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, 2005

 

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) 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

 

Indicate by check mark whether the registrant is a shell company (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 November 1, 2005 was 75,223,769.

 

 



 

ASSURED GUARANTY LTD.

 

INDEX TO FORM 10-Q

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

Consolidated Balance Sheets (unaudited) as of September 30, 2005 and December 31, 2004

 

 

Consolidated Statements of Operations and Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2005 and 2004

 

 

Consolidated Statements of Shareholders’ Equity (unaudited) for Nine Months Ended September 30, 2005

 

 

Consolidated Statements of Cash Flows (unaudited) for Nine Months Ended September 30, 2005 and 2004

 

 

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 Disclosures About Market Risk

 

Item 4.

Controls and Procedures

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

 

2



 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Assured Guaranty Ltd.

Consolidated Balance Sheets
(in thousands of U.S. dollars except per share and share amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Fixed maturity securities, at fair value (amortized cost: $2,132,114 in 2005 and $1,873,450 in 2004)

 

$

2,192,519

 

$

1,965,051

 

Short-term investments, at cost which approximates fair value

 

62,814

 

175,837

 

Total investments

 

2,255,333

 

2,140,888

 

Cash and cash equivalents

 

7,065

 

16,978

 

Accrued investment income

 

22,681

 

21,924

 

Deferred acquisition costs

 

190,034

 

186,354

 

Prepaid reinsurance premiums

 

12,894

 

15,204

 

Reinsurance recoverable on ceded losses

 

107,220

 

120,220

 

Premiums receivable

 

33,369

 

40,819

 

Goodwill

 

85,417

 

85,417

 

Unrealized gains on derivative financial instruments

 

34,757

 

43,901

 

Other assets

 

17,972

 

22,306

 

Total assets

 

$

2,766,742

 

$

2,694,011

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Unearned premium reserves

 

$

527,925

 

$

521,271

 

Reserves for losses and loss adjustment expenses

 

201,214

 

226,503

 

Profit commissions payable

 

47,303

 

61,671

 

Reinsurance balances payable

 

17,879

 

25,112

 

Current income taxes

 

12,393

 

 

Deferred income taxes

 

17,703

 

40,053

 

Funds held by Company under reinsurance contracts

 

55,125

 

50,768

 

Long-term debt

 

197,337

 

197,356

 

Other liabilities

 

56,219

 

43,665

 

Total liabilities

 

1,133,098

 

1,166,399

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 74,919,155 and 75,678,792 shares issued and outstanding in 2005 and 2004)

 

749

 

757

 

Treasury stock held in trust, at cost (436,000 shares outstanding)

 

(7,850

)

(7,850

)

Additional paid-in capital

 

885,431

 

894,219

 

Unearned stock grant compensation

 

(9,399

)

(6,729

)

Retained earnings

 

711,770

 

568,255

 

Accumulated other comprehensive income

 

52,943

 

78,960

 

Total shareholders’ equity

 

1,633,644

 

1,527,612

 

Total liabilities and shareholders’ equity

 

$

2,766,742

 

$

2,694,011

 

 

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,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Gross written premiums

 

$

75,567

 

$

62,227

 

$

194,134

 

$

125,039

 

Ceded premiums

 

(22,337

)

(7,246

)

(34,279

)

(106,871

)

Net written premiums

 

53,230

 

54,981

 

159,855

 

18,168

 

Decrease (increase) in net unearned premium reserves

 

1,315

 

(1,601

)

(8,956

)

112,548

 

Net earned premiums

 

54,545

 

53,380

 

150,899

 

130,716

 

Net investment income

 

24,378

 

23,203

 

71,178

 

71,045

 

Net realized investment gains

 

178

 

1,307

 

3,635

 

11,176

 

Unrealized gains (losses) on derivative financial instruments

 

286

 

12,881

 

(9,144

)

34,884

 

Other income

 

147

 

15

 

240

 

560

 

Total revenues

 

79,534

 

90,786

 

216,808

 

248,381

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

(790

)

4,187

 

(69,319

)

(32,154

)

Profit commission expense

 

2,037

 

1,051

 

6,369

 

11,384

 

Acquisition costs

 

13,004

 

14,215

 

34,933

 

35,761

 

Other operating expenses

 

14,961

 

14,022

 

43,956

 

53,251

 

Interest expense

 

3,440

 

3,376

 

10,146

 

7,356

 

Other expense

 

623

 

 

3,111

 

1,645

 

Total expenses

 

33,275

 

36,851

 

29,196

 

77,243

 

Income before provision for income taxes

 

46,259

 

53,935

 

187,612

 

171,138

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

Current

 

1,003

 

11,005

 

52,471

 

18,430

 

Deferred

 

6,071

 

(1,581

)

(15,142

)

18,187

 

Total provision for income taxes

 

7,074

 

9,424

 

37,329

 

36,617

 

Net income

 

39,185

 

44,511

 

150,283

 

134,521

 

