Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

Amendment No. 1 to Form 10-Q

 

(Mark One)

 

x

 

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

 

 

 

For the Quarterly Period Ended March 31, 2011

 

or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the 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 offices)

 

(441) 279-5700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of registrant’s Common Shares ($0.01 par value) outstanding as of November 4, 2011 was 182,228,965 (excludes 76,060 unvested restricted shares).

 

 

 



Table of Contents

 

Assured Guaranty Ltd.

Form 10-Q/A

Explanatory Note

 

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) amends our quarterly report on Form 10-Q for the quarter ended March 31, 2011, which was originally filed on May 10, 2011 (“Original Form 10-Q”). This amendment is being filed to include restated financial statements as described in Note 2 to the consolidated financial statements contained in “Item 1. Financial Statements,” financial data and related disclosures. The Company is restating its previously issued consolidated financial statements as of and for the quarters ended March 31, 2011 and 2010 to reflect the Company’s determination that it did not properly account for the elimination of intercompany activity between the Company’s insurance subsidiaries and its consolidated financial guaranty variable interest entities. Included in this restatement is the correction of other immaterial errors which affected the quarters ended March 31, 2011 and 2010. The total effect of this restatement was a decrease to equity of $50.4 million and $65.3 million as of March 31, 2011 and December 31, 2010, respectively, and increases to net income of $15.2 million and $11.5 million for the quarters ended March 31, 2011 and 2010, respectively.

 

As a result of the errors discussed above, management has now determined that the Company had a material weakness in its internal control over financial reporting at March 31, 2011. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. For a discussion of management’s consideration of the Company’s disclosure controls and procedures and the material weakness identified, see Part I, Item 4, Controls and Procedures of this Form 10-Q/A.

 

In accordance with the rules of the Securities and Exchange Commission (the “SEC”), this Form 10-Q/A sets forth the complete text of the following items of the Original Form 10-Q as modified where necessary to reflect the restatement:

 

·                  Part I – Item 1. Financial Statements;

 

·                  Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

·                  Part I – Item 4. Controls and Procedures; and

 

·                  Part II – Item 6. Exhibits.

 

In accordance with rules of the SEC, this Form 10-Q/A also includes as exhibits certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

 

Except for the items noted above, no other information included in the Original Form 10-Q is being amended by this Form 10-Q/A. This Form 10-Q/A continues to speak as of the date of the Original Form 10-Q and we have not updated the filing to reflect events occurring subsequently to the Original Form 10-Q date other than those associated with the restatement of the Company’s financial statements and certain material events which are identified as to date. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings with the SEC subsequent to the filing of the Original 10-Q, including any amendments to those filings.

 



Table of Contents

 

ASSURED GUARANTY LTD.

 

INDEX TO FORM 10-Q/A

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

Consolidated Balance Sheets (restated) (unaudited) as of March 31, 2011 and December 31, 2010

1

 

Consolidated Statements of Operations (restated) (unaudited) for the Three Months Ended March 31, 2011 and 2010

2

 

Consolidated Statements of Comprehensive Income (restated) (unaudited) for the Three Months Ended March 31, 2011 and 2010

3

 

Consolidated Statement of Shareholders’ Equity (restated) (unaudited) for Three Months Ended March 31, 2011

4

 

Consolidated Statements of Cash Flows (restated) (unaudited) for Three Months Ended March 31, 2011 and 2010

5

 

Notes to Consolidated Financial Statements (restated) (unaudited)

6

 

1. Business and Basis of Presentation

6

 

2. Restatement of Previously Issued Financial Statements

 

 

3. Business Changes, Risks, Uncertainties and Accounting Developments

14

 

4. Outstanding Exposure

15

 

5. Financial Guaranty Contracts Accounted for as Insurance

18

 

6. Fair Value Measurement

38

 

7. Financial Guaranty Contracts Accounted for as Credit Derivatives

42

 

8. Consolidation of Variable Interest Entities

50

 

9. Investments

52

 

10. Insurance Company Regulatory Requirements

55

 

11. Income Taxes

56

 

12. Reinsurance

57

 

13. Commitments and Contingencies

60

 

14. Long Term Debt and Credit Facilities

64

 

15. Earnings Per Share

68

 

16. Subsidiary Information

69

 

17. Subsequent Events

 

Item 2.

