UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
transition Period from to
Commission File No. 001-32141
ASSURED GUARANTY LTD.
(Exact name of registrant as specified in its charter)
Bermuda |
|
98-0429991 |
(State or other jurisdiction of incorporation) |
|
(I.R.S. employer identification no.) |
30 Woodbourne Avenue
Hamilton
HM 08
Bermuda
(address of principal executive office)
(441) 299-9375
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
|
Accelerated filer o |
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of registrants Common Shares ($0.01 par value) outstanding as of April 30, 2007 was 67,784,233.
ASSURED GUARANTY LTD.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
Assured Guaranty
Ltd.
Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)
(Unaudited)
|
|
March 31, |
|
December 31, |
|
||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Assets |
|
|
|
|
|
||
Fixed maturity securities, at fair value (amortized cost: $2,348,359 in 2007 and $2,286,373 in 2006) |
|
$ |
2,391,702 |
|
$ |
2,331,071 |
|
Short-term investments, at cost which approximates fair value |
|
96,668 |
|
134,064 |
|
||
|
|
|
|
|
|
||
Total investments |
|
2,488,370 |
|
2,465,135 |
|
||
Cash and cash equivalents |
|
5,714 |
|
4,785 |
|
||
Accrued investment income |
|
23,617 |
|
24,195 |
|
||
Deferred acquisition costs |
|
220,413 |
|
217,029 |
|
||
Prepaid reinsurance premiums |
|
9,513 |
|
7,500 |
|
||
Reinsurance recoverable on ceded losses |
|
10,596 |
|
10,889 |
|
||
Premiums receivable |
|
36,188 |
|
41,565 |
|
||
Goodwill |
|
85,417 |
|
85,417 |
|
||
Unrealized gains on derivative financial instruments |
|
45,627 |
|
52,596 |
|
||
Other assets |
|
27,604 |
|
26,229 |
|
||
Total assets |
|
$ |
2,953,059 |
|
$ |
2,935,340 |
|
|
|
|
|
|
|
||
Liabilities and shareholders equity |
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Unearned premium reserves |
|
$ |
661,034 |
|
$ |
644,496 |
|
Reserves for losses and loss adjustment expenses |
|
120,967 |
|
120,600 |
|
||
Profit commissions payable |
|
16,754 |
|
35,994 |
|
||
Reinsurance balances payable |
|
2,743 |
|
7,199 |
|
||
Current income taxes payable |
|
6,505 |
|
7,196 |
|
||
Deferred income taxes |
|
21,106 |
|
39,906 |
|
||
Funds held by Company under reinsurance contracts |
|
24,661 |
|
21,412 |
|
||
Unrealized losses on derivative financial instruments |
|
9,432 |
|
6,687 |
|
||
Senior Notes |
|
197,383 |
|
197,375 |
|
||
Series A Enhanced Junior Subordinated Debentures |
|
149,716 |
|
149,708 |
|
||
Liability for tax basis step-up adjustment |
|
10,453 |
|
14,990 |
|
||
Other liabilities |
|
38,009 |
|
39,016 |
|
||
Total liabilities |
|
1,258,763 |
|
1,284,579 |
|
||
Commitments and contingencies |
|
|
|
|
|
||
Shareholders equity |
|
|
|
|
|
||
Common stock ($0.01 par value, 500,000,000 shares authorized; 67,675,749 and 67,534,024 shares issued and outstanding in 2007 and 2006) |
|
677 |
|
675 |
|
||
Additional paid-in capital |
|
716,550 |
|
711,256 |
|
||
Retained earnings |
|
935,726 |
|
896,947 |
|
||
Accumulated other comprehensive income |
|
41,343 |
|
41,883 |
|
||
Total shareholders equity |
|
1,694,296 |
|
1,650,761 |
|
||
Total liabilities and shareholders equity |
|
$ |
2,953,059 |
|
$ |
2,935,340 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Assured Guaranty Ltd.
Consolidated Statements of Operations and Comprehensive Income
(in thousands of U.S. dollars except per share amounts)
(Unaudited)
|
|
Three Months Ended |
|
||||
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
||
Revenues |
|
|
|
|
|
||
Gross written premiums |
|
$ |
72,540 |
|
$ |
55,384 |
|
Ceded premiums |
|
(4,158 |
) |
(4,600 |
) |
||
Net written premiums |
|
68,382 |
|
50,784 |
|
||
Increase in net unearned premium reserves |
|
(14,512 |
) |
(2,729 |
) |
||
Net earned premiums |
|
53,870 |
|
48,055 |
|
||
Net investment income |
|
31,482 |
|
26,238 |
|
||
Net realized investment losses |
|
(279 |
) |
(1,006 |
) |
||
Unrealized (losses) gains on derivative financial instruments |
|
(9,714 |
) |
29 |
|
||
Total revenues |
|
75,359 |
|
73,316 |
|
||
|
|
|
|
|
|
||
Expenses |
|
|
|
|
|
||
Loss and loss adjustment expenses |
|
(4,729 |
) |
(382 |
) |
||
Profit commission expense |
|
1,613 |
|
1,308 |
|
||
Acquisition costs |
|
10,811 |
|
10,785 |
|
||
Other operating expenses |
|
20,703 |
|
17,150 |
|
||
Interest expense |
|
6,033 |
|
3,375 |
|
||
Other expense |
|
601 |
|
614 |
|
||
Total expenses |
|
35,032 |
|
32,850 |
|
||
|
|
|
|
|
|
||
Income before provision for income taxes |
|
40,327 |
|
40,466 |
|
||
Provision (benefit) for income taxes |
|
|
|
|
|
||
Current |
|
3,671 |
|
2,643 |
|
||
Deferred |
|
(2,295 |
) |
2,941 |
|
||
Total provision for income taxes |
|
1,376 |
|
5,584 |
|
||
Net income |
|
38,951 |
|
34,882 |
|
||
Other comprehensive loss, net of taxes |
|
|
|
|
|
||
Unrealized holding losses on fixed maturity securities arising during the period |
|
(685 |
) |
(24,227 |
) |
||
Reclassification adjustment for realized losses included in net income |
|
221 |
|
658 |
|
||
Change in net unrealized gains on fixed maturity securities |
|
(464 |
) |
(23,569 |
) |
||
Change in cumulative translation adjustment |
|
29 |
|
167 |
|
||
Change in cash flow hedge |
|
(105 |
) |
(105 |
) |
||
Other comprehensive loss, net of taxes |
|
(540 |
) |
(23,507 |
) |
||
Comprehensive income |
|
$ |
38,411 |
|
$ |
11,375 |
|
|
|
|
|
|
|
||
Earnings per share: |
|
|
|
|
|
||
Basic |
|
$ |
0.58 |
|
$ |
0.47 |
|
Diluted |
|
$ |
0.57 |
|
$ |
0.47 |
|
Dividends per share |
|
$ |
0.04 |
|
$ |
0.035 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Assured Guaranty Ltd.