Other comprehensive income (loss), net of taxes

 

 

 

 

 

 

 

 

 

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

 

(24,339

)

29,512

 

(22,850

)

(20,483

)

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

 

(107

)

103

 

(2,853

)

7,614

 

Change in net unrealized gains on fixed maturity securities

 

(24,446

)

29,615

 

(25,703

)

(12,869

)

Cash flow hedge

 

(105

)

(7,321

)

(314

)

11,929

 

Other comprehensive income (loss), net of taxes

 

(24,551

)

22,294

 

(26,017

)

(940

)

Comprehensive income

 

$

14,634

 

$

66,805

 

$

124,266

 

$

133,581

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.53

 

$

0.59

 

$

2.03

 

$

1.79

 

Diluted

 

$

0.53

 

$

0.59

 

$

2.02

 

$

1.79

 

Dividends per share

 

$

0.03

 

$

0.03

 

$

0.09

 

$

0.03

 

 

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

 

4



 

Assured Guaranty Ltd.

Consolidated Statements of Shareholders’ Equity
For Nine Months Ended September 30, 2005
(in thousands of U.S. dollars except per share amounts)

(Unaudited)

 

 

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Unearned
Stock Grant
Compensation

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total
Shareholders’
Equity

 

Balance, January 1, 2005

 

$

757

 

$

(7,850

)

$

894,219

 

$

(6,729

)

$

568,255

 

$

78,960

 

$

1,527,612

 

Net income

 

 

 

 

 

150,283

 

 

150,283

 

Dividends ($0.09 per share)

 

 

 

 

 

(6,768

)

 

(6,768

)

Restricted stock issuance, net

 

3

 

 

7,325

 

 

 

 

7,328

 

Common stock repurchases

 

(10

)

 

(19,004

)

 

 

 

(19,014

)

Share activity under option and incentive plans, net

 

(1

)

 

(1,168

)

 

 

 

(1,169

)

Tax benefit for options exercised

 

 

 

4,059

 

 

 

 

4,059

 

Cash flow hedge, net of tax of $(169)

 

 

 

 

 

 

(314

)

(314

)

Unrealized loss on fixed maturity securities, net of tax of $(7,156)

 

 

 

 

 

 

(25,703

)

(25,703

)

Unearned stock grant compensation, net

 

 

 

 

(2,670

)

 

 

(2,670

)

Balance, September 30, 2005

 

$

749

 

$

(7,850

)

$

885,431

 

$

(9,399

)

$

711,770

 

$

52,943

 

$

1,633,644

 

 

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,

 

 

 

2005

 

2004

 

Operating activities

 

 

 

 

 

Net income

 

$

150,283

 

$

134,521

 

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

 

 

 

 

 

Non-cash interest and operating expenses

 

5,138

 

4,833

 

Net amortization of premium on fixed maturity securities

 

5,206

 

6,437

 

Goodwill impairment

 

 

1,645

 

(Benefit) provision for deferred income taxes

 

(15,142

)

18,613

 

Net realized investment gains

 

(3,635

)

(6,871

)

Change in unrealized losses (gains) on derivative financial instruments

 

9,144

 

(34,884

)

Change in deferred acquisition costs

 

(3,680

)

(8,197

)

Change in accrued investment income

 

(757

)

732

 

Change in premiums receivable

 

7,450

 

23,953

 

Change in due from affiliate

 

 

115,000

 

Change in prepaid reinsurance premiums

 

2,310

 

(9,658

)

Change in unearned premium reserves

 

6,654

 

(102,890

)

Change in reserves for losses and loss adjustment expenses, net

 

(19,522

)

(259,890

)

Change in profit commissions payable

 

(14,368

)

(12,808

)

Change in value of reinsurance business assumed

 

 

14,226

 

Change in funds held by Company under reinsurance contracts

 

4,357

 

44,339

 

Change in current income taxes

 

16,957

 

4,331

 

Other

 

14,779

 

(17,832

)

Net cash flows provided by (used in) operating activities

 

165,174

 

(84,400

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

Purchases

 

(799,385

)

(492,576

)

Sales

 

525,278

 

517,542

 

Maturities

 

14,000

 

14,172

 

Sales (purchases) of short-term investments, net

 

113,023

 

(28,292

)

Net proceeds from sale of subsidiary

 

 

39,784

 

Net cash flows (used in) provided by investing activities

 

(147,084

)

50,630

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Repurchases of common stock

 

(19,014

)

 

Dividends paid

 

(6,768

)

(2,279

)

Share activity under options and incentive plans

 

(1,169

)

 

Net proceeds from issuance of senior notes

 

 

197,333

 

Repayment of note payable

 

 

(200,000

)

Proceeds from cash flow hedge

 

 

19,250

 

Net cash flows (used in) provided by financing activities

 

(26,951

)

14,304

 

Effect of exchange rate changes

 

(1,052

)

503

 

Decrease in cash and cash equivalents

 

(9,913

)

(18,963

)

Cash and cash equivalents at beginning of period

 

16,978

 

32,365

 

Cash and cash equivalents at end of period

 

$

7,065

 

$

13,402

 

 

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

 

6



 

Assured Guaranty Ltd.