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

79

 

Forward-Looking Statements

79

 

Convention

80

 

Website Information

80

 

Introduction

80

 

Executive Summary

82

 

Results of Operations

85

 

Non-GAAP Financial Measures

111

 

Insured Portfolio

116

 

Exposure to Residential Mortgage Backed Securities

121

 

Exposures by Reinsurer

124

 

Liquidity and Capital Resources

125

Item 4.

Controls and Procedures

144

 

PART II. OTHER INFORMATION

 

Item 6.

Exhibits

145

 



Table of Contents

 

Assured Guaranty Ltd.

 

Consolidated Balance Sheets (Unaudited)

 

(dollars in thousands except per share and share amounts)

 

 

 

March 31,
2011

 

December 31,
2010

 

 

 

(restated)

 

(restated)

 

Assets

 

 

 

 

 

Investment portfolio:

 

 

 

 

 

Fixed maturity securities, available-for-sale, at fair value (amortized cost of $9,368,735 and $9,274,718)

 

$

9,459,814

 

$

9,402,287

 

Short term investments, at fair value

 

813,392

 

1,055,567

 

Other invested assets

 

264,517

 

283,032

 

Total investment portfolio

 

10,537,723

 

10,740,886

 

Cash

 

111,587

 

108,389

 

Premiums receivable, net of ceding commissions payable

 

1,118,033

 

1,167,587

 

Ceded unearned premium reserve

 

794,300

 

821,819

 

Deferred acquisition costs

 

235,982

 

239,805

 

Reinsurance recoverable on unpaid losses

 

18,641

 

22,255

 

Salvage and subrogation recoverable

 

1,056,961

 

1,032,369

 

Credit derivative assets

 

619,303

 

592,898

 

Deferred tax asset, net

 

1,031,688

 

1,259,125

 

Current income tax receivable

 

159,571

 

 

Financial guaranty variable interest entities’ assets, at fair value

 

3,679,025

 

3,657,481

 

Other assets

 

221,855

 

199,305

 

Total assets

 

$

19,584,669

 

$

19,841,919

 

Liabilities and shareholders’ equity

 

 

 

 

 

Unearned premium reserve

 

$

6,637,213

 

$

6,972,894

 

Loss and loss adjustment expense reserve

 

419,592

 

574,369

 

Reinsurance balances payable, net

 

268,221

 

274,431

 

Long-term debt

 

1,049,708

 

1,052,936

 

Credit derivative liabilities

 

2,759,326

 

2,462,831

 

Current income tax payable

 

 

93,020

 

Financial guaranty variable interest entities’ liabilities with recourse, at fair value

 

2,874,183

 

3,030,908

 

Financial guaranty variable interest entities’ liabilities without recourse, at fair value

 

1,373,006

 

1,337,214

 

Other liabilities

 

359,367

 

309,862

 

Total liabilities

 

15,740,616

 

16,108,465

 

Commitments and contingencies (See Note 13)

 

 

 

 

 

Common stock ($0.01 par value, 500,000,000 shares authorized; 184,044,597 and 183,744,655 shares issued and outstanding in 2011 and 2010)

 

1,840

 

1,837

 

Additional paid-in capital

 

2,589,197

 

2,585,423

 

Retained earnings

 

1,164,703

 

1,032,445

 

Accumulated other comprehensive income, net of tax provision (benefit) of $8,345 and $18,341

 

86,313

 

111,749

 

Deferred equity compensation (181,818 shares)

 

2,000

 

2,000

 

Total shareholders’ equity

 

3,844,053

 

3,733,454

 

Total liabilities and shareholders’ equity

 

$

19,584,669

 

$

19,841,919

 

 

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

 

1



Table of Contents

 

Assured Guaranty Ltd.

