UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the Quarterly Period Ended September 30, 2004

 

 

 

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

 

98-042991

(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) 296-4004

(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  ý     NO  o

 

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES  o     NO  ý

 

The number of registrant’s Common Shares ($0.01 par value) outstanding as of October 31 was 75,983,992 .

 

 



 

ASSURED GUARANTY LTD.

 

INDEX TO FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

Item 1.

 

Financial Statements

 

 

 

1

 

Consolidated Balance Sheet as of September 30, 2004 (unaudited) and December 31, 2003

 

 

 

2

 

Consolidated Statements of Operations and Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003

 

 

 

3

 

Consolidated Statements of Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2004

 

 

 

4

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2004 and 2003

 

 

 

5

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

 

 

Signatures

 

2



 

Assured Guaranty Ltd.
Consolidated Balance Sheets
(in thousands of U.S. dollars)

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Fixed maturity securities, at fair value (amortized cost: $1,853,691 in 2004 and $1,937,743 in 2003)

 

$

1,948,704

 

$

2,052,217

 

Short-term investments, at cost which approximates fair value

 

164,288

 

137,517

 

Total investments

 

2,112,992

 

2,189,734

 

Cash and cash equivalents

 

13,402

 

32,365

 

Accrued investment income

 

22,316

 

23,758

 

Deferred acquisition costs

 

186,861

 

178,673

 

Prepaid reinsurance premiums

 

20,632

 

10,974

 

Reinsurance recoverable on ceded losses

 

185,744

 

122,124

 

Due from affiliate

 

 

115,000

 

Unrealized gains on derivative financial instruments

 

26,326

 

 

Premiums receivable

 

40,031

 

63,997

 

Value of reinsurance business assumed

 

 

14,226

 

Goodwill

 

85,417

 

87,062

 

Other assets

 

22,946

 

19,954

 

Total assets

 

$

2,716,667

 

$

2,857,867

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Unearned premium reserves

 

$

522,445

 

$

625,429

 

Reserve for losses and loss adjustment expenses

 

297,421

 

522,593

 

Profit commissions payable

 

57,175

 

71,237

 

Reinsurance balances payable

 

26,690

 

4,908

 

Deferred income taxes

 

20,693

 

55,637

 

Unrealized losses on derivative financial instruments

 

 

8,558

 

Funds held by Company under reinsurance contracts

 

53,974

 

9,635

 

Long term debt

 

197,333

 

75,000

 

Other liabilities

 

53,049

 

47,246

 

Total liabilities

 

1,228,780

 

1,420,243

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 75,983,992 shares issued and outstanding in 2004)

 

$

760

 

$

16,403

 

Treasury stock (436,000 shares outstanding)

 

(7,850

)

 

Additional paid-in capital

 

900,202

 

955,490

 

Unearned stock grant compensation

 

(7,737

)

(5,479

)

Retained earnings

 

522,267

 

390,025

 

Accumulated other comprehensive income

 

80,245

 

81,185

 

Total shareholders’ equity

 

1,487,887

 

1,437,624

 

Total liabilities and shareholders’ equity

 

$

2,716,667

 

$

2,857,867

 

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

62,227

 

$

110,313

 

$

125,039

 

$

304,598

 

Ceded premiums

 

7,246

 

327

 

106,871

 

(28,505

)

Net written premiums

 

54,981

 

109,986

 

18,168

 

333,103

 

(Increase)decrease in net unearned premium reserves

 

(1,601

)

(31,847

)

112,548

 

(109,229

)

Net earned premiums

 

53,380

 

78,139

 

130,716

 

223,874

 

Net investment income

 

23,203

 

23,816

 

71,045

 

71,920

 

Net realized investment gains

 

1,307

 

1,529

 

11,176

 

5,420

 

Unrealized gains on derivative financial instruments

 

12,881

 

14,349

 

34,884

 

26,322

 

Other income

 

15

 

193

 

560

 

1,014

 

Total revenues

 

90,786

 

118,026

 

248,381

 

328,550

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

4,187

 

32,911

 

(32,154

)

91,895

 

Profit commissions expense

 

1,051

 

1,816

 

11,384

 

7,466

 

Acquisition costs

 

14,215

 

17,902

 

35,761

 

49,123

 

Other operating expenses

 

14,022

 

12,283

 

53,251

 

31,452

 

Goodwill impairment

 

 

 

1,645

 

 

Interest expense

 

3,376

 

1,434

 

7,356

 

4,302

 

Total expenses

 

36,851

 

66,346

 

77,243

 

184,238

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

53,935

 

51,680

 

171,138

 

144,312

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

Current

 

11,005

 

6,678

 

18,430

 

14,087

 

Deferred

 

(1,581

)

2,182

 

18,187

 

12,951

 

Total provision for income taxes

 

9,424

 

8,860

 

36,617

 

27,038

 

Net income

 

44,511

 

42,820

 

134,521

 

117,274

 

Other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on fixed maturity securities arising during the year

 

29,512

 

(10,040

)

(20,483

)

14,498

 

Reclassification adjustment for realized (gains)losses included in net income

 

103

 

(11,570

)

7,614

 

(14,332

)

Change in net unrealized gains on fixed maturity securities

 

29,615

 

(21,610

)

(12,869

)

166

 

Comprehensive income

 

