- Shareholders' equity per share, non-GAAP operating shareholders' equity 1 per share and non-GAAP adjusted book value 1 per share reached new records at $61.73, $60.20 and $84.51, respectively.
- Net income and non-GAAP operating income 1 were each $161 million, or $1.47 per share, for third quarter 2018.
- PVP 1 increased 21% to $52 million compared to third quarter 2017.
- In third quarter 2018, 3.3 million shares were repurchased for $130 million. Year-to-date repurchases (through November 8, 2018) were 11.4 million shares or $429 million.
HAMILTON, Bermuda--(BUSINESS WIRE)--Assured Guaranty Ltd. (NYSE:AGO) (AGL and, together with its
consolidated entities, Assured Guaranty or the Company) announced today
its financial results for the three-month period ended September 30,
2018 (third quarter 2018).
|
Summary Financial Results
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
161
|
|
|
$
|
208
|
|
|
Non-GAAP operating income(1)
|
|
|
|
161
|
|
|
156
|
|
|
Gain (loss) related to the effect of consolidating financial
guaranty variable
interest entities (FG VIE consolidation) included in non-GAAP
operating
income
|
|
|
|
(2
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
|
|
$
|
1.47
|
|
|
$
|
1.72
|
|
|
Non-GAAP operating income(1) per diluted share
|
|
|
|
1.47
|
|
|
1.29
|
|
|
Gain (loss) related to FG VIE consolidation included in non-GAAP
operating income per diluted share
|
|
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
|
109.3
|
|
|
120.7
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums (GWP)
|
|
|
|
$
|
50
|
|
|
$
|
45
|
|
|
Present value of new business production (PVP)(1)
|
|
|
|
52
|
|
|
43
|
|
|
Gross par written
|
|
|
|
3,001
|
|
|
3,417
|
|
|
|
|
Summary Financial Results (continued)
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
Amount
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
$
|
6,583
|
|
|
$
|
61.73
|
|
|
$
|
6,839
|
|
|
$
|
58.95
|
|
|
Non-GAAP operating shareholders' equity (1)
|
|
|
|
|
6,420
|
|
|
60.20
|
|
|
6,521
|
|
|
56.20
|
|
|
Non-GAAP adjusted book value (1)
|
|
|
|
|
9,012
|
|
|
84.51
|
|
|
9,020
|
|
|
77.74
|
|
|
Gain (loss) related to FG VIE consolidation
included in non-GAAP operating shareholders'
equity
|
|
|
|
|
3
|
|
|
0.03
|
|
|
5
|
|
|
0.03
|
|
|
Gain (loss) related to FG VIE consolidation
included in non-GAAP adjusted book value
|
|
|
|
|
(14
|
)
|
|
(0.14
|
)
|
|
(14
|
)
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
|
|
106.6
|
|
|
|
|
116.0
|
|
|
|
|
|
________________________________________________
(1) Please see “Explanation of Non-GAAP Financial Measures” at the end
of this press release.
1 Please see “Explanation of Non-GAAP Financial Measures.”
When a financial measure is described as "operating," it is a non-GAAP
financial measure.
“In the third quarter of 2018, we increased the company’s intrinsic
value per share, measured as non-GAAP adjusted value per share, to a new
high of $84.51 per share,” said Dominic Frederico, President and CEO of
Assured Guaranty. “We saw positive activity in each of our financial
guaranty businesses, leading the industry again in the U.S. public
finance market, generating premiums in the international markets for the
twelfth consecutive quarter, and continuing to close transactions and
further develop opportunities in structured finance.”
Third Quarter Results
GAAP Financial Information
Net income for third quarter 2018 was $161 million, compared with $208
million for the three-month period ended September 30, 2017 (third
quarter 2017). Excluding third quarter 2017 commutation gains, net
income increased due mainly to lower loss and loss adjustment expenses
(LAE), a fair value gain on the sale of an equity security and a lower
effective tax rate, offset in part by lower premium accelerations, lower
fair value gains on credit derivatives and foreign exchange losses in
third quarter 2018.
Loss and LAE was $17 million in third quarter 2018, compared with $223
million in third quarter 2017. The losses in third quarter 2017 were
composed primarily of increases in reserves for Puerto Rico exposures.
The Company recorded, in other income, a gain on change in fair value of
equity securities of $32 million in third quarter 2018, including a gain
of $31 million related to the Company's minority interest in the parent
company of TMC Bonds LLC, which it sold in third quarter 2018.
The effective tax rate was 8.3% for third quarter 2018, compared with an
effective tax rate for third quarter 2017 of 33.6%. The effective tax
rate for third quarter 2018 represents a lower corporate tax rate than
third quarter 2017 and includes a release of reserves for uncertain tax
positions. The effective tax rate fluctuates from quarter to quarter
based on the proportion of income in different tax jurisdictions.
Net earned premiums in third quarter 2018 were $142 million, compared
with $186 million in third quarter 2017. The decline in net earned
premiums was attributable mainly to reduced refunding activity.