Consolidated Statements of Shareholders Equity
For the Three Months Ended March 31, 2007
(in thousands of U.S. dollars except per share amounts)
(Unaudited)
|
|
Common |
|
Additional |
|
Retained |
|
Accumulated |
|
Total |
|
|||||
Balance, December 31, 2006 |
|
$ |
675 |
|
$ |
711,256 |
|
$ |
896,947 |
|
$ |
41,883 |
|
$ |
1,650,761 |
|
Cumulative effect of FIN 48 adoption |
|
|
|
|
|
2,629 |
|
|
|
2,629 |
|
|||||
Net income |
|
|
|
|
|
38,951 |
|
|
|
38,951 |
|
|||||
Dividends ($0.04 per share) |
|
|
|
|
|
(2,801 |
) |
|
|
(2,801 |
) |
|||||
Shares cancelled to pay withholding taxes |
|
(1 |
) |
(1,794 |
) |
|
|
|
|
(1,795 |
) |
|||||
Stock options exercises |
|
1 |
|
787 |
|
|
|
|
|
788 |
|
|||||
Tax benefit for stock options exercised |
|
|
|
96 |
|
|
|
|
|
96 |
|
|||||
Share-based compensation and other |
|
2 |
|
6,205 |
|
|
|
|
|
6,207 |
|
|||||
Change in cash flow hedge, net of tax of $(56) |
|
|
|
|
|
|
|
(105 |
) |
(105 |
) |
|||||
Change in cumulative translation adjustment |
|
|
|
|
|
|
|
29 |
|
29 |
|
|||||
Unrealized loss on fixed maturity securities, net of tax of $(887) |
|
|
|
|
|
|
|
(464 |
) |
(464 |
) |
|||||
Balance, March 31, 2007 |
|
$ |
677 |
|
$ |
716,550 |
|
$ |
935,726 |
|
$ |
41,343 |
|
$ |
1,694,296 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Assured Guaranty
Ltd.
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(Unaudited)
|
|
Three Months Ended |
|
||||
|
|
2007 |
|
2006 |
|
||
Operating activities |
|
|
|
|
|
||
Net income |
|
$ |
38,951 |
|
$ |
34,882 |
|
Adjustments to reconcile net income to net cash flows provided by operating activities: |
|
|
|
|
|
||
Non-cash interest and operating expenses |
|
6,582 |
|
3,893 |
|
||
Net amortization of premium on fixed maturity securities |
|
267 |
|
1,521 |
|
||
(Benefit) provision for deferred income taxes |
|
(2,295 |
) |
2,941 |
|
||
Net realized investment losses |
|
279 |
|
1,006 |
|
||
Change in unrealized losses (gains) on derivative financial instruments |
|
9,714 |
|
(29 |
) |
||
Change in deferred acquisition costs |
|
(3,384 |
) |
(2,455 |
) |
||
Change in accrued investment income |
|
578 |
|
909 |
|
||
Change in premiums receivable |
|
5,377 |
|
6,027 |
|
||
Change in prepaid reinsurance premiums |
|
(2,013 |
) |
(866 |
) |
||
Change in unearned premium reserves |
|
16,538 |
|
3,595 |
|
||
Change in reserves for losses and loss adjustment expenses, net |
|
(3,669 |
) |
1,480 |
|
||
Change in profit commissions payable |
|
(19,240 |
) |
(24,945 |
) |
||
Change in funds held by Company under reinsurance contracts |
|
3,249 |
|
2,776 |
|
||
Change in current income taxes |
|
(691 |
) |
(96 |
) |
||
Change in liability for tax basis step-up adjustment |
|
(4,537 |
) |
(186 |
) |
||
Other |
|
(15,703 |
) |
(10,126 |
) |
||
Net cash flows provided by operating activities |
|
30,003 |
|
20,327 |
|
||
|
|
|
|
|
|
||
Investing activities |
|
|
|
|
|
||
Fixed maturity securities: |
|
|
|
|
|
||
Purchases |
|
(281,321 |
) |
(260,522 |
) |
||
Sales |
|
212,870 |
|
260,035 |
|
||
Maturities |
|
6,020 |
|
|
|
||
Sales (purchases) of short-term investments, net |
|
37,722 |
|
(19,238 |
) |
||
Net cash flows used in investing activities |
|
(24,709 |
) |
(19,725 |
) |
||
|
|
|
|
|
|
||
Financing activities |
|
|
|
|
|
||
Dividends paid |
|
(2,760 |
) |
(2,632 |
) |
||
Share activity under option and incentive plans |
|
(1,444 |
) |
(436 |
) |
||
Tax benefit from employee stock options |
|
96 |
|
|
|
||
Debt issue costs |
|
(425 |
) |
|
|
||
Net cash flows used in financing activities |
|
(4,533 |
) |
(3,068 |
) |
||
Effect of exchange rate changes |
|
168 |
|
22 |
|
||
Increase (decrease) increase in cash and cash equivalents |
|
929 |
|
(2,444 |
) |
||
Cash and cash equivalents at beginning of period |
|
4,785 |
|
6,190 |
|
||
Cash and cash equivalents at end of period |
|
$ |
5,714 |
|
$ |
3,746 |
|
|
|
|
|
|
|
||
Supplementary cash flow information |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Income taxes |
|
$ |
8,400 |
|
$ |
2,740 |
|
Interest |
|
$ |
210 |
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements
March 31, 2007
(Unaudited)
1. Business and Organization
Assured Guaranty Ltd. (the Company) is a Bermuda-based holding company which provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance and mortgage markets. Credit enhancement products are financial guarantees or other types of support, including credit derivatives, that improve the credit of underlying debt obligations. Assured Guaranty Ltd. applies its credit expertise, risk management skills and capital markets experience to develop insurance, reinsurance and derivative products that meet the credit enhancement needs of its customers. Under a reinsurance agreement, the reinsurer, in consideration of a premium paid to it, agrees to indemnify another insurer, called the ceding company, for part or all of the liability of the ceding company under one or more insurance policies that the ceding company has issued. A derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying security. Assured Guaranty Ltd. markets its products directly to and through financial institutions, serving the U.S. and international markets. Assured Guaranty Ltd.s financial results include four principal business segments: financial guaranty direct, financial guaranty reinsurance, mortgage guaranty and other. These segments are further discussed in Note 10.
Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. A loss event occurs upon existing or anticipated credit deterioration, while a payment under a policy occurs when the insured obligation defaults. This requires the Company to pay the required principal and interest when due in accordance with the underlying contract. The principal types of obligations covered by the Companys financial guaranty direct and financial guaranty assumed reinsurance businesses are structured finance obligations and public finance obligations. Because both businesses involve similar risks, the Company analyzes and monitors its financial guaranty direct portfolio and financial guaranty assumed reinsurance portfolio on a unified process and procedure basis.
Mortgage guaranty insurance is a specialized class of credit insurance that provides protection to mortgage lending institutions against the default of borrowers on mortgage loans that, at the time of the advance, had a loan to value in excess of a specified ratio. Reinsurance in the mortgage guaranty insurance industry is used to increase the insurance capacity of the ceding company, to assist the ceding company in meeting applicable regulatory and rating agency requirements, to augment the financial strength of the ceding company, and to manage the ceding companys risk profile. The Company provides mortgage guaranty protection on an excess of loss basis.
The Company has participated in several lines of business that are reflected in its historical financial statements but that the Company exited in connection with its 2004 initial public offering (IPO).
2. Basis of Presentation
The unaudited interim consolidated financial statements, which include the accounts of the Company, have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments, necessary for a fair presentation of the Companys financial condition, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim consolidated financial statements cover the three-month period ended March 31, 2007 (First Quarter 2007) and the three-month period ended March 31, 2006 (First Quarter 2006). Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of
7
the results that may be expected for the full year. Certain items in the prior year unaudited interim consolidated financial statements have been reclassified to conform with the current period presentation. These unaudited interim consolidated financial statements should be read in conjunction with the Companys consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission.
Certain of the Companys subsidiaries are subject to U.S. and U.K. income tax. The provision for income taxes is calculated in accordance with Statement of Financial Accounting Standards (FAS) FAS No. 109, Accounting for Income Taxes. The Companys provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to the variability in changes in fair value of its derivative financial instruments. A discrete calculation of the provision is calculated for each interim period.
3. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (FASB) issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments (FAS 155), which amends FAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133) and FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), and addresses issues raised in FAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. The primary objectives of FAS 155 are: (i) with respect to FAS 133, to address the accounting for beneficial interests in securitized financial assets and (ii) with respect to FAS 140, to eliminate a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. FAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006, which for the Company is January 1, 2007. In particular, FAS 155 affects the Companys determination of which transactions are derivative or non-derivative in nature.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 applies to other accounting pronouncements that require or permit fair value measurements, since the FASB had previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, FAS 157 does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company plans to adopt FAS 157 at the beginning of 2008. The Company is currently evaluating the impact, if any, that FAS 157 will have on its results of operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Liabilities (FAS 159). FAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain nonfinancial instruments that are similar to financial instruments) at fair value (the fair value option). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, FAS 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. FAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. Earlier adoption of FAS 159 is permitted, but we do not intend to early adopt. The Company is currently evaluating the impact, if any, that FAS 159 will have on its results of operations or financial position.
4. Analysis Of Premiums Written, Premiums Earned And Loss And Loss Adjustment Expenses
In order to limit its exposure on assumed risks, the Company at the time of the IPO entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE Limited (ACE), the Companys former parent, to cede a portion of the risk underwritten by the Company, prior to the IPO. In addition, the Company enters into reinsurance agreements with non-affiliated companies to limit its exposure to risk on an on-going basis.
8
In the event that any or all of the reinsurers are unable to meet their obligations, the Company would be liable for such defaulted amounts. Direct, assumed, and ceded amounts were as follows:
|
Three Months Ended |
|
|||||
|
|
2007 |
|
2006 |
|
||
|
|
(in thousands of U.S. dollars) |
|
||||
Premiums Written |
|
|
|
|
|
||
Direct |
|
$ |
49,520 |
|
$ |
30,248 |
|
Assumed |
|
23,020 |
|
25,136 |
|
||
Ceded |
|
(4,158 |
) |
(4,600 |
) |
||
Net |
|
$ |
68,382 |
|
$ |
50,784 |
|
|
|
|
|
|
|
||
Premiums Earned |
|
|
|
|
|
||
Direct |
|
$ |
29,490 |
|
$ |
21,228 |
|
Assumed |
|
26,533 |
|
30,528 |
|
||
Ceded |
|
(2,153 |
) |
(3,701 |
) |
||
Net |
|
$ |
53,870 |
|
$ |
48,055 |
|
|
|
|
|
|
|
||
Loss and Loss Adjustment Expenses |
|
|
|
|
|
||
Direct |
|
$ |
86 |
|
$ |
(3,031 |
) |
Assumed |
|
(4,973 |
) |
3,292 |
|
||
Ceded |
|
158 |
|
(643 |
) |
||
Net |
|
$ |
(4,729 |
) |
$ |
(382 |
) |
Net premiums written for First Quarter 2007 were $68.4 million compared with $50.8 million for First Quarter 2006. The $17.6 million increase is mainly attributable to our direct premiums written resulting from the expansion of our financial guaranty direct segment, particularly in international markets. First Quarter 2007 includes upfront direct premiums written of $11.8 million from our international business. First Quarter 2006 did not include any upfront direct premium written from our international business.
Net premiums earned for First Quarter 2007 were $53.9 million compared with $48.1 million for First Quarter 2006. The $5.8 million increase is primarily attributable to our direct earned premiums which increased $8.3 million in First Quarter 2007, compared with First Quarter 2006. This increase is attributable to the continued growth of our in-force book of business, resulting in increased net earned premiums, and $1.7 million of public finance refundings, in First Quarter 2007. First Quarter 2006 did not have any earned premiums from public finance refundings. Public finance refundings reflect the unscheduled pre-payment or refundings of underlying municipal bonds.