$

74,126

 

$

21,210

 

$

121,652

 

$

117,440

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

$

0.57

 

$

1.79

 

$

1.56

 

Diluted

 

$

0.59

 

$

0.57

 

$

1.79

 

$

1.56

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



 

Assured Guaranty Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2004
(in thousands of U.S. dollars)

(unaudited)

 

 

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
capital

 

Unearned
Stock Grant
Compensation

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

$

16,403

 

$

 

$

955,490

 

$

(5,479

)

$

390,025

 

$

81,185

 

$

1,437,624

 

Net income

 

 

 

 

 

134,521

 

 

134,521

 

Common stock issuance

 

760

 

 

 

 

 

 

760

 

Dividends

 

 

 

 

 

(2,279

)

 

(2,279

)

Recapitalization due to IPO

 

(16,403

)

 

16,403

 

 

 

 

 

Return of capital

 

 

 

(200,000

)

 

 

 

(200,000

)

Capital contribution

 

 

 

94,754

 

 

 

 

94,754

 

Tax benefit for options exercised

 

 

 

5,430

 

 

 

 

5,430

 

Tax basis step-up adjustment

 

 

 

28,124

 

 

 

 

28,124

 

Cash flow hedge, net of tax of $6,685

 

 

 

 

 

 

12,415

 

12,415

 

Unrealized loss on fixed maturity securities, net of tax of ($6,584)

 

 

 

 

 

 

(13,355

)

(13,355

)

Common shares purchased by trust

 

 

(7,850

)

 

7,850

 

 

 

 

Unearned stock grant compensation, net

 

 

 

 

 

(10,108

)

 

 

(10,108

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2004

 

$

760

 

$

(7,850

)

$

900,202

 

$

(7,737

)

$

522,267

 

$

80,245

 

$

1,487,887

 

 

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)

 

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

Operating activities

 

 

 

 

 

Net income

 

$

134,521

 

$

117,274

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Non-cash interest and operating expenses

 

4,833

 

2,912

 

Net amortization of premium on fixed maturity securities

 

6,437

 

6,269

 

Goodwill impairment

 

1,645

 

 

Provision for deferred income taxes

 

18,613

 

12,951

 

Net realized investment gains

 

(6,871

)

(5,420

)

Change in unrealized gains on derivative financial instruments

 

(34,884

)

(26,322

)

Change in deferred acquisition costs

 

(8,197

)

(18,360

)

Change in accrued investment income

 

732

 

(1,218

)

Change in premiums receivable

 

23,953

 

(15,656

)

Change in due from affiliate

 

115,000

 

 

Change in prepaid reinsurance premiums

 

(9,658

)

47,839

 

Change in unearned premium reserves

 

(102,890

)

60,829

 

Change in reserve for losses and loss adjustment expenses, net

 

(259,890

)

17,157

 

Change in profit commissions payable

 

(12,808

)

(26,781

)

Change in value of reinsurance business assumed

 

14,226

 

4,572

 

Change in funds held by Company under reinsurance contracts

 

44,339

 

2,695

 

Other

 

(13,501

)

6,257

 

Net cash (used in) provided by operating activities

 

(84,400

)

184,998

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

Purchases

 

(492,576

)

(707,796

)

Sales

 

517,542

 

506,501

 

Maturities

 

14,172

 

94,612

 

(Purchases) of short-term investments, net

 

(28,292

)

(37,259

)

Net proceeds from sale of subsidiary

 

39,784

 

 

Net cash provided by (used in) investing activities

 

50,630

 

(143,942

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Net proceeds from issuance of senior notes

 

197,333

 

 

Repayment of note payable

 

(200,000

)

 

Proceeds from cash flow hedge

 

19,250

 

 

Dividends paid

 

(2,279

)

(31,750

)

Net cash provided by (used in) financing activities

 

14,304

 

(31,750

)

(Decrease)increase in cash and cash equivalents

 

(19,466

)

9,306

 

Effect of exchange rate changes

 

503

 

1,517

 

Cash and cash equivalents at beginning of period

 

32,365

 

9,445

 

Cash and cash equivalents at end of period

 

$

13,402

 

$

20,268

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



 

ASSURED GUARANTY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

 

1.              Organization

 

On April 28, 2004, subsidiaries of ACE Limited (“ACE”), completed an initial public offering (“IPO”) of 49,000,000 of their 75,000,000 common shares, par value $0.01 per share, of Assured Guaranty Ltd., formerly AGC Holdings Ltd.  Assured Guaranty Ltd.’s common shares are traded on the New York Stock Exchange under the symbol “AGO”. The IPO raised approximately $840.1 million in net proceeds, all of which went to the selling shareholders.  As part of the IPO, Assured Guaranty Ltd. and ACE entered into various agreements which govern various settlement issues.  As part of these agreements all pre-IPO intercompany receivables and payables were settled with ACE on June 10, 2004.  In connection with the IPO, the following transactions took place:

 

                  On April 15, 2004, Assured Guaranty Ltd. sold 100% of the common stock of its subsidiary, ACE Capital Title Reinsurance Company, to ACE Bermuda Insurance Ltd., a subsidiary of ACE, for $39.8 million. There was no gain or loss associated with the sale.

