Business Context and Reporting Period
Company: Assured Guaranty Ltd. (AGL)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: AGL is a Bermuda-based holding company providing credit protection (financial guaranty insurance and reinsurance) for public finance, infrastructure, and structured finance markets. Following the acquisition of Financial Security Assurance Holdings Ltd. (AGMH) on July 1, 2009, AGL became the dominant market leader in the financial guaranty industry, with competitors largely ceasing new business due to the credit crisis.
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Net Earned Premiums | $930.4 million | $261.4 million | $159.3 million |
| Net Investment Income | $259.2 million | $162.6 million | $128.1 million |
| Total Revenues | $929.6 million | $553.2 million | ($301.5 million) |
| Loss and LAE Expenses | $377.8 million | $265.8 million | $5.8 million |
| Net Income Attributable to AGL | $97.2 million | $68.9 million | ($303.3 million) |
| Diluted EPS | $0.75 | $0.77 | ($4.38) |
| Total Assets | $16,593.4 million | $4,555.7 million | $3,762.9 million |
| Shareholders' Equity | $3,520.5 million | $1,926.2 million | $1,666.6 million |
| Net Par Outstanding (Financial Guaranty) | $640.4 billion | $222.7 billion | $200.3 billion |
Note: 2009 results include AGMH from July 1, 2009. New accounting guidance effective Jan 1, 2009, impacts comparability of premiums and losses.
Material Changes vs. Prior Period
- Revenue Surge: Net earned premiums increased 256% to $930.4 million, driven primarily by the AGMH acquisition and strong U.S. public finance market share (98% of insured issuances in 2009).
- Loss Development: Loss and LAE expenses rose to $377.8 million, primarily due to adverse development in U.S. Residential Mortgage-Backed Securities (RMBS) portfolios (HELOC and Alt-A sectors).
- Acquisition Costs: The company incurred $92.3 million in AGMH acquisition-related expenses and a net $23.3 million charge for goodwill impairment and settlement of pre-existing relationships.
- Balance Sheet Growth: Total assets more than tripled to $16.6 billion, and equity nearly doubled to $3.5 billion, reflecting the acquisition and a December 2009 equity offering raising approximately $574 million in net proceeds.
- Portfolio Composition: U.S. Public Finance now represents the majority of the portfolio ($423.1 billion net par), while structured finance exposure remains significant ($174.6 billion net par).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Market Position: AGL is the market leader with competitors (MBIA, Ambac, FGIC) largely inactive. Demand remains strong in U.S. public finance but weak in structured finance and international infrastructure due to the credit crisis.
- Non-GAAP Measures: Management highlights "Operating Income" of $316.7 million (excluding fair value volatility) and "Adjusted Book Value" of $8.9 billion to better reflect intrinsic value.
- Capital Strategy: The company raised capital in late 2009 to maintain financial strength ratings. Moody's and S&P maintain negative outlooks due to uncertainty regarding ultimate credit losses and future market demand.
Risks and Contingencies
- RMBS Losses: Significant uncertainty remains regarding ultimate losses on U.S. RMBS (HELOC and Alt-A). The company estimates recoveries from loan repurchases but notes these are subject to counterparty solvency and litigation.
- Rating Agency Actions: A downgrade could trigger collateral posting requirements on credit derivatives (approx. $20.1 billion par subject to posting) and allow reinsurance recapture. Fitch withdrew ratings on all subsidiaries in Feb 2010 at the company's request.
- Dexia Exposure: The company retains exposure to credit and liquidity risks from Dexia (seller of AGMH) regarding AGMH's former Financial Products Business (GICs), though indemnification agreements are in place.
- Legal Proceedings: Ongoing investigations by the DOJ and SEC regarding bid-rigging in municipal derivatives (related to AGMH's former business) and antitrust lawsuits regarding rating scales.
Unusual Items
- Mark-to-Market Volatility: Net income was impacted by a $337.8 million unrealized loss on credit derivatives and a $122.9 million loss on committed capital securities due to changes in credit spreads and interest rates.
- Accounting Changes: Adoption of new FASB guidance for financial guaranty contracts in 2009 changed the timing of premium and loss recognition.
Investor Verification Checklist
- RMBS Reserve Adequacy: Verify the assumptions used for Conditional Default Rates (CDR) and loss severity in the HELOC and Alt-A portfolios, as these drive future loss emergence.
- Recovery Estimates: Assess the realizability of the estimated $905.1 million in recoveries from loan repurchases for second-lien RMBS, considering the financial health of originators like Countrywide.
- Rating Agency Capital Models: Monitor Moody's and S&P capital charge requirements, as further downgrades could necessitate additional capital raises or business curtailment.
- Dexia Indemnification: Review the enforceability and sufficiency of indemnification agreements with Dexia regarding the former Financial Products Business.
- Collateral Posting: Track the company's credit spreads to estimate potential cash outflows for collateral posting on credit derivative contracts if ratings decline.