Accelerations due to refundings and terminations were $40 million in
third quarter 2018, compared with $87 million in third quarter 2017.
Third quarter 2018 reflects the elimination of the tax-exempt status of
advance refunding bonds, as well as the reduction in the insured
portfolio subject to a call provision.
Fair value gains on credit derivatives were $21 million in third quarter
2018, compared with $58 million in third quarter 2017. Third quarter
2018 fair value gains were attributable primarily to price improvements
on the underlying collateral of the Company's insured credit default
swaps, while third quarter 2017 gains were attributable primarily to the
termination of several transactions, the runoff of net par outstanding
and changes in the Company's own credit risk. Except for credit
impairment, the fair value adjustments on credit derivatives in the
insured portfolio are non-economic adjustments that reverse to zero over
the remaining term of that portfolio.
Foreign exchange gains and losses relate primarily to premiums
receivable and are due mainly to changes in the exchange rate of the
British pound sterling relative to the United States (U.S.) dollar.
Third quarter 2018 foreign exchange losses were $9 million, compared
with gains of $17 million in third quarter 2017.
|
Condensed Consolidated Statements of Operations (unaudited)
(in millions)
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
Net earned premiums
|
|
|
|
$
|
142
|
|
|
$
|
186
|
|
|
Net investment income
|
|
|
|
98
|
|
|
99
|
|
|
Net realized investment gains (losses)
|
|
|
|
(7
|
)
|
|
7
|
|
|
Net change in fair value of credit derivatives:
|
|
|
|
|
|
|
|
Realized gains (losses) and other settlements
|
|
|
|
1
|
|
|
(1
|
)
|
|
Net unrealized gains (losses)
|
|
|
|
20
|
|
|
59
|
|
|
Net change in fair value of credit derivatives
|
|
|
|
21
|
|
|
58
|
|
|
Fair value gains (losses) on financial guaranty variable interest
entities (FG
VIEs)
|
|
|
|
5
|
|
|
3
|
|
|
Commutation gains (losses)
|
|
|
|
1
|
|
|
255
|
|
|
Other income (loss)
|
|
|
|
14
|
|
|
15
|
|
|
Total revenues
|
|
|
|
274
|
|
|
623
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Loss and LAE
|
|
|
|
17
|
|
|
223
|
|
|
Amortization of deferred acquisition costs
|
|
|
|
3
|
|
|
5
|
|
|
Interest expense
|
|
|
|
23
|
|
|
24
|
|
|
Other operating expenses
|
|
|
|
56
|
|
|
58
|
|
|
Total expenses
|
|
|
|
99
|
|
|
310
|
|
|
Income (loss) before income taxes
|
|
|
|
175
|
|
|
313
|
|
|
Provision (benefit) for income taxes
|
|
|
|
14
|
|
|
105
|
|
|
Net income (loss)
|
|
|
|
$
|
161
|
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Loss Development
Total economic loss development was de minimis in third quarter 2018.
Net economic development in U.S. residential mortgage-backed securities
(RMBS) was a benefit of $40 million due to improved performance of the
underlying collateral, while certain Puerto Rico exposures had increased
expected losses. The economic development attributable to changes in
discount rates was a benefit of $9 million in third quarter 2018.
|
Roll Forward of Net Expected Loss to be Paid (1)
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Expected
Loss to be
Paid (Recovered)
as of
June 30, 2018
|
|
Economic Loss
Development/
(Benefit)
|
|
Losses (Paid)/
Recovered
|
|
Net Expected
Loss to be
Paid (Recovered)
as of
September 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public finance
|
|
|
|
|
$
|
1,082
|
|
|
$
|
39
|
|
|
$
|
(251
|
)
|
|
$
|
870
|
|
U.S. RMBS
|
|
|
|
|
326
|
|
|
(40
|
)
|
|
17
|
|
|
303
|
|
Other structured finance
|
|
|
|
|
24
|
|
|
1
|
|
|
(7
|
)
|
|
18
|
|
Total
|
|
|
|
|
$
|
1,432
|
|
|
$
|
0
|
|
|
$
|
(241
|
)
|
|
$
|
1,191
|
|
|
________________________________________________
(1) Economic loss development represents the change in net expected loss
to be paid attributable to the effects of changes in assumptions based
on observed market trends, changes in discount rates, accretion of
discount and the economic effects of loss mitigation efforts. Economic
loss development is the principal measure that the Company uses to
evaluate the loss experience in its insured portfolio. Expected loss to
be paid includes all transactions insured by the Company, whether
written in insurance or credit derivative form, regardless of the
accounting model prescribed under accounting principles generally
accepted in the United States of America (GAAP).