 

                  On April 28, 2004, Assured Guaranty Re Overseas Ltd. (“AGRO”)  (an indirect subsidiary of Assured Guaranty Ltd.) commuted its remaining auto residual value reinsurance business and transferred assets with a market value of $108.3 million to a subsidiary of ACE. This transaction caused a $(5.4) million underwriting loss, offset by a $5.4 realized gain.

 

Assured Guaranty Ltd. 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 or commodity. Assured Guaranty Ltd. markets our 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.

 

2.              Basis of presentation

 

The interim unaudited consolidated financial statements, which include the accounts of Assured Guaranty Ltd. and its subsidiaries (“Assured Guaranty” or 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, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s 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 interim consolidated financial statements cover the third quarters ended September 30, 2004 (“Third Quarter 2004”) and September 30, 2003 (“Third Quarter 2003”) and the nine-month periods ended September 30, 2004

 

7



 

(“Nine Months 2004”) and September 30, 2003 (“nine Months 2003”).  Certain items in the prior year financial statements have been reclassified to conform with the current period presentation.

 

Amounts presented prior to April 28, 2004, the IPO date, were prepared on an historical combined basis, since Assured Guaranty Ltd. and its subsidiaries were included in the results of ACE. However, since the entities are the same for all periods presented, the financial statements have been prepared and reported on a consolidated basis.  This presentation has no impact on the Company’s results of operations or financial condition. Certain expenses reflected in the combined financial statements include allocations of corporate expenses incurred by ACE, related to general and administrative services provided to the Company, including tax consulting and preparation services, internal audit services and liquidity facility costs. These expenses were allocated based on estimates of the cost incurred by ACE to provide these services to the Company and are mainly reflected in 2003 amounts.

 

Certain of the Company’s subsidiaries are subject to U.S. income tax.  The provision for income taxes is calculated in accordance with FAS No. 109, “Accounting for Income Taxes”.  The Company’s 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.  The Company’s tax sharing agreement is further discussed in note 9.

 

These interim unaudited consolidated financial statements should be read in conjunction with the 2003 audited combined financial statements and related notes thereto included in the Company’s Registration Statement on Form S-1 (Registration No. 333-111491).

 

3.              New accounting pronouncements

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), as an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46 addresses consolidation of variable interest entities (“VIE”s) by business enterprises. An entity is considered a VIE subject to consolidation if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support or if the equity investors lack one of three characteristics of a controlling financial interest. First, the equity investors lack the ability to make decisions about the entity’s activities through voting rights or similar rights. Second, they do not bear the obligation to absorb the expected losses of the entity if they occur. Lastly, they do not claim the right to receive expected returns of the entity if they occur, which are the compensation for the risk of absorbing the expected losses. FIN 46 requires that VIEs be consolidated by the entity that maintains the majority of the risks and rewards of ownership. This Interpretation applied immediately to VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. FASB deferred the effective date of FIN 46 until the end of the first interim or annual period ending after December 15, 2003 for VIEs created before February 1, 2003. The adoption of FIN 46 did not have a material impact on our results of operations or financial condition.

 

During September 2004, FASB Staff Position (“FSP”) EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued, delaying the effective date for the recognition and measurement guidance of EITF 03-1, as contained in paragraphs 10-20, until certain implementation issues are addressed and a final FSP providing implementation guidance is issued. The final FSP providing implementation guidance is expected to be issued early in December 2004. The disclosure requirements of the consensus remain in effect. The Company will continue to monitor this project and its potential effects on our results of operations.

 

On October 13, 2004, the FASB concluded that Statement 123R, “Share-Based Payment”, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies (except small business issuer as defined in SEC Regulation S-B) for interim or annual periods beginning after June 15, 2005.  Retroactive application of the requirements of Statement 123 (not Statement 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required.  Early adoption of Statement 123R is encouraged.

 

4.              Reinsurance

 

To limit its exposure on assumed risks, the Company entered into certain proportional and non-proportional retrocessional agreements with other insurance companies, primarily subsidiaries of ACE, to cede a portion of the risk underwritten by the Company.

 

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 reinsurance amounts were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands of U.S. Dollars)

 

2004

 

2003

 

2004

 

2003

 

Premiums Written:

 

 

 

 

 

 

 

 

 

Direct

 

$

12,362

 

$

13,657

 

$

(64,564

)

$

32,057

 

Assumed

 

49,865

 

96,656

 

189,603

 

272,541

 

Ceded

 

7,246

 

327

 

106,871

 

(28,505

)

Net

 

$

54,981

 

$

109,986

 

$

18,168

 

$

333,103

 

 

 

 

 

 

 

 

 

 

 

Premiums Earned:

 

 

 

 

 

 

 

 

 

Direct

 

$

13,055

 

$

12,664

 

$

43,501

 

$

30,842

 

Assumed

 

52,528

 

69,226

 

183,192

 

212,927

 

Ceded

 

12,203

 

3,751

 

95,977

 

19,895

 

Net

 

$

53,380

 

$

78,139

 

$

130,716

 

$

223,874

 

 

 

 

 

 

 

 

 

 

 

Loss and Loss Adjustment Expenses:

 

 

 

 

 

 

 

 

 

Direct

 

$

(1,084

)

$

31,886

 

$

(8,761

)

$

50,238

 

Assumed

 

7,406

 

11,381

 

55,734

 

61,501

 

Ceded

 