Loss and loss adjustment expenses (LAE) were $(4.7) million and $(0.4) million for First Quarter 2007 and First Quarter 2006, respectively. First Quarter 2007 assumed loss and LAE was $(5.0) million principally due to aircraft-related transactions in the reinsurance segment. In addition we received $1.3 million of loss recoveries from our other segment. First Quarter 2006 assumed loss and LAE was $3.3 million primarily due to increased case reserves of $2.6 million and also incurred and paid losses of $0.6 million. First Quarter 2006 direct loss and LAE was $(3.0) million mainly due to a $0.7 million subrogation receivable, a $4.5 million release of case reserves and a litigation recovery of $1.2 million, offset by a $3.2 million settlement of a sub-prime mortgage transaction.
Reinsurance recoverable on ceded losses and LAE as of March 31, 2007 and December 31, 2006 were $10.6 million and $10.9 million, respectively and are all related to our other segment. Of these amounts, $10.5 million and $10.8 million, respectively, relate to reinsurance agreements with ACE.
9
5. Commitments and Contingencies
Lawsuits arise in the ordinary course of the Companys business. It is the opinion of the Companys management, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys financial position, results of operations or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Companys results of operations or liquidity in a particular quarter or fiscal year.
In the ordinary course of their respective businesses, certain of the Companys subsidiaries assert claims in legal proceedings against third parties to recover losses paid in prior periods. The amounts, if any, the Company will recover in these proceedings are uncertain, although recoveries in any one or more of these proceedings during any quarter or fiscal year could be material to the Companys results of operations in that particular quarter or fiscal year.
The Company is party to reinsurance agreements with all of the major monoline primary financial guaranty insurance companies. The Companys facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with state mandated insurance laws and to maintain a specified financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all statutory unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements after which the Company would be released from liability with respect to the ceded business. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement or it may be obligated to increase the level of ceding commission paid.
6. Long-Term Debt and Credit Facilities
The Companys unaudited interim consolidated financial statements include long-term debt used to fund the Companys insurance operations, and related interest expense, as described below.
Senior Notes
Assured Guaranty US Holdings Inc. (AGUS), a subsidiary of the Company, issued $200.0 million of 7.0% Senior Notes due 2034 for net proceeds of $197.3 million. The proceeds of the offering were used to repay substantially all of a $200.0 million promissory note issued to a subsidiary of ACE in April 2004 as part of the IPO related formation transactions. The coupon on the Senior Notes is 7.0%, however, the effective rate is approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004. The Company recorded interest expense of $3.3 million, including $0.2 million of amortized gain on the cash flow hedge, for both First Quarter 2007 and First Quarter 2006. These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.
Series A Enhanced Junior Subordinated Debentures
On December 20, 2006, AGUS issued $150.0 million of Series A Enhanced Junior Subordinated Debentures (the Debentures) due 2066 for net proceeds of $149.7 million. The proceeds of the offering were used to repurchase 5,692,599 of Assured Guaranty Ltd.s common shares from ACE Bermuda Insurance Ltd., a subsidiary of ACE. The Debentures pay a fixed 6.40% rate of interest until December 15, 2016, and thereafter pay a floating rate of interest, reset quarterly, at a rate equal to 3 month LIBOR plus a margin equal to 2.38%. AGUS may elect at one or more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears interest at the then applicable rate. AGUS may not defer interest past the maturity date. The Company recorded interest expense of $2.4 million for the three months ended March 31, 2007. These Debentures are guaranteed on a junior subordinated basis by Assured Guaranty Ltd.
10
Credit Facilities
$300.0 million Credit Facility
On November 6, 2006, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million five-year unsecured revolving credit facility (the $300.0 million credit facility) with a syndicate of banks. Under the $300.0 million credit facility, each of Assured Guaranty Corp. (AGC), Assured Guaranty (UK) Ltd. (AG (UK)), Assured Guaranty Re Ltd. (AG Re), Assured Guaranty Re Overseas Ltd. (AGRO) and Assured Guaranty Ltd. are entitled to request the banks to make loans to such borrower or to request that letters of credit be issued for the account of such borrower.
Of the $300.0 million available to be borrowed, no more than $100.0 million may be borrowed by Assured Guaranty Ltd., AG Re or AGRO, individually or in the aggregate, and no more than $20.0 million may be borrowed by AG (UK). The stated amount of all outstanding letters of credit and the amount of all unpaid drawings in respect of all letters of credit cannot, in the aggregate, exceed $100.0 million.
The $300.0 million credit facility also provides that Assured Guaranty Ltd. may request that the commitment of the banks be increased an additional $100.0 million up to a maximum aggregate amount of $400.0 million. Any such incremental commitment increase is subject to certain conditions provided in the agreement and must be for at least $25.0 million.
The proceeds of the loans and letters of credit are to be used for the working capital and other general corporate purposes of the borrowers and to support reinsurance transactions.
At the closing of the $300.0 million credit facility, (i) AGC guaranteed the obligations of AG (UK) under such facility, (ii) Assured Guaranty Ltd. guaranteed the obligations of AG Re and AGRO under such facility and agreed that, if the Company Consolidated Assets (as defined in the related credit agreement) of AGC and its subsidiaries were to fall below $1.2 billion, it would, within 15 days, guarantee the obligations of AGC and AG (UK) under such facility, (iii) Assured Guaranty Overseas US Holdings Inc., guaranteed the obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility and (iv) Each of AG Re and AGRO guarantees the other as well as Assured Guaranty Ltd.
The $300.0 million credit facilitys financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of seventy-five percent (75%) of the Consolidated Net Worth of Assured Guaranty Ltd. as of the most recent fiscal quarter of Assured Guaranty Ltd. prior to November 6, 2006 and (b) maintain a maximum debt-to-capital ratio of 30%. In addition, the $300.0 million credit facility requires that AGC maintain qualified statutory capital of at least 75% of its statutory capital as of the fiscal quarter prior to November 6, 2006. Furthermore, the $300.0 million credit facility contains restrictions on Assured Guaranty Ltd. and its subsidiaries, including, among other things, in respect of their ability to incur debt, permit liens, become liable in respect of guaranties, make loans or investments, pay dividends or make distributions, dissolve or become party to a merger, consolidation or acquisition, dispose of assets or enter into affiliate transactions. Most of these restrictions are subject to certain minimum thresholds and exceptions. The $300.0 million credit facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control and cross-default to other debt agreements. A default by one borrower will give rise to a right of the lenders to terminate the facility and accelerate all amounts then outstanding. As of March 31, 2007 and December 31, 2006, Assured Guaranty was in compliance with all of those financial covenants.
As of March 31, 2007 and December 31, 2006, no amounts were outstanding under this facility nor have there been any borrowings under this facility.