New Business Production
Financial guaranty GWP includes amounts collected upfront on new
business written, the present value of future premiums on new business
written (discounted at risk free rates), as well as the effects of
changes in the estimated lives of transactions in the inforce book of
business. Non-financial guaranty GWP is recorded as premiums are
received. Non-GAAP PVP includes upfront premiums and future installments
on new business as estimated at the time of issuance, discounted at 6%
for all contracts.
|
New Business Production
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
GWP
|
|
PVP(1)
|
|
Gross Par
Written
|
|
GWP
|
|
PVP(1)
|
|
Gross Par
Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public finance - U.S.
|
|
|
|
$
|
24
|
|
|
$
|
33
|
|
|
$
|
2,338
|
|
|
$
|
37
|
|
|
$
|
39
|
|
|
$
|
3,328
|
|
Public finance - non - U.S.
|
|
|
|
17
|
|
|
12
|
|
|
189
|
|
|
8
|
|
|
4
|
|
|
89
|
|
Structured finance - U.S.
|
|
|
|
9
|
|
|
7
|
|
|
473
|
|
|
1
|
|
|
0
|
|
|
—
|
|
Structured finance - non-U.S.
|
|
|
|
0
|
|
|
0
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
$
|
50
|
|
|
$
|
52
|
|
|
$
|
3,001
|
|
|
$
|
45
|
|
|
$
|
43
|
|
|
$
|
3,417
|
|
|
________________________________________________
(1) Please see “Explanation of Non-GAAP Financial Measures” at the end
of this press release.
In the U.S. public finance sector, Assured Guaranty once again
guaranteed the majority of insured par issued.
Outside the U.S. the Company closed three new transactions during the
quarter: a guarantee of an accommodation project for Durham University;
a restructuring of an existing guarantee with a bank; and the Company's
first post-financial crisis transaction in Australia, a guarantee of a
bond issue for the Port of Brisbane. This is the twelfth consecutive
quarter that the Company generated new business outside the U.S.
Quarterly business activity in the international infrastructure sector
is influenced by typically long lead times and therefore may vary from
quarter to quarter.
In structured finance, the Company continued to execute transactions in
the aviation and commercial real estate markets, and guaranteed a
collateralized loan obligation for the first time since 2008.
Other Non-GAAP Financial Measures
Non-GAAP operating income was $161 million in third quarter 2018,
compared with $156 million in third quarter 2017. Non-GAAP operating
income in third quarter 2018 was higher than the comparable prior year
primarily due to lower loss and LAE, the gain on sale of TMC Bonds LLC,
and a lower effective tax rate, offset in part by lower commutation
gains and lower net earned premiums from accelerations in third quarter
2018.
Common Share Repurchases
|
Summary of Share Repurchases
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Number of
Shares
|
|
Average Price
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 (January 1 - March 31)
|
|
|
|
|
$
|
98
|
|
|
2.79
|
|
|
$
|
35.20
|
|
2018 (April 1 - June 30)
|
|
|
|
|
152
|
|
|
4.16
|
|
|
36.48
|
|
2018 (July 1 - September 30)
|
|
|
|
|
130
|
|
|
3.30
|
|
|
39.41
|
|
2018 (October 1 - November 8, 2018)
|
|
|
|
|
49
|
|
|
1.18
|
|
|
41.29
|
|
Total 2018
|
|
|
|
|
$
|
429
|
|
|
11.43
|
|
|
$
|
37.51
|
|
|
From 2013 through November 8, 2018, the Company repurchased a total of
92.7 million common shares at an average price of $28.52, representing
approximately 48% of the total shares outstanding at the beginning of
the repurchase program in 2013. On August 1, 2018, the Board of
Directors approved an incremental $250 million share repurchase
authorization. As of November 8, the Company was authorized to purchase
$169 million of its common shares. These repurchases can be made from
time to time in the open market or in privately negotiated transactions.
As in the past, the Company's execution of its capital management
strategy is contingent upon its available free cash and the capital
position of the parent company, market conditions, the maintenance of
its strong financial strength ratings and other factors. The repurchase
program may be modified, extended or terminated by the Board of
Directors at any time. It does not have an expiration date.