Notes to Consolidated Financial Statements

September 30, 2005

(Unaudited)

 

1.  Business and 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. (the “Company”), 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, the Company 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 Re Overseas Ltd. (“AGRO”)  (an indirect subsidiary of Assured Guaranty Ltd.)  sold 100% of the common stock of its subsidiary, ACE Capital Title Reinsurance Company (“ACTR”), 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, AGRO 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 $(6.5) million underwriting loss, offset by a $6.8 million realized gain from the asset transfer.

 

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. 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 Company’s 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 coordinated 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 company’s risk profile.   The Company provides mortgage guaranty protection on an excess of loss basis.

 

7



 

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 the IPO, including equity layer credit protection, trade credit reinsurance, title reinsurance, life, accident and health and auto residual value reinsurance.  These lines of business make up the Company’s other segment.

 

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, consisting only of normal recurring adjustments, necessary for a fair statement 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 unaudited interim consolidated financial statements cover the three-month periods ended September 30, 2005 (“Third Quarter 2005”) and September 30, 2004 (“Third Quarter 2004”), and the nine-month periods ended September 30, 2005 (“Nine Months 2005”) and September 30, 2004 (“Nine Months 2004”). Operating results for the three- and nine-month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results that may be expected for a full year.  Certain items in the prior year 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 Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission.

 

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 September 30, 2004 consolidated 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.

 

Certain of the Company’s subsidiaries are subject to U.S. 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 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.

 

3.  Recent Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”). FAS 123R replaces FAS No.123, “Accounting for Stock-Based Compensation” (“FAS 123”) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). As permitted by FAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation expense for employee stock options. Accordingly, the adoption of FAS 123R’s fair value method will impact the Company’s results of operations, although it will have no impact on its overall financial position. The impact of adoption of FAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted FAS 123R in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 7. FAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required

 

8



 

under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in Nine Months 2005 and Nine Months 2004 for such excess tax deductions were $4.1 million and $5.4 million, respectively. In April 2005, the Securities and Exchange Commission delayed the effective date for adoption of FAS 123R for the Company until January 1, 2006.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments” (“EITF 03-1”), which provides guidance on recognizing other-than-temporary impairments on several types of investments including debt securities classified as held-to-maturity and available-for-sale under FAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”.  In June 2005, the FASB decided to rescind the guidance in paragraphs 10-20 of EITF 03-1. The disclosure requirements of EITF 03-1 remain in effect. These pronouncements will not materially effect the Company’s results of operations or financial position.

 

4.  Impact of Reinsurance Transactions

 

To limit its exposure on assumed risks, at the time of the IPO, 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. In addition, the Company enters into reinsurance agreements with non-affiliated companies to limit its exposure to risk on an on-going basis.

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in thousands of U.S. dollars)

 

Premiums Written

 

 

 

 

 

 

 

 

 

Direct

 

$

24,891

 

$

12,362

 

$

69,588

 

$

(64,564

)

Assumed

 

50,676

 

49,865

 

124,546

 

189,603

 

Ceded

 

(22,337

)

(7,246

)

(34,279

)

(106,871

)

Net

 

$

53,230

 

$

54,981

 

$

159,855

 

$

18,168

 

 

 

 

 

 

 

 

 

 

 

Premiums Earned

 

 

 

 

 

 

 

 

 

Direct

 

$

19,085

 

$

13,055

 

$

57,121

 

$

43,501

 

Assumed

 

58,714

 

52,528

 

130,374

 

183,192

 

Ceded

 

(23,254

)

(12,203

)

(36,596

)

(95,977

)

Net

 

$

54,545

 

$

53,380

 

$

150,899

 

$

130,716

 

 

 

 

 

 

 

 

 

 

 

Loss and Loss Adjustment Expenses

 

 

 

 

 

 

 

 

 

Direct

 

$

(5,127

)

$

(1,084

)

$

(2,491

)

$

(8,761

)

Assumed

 

8,694

 

7,406

 

(71,880

)

55,734

 

Ceded

 

(4,357

)

(2,135

)

5,052

 

(79,127

)

Net

 

$

(790

)

$

4,187

 

$

(69,319

)

$

(32,154

)

 

Assumed premiums written and ceded premiums written for Third Quarter 2005 include $21.0 million for a pre-IPO reinsurance agreement with a subsidiary of ACE under which we provided reinsurance to CGA Group Ltd. (“CGA”) and retroceded 100% of this exposure to the ACE subsidiary.   This transaction is included in our other segment results.  These same captions for Nine Months 2005 include $25.8 million related to this agreement.