Letters of Credit for a total aggregate stated amount of approximately $64.2 million and $19.6 million, remain outstanding as of March 31, 2007 and December 31, 2006, respectively.
11
Non-Recourse Credit Facility
AGC is also party to a non-recourse credit facility with a syndicate of banks which provides up to $175.0 million specifically designed to provide rating agency qualified capital to further support AGCs claims paying resources. The facility expires in December 2010. As of March 31, 2007 and December 31, 2006, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.
AGCs failure to comply with certain covenants under AGCs credit facilities could, subject to grace periods in the case of certain covenants, result in an event of default. This could require AGC to repay any outstanding borrowings in an accelerated manner.
On April 8, 2005, AGC entered into four separate agreements with four different unaffiliated custodial trusts pursuant to which AGC may, at its option, cause each of the custodial trusts to purchase up to $50.0 million of perpetual preferred stock of AGC. The custodial trusts were created as a vehicle for providing capital support to AGC by allowing AGC to obtain immediate access to new capital at its sole discretion at any time through the exercise of the put option. If the put options were exercised, AGC would receive $200.0 million in return for the issuance of its own perpetual preferred stock, the proceeds of which may be used for any purpose including the payment of claims. The put options have not been exercised through March 31, 2007. Initially, all of the CCS Securities were issued to a special purpose pass-through trust (the Pass-Through Trust). The Pass-Through Trust is a statutory trust organized under the Delaware Statutory Trust Act formed for the purposes of (i) issuing $200,000,000 of Pass-Through Trust Securities to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended, (ii) investing the proceeds from the sale of the Pass-Through Trust Securities in, and holding, the CCS Securities issued by the Custodial Trusts and (iii) entering into related agreements. Neither the Pass-Through Trust nor the Custodial Trusts are consolidated in Assured Guaranty Ltd.s financial statements.
During both First Quarter 2007 and First Quarter 2006, AGC incurred $0.6 million of put option premiums which are an on-going expense. These expenses are presented in the Companys unaudited interim consolidated statements of operations and comprehensive income under other expense.
7. Share-Based Compensation
Share-based compensation expense in First Quarter 2007 and First Quarter 2006 was $5.5 million ($4.6 million after tax) and $3.2 million ($2.7 million after tax), respectively. The effect on basic and diluted earnings per share for First Quarter 2007 and First Quarter 2006 was $0.07 and $0.04, respectively. First Quarter 2007 and First Quarter 2006 expense included $2.6 million and $0.6 million, respectively, for stock award grants to retirement-eligible employees.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
Three Months Ended March 31, |
|
|||||
|
|
2007 |
|
2006 |
|
||
|
|
(in thousands of U.S. dollars |
|
||||
Net income |
|
$ |
38,951 |
|
$ |
34,882 |
|
Basic shares |
|
67,601 |
|
73,768 |
|
||
Effect of dilutive securities: |
|
|
|
|
|
||
Stock awards |
|
1,194 |
|
1,085 |
|
||
Diluted shares |
|
68,795 |
|
74,853 |
|
||
Basic EPS |
|
$ |
0.58 |
|
$ |
0.47 |
|
Diluted EPS |
|
$ |
0.57 |
|
$ |
0.47 |
|
12
9. Income Taxes
Adoption of FIN 48
The Companys Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. The Companys U.S. and U.K. subsidiaries are subject to income taxes imposed by U.S. and U.K. authorities and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company, has elected under Section 953(d) of the Internal Revenue Code to be taxed as a U.S. domestic corporation.
The Internal Revenue Service (IRS) has completed audits of all of the Companys U.S. subsidiaries federal tax returns for taxable years though 2001. The IRS is currently reviewing tax years 2002 through 2004 for Assured Guaranty Overseas US Holdings Inc. and subsidiaries, which includes Assured Guaranty Overseas US Holdings Inc., AGRO, Assured Guaranty Mortgage Insurance Company and AG Intermediary Inc. In addition the IRS is reviewing AGUS for tax years 2002 through the date of the IPO. AGUS includes Assured Guaranty US Holdings Inc., AGC and AG Financial Products and were part of the consolidated tax return of a subsidiary of ACE, for years prior to the IPO. The Company is indemnified by ACE for any potential tax liability associated with the tax examination of AGUS as it relates to years prior to the IPO.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. As a result of the adoption of FIN 48, the Company reduced its liability for unrecognized tax benefits and increased retained earnings by $2.6 million. The total liability for unrecognized tax benefits as of January 1, 2007 was $12.9 million. This entire amount, if recognized, would affect the effective tax rate.
Subsequent to the adoption of FIN 48, the IRS published final regulations on the treatment of consolidated losses. As a result of these regulations the utilization of certain capital losses is no longer at a level that would require recording an associated liability for an uncertain tax position. As such, the Company decreased its liability for unrecognized tax benefits and its provision for income taxes $4.1 million during First Quarter 2007. The total liability for unrecognized tax benefits as of March 31, 2007 is $8.8 million, and is included in other liabilities on the balance sheet.
The Companys policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of the date of adoption, the Company has accrued $2.7 million in interest and penalties.
Liability For Tax Basis Step-Up Adjustment
In connection with the IPO, the Company and ACE Financial Services Inc. (AFS), a subsidiary of ACE, entered into a tax allocation agreement, whereby the Company and AFS made a Section 338 (h)(10) election that has the effect of increasing the tax basis of certain affected subsidiaries tangible and intangible assets to fair value. Future tax benefits that the Company derives from the election will be payable to AFS when realized by the Company.
As a result of the election, the Company has adjusted its net deferred tax liability to reflect the new tax basis of the Companys affected assets. The additional basis is expected to result in increased future income tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company. Any tax benefit realized by the Company will be paid to AFS. Such tax benefits will generally be calculated by comparing the Companys affected subsidiaries actual taxes to the taxes that would have been owed by those subsidiaries had the increase in basis not occurred. After a 15 year period, to the extent there remains an unrealized tax benefit, the Company and AFS will negotiate a settlement of the unrealized benefit based on the expected realization at that time.
13
The Company initially recorded a $49.0 million reduction of its existing deferred tax liability, based on an estimate of the ultimate resolution of the Section 338(h)(10) election. Under the tax allocation agreement, the Company estimated that, as of the IPO date, it was obligated to pay $20.9 million to AFS and accordingly established this amount as a liability. The initial difference, which is attributable to the change in the tax basis of certain liabilities for which there is no associated step-up in the tax basis of its assets and no amounts due to AFS, resulted in an increase to additional paid-in capital of $28.1 million. The Company has paid ACE and correspondingly reduced its liability by $4.5 million and $0.2 million in First Quarter 2007 and First Quarter 2006, respectively.