|
Condensed Consolidated Balance Sheets (unaudited)
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Investment portfolio:
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available-for-sale, at fair value
|
|
|
|
|
$
|
10,192
|
|
|
$
|
10,674
|
|
Short-term investments, at fair value
|
|
|
|
|
738
|
|
|
627
|
|
Other invested assets
|
|
|
|
|
95
|
|
|
94
|
|
Total investment portfolio
|
|
|
|
|
11,025
|
|
|
11,395
|
|
Cash
|
|
|
|
|
82
|
|
|
144
|
|
Premiums receivable, net of commissions payable
|
|
|
|
|
916
|
|
|
915
|
|
Ceded unearned premium reserve
|
|
|
|
|
61
|
|
|
119
|
|
Deferred acquisition costs
|
|
|
|
|
103
|
|
|
101
|
|
Salvage and subrogation recoverable
|
|
|
|
|
471
|
|
|
572
|
|
FG VIEs' assets, at fair value
|
|
|
|
|
596
|
|
|
700
|
|
Other assets
|
|
|
|
|
485
|
|
|
487
|
|
Total assets
|
|
|
|
|
$
|
13,739
|
|
|
$
|
14,433
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Unearned premium reserve
|
|
|
|
|
$
|
3,538
|
|
|
$
|
3,475
|
|
Loss and LAE reserve
|
|
|
|
|
1,147
|
|
|
1,444
|
|
Long-term debt
|
|
|
|
|
1,249
|
|
|
1,292
|
|
Credit derivative liabilities
|
|
|
|
|
239
|
|
|
271
|
|
FG VIEs' liabilities with recourse, at fair value
|
|
|
|
|
545
|
|
|
627
|
|
FG VIEs' liabilities without recourse, at fair value
|
|
|
|
|
104
|
|
|
130
|
|
Other liabilities
|
|
|
|
|
334
|
|
|
355
|
|
Total liabilities
|
|
|
|
|
7,156
|
|
|
7,594
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
1
|
|
|
1
|
|
Additional paid-in capital
|
|
|
|
|
200
|
|
|
573
|
|
Retained earnings
|
|
|
|
|
6,303
|
|
|
5,892
|
|
Accumulated other comprehensive income
|
|
|
|
|
78
|
|
|
372
|
|
Deferred equity compensation
|
|
|
|
|
1
|
|
|
1
|
|
Total shareholders' equity
|
|
|
|
|
6,583
|
|
|
6,839
|
|
Total liabilities and shareholders' equity
|
|
|
|
|
$
|
13,739
|
|
|
$
|
14,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Explanation of Non-GAAP Financial Measures
To reflect the key financial measures that management analyzes in
evaluating the Company’s operations and progress towards long-term
goals, the Company discloses both financial measures determined in
accordance with GAAP and financial measures not determined in accordance
with GAAP (non-GAAP financial measures).
Financial measures identified as non-GAAP should not be considered
substitutes for GAAP financial measures. The primary limitation of
non-GAAP financial measures is the potential lack of comparability to
financial measures of other companies, whose definitions of non-GAAP
financial measures may differ from those of the Company.
By disclosing non-GAAP financial measures, the Company gives investors,
analysts and financial news reporters access to information that
management and the Board of Directors review internally. The Company
believes its presentation of non-GAAP financial measures, along with the
effect of FG VIE consolidation, provides information that is necessary
for analysts to calculate their estimates of Assured Guaranty’s
financial results in their research reports on Assured Guaranty and for
investors, analysts and the financial news media to evaluate Assured
Guaranty’s financial results.
GAAP requires the Company to consolidate certain VIEs that have issued
debt obligations insured by the Company. However, the Company does not
own such VIEs and its exposure is limited to its obligation under its
financial guaranty insurance contract. Management and the Board of
Directors use non-GAAP financial measures adjusted to remove FG VIE
consolidation (which the Company refers to as its core financial
measures), as well as GAAP financial measures and other factors, to
evaluate the Company’s results of operations, financial condition and
progress towards long-term goals. The Company uses these core financial
measures in its decision making process and in its calculation of
certain components of management compensation. Wherever possible, the
Company has separately disclosed the effect of FG VIE consolidation.
Many investors, analysts and financial news reporters use non-GAAP
operating shareholders’ equity, adjusted to remove the effect of FG VIE
consolidation, as the principal financial measure for valuing AGL’s
current share price or projected share price and also as the basis of
their decision to recommend, buy or sell AGL’s common shares. Many of
the Company’s fixed income investors also use this measure to evaluate
the Company’s capital adequacy.
Many investors, analysts and financial news reporters also use non-GAAP
adjusted book value, adjusted to remove the effect of FG VIE
consolidation, to evaluate AGL’s share price and as the basis of their
decision to recommend, buy or sell the AGL common shares. Non-GAAP
operating income adjusted for the effect of FG VIE consolidation enables
investors and analysts to evaluate the Company’s financial results in
comparison with the consensus analyst estimates distributed publicly by
financial databases.
The core financial measures that the Company uses to help determine
compensation are: (1) non-GAAP operating income, adjusted to remove the
effect of FG VIE consolidation, (2) non-GAAP operating shareholders'
equity, adjusted to remove the effect of FG VIE consolidation, (3)
growth in non-GAAP adjusted book value per share, adjusted to remove the
effect of FG VIE consolidation, and (4) PVP.
The following paragraphs and tables define each non-GAAP financial
measure disclosed by the Company and describe why it is useful. A
reconciliation of the non-GAAP financial measure and the most directly
comparable GAAP financial measure is presented below.
Non-GAAP Operating Income
Management believes that non-GAAP operating income is a useful measure
because it clarifies the understanding of the underwriting results and
financial condition of the Company and presents the results of
operations of the Company excluding the fair value adjustments on credit
derivatives and CCS that are not expected to result in economic gain or
loss, as well as other adjustments described below. Management adjusts
non-GAAP operating income further by removing FG VIE consolidation to
arrive at its core operating income measure. Non-GAAP operating income
is defined as net income (loss) attributable to AGL, as reported under
GAAP, adjusted for the following:
1) Elimination of realized gains (losses) on the Company’s investments,
except for gains and losses on securities classified as trading. The
timing of realized gains and losses, which depends largely on market
credit cycles, can vary considerably across periods. The timing of sales
is largely subject to the Company’s discretion and influenced by market
opportunities, as well as the Company’s tax and capital profile.