 

Loss and loss adjustment expenses of $(69.3) million in Nine Months 2005 was the result of $71.0 million in loss recoveries from a third party settlement agreement, with two parties, relating to a reinsurance claim incurred

 

9



 

in 1998 and 1999.  The Company is also pursing recovery efforts with respect to other claims. In addition, the Company has recovered $2.4 million relating to its equity layer credit protection business, which was exited in connection with the IPO.

 

In connection with the IPO, the Company 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 the Company’s results of operations to otherwise be lower during the period in which, if at all, the Company recognizes a loss for adverse development on one of these agreements, notwithstanding the reinsurance, and will be recaptured through income in the period in which the Company actually recovers the underlying loss.  During 2004, at the inception of these retroactive reinsurance contracts, ceded premiums written increased $92.5 million, ceded premiums earned increased $66.9 million and ceded loss and loss adjustment expenses increased $56.9 million.

 

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 losses and LAE as of September 30, 2005 and December 31, 2004 were $107.2 million and $120.2 million, respectively, and were all related to our other segment. Of these amounts, $84.8 million and $97.8 million, respectively, related to reinsurance agreements with ACE.

 

For Third Quarter 2005,  $13.4 million, $6.9 million and $4.6 million of our gross written premiums was ceded by Financial Security Assurance Inc. (“FSA”), Ambac Assurance Corporation (“Ambac”), and MBIA Insurance Corporation (“MBIA”), respectively.  Also during Third Quarter 2005, $21.0 million of our gross written premiums was ceded by CGA under the reinsurance agreement discussed above.   The entire amount related to CGA was retroceded to a subsidiary of ACE. This transaction is included in our other segment results.  For Third Quarter 2004, $12.2 million, $13.5 million and $7.9 million of our gross written premiums was ceded by FSA, Ambac and MBIA, respectively.

 

For Nine Months 2005, $38.3 million, excluding $18.4 million of reassumption premiums related to our healthcare business described below in the section titled “Agreement with FSA”, $26.0 million and $13.5 million of our gross written premiums was ceded by FSA, Ambac, and MBIA, respectively.  For Nine Months 2005, $25.8 million of our gross written premiums was ceded by CGA under the reinsurance agreement discussed above.  For Nine Months 2004, $59.8 million, $35.0 million and $24.6 million of our gross written premiums was ceded by FSA, Ambac and MBIA, respectively.

 

Agreement with FSA

 

During Second Quarter 2005, Assured Guaranty Corp. (“AGC”) and Assured Guaranty Re Ltd. (“AG Re”), two of our subsidiaries, entered into a reinsurance agreement with FSA pursuant to which substantially all of FSA’s financial guaranty risks previously ceded to AGC (the “Ceded Business”) were assumed by AG Re.  This agreement is effective as of January 1, 2005.   In connection with the transaction, AGC transferred liabilities of $169.0 million, consisting primarily of unearned premium reserves.  All profit and loss related items associated with this transfer were eliminated in consolidation, with the exception of profit commission expense, certain other operating expenses, and provision for income taxes.  Since this transaction transferred unearned premium reserve from AGC, a U.S. tax paying entity, to AG Re, a non-U.S. tax paying entity, we released a deferred tax liability related to differences between the book and tax carrying amounts of unearned premium reserves which resulted in a tax benefit.  The total impact of all these items on Nine Months 2005 net income was $3.7 million.  FSA has released AGC from all liabilities with respect to the Ceded Business.  AG Re has assumed substantially all of AGC’s liabilities with respect to the Ceded Business. FSA may receive a profit commission on the Ceded Business based on its future performance.

 

FSA has also reassumed from AG Re approximately $12.0 million of unearned premium reserves, net of ceding commissions, of healthcare related business with an approximate par value of $820.0 million.

 

10



 

5.  Commitments and Contingencies

 

Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s 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 Company’s 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 Company’s results of operations or liquidity in a particular quarter or fiscal year.

 

In April 2005, AGC received a Notice of Order to Preserve (“Order”) from the Office of the Commissioner of Insurance, State of Georgia (“Commissioner”).  The Order was directed to “ACE Limited, and all affiliates” and requires the preservation of documents and other items related to “finite insurance” and a broad group of other insurance and reinsurance agreements.  Also in April, AGC, and numerous other insurers, received a subpoena from the Commissioner related to the “initial phase” of the Commissioner’s investigation into “finite-risk” transactions.  The subpoena requests information on AGC’s assumed and ceded reinsurance contracts in force during 2004.  AGC is cooperating with the Commissioner.

 

In the ordinary course of their respective businesses, certain of the Company’s 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 Company’s results of operations in that particular quarter or fiscal year.  See Note 4 for information on reinsurance recoveries due to the Company’s legal proceedings against third parties.

 

The Company is party to reinsurance agreements with most of the major 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 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 Company’s unaudited interim consolidated financial statements include long-term debt used to fund the Company’s insurance operations, and related interest expense, as described below.