10. Segment Reporting
The Company has four principal business segments: (1) financial guaranty direct, which includes transactions whereby the Company provides an unconditional and irrevocable guaranty that indemnifies the holder of a financial obligation against non-payment of principal and interest when due, and could take the form of a credit derivative; (2) financial guaranty reinsurance, which includes agreements whereby the Company is a reinsurer and agrees to indemnify a primary insurance company against part or all of the loss which the latter may sustain under a policy it has issued; (3) mortgage guaranty, which includes mortgage guaranty insurance and reinsurance whereby the Company provides protection against the default of borrowers on mortgage loans; and (4) other, which includes lines of business in which the Company is no longer active.
The Company does not segregate assets and liabilities at a segment level since management reviews and controls these assets and liabilities on a consolidated basis. The Company allocates operating expenses to each segment based on a comprehensive cost study. During 2006, the Company implemented a new operating expense allocation methodology to more closely allocate expenses to the individual operating segments. This new methodology was based on a comprehensive study and is based on departmental time estimates and headcount. Management uses underwriting gains and losses as the primary measure of each segments financial performance.
The following tables summarize the components of underwriting gain for each reporting segment:
|
|
Three Months Ended March 31, 2007 |
|
|||||||||||||
|
|
Financial |
|
Financial |
|
Mortgage |
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
Gross written premiums |
|
$ |
49.5 |
|
$ |
18.7 |
|
$ |
1.0 |
|
$ |
3.3 |
|
$ |
72.5 |
|
Net written premiums |
|
48.9 |
|
18.5 |
|
1.0 |
|
|
|
68.4 |
|
|||||
Net earned premiums |
|
28.9 |
|
21.9 |
|
3.1 |
|
|
|
53.9 |
|
|||||
Loss and loss adjustment expenses |
|
1.2 |
|
(4.8 |
) |
0.1 |
|
(1.3 |
) |
(4.7 |
) |
|||||
Profit commission expense |
|
|
|
0.9 |
|
0.7 |
|
|
|
1.6 |
|
|||||
Acquisition costs |
|
3.0 |
|
7.7 |
|
0.2 |
|
|
|
10.8 |
|
|||||
Other operating expenses |
|
15.9 |
|
4.4 |
|
0.3 |
|
|
|
20.7 |
|
|||||
Underwriting gain |
|
$ |
8.8 |
|
$ |
13.6 |
|
$ |
1.8 |
|
$ |
1.3 |
|
$ |
25.5 |
|
14
|
|
Three Months Ended March 31, 2006 |
|
|||||||||||||
|
|
Financial |
|
Financial |
|
Mortgage |
|
Other |
|
Total |
|
|||||
|
|
(in millions of U.S. dollars) |
|
|||||||||||||
Gross written premiums |
|
$ |
30.2 |
|
$ |
18.8 |
|
$ |
2.6 |
|
$ |
3.8 |
|
$ |
55.4 |
|
Net written premiums |
|
29.7 |
|
18.5 |
|
2.6 |
|
|
|
50.8 |
|
|||||
Net earned premiums |
|
20.7 |
|
23.3 |
|
4.2 |
|
|
|
48.1 |
|
|||||
Loss and loss adjustment expenses |
|
(1.8 |
) |
2.8 |
|
(0.2 |
) |
(1.2 |
) |
(0.4 |
) |
|||||
Profit commission expense |
|
|
|
0.4 |
|
0.9 |
|
|
|
1.3 |
|
|||||
Acquisition costs |
|
1.8 |
|
8.7 |
|
0.3 |
|
|
|
10.8 |
|
|||||
Other operating expenses |
|
13.4 |
|
3.4 |
|
0.3 |
|
|
|
17.2 |
|
|||||
Underwriting gain |
|
$ |
7.2 |
|
$ |
8.0 |
|
$ |
2.8 |
|
$ |
1.2 |
|
$ |
19.2 |
|
The following is a reconciliation of total underwriting gain to income before provision for income taxes for the periods ended:
|
Three Months Ended |
|
|||||
|
|
2007 |
|
2006 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Total underwriting gain |
|
$ |
25.5 |
|
$ |
19.2 |
|
Net investment income |
|
31.5 |
|
26.2 |
|
||
Net realized investment losses |
|
(0.3 |
) |
(1.0 |
) |
||
Unrealized (losses) gains on derivative financial instruments |
|
(9.7 |
) |
|
|
||
Interest expense |
|
(6.0 |
) |
(3.4 |
) |
||
Other expense |
|
(0.6 |
) |
(0.6 |
) |
||
Income before provision for income taxes |
|
$ |
40.3 |
|
$ |
40.5 |
|
The following table provides the lines of businesses from which each of the Companys segments derive their net earned premiums:
|
Three Months Ended |
|
|||||
|
|
2007 |
|
2006 |
|
||
|
|
(in millions of U.S. dollars) |
|
||||
Financial guaranty direct: |
|
|
|
|
|
||
Public finance |
|
$ |
4.2 |
|
$ |
1.3 |
|
Structured finance |
|
24.7 |
|
19.4 |
|
||
Total |
|
28.9 |
|
20.7 |
|
||
|
|
|
|
|
|
||
Financial guaranty reinsurance: |
|
|
|
|
|
||
Public finance |
|
16.0 |
|
15.6 |
|
||
Structured finance |
|
5.9 |
|
7.7 |
|
||
Total |
|
21.9 |
|
23.3 |
|
||
|
|
|
|
|
|
||
Mortgage guaranty: |
|
|
|
|
|
||
Mortgage guaranty |
|
3.1 |
|
4.2 |
|
||
Total net earned premiums |
|
$ |
53.9 |
|
$ |
48.1 |
|
15
The other segment had an underwriting gain of $1.3 million and $1.2 million for First Quarter 2007 and First Quarter 2006, respectively, as loss recoveries were recorded in both periods.