2,135

 

10,356

 

79,127

 

19,844

 

Net

 

$

4,187

 

$

32,911

 

$

(32,154

)

$

91,895

 

 

 

In connection with the IPO, we have entered into several reinsurance agreements with subsidiaries of ACE that are considered retroactive reinsurance contracts. Under applicable accounting rules related to retroactive reinsurance, the Company would not be able to recognize a reinsurance recoverable on future adverse loss development, if applicable, until the Company paid the underlying loss and the Company is reimbursed by ACE. This difference in timing will cause our results of operations to otherwise be lower during any period in which, if at all, we recognize a loss for adverse development on one of these agreements, notwithstanding the reinsurance, and will be recaptured through income in the period in which we actually pay the underlying loss. During Second Quarter 2004, at the initiation of these retroactive reinsurance contracts, ceded premiums written were increased $92.5 million, ceded premiums earned were increased $66.9 million and ceded loss and loss adjustment expenses were increased $56.9 million due to these retroactive reinsurance agreements.  No amounts were recorded during Third Quarter 2004 relating to these agreements.

 

For Nine Months 2004 direct premiums written and direct loss and loss adjustment expenses (“LAE”) were impacted $(97.8) million and $(19.0) million, respectively, from the close out of transaction types either through reinsurance or commutation the Company does not expect to underwrite in the future.  Reinsurance recoverable on ceded unpaid losses and LAE as of September 30, 2004 and December 31, 2003 is $185.7 million and $122.1 million, respectively. Of these amounts, $185.7 million and $100.1 million, respectively, relate to reinsurance agreements with ACE.

 

For Third Quarter 2004, $12.1 million, $13.4 million and $7.9 million of our gross written premiums was ceded by Financial Security Assurance Inc. (“FSA”), Ambac Assurance Corporation (“Ambac”) and MBIA Insurance Corporation (“MBIA”), respectively.  For Nine Months 2004, $57.2 million, $34.1 million and $24.5 million of our gross written premiums was ceded by FSA, Ambac and MBIA, respectively.

 

5. Commitments and Contingencies

 

Various lawsuits have arisen in the ordinary course of the Company’s business. It is the opinion of the Company’s management, based upon the available information, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity, although an adverse resolution of one or more of these items could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.

 

9



 

The Company is party to reinsurance agreements with other monoline primary financial guaranty insurance companies. The Company’s 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 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. 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 Facility

 

The Company’s consolidated financial statements include long-term debt used to fund the Company’s insurance operations, and related interest expense, as described below.

 

On May 18, 2004, Assured Guaranty US Holdings Inc., a subsidiary of the Company, issued $200.0 million of 7.0% Senior Notes due 2034. The proceeds of the offering were used to repay 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 will be approximately 6.4%, taking into account the effect of a cash flow hedge executed by the Company in March 2004.   Interest expense of $3.4 million for Third Quarter 2004 and $5.2 million for Nine Months 2004 was recorded for these Senior Notes.  These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.

 

As of December 31, 2003, the Company’s long-term debt included $75.0 million of cumulative monthly income preferred shares issued in 1994 through a former affiliate of the Company, Capital Re LLC, a limited liability company organized under the laws of Turks and Caicos Islands. The amount paid to preferred shareholders for Third Quarter 2003 was $1.4 million and for Nine Months 2004 and Nine Months 2003 it was $2.1 million and $4.3 million, respectively, and is shown on the consolidated statements of operations and comprehensive income as interest expense.   No amounts were recorded during Third Quarter 2004.  Upon completion of the IPO, Capital Re LLC and the obligation with respect to the $75.0 million cumulative monthly preferred shares remained with ACE.

 

On April 29, 2004,  the Company entered into a $250.0 million unsecured credit facility to replace its general corporate purpose credit facilities (“$250.0 million credit facility”), with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America (an affiliate of Banc of America Securities LLC) acted as co-arrangers to which each of Assured Guaranty Ltd., Assured Guaranty Corp. (“AGC”), a Maryland domiciled insurance company and subsidiary of the Company and Assured Guaranty (UK) Ltd., a subsidiary of Assured Guaranty Ltd. organized under the laws of the United Kingdom, is a party, as borrower. The $250.0 million credit facility is a 364-day facility and any amounts outstanding under the facility at its expiration will be due and payable one year following the facility’s expiry. Under the $250.0 million credit facility, AGC can borrow up to $250.0 million, Assured Guaranty Ltd. has a borrowing limit not to exceed $50.0 million, and Assured Guaranty (UK) Ltd. has a borrowing limit not to exceed $12.5 million.  As of September 30, 2004, no amounts had been drawn under this credit facility.

 

As of September 30, 2004, the Company was party to a non-recourse credit facility with a syndicate of banks, which provided up to $175.0 million. This facility was specifically designed to provide rating agency qualified capital to further support the Company’s claim paying resources. This agreement is due to expire November 2010.   As of September 30, 2004, no amounts had been drawn under this credit facility.

 

As of December 31, 2003, the Company had entered into the following credit facilities, which were available for general corporate purposes:

 

10



 

(i)            The Company participated in a liquidity facility established for the benefit of ACE and certain of its subsidiaries. The overall facility was a 364-day credit agreement in the amount of $500.0 million with a syndicate of banks. The Company had a $50.0 million participation in the facility.  In connection with the IPO, as of April 29, 2004, the Company’s participation in this facility was replaced by the $250.0 million credit facility.

