Business Context and Reporting Period
Company: Assured Guaranty Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A Bermuda-based holding company providing credit enhancement products (financial guaranty insurance 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 (in millions) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Earned Premiums | $78.6 | $51.7 | $227.1 | $98.5 |
| Net Investment Income | $43.3 | $40.2 | $86.9 | $76.8 |
| Total Revenues | $(169.5) | $842.7 | $73.6 | $703.3 |
| Total Expenses | $111.8 | $78.2 | $254.8 | $181.6 |
| Net (Loss) Income | $(170.0) | $545.2 | $(84.5) | $376.0 |
| Underwriting (Loss) Gain | $(8.2) | $7.3 | $37.9 | $(18.1) |
| Operating Cash Flow | N/A | N/A | $202.8 | $331.4 |
| Total Assets | $6,495.7 | N/A | N/A | N/A |
| Total Liabilities | $4,140.8 | N/A | N/A | N/A |
| Shareholders' Equity | $2,354.9 | N/A | N/A | N/A |
Material Changes vs. Prior Period
- Net Loss vs. Net Income: The company reported a net loss of $170.0 million for the quarter ended June 30, 2009, compared to net income of $545.2 million in the same period in 2008. This $715.2 million decline is primarily driven by a reversal in unrealized gains/losses on credit derivatives.
- Credit Derivatives Volatility: Unrealized losses on credit derivatives were $254.3 million in Q2 2009, compared to unrealized gains of $708.5 million in Q2 2008. This swing is largely attributable to the narrowing of the company's own credit spread (from 3,847 bps to 1,544 bps) and widening spreads in the broader market.
- Investment Impairments: The company recognized $14.8 million in other-than-temporary impairment (OTTI) losses in Q2 2009, primarily related to mortgage-backed securities, compared to $0.3 million in Q2 2008.
- Acquisition Expenses: The company incurred $24.2 million in FSAH acquisition-related expenses in Q2 2009, a new line item not present in the prior year.
- Premium Growth: Net earned premiums increased 52% year-over-year for the quarter ($78.6M vs $51.7M), driven by growth in the in-force book and accelerated premium recognition due to contract terminations.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition of FSAH: On July 1, 2009, the company completed the acquisition of Financial Security Assurance Holdings Ltd. (FSAH) for approximately $822 million (cash and stock). This transaction is not reflected in the June 30, 2009 financial statements but will impact future periods.
- Rating Agency Actions:
- Fitch: Downgraded insurer financial strength ratings of subsidiaries (e.g., AGC from AAA to AA) in May 2009 and placed ratings on "Rating Watch Negative" in August 2009 due to credit migration in structured finance and mortgage exposures.
- Moody's: Placed ratings of AGC and FSA under review for possible downgrade in May 2009, citing worsened performance of the insured portfolio, particularly mortgage-related risks.
- S&P: Affirmed AAA ratings on AGC and FSA in July 2009 but revised the outlook to "Negative."
- Collateral and Termination Risks: Downgrades could trigger termination payments or collateral posting requirements on credit derivative contracts. The company has posted approximately $325 million in collateral to secure obligations under specific CDS contracts and is in discussions with counterparties to reduce exposure.
- Reserve Uncertainty: Significant uncertainty remains regarding the ultimate performance of Home Equity Line of Credit (HELOC) and Residential Mortgage-Backed Securities (RMBS) transactions. The company estimates the maximum probable development on loss reserves under stressed scenarios to be approximately $550 million.
- Legal Proceedings: The company is involved in litigation regarding the Orkney Re II transaction (suing J.P. Morgan Investment Management) and faces antitrust investigations and class-action lawsuits related to municipal derivatives bidding practices.
Key Facts for Investor Verification
- Credit Derivative Valuation: Verify the assumptions used in the Level 3 fair value models for credit derivatives, specifically the impact of the company's own credit spread narrowing on reported earnings.
- RMBS and HELOC Exposure: Review the specific performance metrics (delinquency rates, default rates, subordination levels) for the $1.5 billion HELOC exposure and $16.7 billion total RMBS exposure to assess reserve adequacy.
- Rating Downgrade Triggers: Confirm the specific collateral posting and termination thresholds associated with the recent Fitch and Moody's rating actions and reviews.
- FSAH Integration: Monitor the pro forma impact of the FSAH acquisition on capital adequacy and underwriting results in the Q3 2009 filing.
- Liquidity Position: Assess the company's ability to meet potential collateral calls and operating expenses given the significant unrealized losses and the recent equity raise ($616.5 million net proceeds in June 2009).