 

Senior Notes

 

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 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 will be 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, net of amortized gain on the cash flow hedge of $3.3 million in both Third Quarter 2005 and 2004.  The Company recorded interest expense, net of amortized gain on the cash flow hedge of $10.0 million and $4.9 million in Nine Months 2005 and 2004, respectively.  These Senior Notes are fully and unconditionally guaranteed by Assured Guaranty Ltd.

 

11



 

Credit Facilities

 

$300.0 million Credit Facility

 

On April 15, 2005, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $300.0 million three-year unsecured revolving credit facility (the “$300.0 million credit facility”) with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as lead arrangers and KeyBank National Association (“KeyBank”) acted as syndication agent.  Under the $300.0 million credit facility, each of AGC, Assured Guaranty (UK) Ltd. (“AG (UK)”), a subsidiary of AGC organized under the laws of the United Kingdom, Assured Guaranty Ltd., AG Re and AGRO 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.  The $300.0 million credit facility replaced (1) the $250.0 million credit facility and (2)  the Letter of Credit Agreement, both discussed below.

 

The proceeds of the loans and letters of credit are to be used for 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 and (iii) Assured Guaranty Overseas US Holdings Inc., as a Material Non-AGC Subsidiary (as defined in the related credit agreement), guaranteed the obligations of Assured Guaranty Ltd., AG Re and AGRO under such facility.  Subsequently, AG Re and AGRO, as Material Non-AGC Subsidiaries, both guaranteed the obligations of the other and of Assured Guaranty Ltd. under such facility.

 

The $300.0 million credit facility’s financial covenants require that Assured Guaranty Ltd. (a) maintain a minimum net worth of $1.2 billion, (b) maintain an interest coverage ratio of at least 2.5:1, and (c) maintain a maximum debt-to-capital ratio of 30%.  In addition, the $300.0 million credit facility requires that AGC: (x) maintain qualified statutory capital of at least 80% of its statutory capital as of the fiscal quarter prior to the closing date of the facility and (y) maintain a ratio of aggregate net par outstanding to qualified statutory capital of not more than 150:1.  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.  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 September 30, 2005, Assured Guaranty was in compliance with all of those financial covenants.

 

As of September 30, 2005, no amounts were outstanding under this facility nor have there been any borrowings under this facility.

 

$250.0 million Credit Facility

 

On April 29, 2004, Assured Guaranty Ltd. and certain of its subsidiaries entered into a $250.0 million unsecured credit facility (“$250.0 million credit facility”), with a syndicate of banks, for which ABN AMRO Incorporated and Bank of America, N.A. acted as co-arrangers. Each of Assured Guaranty, AGC and AG (UK), was a party, as borrower. The $250.0 million credit facility was terminated and replaced by the $300.0 million credit facility discussed above.

 

The $250.0 million credit facility was a 364-day facility available for general corporate purposes. As of its termination, no amounts were outstanding under this facility nor had there been any borrowings under the life of this facility.

 

12



 

Letter of Credit Agreement

 

On November 8, 2004, Assured Guaranty Ltd., AG Re and AGRO entered into a standby letter of credit agreement (the “LOC Agreement”) with KeyBank National Association (“KeyBank”). Under the LOC Agreement, KeyBank agreed to issue up to $50.0 million in letters of credit on our behalf. The obligations of Assured Guaranty Ltd., AG Re and AGRO under the LOC Agreement were joint and several. The letters of credit were used to satisfy AG Re’s or AGRO’s obligations under certain reinsurance agreements and for general corporate purposes. Under the LOC Agreement, KeyBank issued two letters of credit, both on behalf of AGRO, with an aggregate stated amount of approximately $20.7 million.  The parties to the LOC Agreement have agreed that no additional letters of credit would be issued, extended or renewed from and after the date of the closing of the $300.0 million credit facility and letters of credit that were outstanding on such date will, unless cancelled and surrendered by the respective beneficiaries thereof, remain outstanding until their respective stated expiration dates of December 31, 2005.  The LOC Agreement contains covenants that limit debt, liens, guaranties, loans and investments, dividends, liquidations, mergers, consolidations, acquisitions, sales of assets or subsidiaries and affiliate transactions.  Most of these restrictions were subject to certain minimum thresholds and exceptions. The LOC Agreement also contained financial covenants that required the Company: (i) to maintain the ratio of consolidated debt to total capitalization at not greater than 0.30 to 1.0; (ii) to maintain consolidated net worth of at least seventy-five percent (75%) of its consolidated net worth as of June 30, 2004; and (iii) to maintain the consolidated interest coverage ratio for any test period ending on the last day of a fiscal quarter at not less than 2.50 to 1.0. In addition, the LOC Agreement provided that the obligations of KeyBank to issue letters of credit may be terminated, and our obligations under the agreement may be accelerated, upon an event of default.  As of December 31, 2004, no amounts were payable under any letter of credit issued under this facility. The LOC Agreement expired on April 28, 2005 and was replaced by the $300.0 million credit facility discussed above.