11. Subsidiary Information
The following tables present the unaudited condensed consolidated financial information for Assured Guaranty Ltd., Assured Guaranty US Holdings Inc., of which AGC is a subsidiary and other subsidiaries of Assured Guaranty Ltd. as of March 31, 2007 and December 31, 2006 and for the three months ended March 31, 2007 and 2006.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2007
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total investments and cash |
|
$ |
971 |
|
$ |
1,252,143 |
|
$ |
1,240,970 |
|
$ |
|
|
$ |
2,494,084 |
|
Investment in subsidiaries |
|
1,691,800 |
|
|
|
|
|
(1,691,800 |
) |
|
|
|||||
Deferred acquisition costs |
|
|
|
70,142 |
|
150,271 |
|
|
|
220,413 |
|
|||||
Reinsurance recoverable |
|
|
|
8,772 |
|
4,417 |
|
(2,593 |
) |
10,596 |
|
|||||
Goodwill |
|
|
|
85,417 |
|
|
|
|
|
85,417 |
|
|||||
Premiums receivable |
|
|
|
24,612 |
|
25,630 |
|
(14,054 |
) |
36,188 |
|
|||||
Other |
|
4,931 |
|
152,679 |
|
46,611 |
|
(97,860 |
) |
106,361 |
|
|||||
Total assets |
|
$ |
1,697,702 |
|
$ |
1,593,765 |
|
$ |
1,467,899 |
|
$ |
(1,806,307 |
) |
$ |
2,953,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Unearned premium reserves |
|
$ |
|
|
$ |
279,590 |
|
$ |
460,393 |
|
$ |
(78,949 |
) |
$ |
661,034 |
|
Reserves for losses and loss adjustment expenses |
|
|
|
63,024 |
|
60,536 |
|
(2,593 |
) |
120,967 |
|
|||||
Profit commissions payable |
|
|
|
3,683 |
|
13,071 |
|
|
|
16,754 |
|
|||||
Deferred income taxes |
|
|
|
37,147 |
|
(16,041 |
) |
|
|
21,106 |
|
|||||
Senior Notes |
|
|
|
197,383 |
|
|
|
|
|
197,383 |
|
|||||
Series A Enhanced Junior Subordinated Debentures |
|
|
|
149,716 |
|
|
|
|
|
149,716 |
|
|||||
Other |
|
3,406 |
|
72,460 |
|
48,902 |
|
(32,965 |
) |
91,803 |
|
|||||
Total liabilities |
|
3,406 |
|
803,003 |
|
566,861 |
|
(114,507 |
) |
1,258,763 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total shareholders equity |
|
1,694,296 |
|
790,762 |
|
901,038 |
|
(1,691,800 |
) |
1,694,296 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities and shareholders equity |
|
$ |
1,697,702 |
|
$ |
1,593,765 |
|
$ |
1,467,899 |
|
$ |
(1,806,307 |
) |
$ |
2,953,059 |
|
16
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2006
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total investments and cash |
|
$ |
1,523 |
|
$ |
1,258,865 |
|
$ |
1,209,532 |
|
$ |
|
|
$ |
2,469,920 |
|
Investment in subsidiaries |
|
1,648,358 |
|
|
|
|
|
(1,648,358 |
) |
|
|
|||||
Deferred acquisition costs |
|
|
|
70,305 |
|
146,724 |
|
|
|
217,029 |
|
|||||
Reinsurance recoverable |
|
|
|
8,826 |
|
4,547 |
|
(2,484 |
) |
10,889 |
|
|||||
Goodwill |
|
|
|
85,417 |
|
|
|
|
|
85,417 |
|
|||||
Premiums receivable |
|
|
|
21,846 |
|
38,738 |
|
(19,019 |
) |
41,565 |
|
|||||
Other |
|
5,152 |
|
146,021 |
|
46,873 |
|
(87,526 |
) |
110,520 |
|
|||||
Total assets |
|
$ |
1,655,033 |
|
$ |
1,591,280 |
|
$ |
1,446,414 |
|
$ |
(1,757,387 |
) |
$ |
2,935,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Unearned premium reserves |
|
$ |
|
|
$ |
266,800 |
|
$ |
447,785 |
|
$ |
(70,089 |
) |
$ |
644,496 |
|
Reserves for losses and loss adjustment expenses |
|
|
|
65,388 |
|
57,696 |
|
(2,484 |
) |
120,600 |
|
|||||
Profit commissions payable |
|
|
|
3,683 |
|
32,311 |
|
|
|
35,994 |
|
|||||
Deferred income taxes |
|
|
|
41,415 |
|
(1,509 |
) |
|
|
39,906 |
|
|||||
Senior Notes |
|
|
|
197,375 |
|
|
|
|
|
197,375 |
|
|||||
Series A Enhanced Junior Subordinated Debentures |
|
|
|
149,708 |
|
|
|
|
|
149,708 |
|
|||||
Other |
|
4,272 |
|
89,157 |
|
39,527 |
|
(36,456 |
) |
96,500 |
|
|||||
Total liabilities |
|
4,272 |
|
813,526 |
|
575,810 |
|
(109,029 |
) |
1,284,579 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total shareholders equity |
|
1,650,761 |
|
777,754 |
|
870,604 |
|
(1,648,358 |
) |
1,650,761 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities and shareholders equity |
|
$ |
1,655,033 |
|
$ |
1,591,280 |
|
$ |
1,446,414 |
|
$ |
(1,757,387 |
) |
$ |
2,935,340 |
|
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net premiums written |
|
$ |
|
|
$ |
32,471 |
|
$ |
35,911 |
|
$ |
|
|
$ |
68,382 |
|
Net premiums earned |
|
|
|
28,295 |
|
25,575 |
|
|
|
53,870 |
|
|||||
Net investment income |
|
1 |
|
15,748 |
|
15,734 |
|
(1 |
) |
31,482 |
|
|||||
Net realized investment (losses) gains |
|
|
|
(112 |
) |
(198 |
) |
31 |
|
(279 |
) |
|||||
Unrealized losses on derivative financial instruments |
|
|
|
(5,929 |
) |
(3,785 |
) |
|
|
(9,714 |
) |
|||||
Equity in earnings of subsidiaries |
|
44,043 |
|
|
|
|
|
(44,043 |
) |
|
|
|||||
Other revenues |
|
|
|
214 |
|
|
|
(214 |
) |
|
|
|||||
Total revenues |
|
44,044 |
|
38,216 |
|
37,326 |
|
(44,227 |
) |
75,359 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss and loss adjustment expenses |
|
|
|
(6,876 |
) |
2,147 |
|
|
|
(4,729 |
) |
|||||
Acquisition costs and other operating expenses |
|
5,093 |
|
16,332 |
|
11,702 |
|
|
|
33,127 |
|
|||||
Other |
|
|
|
6,604 |
|
30 |
|
|
|
6,634 |
|
|||||
Total expenses |
|
5,093 |
|
16,060 |
|
13,879 |
|
|
|
35,032 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before provision for income taxes |
|
38,951 |
|
22,156 |
|
23,447 |
|
(44,227 |
) |
40,327 |
|
|||||
Total provision (benefit) for income taxes |
|
|
|
4,469 |
|
(3,104 |
) |
11 |
|
1,376 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
$ |
38,951 |
|
$ |
17,687 |
|
$ |
26,551 |
|
$ |
(44,238 |
) |
$ |
38,951 |
|
* Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to 1) recognition of income by Assured Guaranty US Holdings Inc. for dividends received from Assured Guaranty Ltd. and 2) the residual effects of the FSA agreement.