 

Consolidated Statements of Operations (Unaudited)

 

(dollars in thousands except per share amounts)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

(restated)

 

(restated)

 

Revenues

 

 

 

 

 

Net earned premiums

 

$

253,977

 

$

314,620

 

Net investment income

 

96,061

 

84,302

 

Net realized investment gains (losses):

 

 

 

 

 

Other-than-temporary impairment losses

 

(6,947

)

(1,117

)

Less: portion of other-than-temporary impairment loss recognized in other comprehensive income

 

(2,369

)

(661

)

Other net realized investment gains (losses)

 

7,384

 

9,869

 

Net realized investment gains (losses)

 

2,806

 

9,413

 

Net change in fair value of credit derivatives:

 

 

 

 

 

Realized gains and other settlements

 

35,427

 

26,703

 

Net unrealized gains (losses)

 

(271,636

)

252,098

 

Net change in fair value of credit derivatives

 

(236,209

)

278,801

 

Fair value gain (loss) on committed capital securities

 

526

 

(1,275

)

Net change in financial guaranty variable interest entities

 

119,601

 

(8,913

)

Other income

 

42,151

 

(12,929

)

Total Revenues

 

278,913

 

664,019

 

Expenses

 

 

 

 

 

Loss and loss adjustment expenses

 

(25,580

)

110,852

 

Amortization of deferred acquisition costs

 

7,420

 

8,173

 

Assured Guaranty Municipal Holdings Inc. acquisition-related expenses

 

 

4,021

 

Interest expense

 

24,760

 

25,134

 

Other operating expenses

 

56,835

 

62,533

 

Total expenses

 

63,435

 

210,713

 

Income (loss) before income taxes

 

215,478

 

453,306

 

Provision (benefit) for income taxes

 

 

 

 

 

Current

 

(197,599

)

(38,953

)

Deferred

 

272,465

 

158,799

 

Total provision (benefit) for income taxes

 

74,866

 

119,846

 

Net income (loss)

 

$

140,612

 

$

333,460

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.76

 

$

1.81

 

Diluted

 

$

0.75

 

$

1.75

 

Dividends per share

 

$

0.045

 

$

0.045

 

 

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

 

2



Table of Contents

 

Assured Guaranty Ltd.

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

(restated)

 

(restated)

 

Net income (loss)

 

$

140,612

 

$

333,460

 

Unrealized holding gains (losses) arising during the period, net of tax provision (benefit) of $(10,437) and $(5,382)

 

(25,545

)

9,214

 

Less: reclassification adjustment for gains (losses) included in net income (loss), net of tax provision (benefit) of $172 and $2,768

 

1,029

 

6,645

 

Change in net unrealized gains on investments

 

(26,574

)

2,569

 

Change in cumulative translation adjustment, net of tax provision (benefit) of $669 and $(2,108)

 

1,243

 

(3,884

)

Change in cash flow hedge, net of tax provision (benefit) of $(56) and $(56)

 

(105

)

(105

)

Other comprehensive income (loss)

 

(25,436

)

(1,420

)

Comprehensive income (loss)

 

$

115,176

 

$

332,040

 

 

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

 

3



Table of Contents

 

Assured Guaranty Ltd.

 

Consolidated Statement of Shareholders’ Equity (Unaudited)

 

For the Three Months Ended March 31, 2011

 

(dollars in thousands, except share data)

 

 

 

Common Stock

 

Additional
Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

Deferred
Equity

 

Total
Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Compensation

 

Equity

 

 

 

 

 

 

 

 

 

(restated)

 

(restated)

 

 

 

(restated)

 

Balance, December 31, 2010

 

183,744,655

 

$

1,837

 

$

2,585,423

 

$

1,032,445

 

$

111,749

 

$

2,000

 

$

3,733,454

 

Net income

 

 

 

 

140,612

 

 

 

140,612

 

Dividends ($0.045 per share)

 

 

 

 

(8,286

)

 

 

(8,286

)