 

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 AGC’s claims paying resources. The facility expires in December 2010. As of September 30, 2005 and December 31, 2004, no amounts were outstanding under this facility nor have there been any borrowings under the life of this facility.

 

The Company’s failure to comply with certain covenants under our credit facilities could, subject to grace periods in the case of certain covenants, result in an event of default.  This could require the Company to repay any outstanding borrowings in an accelerated manner.

 

Committed Capital Securities

 

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.  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 newly created 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.

 

As of September 30, 2005, AGC has incurred $3.1 million of fees associated with the committed capital securities consisting of $2.0 million of one-time investment banking fees incurred during Second Quarter 2005 and $1.1 million of put option premiums which are on-going. These expenses are presented in the Company’s consolidated statements of operations and comprehensive income under other expenses.

 

13



 

7. Employee Benefit Plans and Stock Based Compensation

 

Employee Benefit Plans

 

Prior to the IPO, Assured Guaranty Ltd.’s officers and employees participated in ACE’s long-term incentive plans providing options to purchase ACE ordinary shares and restricted share unit awards.

 

Upon completion of the IPO, any unvested options to purchase ACE ordinary shares granted to the Company’s officers or employees under the ACE employee long term incentive plans 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 the Company 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 a trustee, for the value of the restricted ACE ordinary shares forfeited by all of the Company’s officers and employees. These pre-tax charges took place during Second Quarter 2004.  The trust purchased common shares of Assured Guaranty Ltd. 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 were delivered to each individual that was not employed, directly or indirectly, by any designated financial guaranty company on October 28, 2005, the 18-month anniversary of the IPO.  (The forfeiture restriction was waived for one former employee of the Company.)  The trustees did not have any beneficial interest in the trust. Since completion of the IPO, the Company’s 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 unrestricted compensation, which it recorded in unearned stock grant compensation, which is included in shareholders’ equity.

 

Stock Based Compensation

 

The Company accounts for its stock-based compensation plans in accordance with APB 25 and related interpretations. 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 123. In December 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“FAS 148”). 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 income ratably over the vesting period.

 

14



 

The following table outlines the Company’s net income, basic and diluted earnings per share for the three- and nine-month periods ended September 30, 2005 and 2004, had the compensation expense been determined in accordance with the fair value method recommended in FAS 123.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

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

 

Net income as reported

 

$

39,185

 

$

44,511

 

$

150,283

 

$

134,521

 

Add: Stock-based compensation expense due to accelerated vesting of ACE awards included in reported net income, net of income tax

 

 

9,652

 

 

9,652

 

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

 

1,426

 

1,038

 

4,079

 

2,236

 

Deduct: Compensation expense, net of income tax

 

(2,243

)

(11,661

)

(6,944

)

(13,434

)

Pro forma net income

 

$

38,368

 

$

43,540

 

$

147,418

 

$

132,975

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.53

 

$

0.59

 

$

2.03

 

$

1.79

 

Pro forma

 

$

0.52

 

$

0.58

 

$

1.99

 

$

1.77

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

As reported

 

$

0.53

 

$

0.59

 

$

2.02

 

$

1.79

 

Pro forma

 

$

0.52

 

$

0.58

 

$

1.98

 

$

1.77

 

 

8. Earnings Per Share

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

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

 

Net income as reported

 

$

39,185

 

$

44,511

 

$

150,283

 

$

134,521

 

Basic shares(1)

 

73,868

 

75,000

 

74,044

 

75,000

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock awards

 

583

 

4

 

436

 

2

 

Diluted shares(1)

 

74,451

 

75,004

 

74,480

 

75,002

 

Basic EPS

 

$

0.53

 

$

0.59

 

$

2.03

 

$

1.79

 

Diluted EPS

 

$

0.53

 

$

0.59

 

$

2.02

 

$

1.79

 

 


(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.

 

9.  Tax Allocation Agreement

 

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 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.

 

15



 

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 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 estimates that as of the IPO date, it will pay $20.9 million to AFS and accordingly has 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 during 2004.  During Third Quarter 2005 and Nine Months 2005, we paid AFS $0.2 million and $0.6 million, respectively, reducing the liability to $20.3 million, which is included in other liabilities on the balance sheet.

 

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 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 (“CDOs”).

 

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.  The other segment received its proportional share of operating expenses up to the IPO date. From the IPO date, the other segment was not allocated operating expenses. Management uses underwriting gains and losses as the primary measure of each segment’s financial performance.