 

(ii)           The Company also participated in a liquidity facility established for the benefit of AGC. The overall facility was a 364-day credit agreement in the amount of $140.0 million with a syndicate of banks. Under the terms of this liquidity facility, AGC would have been required to pledge collateral to one of the syndicate banks, if the amount of collateral posted for the benefit of AGC credit default swap counterparties exceeded 11% of AGC shareholders’ equity.  In such case an amount equal to that excess was to have been pledged for the benefit of the syndicate banks. As of December 31, 2003, AGC had not posted any collateral under this covenant.   In connection with the IPO, as of April 29, 2004 the Company’s participation in this facility was replaced by the $250 million credit facility.

 

(iii)          The Company had a $75.0 million line of credit facility and a $50.0 million line of credit facility from subsidiaries of ACE.  Due to the IPO, as of April 29, 2004 these facilities were replaced.  As of December 31, 2003, no amounts had been drawn under these credit facilities.

 

7. Employee Benefit Plans and Stock Based Compensation

 

Prior to the IPO, Assured Guaranty’s officers and employees participated in ACE’s long-term incentive plans providing options to purchase shares and restricted share unit awards. Our officers and employees have been covered under additional benefit plans, including retirement programs providing 401(k) plan benefits, health and life insurance benefits; medical, dental and vision benefits for active employees; disability and life insurance protection; and severance.  These additional benefits have been provided to our employees and officers who work in the United States by plans maintained by Assured Guaranty Corp. and to our employees and officers who work in Bermuda and the United Kingdom through plans maintained by ACE covering ACE employees in those locations.  Since the completion of the IPO, our United States officers and employees have been covered by benefit plans established by the Company. Employees located in the United Kingdom and Bermuda continue to participate in the ACE benefit plans in which they participated prior to the IPO until December 31, 2004.

 

Upon completion of the IPO, any unvested options to purchase ACE ordinary shares granted to our officers or employees under the ACE employee long term incentive plan immediately vested and any unvested restricted ACE ordinary shares were forfeited. These officers and employees generally had 90 days from the date of the IPO to exercise any vested options to acquire ACE ordinary shares. The acceleration of vesting of options to purchase ordinary shares resulted in a pre-tax charge to us of approximately $3.5 million.  Based upon a price of $42.79 per ACE ordinary share, the Company incurred a pre-tax charge of $7.8 million and contributed cash in the same amount to fund a trust, with an independent trustee, for the value of the restricted ACE ordinary shares forfeited by all of our officers and employees. These pre-tax charges took place during Second Quarter 2004 and are included in other operating expenses on the consolidated statements of operation and comprehensive income.  The trust purchased common shares in the IPO and allocated to each such individual common shares having the approximate value of the ACE ordinary shares forfeited by such individual. Based on the initial public offering price of $18.00 per common share, the trust purchased approximately 436,000 common shares. This transaction is reported in shareholders’ equity as treasury stock and unearned stock grant compensation.  The common shares will be deliverable to each individual on the 18-month anniversary of the IPO so long as during that 18-month period the individual was not employed, directly or indirectly, by any designated financial guaranty company. Any forfeited common shares will be delivered to us. The independent trustee will not have any beneficial interest in the trust. Since completion of the IPO, our officers and employees are no longer eligible to participate in ACE’s employee long-term incentive plans.   In connection with these events, Assured Guaranty received $4.5 million from ACE, for the book value of

 

11



 

unrestricted compensation, which it recorded in unearned stock grant compensation, which is included in shareholders equity.

 

As of April 27, 2004, the Company adopted the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan (the “Incentive Plan”). The number of common shares that may be delivered under the Incentive Plan may not exceed 7,500,000. In the event of certain transactions affecting our common shares, the number or type of shares subject to the Incentive Plan, the number and type of shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may be adjusted.

 

The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights, and full value awards that are based on our common shares. The grant of full value awards may be in return for a participant’s previously performed services, or in return for the participant surrendering other compensation that may be due, or may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become vested upon a change in control of Assured Guaranty.

 

The Incentive Plan is administered by a committee of the Board of Directors. The Compensation Committee of the Board serves as this committee except as otherwise determined by the Board. The Board may amend or terminate the Incentive Plan.

 

In connection with the IPO, awards of options and restricted common shares were made to our officers and employees. Each of the options will vest in equal annual installments over a three-year period and will expire on the tenth anniversary of the date of grant. The exercise price of the options is $18.00, the public offering price of the IPO. Restricted common shares will vest in equal annual installments over a four-year period. Options to purchase an aggregate of 1,873,300 common shares and an aggregate of 931,400 restricted common shares were issued in connection with the IPO.

 

The Company accounts for stock-based compensation plans in accordance with APB No. 25. No compensation expense for options is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. Pro forma information regarding net income and earnings per share is required by FAS No. 123, “Accounting for Stock-Based Compensation”. In December 2002, FASB issued FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosure in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.

 

For restricted stock awards, the Company records the market value of the shares awarded at the time of the grant as unearned stock grant compensation and includes it as a separate component of shareholders equity. The unearned stock grant compensation is amortized into expense ratably over the vesting period.