2) Elimination of non-credit-impairment unrealized fair value gains
(losses) on credit derivatives that are recognized in net income, which
is the amount of unrealized fair value gains (losses) in excess of the
present value of the expected estimated economic credit losses, and
non-economic payments. Such fair value adjustments are heavily affected
by, and in part fluctuate with, changes in market interest rates, the
Company's credit spreads, and other market factors and are not expected
to result in an economic gain or loss.
3) Elimination of fair value gains (losses) on the Company’s CCS that
are recognized in net income. Such amounts are affected by changes in
market interest rates, the Company's credit spreads, price indications
on the Company's publicly traded debt, and other market factors and are
not expected to result in an economic gain or loss.
4) Elimination of foreign exchange gains (losses) on remeasurement of
net premium receivables and loss and LAE reserves that are recognized in
net income. Long-dated receivables and loss and LAE reserves represent
the present value of future contractual or expected cash flows.
Therefore, the current period’s foreign exchange remeasurement gains
(losses) are not necessarily indicative of the total foreign exchange
gains (losses) that the Company will ultimately recognize.
5) Elimination of the tax effects related to the above adjustments,
which are determined by applying the statutory tax rate in each of the
jurisdictions that generate these adjustments.
|
Summary Reconciliation of
|
|
GAAP Net Income to Non-GAAP Operating Income
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
Total
|
|
Per Diluted
Share
|
|
Total
|
|
Per Diluted
Share
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
161
|
|
|
$
|
1.47
|
|
|
$
|
208
|
|
|
$
|
1.72
|
|
|
Less pre-tax adjustments:
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on investments
|
|
(7
|
)
|
|
(0.07
|
)
|
|
7
|
|
|
0.06
|
|
|
Non-credit impairment unrealized fair value
gains (losses) on credit derivatives
|
|
17
|
|
|
0.16
|
|
|
55
|
|
|
0.46
|
|
|
Fair value gains (losses) on committed capital
securities (CCS)
|
|
(1
|
)
|
|
(0.01
|
)
|
|
(4
|
)
|
|
(0.03
|
)
|
|
Foreign exchange gains (losses) on
remeasurement of premiums receivable and
loss and LAE reserves
|
|
(8
|
)
|
|
(0.07
|
)
|
|
18
|
|
|
0.14
|
|
|
Total pre-tax adjustments
|
|
1
|
|
|
0.01
|
|
|
76
|
|
|
0.63
|
|
|
Less tax effect on pre-tax adjustments
|
|
(1
|
)
|
|
(0.01
|
)
|
|
(24
|
)
|
|
(0.20
|
)
|
|
Non-GAAP operating income
|
|
$
|
161
|
|
|
$
|
1.47
|
|
|
$
|
156
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) related to FG VIE consolidation
(net of tax provision (benefit) of $0 and $(1))
included in non-GAAP operating income
|
|
$
|
(2
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(1
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
Non-GAAP Operating Income Adjustments and
|
|
Effect of FG VIE Consolidation
|
|
(in millions)
|
|
|
|
|
|
Quarter Ended
|
|
Quarter Ended
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
|
Non-GAAP
Operating
Income
Adjustments
(1)
|
|
Effect of FG
VIE
Consolidation
(2)
|
|
Non-GAAP
Operating
Income
Adjustments
(1)
|
|
Effect of FG
VIE
Consolidation
(2)
|
|
Adjustments to revenues:
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
Net investment income
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
Net realized investment gains (losses)
|
|
(7
|
)
|
|
—
|
|
|
7
|
|
|
—
|
|
|
Net change in fair value of credit derivatives
|
|
16
|
|
|
—
|
|
|
54
|
|
|
—
|
|
|
Fair value gains (losses) on FG VIEs
|
|
—
|
|
|
5
|
|
|
—
|
|
|
3
|
|
|
Other income (loss)
|
|
(9
|
)
|
|
0
|
|
|
14
|
|
|
0
|
|
|
Total revenue adjustments
|
|
0
|
|
|
1
|
|
|
75
|
|
|
(3
|
)
|
|
Adjustments to expenses:
|
|
|
|
|
|
|
|
|
|
Loss expense
|
|
(1
|
)
|
|
3
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Total expense adjustments
|
|
(1
|
)
|
|
3
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Pre-tax adjustments
|
|
1
|
|
|
(2
|
)
|
|
76
|
|
|
(2
|
)
|
|
Tax effect of adjustments
|
|
1
|
|
|
0
|
|
|
24
|
|
|
(1
|
)
|
|
After-tax adjustments
|
|
$
|
0
|
|
|
$
|
(2
|
)
|
|
$
|
52
|
|
|
$
|
(1
|
)
|
|
|
________________________________________________
(1) The "Non-GAAP Operating Income Adjustments" column represents the
amounts recorded in the condensed consolidated statements of operations
that the Company removes to arrive at non-GAAP operating income.