18
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net premiums written |
|
$ |
|
|
$ |
25,117 |
|
$ |
25,667 |
|
$ |
|
|
$ |
50,784 |
|
Net premiums earned |
|
|
|
26,729 |
|
21,326 |
|
|
|
48,055 |
|
|||||
Net investment income |
|
|
|
12,829 |
|
13,421 |
|
(12 |
) |
26,238 |
|
|||||
Net realized investment (losses) gains |
|
|
|
(1,146 |
) |
140 |
|
|
|
(1,006 |
) |
|||||
Unrealized gains (losses) on derivative financial instruments |
|
|
|
720 |
|
(691 |
) |
|
|
29 |
|
|||||
Equity in earnings of subsidiaries |
|
38,342 |
|
|
|
|
|
(38,342 |
) |
|
|
|||||
Other revenues |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total revenues |
|
38,342 |
|
39,132 |
|
34,196 |
|
(38,354 |
) |
73,316 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|||||
Loss and loss adjustment expenses |
|
|
|
2,045 |
|
(2,427 |
) |
|
|
(382 |
) |
|||||
Acquisition costs and other operating expenses |
|
3,450 |
|
15,294 |
|
10,499 |
|
|
|
29,243 |
|
|||||
Other |
|
10 |
|
3,978 |
|
1 |
|
|
|
3,989 |
|
|||||
Total expenses |
|
3,460 |
|
21,317 |
|
8,073 |
|
|
|
32,850 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before provision for income taxes |
|
34,882 |
|
17,815 |
|
26,123 |
|
(38,354 |
) |
40,466 |
|
|||||
Total provision for income taxes |
|
|
|
3,505 |
|
2,059 |
|
20 |
|
5,584 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net income |
|
$ |
34,882 |
|
$ |
14,310 |
|
$ |
24,064 |
|
$ |
(38,374 |
) |
$ |
34,882 |
|
* Due to the accounting for subsidiaries under common control, net income in the consolidating adjustment column does not equal parent company equity in earnings of subsidiaries, due to the residual effects of the FSA agreement.
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
Dividends received |
|
$ |
3,000 |
|
$ |
214 |
|
$ |
|
|
$ |
(3,214 |
) |
$ |
|
|
Other operating activities |
|
866 |
|
(3,374 |
) |
32,511 |
|
|
|
30,003 |
|
|||||
Net cash flows provided by (used in) operating activities |
|
3,866 |
|
(3,160 |
) |
32,511 |
|
(3,214 |
) |
30,003 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchases |
|
|
|
(83,471 |
) |
(197,850 |
) |
|
|
(281,321 |
) |
|||||
Sales |
|
|
|
65,434 |
|
147,436 |
|
|
|
212,870 |
|
|||||
Maturities |
|
|
|
2,020 |
|
4,000 |
|
|
|
6,020 |
|
|||||
Sales of short-term investments, net |
|
552 |
|
20,476 |
|
16,694 |
|
|
|
37,722 |
|
|||||
Net cash flows provided by (used in) investing activities |
|
552 |
|
4,459 |
|
(29,720 |
) |
|
|
(24,709 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Dividends paid |
|
(2,974 |
) |
|
|
(3,000 |
) |
3,214 |
|
(2,760 |
) |
|||||
Share activity under option and incentive plans |
|
(1,444 |
) |
|
|
|
|
|
|
(1,444 |
) |
|||||
Tax benefit from stock options exercised |
|
|
|
96 |
|
|
|
|
|
96 |
|
|||||
Debt issue costs |
|
|
|
(425 |
) |
|
|
|
|
(425 |
) |
|||||
Net cash flows used in financing activities |
|
(4,418 |
) |
(329 |
) |
(3,000 |
) |
3,214 |
|
(4,533 |
) |
|||||
Effect of exchange rate changes |
|
|
|
15 |
|
153 |
|
|
|
168 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
|
|
|
985 |
|
(56 |
) |
|
|
929 |
|
|||||
Cash and cash equivalents at beginning of period |
|
|
|
2,776 |
|
2,009 |
|
|
|
4,785 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
3,761 |
|
$ |
1,953 |
|
$ |
|
|
$ |
5,714 |
|
20
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(in thousands of U. S. dollars)
|
|
Assured |
|
Assured |
|
AG Re and |
|
Consolidating |
|
Assured |
|
|||||
Dividends received |
|
$ |
2,650 |
|
$ |
|
|
$ |
|
|
$ |
(2,650 |
) |
$ |
|
|
Other operating activities |
|
331 |
|
26,827 |
|
(6,831 |
) |
|
|
20,327 |
|
|||||
Net cash flows provided by (used in) operating activities |
|
2,981 |
|
26,827 |
|
(6,831 |
) |
(2,650 |
) |
20,327 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchases |
|
|
|
(144,847 |
) |
(115,675 |
) |
|
|
(260,522 |
) |
|||||
Sales |
|
|
|
144,378 |
|
115,657 |
|
|
|
260,035 |
|
|||||
Maturities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales (purchases) of short-term investments, net |
|
87 |
|
(27,398 |
) |
8,073 |
|
|
|
(19,238 |
) |
|||||
Net cash flows (used in) provided by investing activities |
|
87 |
|
(27,867 |
) |
8,055 |
|
|
|
(19,725 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Dividends paid |
|
(2,632 |
) |
|
|
(2,650 |
) |
2,650 |
|
(2,632 |
) |
|||||
Share activity under option and incentive plans |
|
(436 |
) |
|
|
|
|
|
|
(436 |
) |
|||||
Net cash flows used in financing activities |
|
(3,068 |
) |
|
|
(2,650 |
) |
2,650 |
|
(3,068 |
) |
|||||
Effect of exchange rate changes |
|
|
|
17 |
|
5 |
|
|
|
22 |
|
|||||
|
|
|
|
|
|
|
|
|
|