Dividends on restricted stock units

 

 

 

68

 

(68

)

 

 

 

Share-based compensation and other

 

299,942

 

3

 

3,706

 

 

 

 

3,709

 

Change in cumulative translation adjustment

 

 

 

 

 

1,243

 

 

1,243

 

Change in cash flow hedge

 

 

 

 

 

(105

)

 

(105

)

Change in unrealized gains (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments with no other-than-temporary impairment

 

 

 

 

 

(46,390

)

 

(46,390

)

Investments with other-than-temporary impairment

 

 

 

 

 

20,845

 

 

20,845

 

Less: reclassification adjustment for gains (losses) included in net income (loss)

 

 

 

 

 

1,029

 

 

1,029

 

Balance, March 31, 2011

 

184,044,597

 

$

1,840

 

$

2,589,197

 

$

1,164,703

 

$

86,313

 

$

2,000

 

$

3,844,053

 

 

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

 

4



Table of Contents

 

Assured Guaranty Ltd.

 

Consolidated Statements of Cash Flows (Unaudited)

 

(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

(restated)

 

(restated)

 

Net cash flows provided by (used in) operating activities

 

$

(122,143

)

$

(210,399

)

Investing activities

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

Purchases

 

(511,679

)

(418,032

)

Sales

 

299,877

 

187,800

 

Maturities

 

183,587

 

265,268

 

Net sales (purchases) of short-term investments

 

242,296

 

219,827

 

Net proceeds from paydowns on financial guaranty variable interest entities’ assets

 

162,500

 

60,687

 

Other

 

4,246

 

4,867

 

Net cash flows provided by (used in) investing activities

 

380,827

 

320,417

 

Financing activities

 

 

 

 

 

Dividends paid

 

(8,286

)

(8,305

)

Share activity under option and incentive plans

 

(2,312

)

(2,583

)

Net paydowns of financial guaranty variable interest entities’ liabilities

 

(241,618

)

(46,157

)

Repayment of long-term debt

 

(5,095

)

(6,363

)

Net cash flows provided by (used in) financing activities

 

(257,311

)

(63,408

)

Effect of exchange rate changes

 

1,825

 

(254

)

Increase (decrease) in cash

 

3,198

 

46,356

 

Cash at beginning of period

 

108,389

 

44,133

 

Cash at end of period

 

$

111,587

 

$

90,489

 

Supplemental cash flow information

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

Income taxes

 

$

51,465

 

$

136,645

 

Interest

 

$

12,190

 

$

12,588

 

 

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

 

5



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited)

 

March 31, 2011

 

1. Business and Basis of Presentation

 

Business

 

Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”) is a Bermuda-based holding company that provides, through its operating subsidiaries, credit protection products to the United States (“U.S.”) and international public finance, infrastructure and structured finance markets. The Company has applied its credit underwriting judgment, risk management skills and capital markets experience to develop insurance, reinsurance and credit derivative products that protect holders of debt instruments and other monetary obligations from defaults in scheduled payments, including scheduled interest and principal payments. The securities insured by the Company include taxable and tax-exempt obligations issued by U.S. state or municipal governmental authorities, utility districts or facilities; notes or bonds issued to finance international infrastructure projects; and asset-backed securities issued by special purpose entities. The Company markets its credit protection products directly to issuers and underwriters of public finance, infrastructure and structured finance securities as well as to investors in such debt obligations. The Company guarantees debt obligations issued in many countries, although its principal focus is on the U.S., Europe and Australia.

 

Financial guaranty contracts accounted for as insurance provide an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty contracts accounted for as credit derivatives are generally structured such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty contracts accounted for as insurance and only occurs upon one or more defined credit events such as failure to pay or bankruptcy, in each case, as defined within the transaction documents, with respect to one or more third party referenced securities or loans. Financial guaranty contracts accounted for as credit derivatives are primarily comprised of credit default swaps (“CDS”). In general, the Company structures credit derivative transactions such that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty contracts accounted for as insurance but are governed by International Swaps and Derivative Association, Inc. (“ISDA”) documentation. The Company has not written any new CDS since 2009 and does not expect to write CDS in the future. The Company also entered into ceded reinsurance agreements to provide greater business diversification and reduce the net potential loss from large risks; however, ceded contracts do not relieve the Company of its obligations. Ceded reinsurance is generally not currently available.