(2) The "Effect of FG VIE Consolidation" column represents the amounts
included in the condensed consolidated statements of operations and
non-GAAP operating income that the Company removes to arrive at the core
financial measures that management uses in certain of its compensation
calculations and its decision making process.
Non-GAAP Operating Shareholders’ Equity and Non-GAAP Adjusted Book
Value
Management believes that non-GAAP operating shareholders’ equity is a
useful measure because it presents the equity of the Company excluding
the fair value adjustments on investments, credit derivatives and CCS,
that are not expected to result in economic gain or loss, along with
other adjustments described below. Management adjusts non-GAAP operating
shareholders’ equity further by removing FG VIE consolidation to arrive
at its core operating shareholders' equity and core adjusted book value.
Non-GAAP operating shareholders’ equity is the basis of the calculation
of non-GAAP adjusted book value (see below). Non-GAAP operating
shareholders’ equity is defined as shareholders’ equity attributable to
AGL, as reported under GAAP, adjusted for the following:
1) Elimination of non-credit-impairment unrealized fair value gains
(losses) on credit derivatives, which is the amount of unrealized fair
value gains (losses) in excess of the present value of the expected
estimated economic credit losses, and non-economic payments. Such fair
value adjustments are heavily affected by, and in part fluctuate with,
changes in market interest rates, credit spreads and other market
factors and are not expected to result in an economic gain or loss.
2) Elimination of fair value gains (losses) on the Company’s CCS. Such
amounts are affected by changes in market interest rates, the Company's
credit spreads, price indications on the Company's publicly traded debt,
and other market factors and are not expected to result in an economic
gain or loss.
3) Elimination of unrealized gains (losses) on the Company’s investments
that are recorded as a component of accumulated other comprehensive
income (AOCI) (excluding foreign exchange remeasurement). The AOCI
component of the fair value adjustment on the investment portfolio is
not deemed economic because the Company generally holds these
investments to maturity and therefore should not recognize an economic
gain or loss.
4) Elimination of the tax effects related to the above adjustments,
which are determined by applying the statutory tax rate in each of the
jurisdictions that generate these adjustments.
Management uses non-GAAP adjusted book value, adjusted for FG VIE
consolidation, to measure the intrinsic value of the Company, excluding
franchise value. Growth in non-GAAP adjusted book value per share,
adjusted for FG VIE consolidation (core adjusted book value), is one of
the key financial measures used in determining the amount of certain
long-term compensation elements to management and employees and used by
rating agencies and investors. Management believes that non-GAAP
adjusted book value is a useful measure because it enables an evaluation
of the Company’s in-force premiums and revenues net of expected losses.
Non-GAAP adjusted book value is non-GAAP operating shareholders’ equity,
as defined above, further adjusted for the following:
1) Elimination of deferred acquisition costs, net. These amounts
represent net deferred expenses that have already been paid or accrued
and will be expensed in future accounting periods.
2) Addition of the net present value of estimated net future revenue on
non-financial guaranty contracts. See below.
3) Addition of the deferred premium revenue on financial guaranty
contracts in excess of expected loss to be expensed, net of reinsurance.
This amount represents the expected future net earned premiums, net of
expected losses to be expensed, which are not reflected in GAAP equity.
4) Elimination of the tax effects related to the above adjustments,
which are determined by applying the statutory tax rate in each of the
jurisdictions that generate these adjustments.
The unearned premiums and revenues included in non-GAAP adjusted book
value will be earned in future periods, but actual earnings may differ
materially from the estimated amounts used in determining current
non-GAAP adjusted book value due to changes in foreign exchange rates,
prepayment speeds, terminations, credit defaults and other factors.