 

12



 

The following table outlines the Company’s net income, and basic and diluted earnings per share for the periods ended September 30, 2004, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123.

 

 

 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

 

(in thousands of U.S. dollars, except per share amounts)

 

2004

 

2004

 

 

 

 

 

 

 

Net income as reported

 

$

44,511

 

$

134,521

 

Add: Stock-based compensation expense included in reported net income, net of income tax

 

538

 

1,452

 

Deduct: Compensation expense, net of income tax

 

(1,253

)

(2,618

)

Pro Forma

 

$

43,796

 

$

133,355

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

As reported

 

$

0.59

 

$

1.79

 

Pro forma

 

$

0.58

 

$

1.78

 

Diluted Earnings Per Share:

 

 

 

 

 

As reported

 

$

0.59

 

$

1.79

 

Pro forma

 

$

0.58

 

$

1.78

 

 

 

Since the Company was a subsidiary of ACE during the periods presented in 2003, management has determined that disclosing amounts related to these periods would not be meaningful, as the compensation cost determined under FAS 123 would be based on ACE’s ordinary share price.  The amount of stock-based compensation expense included in reported net income, net of income tax, was $0.6 million for Third Quarter 2003 and $1.5 million for Nine Months 2003.

 

The fair value of options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants for the Third Quarter 2004 and Nine Months 2004, respectively: dividend yield of 0.7 percent, expected volatility of 19.3339 percent, risk free interest rate of 4.12 percent. The expected life of the options is 5 years.

 

8. Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

 

(in thousands of U.S. dollars,

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

except per share amounts)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

44,511

 

$

42,820

 

$

134,521

 

$

117,274

 

Basic shares(1)

 

75,000,000

 

75,000,000

(1)

75,000,000

 

75,000,000

(1)

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock awards

 

3,522

 

 

2,200

 

 

Diluted shares(1)(2)

 

75,003,522

 

75,000,000

(1)

75,002,200

 

75,000,000

(1)

Basic EPS

 

$

0.59

 

$

0.57

 

$

1.79

 

$

1.56

 

Diluted EPS

 

$

0.59

 

$

0.57

 

$

1.79

 

$

1.56

 

 


(1)          Since the shares held as treasury stock are required to be settled by delivery of employer stock, those shares are included in the calculation of basic and diluted EPS.

(2)          Based on shares outstanding immediately prior to the IPO.

 

13



 

9.  Tax Allocation Agreement

 

In connection with the IPO, the Company and ACE Financial Services Inc. (“AFS”)  entered into a tax allocation agreement, whereby the Company and AFS will make a “Section 338 (h)(10)” election that will have 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 Company’s 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 Company’s 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.

 

The Company recorded a $52.8 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 estimates that as of the IPO date, it will pay $24.7 million to AFS and accordingly has established this amount as a liability, which is included in other liabilities on the balance sheet.   The 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.

 

10.  Segment Reporting

 

The Company has classified its business into four principal business segments, which is at the same level as that reviewed by senior management; (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 includes credit support for credit default swaps; (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 several lines of business in which the Company is no longer active, including trade credit reinsurance, title reinsurance, auto residual value reinsurance and the credit protection of equity layers of collateralized debt obligations, as well as life, accident and health reinsurance.

 

The Company’s reportable operating business segments are strategic business units that offer different products and services. They are managed separately since each business requires different marketing strategies and underwriting skill sets.

 

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 certain operating expenses to each segment based on the proportion of net earned premium for each respective segment to the total net earned premium excluding the impact of retroactive reinsurance agreement.  Management uses underwriting gains and losses as the primary measure of each segment’s financial performance.  There were no inter-segment transactions during the periods presented.

 

14



 

The following table summarizes the components of underwriting gain (loss) for each reporting segment:

 

 

 

Three months ended September 30, 2004

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

16.1

 

$

35.6

 

$

5.3

 

$

5.2

 

$

62.2

 

Net written premiums

 

14.1

 

35.6

 

5.3

 

 

55.0

 

Net earned premiums

 

16.5

 

31.9

 

5.1

 

 

53.4

 

Loss and loss adjustment expenses

 

(1.2

)

10.8

 

(5.4

)

 

4.2

 

Profit commission expense

 

 

(0.2

)

1.3

 

 

1.1

 

Acquisition costs

 

1.4

 

12.1

 

0.5

 

 

14.1

 

Operating expenses

 

4.3

 

8.4

 

1.3

 

 

14.0

 

Underwriting gain

 

$

11.9

 

$

0.7

 

$

7.4

 

$

 

$

20.0

 

 

 

 

Three months ended September 30, 2003

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

17.1

 

$

61.4

 

$

5.7

 

$

26.0

 

$

110.2

 

Net written premiums

 

17.0

 

61.2

 

5.7

 

26.0

 

109.9

 

Net earned premiums

 

16.0

 

21.4

 

5.6

 

35.2

 

78.1

 

Loss and loss adjustment expenses

 

4.7

 

7.7

 

(3.9

)

24.4

 

32.9

 

Profit commission expense

 

 

 

1.6

 

0.3

 

1.9

 

Acquisition costs

 

1.2

 

8.2

 

1.0

 

7.5

 

17.9

 

Operating expenses

 

2.5

 

3.4

 

0.9

 

5.5

 

12.3

 

Underwriting gain (loss)