 

Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the issuers’ taxing powers, tax-supported bonds and revenue bonds and other obligations of states, their political subdivisions and other municipal issuers supported by the issuers’ or obligors’ covenant to impose and collect fees and charges for public services or specific projects. Public finance obligations include obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including government office buildings, toll roads, health care facilities and utilities. Structured finance obligations insured by the Company are generally backed by pools of assets such as residential or commercial mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value and issued by special purpose entities. The Company will insure other specialized financial obligations. The Company currently does not underwrite any new U.S. residential mortgage backed security (“RMBS”) transactions. See Note 4 for outstanding U.S. RMBS exposures.

 

Financial obligations guaranteed by AGL’s insurance company subsidiaries are generally awarded credit ratings that are the same rating as the financial strength rating of the AGL subsidiary that has guaranteed that obligation. Investors in products insured by the Company’s insurance company subsidiaries frequently rely on ratings published by nationally recognized statistical rating organizations (“NRSROs”) because such ratings influence the trading value of securities and form the basis for many institutions’ investment guidelines as well as individuals’ bond purchase decisions. Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest that NRSROs will assign. However, the models used by NRSROs differ, presenting conflicting goals that may make it inefficient or impractical to reach the highest rating level. The models are not fully transparent, contain subjective data (such as assumptions about future market demand for the Company’s products) and change frequently. Ratings reflect only the views of the respective NRSROs and are subject to continuous review and revision or withdrawal at any time.

 

6



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

On January 24, 2011, Standard and Poor’s Ratings Services (“S&P”) released a publication entitled “Request for Comment: Bond Insurance Criteria,” in which it requested comments on proposed changes to its bond insurance ratings criteria. In the Request for Comment, S&P noted that it could lower its financial strength ratings on existing investment- grade bond insurers (which include the Company’s insurance subsidiaries) by one or more rating categories if the proposed bond insurance ratings criteria are adopted, unless those bond insurers raise additional capital or reduce risk. The proposed ratings criteria contemplate the imposition of a leverage test which is based solely on the amount of par insured and which does not take into account the bond insurer’s unearned premium reserve as a claims-paying resource; changes to S&P’s capital adequacy model, including significant increases in capital charges for both U.S. public finance obligations and structured finance obligations; and reductions in the single risk limits for U.S. public finance obligations. This action by S&P has exacerbated uncertainty in the market over the Company’s financial strength ratings. The Company has submitted comment letters to S&P discussing the modifications that it believes would be necessary to establish a supportable framework for determining the ratings of financial guaranty companies, and on April 21, 2011, S&P announced that it is in the process of analyzing the feedback received from market participants and revisiting its assumptions and analysis in light of the feedback. S&P also stated that it expects to publish the final criteria early in the third quarter of 2011 and to publish updated ratings that reflect the application of the new criteria by September 30, 2011. If S&P were not to accept any of our comments and adopts the ratings criteria as proposed, the new criteria could have an adverse impact on the financial strength rating of the Company’s insurance subsidiaries if the Company were unable to reduce risk or raise capital on acceptable terms.  See Note 17.

 

Unless otherwise noted, ratings on Assured Guaranty’s insured portfolio reflect its internal rating. The Company’s ratings scale is similar to that used by the NRSROs; however, the ratings in this report may not be the same as ratings assigned by any such rating agency. The super senior category, which is not generally used by rating agencies, is used by the Company in instances where Assured Guaranty’s AAA-rated exposure on its internal rating scale has additional credit enhancement due to either (1) the existence of another security rated AAA that is subordinated to Assured Guaranty’s exposure or (2) Assured Guaranty’s exposure benefiting from a different form of credit enhancement that would pay any claims first in the event that any of the exposures incurs a loss, and such credit enhancement, in management’s opinion, causes Assured Guaranty’s attachment point to be materially above the AAA attachment point.