|
Reconciliation of GAAP Shareholders' Equity to
|
|
Non-GAAP Operating Shareholders' Equity and Non-GAAP Adjusted
Book Value
|
|
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
Total
|
|
Per Share
|
|
Total
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
$
|
6,583
|
|
|
$
|
61.73
|
|
|
$
|
6,839
|
|
|
$
|
58.95
|
|
|
Less pre-tax adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit impairment unrealized fair value gains
(losses) on credit derivatives
|
|
|
|
|
(55
|
)
|
|
(0.51
|
)
|
|
(146
|
)
|
|
(1.26
|
)
|
|
Fair value gains (losses) on CCS
|
|
|
|
|
57
|
|
|
0.53
|
|
|
60
|
|
|
0.52
|
|
|
Unrealized gain (loss) on investment portfolio
excluding foreign exchange effect
|
|
|
|
|
215
|
|
|
2.02
|
|
|
487
|
|
|
4.20
|
|
|
Less taxes
|
|
|
|
|
(54
|
)
|
|
(0.51
|
)
|
|
(83
|
)
|
|
(0.71
|
)
|
|
Non-GAAP operating shareholders' equity
|
|
|
|
|
6,420
|
|
|
60.20
|
|
|
6,521
|
|
|
56.20
|
|
|
Pre-tax adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred acquisition costs
|
|
|
|
|
103
|
|
|
0.97
|
|
|
101
|
|
|
0.87
|
|
|
Plus: Net present value of estimated net future
revenue
|
|
|
|
|
211
|
|
|
1.99
|
|
|
146
|
|
|
1.26
|
|
|
Plus: Net unearned premium reserve on financial
guaranty contracts in excess of expected loss to be
expensed
|
|
|
|
|
3,012
|
|
|
28.24
|
|
|
2,966
|
|
|
25.56
|
|
|
Plus taxes
|
|
|
|
|
(528
|
)
|
|
(4.95
|
)
|
|
(512
|
)
|
|
(4.41
|
)
|
|
Non-GAAP adjusted book value
|
|
|
|
|
$
|
9,012
|
|
|
$
|
84.51
|
|
|
$
|
9,020
|
|
|
$
|
77.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) related to FG VIE consolidation
included in non-GAAP operating shareholders'
equity (net of tax provision of $1 and $2)
|
|
|
|
|
$
|
3
|
|
|
$
|
0.03
|
|
|
$
|
5
|
|
|
$
|
0.03
|
|
|
Gain (loss) related to FG VIE consolidation
included in non-GAAP adjusted book value (net
of tax benefit of $4 and $3)
|
|
|
|
|
$
|
(14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(14
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding at the end of the period
|
|
|
|
|
106.6
|
|
|
|
|
116.0
|
|
|
|
|
|
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it
enables an evaluation of the value of future estimated revenue for
non-financial guaranty insurance contracts. There is no corresponding
GAAP financial measure. This amount represents the present value of
estimated future revenue from the Company’s non-financial guaranty
insurance contracts, net of reinsurance, ceding commissions and premium
taxes, for contracts without expected economic losses, and is discounted
at 6%. Estimated net future revenue may change from period to period due
to changes in foreign exchange rates, prepayment speeds, terminations,
credit defaults or other factors that affect par outstanding or the
ultimate maturity of an obligation.
PVP or Present Value of New Business Production
Management believes that PVP is a useful measure because it enables the
evaluation of the value of new business production for the Company by
taking into account the value of estimated future installment premiums
on all new contracts underwritten in a reporting period as well as
premium supplements and additional installment premium on existing
contracts as to which the issuer has the right to call the insured
obligation but has not exercised such right, whether in insurance or
credit derivative contract form, which management believes GAAP gross
written premiums and the net credit derivative premiums received and
receivable portion of net realized gains and other settlements on credit
derivatives (Credit Derivative Realized Gains (Losses)) do not
adequately measure. PVP in respect of contracts written in a specified
period is defined as gross upfront and installment premiums received and
the present value of gross estimated future installment premiums,
discounted, in each case, at 6%. Under GAAP, financial guaranty
installment premiums are discounted at a risk free rate. Additionally,
under GAAP, management records future installment premiums on financial
guaranty insurance contracts covering non-homogeneous pools of assets
based on the contractual term of the transaction, whereas for PVP
purposes, management records an estimate of the future installment
premiums the Company expects to receive, which may be based upon a
shorter period of time than the contractual term of the transaction.
Actual future earned or written premiums and Credit Derivative Realized
Gains (Losses) may differ from PVP due to factors including, but not
limited to, changes in foreign exchange rates, prepayment speeds,
terminations, credit defaults, or other factors that affect par
outstanding or the ultimate maturity of an obligation.
|
Reconciliation of GWP to PVP
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
Public Finance
|
|
Structured Finance
|
|
|
|
|
|
|
|
|
U.S.
|
|
Non - U.S.
|
|
U.S.
|
|
Non - U.S.
|
|
Total
|
|
GWP
|
|
|
|
|
$
|
24
|
|
|
$
|
17
|
|
|
$
|
9
|
|
|
$
|
0
|
|
|
$
|
50
|
|
Less: Installment GWP and other GAAP
adjustments(1)
|
|
|
|
|
(9
|
)
|
|
17
|
|
|
4
|
|
|
0
|
|
|
12
|
|
Upfront GWP
|
|
|
|
|
33
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
38
|
|
Plus: Installment premium PVP
|
|
|
|
|
0
|
|
|
12
|
|
|
2
|
|
|
0
|
|
|
14
|
|
PVP
|
|
|
|
|
$
|
33
|
|
|
$
|
12
|
|
|
$
|
7
|
|
|
$
|
0
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Public Finance
|
|
Structured Finance
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Non - U.S.
|
|
U.S.
|
|
Non - U.S.
|
|
Total
|
|
GWP
|
|
|
|
|
|
$
|
37
|
|
|
$
|
8
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
45
|
|
Less: Installment GWP and other GAAP
adjustments(1)
|
|
|
|
|
|
2
|
|
|
8
|
|
|
1
|
|
|
(1
|
)
|
|
10
|
|
Upfront GWP
|
|
|
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Plus: Installment premium PVP
|
|
|
|
|
|
4
|
|
|
4
|
|
|
0
|
|
|
—
|
|
|
8
|
|
PVP
|
|
|
|
|
|
$
|
39
|
|
|
$
|
4
|
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________________
(1) Includes present value of new business on installment policies
discounted at the prescribed GAAP discount rates, GWP adjustments on
existing installment policies due to changes in assumptions, any
cancellations of assumed reinsurance contracts, and other GAAP
adjustments.
