AGL subsidiaries. Moody's downgraded AGC and AGUK to Aa3 (Review for Downgrade) and AG Re, AGRO, and AGMIC to A1 (Review for Downgrade). Fitch downgraded AGC and AGUK to AA- and AGM to AA. S&P maintained AAA ratings on AGC and AGM but placed them on Negative Outlook. These actions were driven by exposure to residential mortgage-backed securities (RMBS) and trust preferred CDOs.
- Capital Relief Plan: In response to Moody's rating review, management intends to implement a capital relief plan involving the cession of a portfolio to a third-party reinsurer, intercompany capital support, and approximately $300 million of additional capital. Failure to implement these initiatives could result in further downgrades into the single-A range.
- Unusual Items:
- FSAH Acquisition Expenses: $80.2 million incurred in the first nine months of 2009, including severance, professional services, and office consolidation costs.
- Goodwill Impairment: A $23.3 million charge related to the settlement of pre-existing relationships and goodwill impairment associated with the reinsurance line of business.
- Credit Derivative Volatility: Significant unrealized losses on credit derivatives ($432.6 million for nine months) due to widening credit spreads and the Company's own credit spread widening.
- Legal Proceedings: The company is involved in various legal proceedings, including antitrust investigations regarding municipal derivatives (GICs) and litigation related to the Jefferson County, Alabama sewer debt. Management believes the outcome will not have a material adverse effect on financial position, though it could impact results of operations in specific quarters.
Important Facts for Investor Verification
- RMBS Exposure: Verify the specific exposure to residential mortgage-backed securities (RMBS), particularly second-lien HELOCs and CES, and the assumptions used for loss reserves (e.g., conditional default rates, loss severity).
- Rating Sensitivity: Assess the impact of potential further rating downgrades on the Company's ability to write new business, the value of reinsurance ceded, and collateral posting requirements on credit derivatives (CDS).
- Capital Adequacy: Confirm the execution and cost of the proposed $300 million capital relief plan and its effect on shareholder dilution.
- Deferred Tax Assets: Review the valuation allowance on deferred tax assets, particularly those related to credit derivatives, given the significant pre-tax losses and the unsettled tax treatment of CDS losses.
- Reinsurance Counterparty Risk: Evaluate the credit quality of reinsurers (e.g., Syncora, RAM Re) to whom significant par amounts have been ceded, as their ability to pay affects net exposure.