 

Basis of Presentation

 

The unaudited interim consolidated financial statements 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 which are of a normal recurring nature, 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 period ended March 31, 2011 (“First Quarter 2011”) and the three-month period ended March 31, 2010 (“First Quarter 2010”).

 

These unaudited interim consolidated financial statements include the accounts of AGL and its direct and indirect subsidiaries (collectively, the “Subsidiaries”). These unaudited interim consolidated financial statements also include the accounts of certain variable interest entities (“VIEs”). Intercompany accounts and transactions between and among AGL and its subsidiaries have been eliminated as well as transactions between the insurance company subsidiaries and the consolidated VIEs. Certain prior year balances have been reclassified to conform to the current year’s 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/A for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

AGL’s principal insurance company subsidiaries are Assured Guaranty Corp. (“AGC”), domiciled in Maryland, Assured Guaranty Municipal Corp. (“AGM”), domiciled in New York, and Assured Guaranty Re Ltd. (“AG Re”), a Bermuda insurance company. In addition, the Company also has another U.S. and another Bermuda insurance company subsidiary that participate in a pooling agreement with AGM, two insurance subsidiaries organized in the United Kingdom, and a mortgage insurance company. The Company’s organizational structure includes various holdings companies, two of which—Assured Guaranty US Holdings Inc. (“AGUS”) and Assured Guaranty Municipal Holdings Inc. (“AGMH”)—have public debt outstanding. See Note 14.

 

7



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

Change in Accounting Policy

 

Prior to January 1, 2011, the Company managed its business and reported financial information for two principal financial guaranty segments: direct and reinsurance. There has been no market for financial guaranty reinsurance in the past two years and it is not expected to develop in the foreseeable future. The Company’s reinsurance subsidiary, AG Re, now only writes new treaties with affiliates that are eliminated in consolidation. As a result, the chief operating decision maker now manages the operations of the Company at a consolidated level and no longer uses underwriting gain (loss) by segment as an operating metric. Therefore, segment financial information is no longer disclosed.

 

2. Restatement of Previously Issued Financial Statements

 

AGL, through its insurance subsidiaries, has provided financial guaranties with respect to debt obligations issued by special purpose entities, including financial guaranty VIEs.  Assured Guaranty does not sponsor such financial guaranty VIEs nor does it act as the servicer or collateral manager for any financial guaranty VIE debt obligations that it insures.  However, when Assured Guaranty provides such financial guaranties, it can obtain certain control rights through the transaction structure which make Assured Guaranty the primary beneficiary of the financial guaranty VIE.  Assured Guaranty is required under GAAP to consolidate the financial guaranty VIE in its financial statements when it is the primary beneficiary.  See Note 8.  When such consolidation occurs, Assured Guaranty must eliminate the intercompany transactions between the relevant Assured Guaranty insurance subsidiary and the consolidated financial guaranty VIE.  Assured Guaranty discovered errors in the elimination of such intercompany transactions, which resulted in the restatement of the consolidated financial statements for the three months ended March 31, 2011 and the year ended December 31, 2010.

 

In addition, the Company was required to correct certain unrelated, immaterial errors as part of the restatement which affected expected losses, the fair value of credit derivatives, and the classification of financial guaranty VIE assets and liabilities, which affected the years ended December 31, 2010 and 2009. While these immaterial errors were corrected at the time they were identified, these restated financial statements reflect the correction of such errors in the period in which they arose.

 

The effect of the restatement on the balance sheet is shown in the tables below.