 

$

7.6

 

$

2.2

 

$

6.0

 

$

(2.5

)

$

13.2

 

 

 

 

Nine months ended September 30, 2004

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

59.4

 

$

123.8

 

$

20.2

 

$

(78.4

)

$

125.0

 

Net written premiums

 

56.7

 

123.8

 

20.2

 

(182.5

)

18.2

 

Net earned premiums

 

73.3

 

77.8

 

28.5

 

(48.9

)

130.7

 

Loss and loss adjustment expenses

 

13.8

 

13.7

 

(9.9

)

(49.8

)

(32.2

)

Profit commission expense

 

 

0.2

 

10.6

 

0.6

 

11.4

 

Acquisition costs

 

2.9

 

25.9

 

3.1

 

3.8

 

35.7

 

Operating expenses(1)

 

11.9

 

19.4

 

7.0

 

3.6

 

41.9

 

Underwriting gain (loss)

 

$

44.6

 

$

18.6

 

$

17.7

 

$

(7.1

)

$

73.9

 

 


(1)          Excludes $11.3 million of operating expenses, included in other operating expenses on the consolidated statements of operation and comprehensive income, related to the accelerated vesting of stock awards at the IPO date.

 

15



 

 

 

 

Nine months ended September 30, 2003

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

54.2

 

$

125.2

 

$

20.0

 

$

105.1

 

$

304.5

 

Net written premiums

 

53.4

 

124.2

 

20.0

 

135.4

 

333.0

 

Net earned premiums

 

54.1

 

68.4

 

21.9

 

79.5

 

223.9

 

Loss and loss adjustment expenses

 

13.1

 

10.4

 

1.0

 

67.4

 

91.9

 

Profit commission expense

 

 

1.0

 

6.2

 

0.3

 

7.5

 

Acquisition costs

 

1.2

 

25.6

 

3.5

 

18.8

 

49.1

 

Operating expenses

 

7.1

 

9.3

 

3.6

 

11.6

 

31.6

 

Underwriting gain (loss)

 

$

32.7

 

$

22.2

 

$

7.6

 

$

(18.6

)

$

43.8

 

 

The following is a reconciliation of total underwriting gain to income before provision for income taxes for the periods ended:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions of U.S. dollars)

 

2004

 

2003

 

2004

 

2003

 

Total underwriting gain

 

$

20.0

 

$

13.2

 

$

73.9

 

$

43.8

 

Net investment income

 

23.2

 

23.8

 

71.0

 

71.9

 

Net realized investment gains

 

1.3

 

1.5

 

11.2

 

5.4

 

Unrealized gains on derivative financial instruments

 

12.9

 

14.3

 

34.9

 

26.3

 

Other income

 

 

0.2

 

0.6

 

1.0

 

Accelerated vesting of stock awards

 

 

 

(11.3

)

 

Goodwill impairment

 

 

 

(1.6

)

 

Interest expense

 

(3.4

)

(1.4

)

(7.4

)

(4.3

)

Income before provision for income taxes

 

$

53.9

 

$

51.7

 

$

171.1

 

$

144.3

 

 

Our other segment consists of certain non-core lines of business that the Company has stopped, or intends to stop, writing, including equity layer credit protection, trade credit reinsurance, title reinsurance, LA&H reinsurance and auto residual value reinsurance. In connection with this plan, the Company wrote off $1.6 million of goodwill related to our trade credit reinsurance business which we exited as part of the IPO.  Also included in the other segment is the impact of reinsurance transactions with ACE, that were purchased for the benefit of all of the Company’s reporting segments. The Company does not allocate the cost nor the related benefit of these transactions to the reporting segments but rather records the impact of these transactions in the other segment. The Company manages these exited lines of business by focusing on the net earned premiums and the underwriting gain (loss).

 

The following table provides underwriting gain (loss) by line of business for the other segment.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions of U.S. dollars)

 

2004

 

2003

 

2004

 

2003

 

Underwriting gain (loss):

 

 

 

 

 

 

 

 

 

Equity layer credit protection

 

$

 

$

(15.2

)

$

2.7

 

$

(19.8

)

Trade credit reinsurance

 

 

(0.1

)

(2.9

)

(5.5

)

Title reinsurance

 

 

2.9

 

1.0

 

4.7

 

Life accident and health reinsurance

 

 

(0.1

)

 

(0.6

)

Auto residual value reinsurance

 

 

0.1

 

(7.9

)

(4.3

)

Affiliate reinsurance

 

 

9.9

 

 

6.9

 

Total

 

$

 

$

(2.5

)

$

(7.1

)

$

(18.6

)

 

16



 

The following table provides the lines of business from which the Company’s other reporting segment derives its net earned premiums:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in millions of U.S. dollars)

 

2004

 

2003

 

2004

 

2003

 

Net earned premiums:

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

Equity layer credit protection

 

$

 

$

19.5

 

$

5.4

 

$

39.7

 

Trade credit reinsurance

 

 

11.6

 

(25.3

)

36.6

 

Title reinsurance

 

 

4.6

 

3.2

 

7.0

 

Auto residual value reinsurance

 

 

0.7

 

(32.2

)

2.1

 

Life, accident and health reinsurance

 

 

 

 

 

Affiliate reinsurance

 

 

(1.2

)

 

(5.9

)

Total

 

$

 

$

35.2

 

$

(48.9

)

$

79.5

 

 

17



 

11. Subsidiary information

 

The following tables present, in thousands of U.S. dollars, the condensed consolidated financial information for Assured Guaranty Ltd., Assured Guaranty US Holdings Inc.  and our other subsidiaries at September 30, 2004 and December 31, 2003 and for the three and nine months ended September 30, 2004 and 2003.