Conference Call and Webcast Information
The Company will host a conference call for investors at 8:00 a.m.
Eastern Time (9:00 a.m. Atlantic Time) on Friday, November 9, 2018. The
conference call will be available via live and archived webcast in the
Investor Information section of the Company's website at AssuredGuaranty.com
or by dialing 1-877-281-1545 (in the U.S.) or 1-412-902-6609
(International). A replay of the call will be made available through
February 8, 2019. To listen to the replay, dial 1-877-344-7529 (in the
U.S.) or 1-412-317-0088 (International), passcode 10125893. The replay
will be available one hour after the conference call ends.
Please refer to Assured Guaranty's September 30, 2018 Financial
Supplement, which is posted on the Company's website at assuredguaranty.com/investor-information/by-company/assured-guaranty-ltd,
for more information on the Company's financial guaranty portfolio,
investment portfolio and other items. The Company is also posting on the
same page of its website:
-
“Public Finance Transactions in 3Q 2018,” which lists the U.S. public
finance new issues insured by the Company in third quarter 2018, and
-
“Structured Finance Transactions at September 30, 2018,” which lists
the Company's structured finance exposure as of that date.
In addition, the Company is posting at assuredguaranty.com/presentations
the “September 30, 2018 Equity Investor Presentation.” Furthermore, the
Company's separate-company subsidiary financial supplements and its
Fixed Income Presentation for the current quarter will be posted on the
Company's website when available. Those documents will be furnished to
the Securities and Exchange Commission in a Current Report on Form 8-K.
Assured Guaranty Ltd. is a publicly traded (NYSE: AGO) Bermuda-based
holding company. Its operating subsidiaries provide credit enhancement
products to the U.S. and international public finance, infrastructure
and structured finance markets. More information on Assured Guaranty
Ltd. and its subsidiaries can be found at AssuredGuaranty.com.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statements made in this press release reflect the
Company's current views with respect to future events and financial
performance and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements
involve risks and uncertainties that may cause actual results to differ
materially from those set forth in these statements. For example,
Assured Guaranty's calculations of non-GAAP adjusted book value, PVP,
net present value of estimated future installment premiums in force and
total estimated net future premium earnings and statements regarding its
capital position and demand for its insurance and other forward-looking
statements could be affected by reduction in the amount of available
insurance opportunities and/or in the demand for Assured Guaranty's
insurance; rating agency action, including a ratings downgrade, a change
in outlook, the placement of ratings on watch for downgrade, or a change
in rating criteria, at any time, of AGL or any of its subsidiaries,
and/or of any securities AGL or any of its subsidiaries have issued,
and/or of transactions that AGL’s subsidiaries have insured;
developments in the world’s financial and capital markets that adversely
affect obligors’ payment rates or Assured Guaranty’s loss experience;
the possibility that budget or pension shortfalls or other factors will
result in credit losses or impairments on obligations of state,
territorial and local governments and their related authorities and
public corporations that Assured Guaranty insures or reinsures; the
failure of Assured Guaranty to realize loss recoveries that are assumed
in its expected loss estimates; increased competition, including from
new entrants into the financial guaranty industry; rating agency action
on obligors, including sovereign debtors, resulting in a reduction in
the value of securities in Assured Guaranty's investment portfolio and
in collateral posted by and to Assured Guaranty; the inability of
Assured Guaranty to access external sources of capital on acceptable
terms; changes in the world’s credit markets, segments thereof, interest
rates or general economic conditions; the impact of market volatility on
the mark-to-market of Assured Guaranty’s contracts written in credit
default swap form; changes in applicable accounting policies or
practices; changes in applicable laws or regulations, including
insurance, bankruptcy and tax laws, or other governmental actions; the
impact of changes in the world’s economy and credit and currency markets
and in applicable laws or regulations relating to the decision of the
United Kingdom to exit the European Union; the possibility that
acquisitions or alternative investments made by Assured Guaranty do not
result in the benefits anticipated or subject Assured Guaranty to
unanticipated consequences; deterioration in the financial condition of
Assured Guaranty’s reinsurers, the amount and timing of reinsurance
recoverables actually received and the risk that reinsurers may dispute
amounts owed to Assured Guaranty under its reinsurance agreements;
difficulties with the execution of Assured Guaranty’s business strategy;
loss of key personnel; the effects of mergers, acquisitions and
divestitures; natural or man-made catastrophes; other risk factors
identified in AGL's filings with the U.S. Securities and Exchange
Commission; other risks and uncertainties that have not been identified
at this time; and management’s response to these factors. Readers are
cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of November 8,
2018, and Assured Guaranty undertakes no obligation to update publicly
or review any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as required by law.