 

 

 

As of March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

10,505.1

 

$

32.6

 

$

 

$

10,537.7

 

Cash

 

95.9

 

15.7

 

 

111.6

 

Premiums receivable, net of ceding commissions payable

 

1,118.0

 

 

 

1,118.0

 

Ceded unearned premium reserve

 

794.3

 

 

 

794.3

 

Deferred acquisition costs

 

236.0

 

 

 

236.0

 

Reinsurance recoverable on unpaid losses

 

18.6

 

 

 

18.6

 

Salvage and subrogation recoverable

 

1,057.0

 

 

 

1,057.0

 

Credit derivative assets

 

619.3

 

 

 

619.3

 

Deferred tax asset, net

 

1,004.5

 

23.9

 

3.3

 

1,031.7

 

Current income tax receivable

 

159.6

 

 

 

159.6

 

Financial guaranty variable interest entities’ assets, at fair value

 

3,679.0

 

 

 

3,679.0

 

Other assets

 

221.9

 

 

 

221.9

 

Total assets

 

$

19,509.2

 

$

72.2

 

$

3.3

 

$

19,584.7

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

Unearned premium reserve

 

$

6,637.2

 

$

 

$

 

$

6,637.2

 

Loss and loss adjustment expense reserve

 

407.9

 

 

11.7

 

419.6

 

Reinsurance balances payable, net

 

268.2

 

 

 

268.2

 

Long-term debt

 

1,049.7

 

 

 

1,049.7

 

Credit derivative liabilities

 

2,761.5

 

 

(2.2

)

2,759.3

 

Financial guaranty variable interest entities’ liabilities with recourse, at fair value

 

2,757.8

 

116.4

 

 

2,874.2

 

Financial guaranty variable interest entities’ liabilities without recourse, at fair value

 

1,373.0

 

 

 

1,373.0

 

Other liabilities

 

359.4

 

 

 

359.4

 

Total liabilities

 

15,614.7

 

116.4

 

9.5

 

15,740.6

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Common stock

 

1.8

 

 

 

1.8

 

Additional paid-in capital

 

2,589.2

 

 

 

2,589.2

 

Retained earnings

 

1,215.9

 

(45.0

)

(6.2

)

1,164.7

 

Accumulated other comprehensive income, net of tax provision (benefit)

 

85.6

 

0.8

 

 

86.4

 

Deferred equity compensation

 

2.0

 

 

 

2.0

 

Total shareholders’ equity

 

3,894.5

 

(44.2

)

(6.2

)

3,844.1

 

Total liabilities and shareholders’ equity

 

$

19,509.2

 

$

72.2

 

$

3.3

 

$

19,584.7

 

 

8



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

 

 

As of December 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

10,729.9

 

$

11.0

 

$

 

$

10,740.9

 

Cash

 

107.2

 

1.2

 

 

108.4

 

Premiums receivable, net of ceding commissions payable

 

1,167.6

 

 

 

1,167.6

 

Ceded unearned premium reserve

 

821.8

 

 

 

821.8

 

Deferred acquisition costs

 

239.8

 

 

 

239.8

 

Reinsurance recoverable on unpaid losses

 

22.3

 

 

 

22.3

 

Salvage and subrogation recoverable

 

1,032.4

 

 

 

1,032.4

 

Credit derivative assets

 

592.9

 

 

 

592.9

 

Deferred tax asset, net

 

1,224.0

 

32.1

 

3.0

 

1,259.1

 

Financial guaranty variable interest entities’ assets, at fair value

 

4,334.4

 

 

(676.9

)

3,657.5

 

Other assets

 

199.2

 

 

 

199.2

 

Total assets

 

$

20,471.5

 

$

44.3

 

$

(673.9

)

$

19,841.9

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

Unearned premium reserve

 

$

6,972.9

 

$

 

$

 

$

6,972.9

 

Loss and loss adjustment expense reserve

 

563.0

 

 

11.4

 

574.4

 

Reinsurance balances payable, net

 

274.4

 

 

 

274.4

 

Long-term debt

 

1,052.9

 

 

 

1,052.9

 

Credit derivative liabilities

 

2,465.5

 

 

(2.7

)

2,462.8

 

Current income tax payable

 

93.0

 

 

 

93.0

 

Financial guaranty variable interest entities’ liabilities with recourse, at fair value