 

CONDENSED CONSOLIDATING BALANCE SHEET

at September 30, 2004

 

 

 

 

 

Assured

 

 

 

 

 

 

 

 

 

Assured

 

Guaranty US

 

 

 

 

 

Assured

 

 

 

Guaranty Ltd.

 

Holdings

 

Other

 

Consolidating

 

Guaranty Ltd.

 

 

 

(Parent Company)

 

Inc.

 

Subsidiaries

 

Adjustments

 

(Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash

 

$

629

 

$

1,252,727

 

$

873,038

 

$

 

$

2,126,394

 

Investments in subsidiaries

 

1,490,163

 

 

 

 

 

(1,490,163

)

 

Deferred acquisition costs

 

 

 

146,752

 

36,659

 

3,450

 

186,861

 

Reinsurance recoverable

 

 

 

30,939

 

157,007

 

(2,202

)

185,744

 

Goodwill

 

 

 

85,417

 

 

 

85,417

 

Premiums receivable

 

 

 

39,678

 

40,754

 

(40,401

)

40,031

 

Other

 

182

 

87,311

 

46,886

 

(42,159

)

92,220

 

Total assets

 

$

1,490,974

 

$

1,642,824

 

$

1,154,344

 

$

(1,571,475

)

$

2,716,667

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned premium reserves

 

$

 

$

386,090

 

$

170,929

 

$

(34,574

)

$

522,445

 

Reserve for losses and loss adjustment Expenses

 

 

117,581

 

181,760

 

(1,920

)

297,421

 

Profit commissions payable

 

 

4,066

 

53,108

 

 

57,175

 

Deferred income taxes

 

 

38,617

 

(18,288

)

364

 

20,693

 

Long-term debt

 

 

 

197,333

 

 

 

197,333

 

Other

 

3,090

 

108,330

 

67,752

 

(45,456

)

133,716

 

Total liabilities

 

3,090

 

852,018

 

455,261

 

(81,586

)

1,228,783

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,487,884

 

790,806

 

699,083

 

(1,489,889

)

1,487,884

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,490,974

 

$

1,642,824

 

$

1,154,344

 

$

(1,571,475

)

$

2,716,667

 

 

18



 

CONDENSED CONSOLIDATING BALANCE SHEET

at DECEMBER 31, 2003

 

 

 

 

 

Assured

 

 

 

 

 

 

 

 

 

Assured

 

Guaranty US

 

 

 

 

 

Assured

 

 

 

Guaranty Ltd.

 

Holdings

 

Other

 

Consolidating

 

Guaranty Ltd.

 

 

 

(Parent Company)

 

Inc.

 

Subsidiaries

 

Adjustments

 

(Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash

 

$

 

$

1,205,536

 

$

1,016,563

 

$

 

$

2,222,099

 

Investments in subsidiaries

 

1,512,068

 

 

 

(1,512,068

)

 

Deferred acquisition costs

 

 

146,926

 

28,297

 

3,450

 

178,673

 

Reinsurance recoverable

 

 

 

122,124

 

 

122,124

 

Goodwill

 

 

87,062

 

 

 

87,062

 

Premiums receivable

 

 

28,434

 

155,631

 

(5,068

)

178,997

 

Other

 

12

 

36,227

 

45,731

 

(13,058

)

68,912

 

Total assets

 

$

1,512,080

 

$

1,504,185

 

$

1,368,346

 

$

(1,526,744

)

$

2,857,867

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned premium reserves

 

$

 

$

389,027

 

$

240,367

 

$

(3,965

)

$

625,429

 

Reserve for losses and loss adjustment Expenses

 

 

106,252

 

416,341

 

 

522,593

 

Profit commissions payable

 

 

4,007

 

67,230

 

 

71,237

 

Deferred income taxes

 

 

78,054

 

(22,781

)

364

 

55,637

 

Long-term debt

 

 

 

 

75,000

 

75,000

 

Other

 

 

47,719

 

34,247

 

(11,619

)

70,347

 

Total liabilities

 

 

625,059

 

735,404

 

59,780

 

1,420,243

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,512,080

 

879,126

 

632,942

 

(1,586,524

)

1,437,624

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,512,080

 

$

1,504,185

 

$

1,368,346

 

$

(1,526,744

)

$

2,857,867

 

 

19



 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

for the nine months ended September 30, 2004

 

 

 

Assured

 

Assured

 

 

 

 

 

Assured

 

 

 

Guaranty Ltd.

 

Guaranty US

 

Other

 

Consolidating

 

Guaranty Ltd.

 

 

 

(Parent Company)

 

Holdings Inc.

 

Subsidiaries

 

Adjustments

 

(Consolidated)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

 

$

44,425

 

$

(26,257

)

$

 

$

18,168

 

Net premiums earned

 

 

85,172

 

45,544

 

 

130,716

 

Net investment income

 

 

39,091

 

31,954