 

The following tables summarize the components of underwriting gain (loss) for each reporting segment:

 

 

 

Three Months Ended September 30, 2005

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

24.9

 

$

27.3

 

$

1.7

 

$

21.6

 

$

75.6

 

Net written premiums

 

24.2

 

27.3

 

1.7

 

 

53.2

 

Net earned premiums

 

18.3

 

32.0

 

4.3

 

 

54.5

 

Loss and loss adjustment expenses

 

(4.0

)

4.3

 

0.3

 

(1.3

)

(0.8

)

Profit commission expense

 

 

1.1

 

0.9

 

 

2.0

 

Acquisition costs

 

1.6

 

11.0

 

0.4

 

 

13.0

 

Other operating expenses

 

9.9

 

4.3

 

0.8

 

 

15.0

 

Underwriting gain

 

$

10.8

 

$

11.3

 

$

1.9

 

$

1.3

 

$

25.3

 

 

16



 

 

 

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

 

 

14.2

 

Other operating expenses

 

8.5

 

4.7

 

1.0

 

 

14.0

 

Underwriting gain

 

$

7.8

 

$

4.5

 

$

7.7

 

$

 

$

20.0

 

 

 

 

Nine Months Ended September 30, 2005

 

 

 

Financial
Guaranty
Direct

 

Financial
Guaranty
Reinsurance

 

Mortgage
Guaranty

 

Other

 

Total

 

 

 

(in millions of U.S. dollars)

 

Gross written premiums

 

$

69.6

 

$

69.5

 

$

23.0

 

$

32.0

 

$

194.1

 

Net written premiums

 

67.6

 

69.2

 

23.0

 

 

159.9

 

Net earned premiums

 

54.7

 

82.2

 

14.0

 

 

150.9

 

Loss and loss adjustment expenses

 

(0.5

)

(66.9

)

0.5

 

(2.4

)

(69.3

)

Profit commission expense

 

 

3.4

 

2.9

 

 

6.4

 

Acquisition costs

 

4.7

 

28.6

 

1.5

 

 

34.9

 

Other operating expenses

 

27.6

 

14.4

 

1.9

 

 

44.0

 

Underwriting gain

 

$

22.9

 

$

102.7

 

$

7.2

 

$

2.4

 

$

134.9

 

 

 

 

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

 

13.8

 

(9.9

)

(49.9

)

(32.2

)

Profit commission expense

 

 

0.2

 

10.6

 

0.6

 

11.4

 

Acquisition costs

 

2.9

 

25.9

 

3.1

 

3.7

 

35.8

 

Other operating expenses(1)

 

23.1

 

12.7

 

2.8

 

3.5

 

41.9

 

Underwriting gain (loss)

 

$

33.5

 

$

25.2

 

$

21.9

 

$

 (7.1

)

$

73.9

 

 


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

 

17



 

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,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions of U.S. dollars)

 

Total underwriting gain

 

$

25.3

 

$

20.0

 

$

134.9

 

$

73.9

 

Net investment income

 

24.4

 

23.2

 

71.2

 

71.0

 

Net realized investment gains

 

0.2

 

1.3

 

3.6

 

11.2

 

Unrealized gains (losses) on derivative financial instruments

 

0.3

 

12.9

 

(9.1

)

34.9

 

Other income

 

0.1

 

 

0.2

 

0.6

 

Accelerated vesting of stock awards

 

 

 

 

(11.3

)

Interest expense

 

(3.4

)

(3.4

)

(10.1

)

(7.4

)

Other expense

 

(0.6

)

 

(3.1

)

(1.6

)

Income before provision for income taxes

 

$

46.3

 

$

53.9

 

$

187.6

 

$

171.1

 

 

The following table provides the lines of businesses from which each of the Company’s four reporting segments derive their net earned premiums:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions of U.S. dollars)

 

Financial guaranty direct:

 

 

 

 

 

 

 

 

 

Public finance

 

$

0.7

 

$

 

$

1.3

 

$

0.1

 

Structured finance

 

17.6

 

16.5

 

53.4

 

73.2

 

Total

 

18.3

 

16.5

 

54.7

 

73.3

 

Financial guaranty reinsurance:

 

 

 

 

 

 

 

 

 

Public finance

 

21.1

 

19.3

 

44.8

 

41.8

 

Structured finance

 

10.9

 

12.6

 

37.4

 

36.0

 

Total

 

32.0

 

31.9

 

82.2

 

77.8

 

Mortgage guaranty:

 

 

 

 

 

 

 

 

 

Mortgage guaranty

 

4.3

 

5.1

 

14.0

 

28.5

 

Other:

 

 

 

 

 

 

 

 

 

Equity layer credit protection

 

 

 

 

5.4

 

Trade credit reinsurance

 

 

 

 

(25.3

)

Title reinsurance

 

 

 

 

3.3

 

Auto residual value reinsurance

 

 

 

 

(32.2

)

Total

 

 

 

 

(48.9

)

Total net earned premiums

 

$

54.5

 

$

53.4

 

$

150.9

 

$

130.7

 

 

18



 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(in millions of U.S. dollars)

 

Underwriting gain (loss):

 

 

 

 

 

 

 

 

 

Equity layer credit protection

 

$

1.3

 

$

 

$

2.4

 

$

3.0

 

Trade credit reinsurance

 

 

 

 

(2.8

)

Title reinsurance

 

 

 

 

1.0

 

Auto residual value reinsurance

 

 

 

 

(7.9

)

Total

 

$

1.3

 

$

 

$

2.4

 

$

(7.1

)

 

19



 

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 AG Re and other subsidiaries of Assured Guaranty Ltd. as of September 30, 2005 and December 31, 2004 and for the three and nine months ended September 30, 2005 and 2004.

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2005

(in thousands of U. S. dollars)

 

 

 

Assured
Guaranty Ltd.
(Parent Company)

 

Assured
Guaranty US
Holdings Inc.

 

AG Re and
Other
Subsidiaries

 

Consolidating
Adjustments

 

Assured
Guaranty Ltd.
(Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash

 

$

399

 

$

1,105,551

 

$

1,156,448

 

$

 

$

2,262,398

 

Investment in subsidiaries

 

1,640,222

 

 

 

(1,640,222

)

 

Deferred acquisition costs

 

 

73,698

 

116,336

 

 

190,034

 

Reinsurance recoverable

 

 

30,666

 

79,562

 

(3,008

)

107,220

 

Goodwill

 

 

85,417

 

 

 

85,417

 

Premiums receivable

 

 

17,996

 

21,638

 

(6,265

)

33,369

 

Other

 

1,713

 

86,854

 

34,392

 

(34,655

)

88,304

 

Total assets

 

$

1,642,334

 

$

1,400,182

 

$

1,408,376

 

$

(1,684,150

)

$

2,766,742

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Unearned premium reserves

 

$

 

$

197,011

 

$

360,265

 

$

(29,351

)

$

527,925

 

Reserves for losses and loss adjustment expenses

 

 

69,182

 

135,040

 

(3,008

)

201,214

 

Profit commissions payable

 

 

4,004

 

43,299

 

 

47,303

 

Deferred income taxes

 

 

35,038

 

(17,335

)

 

17,703

 

Long-term debt

 

 

197,337

 

 

 

197,337

 

Other

 

8,690

 

67,515

 

76,980

 

(11,569

)

141,616

 

Total liabilities

 

8,690

 

570,087

 

598,249

 

(43,928

)

1,133,098

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,633,644

 

830,095

 

810,127

 

(1,640,222

)

1,633,644

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,642,334

 

$

1,400,182

 

$

1,408,376

 

$

(1,684,150

)

$

2,766,742

 

 

20



 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2004

(in thousands of U. S. dollars)

 

 

 

Assured
Guaranty Ltd.
(Parent Company)

 

Assured
Guaranty US
Holdings Inc.

 

AG Re and
Other
Subsidiaries

 

Consolidating Adjustments

 

Assured
Guaranty Ltd.
(Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash

 

$

75

 

$

1,263,906

 

$

893,885

 

$

 

$

2,157,866

 

Investment in subsidiaries

 

1,511,778

 

 

 

(1,511,778

)

 

Deferred acquisition costs

 

 

140,333

 

46,021

 

 

186,354

 

Reinsurance recoverable

 

 

36,379

 

88,418

 

(4,577

)

120,220

 

Goodwill

 

 

85,417

 

 

 

85,417

 

Premiums receivable

 

 

36,407

 

56,938

 

(52,518

)

40,827

 

Other

 

19,630

 

106,350

 

46,109

 

(68,762

)

103,327

 

Total assets

 

$

1,531,483

 

$

1,668,792

 

$

1,131,371

 

$

(1,637,635

)

$

2,694,011

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Unearned premium reserves

 

$

 

$

369,320

 

$

195,545

 

$

(43,594

)

$

521,271

 

Reserves for losses and loss adjustment expenses

 

 

118,403

 

112,312

 

(4,212

)

226,503

 

Profit commissions payable

 

 

4,181

 

57,490

 

 

61,671

 

Deferred income taxes

 

 

57,924

 

(17,871

)

 

40,053

 

Long-term debt

 

 

197,356

 

 

 

197,356

 

Other

 

3,871

 

103,795

 

89,930

 

(78,051

)

119,545

 

Total liabilities

 

3,871

 

850,979

 

437,406

 

(125,857

)

1,166,399

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,527,612

 

817,813

 

693,965

 

(1,511,778

)

1,527,612

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,531,483

 

$

1,668,792

 

$

1,131,371

 

$

(1,637,635

)

$

2,694,011

 

 

21



 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands of U. S. dollars)

 

 

 

Assured
Guaranty Ltd.
(Parent Company)

 

Assured
Guaranty US
Holdings Inc.

 

AG Re and
Other
Subsidiaries

 

Consolidating Adjustments *

 

Assured
Guaranty Ltd.
(Consolidated)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

 

$

 

$

23,979

 

$

29,251

 

$

 

$

53,230

 

Net premiums earned

 

 

30,017

 

24,528

 

 

54,545

 

Net investment income

 

1

 

12,278

 

12,135

 

(36

)

24,378

 

Net realized investment gains (losses)

 

(1

)

223

 

(44

)

 

178