 

2,927.0

 

103.9

 

 

3,030.9

 

Financial guaranty variable interest entities’ liabilities without recourse, at fair value

 

2,014.1

 

 

(676.9

)

1,337.2

 

Other liabilities

 

309.9

 

 

 

309.9

 

Total liabilities

 

16,672.7

 

103.9

 

(668.2

)

16,108.4

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Common stock

 

1.8

 

 

 

1.8

 

Additional paid-in capital

 

2,585.4

 

 

 

2,585.4

 

Retained earnings

 

1,098.9

 

(60.7

)

(5.7

)

1,032.5

 

Accumulated other comprehensive income, net of tax provision (benefit)

 

110.7

 

1.1

 

 

111.8

 

Deferred equity compensation

 

2.0

 

 

 

2.0

 

Total shareholders’ equity

 

3,798.8

 

(59.6

)

(5.7

)

3,733.5

 

Total liabilities and shareholders’ equity

 

$

20,471.5

 

$

44.3

 

$

(673.9

)

$

19,841.9

 

 

9



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

The effect of the restatement on the consolidated statements of operations is shown in the tables below.

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

254.0

 

$

 

$

 

$

254.0

 

Net investment income

 

96.4

 

(0.3

)

 

96.1

 

Net realized investment gains (losses)

 

2.8

 

 

 

2.8

 

Net change in fair value of credit derivatives

 

(235.7

)

 

(0.5

)

(236.2

)

Fair value gain (loss) on committed capital securities

 

0.5

 

 

 

0.5

 

Net change in financial guaranty variable interest entities

 

93.9

 

25.7

 

 

119.6

 

Other income

 

42.2

 

 

 

42.2

 

Total revenues

 

254.1

 

25.4

 

(0.5

)

279.0

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

(27.0

)

1.2

 

0.3

 

(25.5

)

Interest and other operating expenses

 

89.0

 

 

 

89.0

 

Total expenses

 

62.0

 

1.2

 

0.3

 

63.5

 

Income (loss) before income taxes

 

192.1

 

24.2

 

(0.8

)

215.5

 

Provision (benefit) for income taxes

 

 

 

 

 

 

 

 

 

Current

 

(197.6

)

 

 

(197.6

)

Deferred

 

264.3

 

8.5

 

(0.3

)

272.5

 

Total provision (benefit) for income taxes

 

66.7

 

8.5

 

(0.3

)

74.9

 

Net income (loss)

 

$

125.4

 

$

15.7

 

$

(0.5

)

$

140.6

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

 

 

 

 

$

0.76

 

Diluted

 

$

0.67

 

 

 

 

 

$

0.75

 

 

10



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

319.6

 

$

(4.9

)

$

 

$

314.7

 

Net investment income

 

84.3

 

 

 

84.3

 

Net realized investment gains (losses)

 

9.4

 

 

 

9.4

 

Net change in fair value of credit derivatives

 

278.8

 

 

 

278.8

 

Fair value gain (loss) on committed capital securities

 

(1.3

)

 

 

(1.3

)

Net change in financial guaranty variable interest entities

 

(10.6

)

1.7

 

 

(8.9

)

Other income

 

(12.9

)

 

 

(12.9

)

Total revenues

 

667.3

 

(3.2

)

 

664.1

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

130.5

 

(14.2

)

(5.4

)

110.9

 

Interest and other operating expenses

 

99.9

 

 

 

99.9

 

Total expenses

 

230.4

 

(14.2

)

(5.4

)

210.8

 

Income (loss) before income taxes

 

436.9

 

11.0

 

5.4

 

453.3

 

Provision (benefit) for income taxes

 

 

 

 

 

 

 

 

 

Current

 

(39.0

)

 

 

(39.0

)

Deferred

 

153.9

 

3.9

 

1.0

 

158.8

 

Total provision (benefit) for income taxes

 

114.9

 

3.9

 

1.0

 

119.8

 

Net income (loss)

 

$

322.0

 

$

7.1

 

$

4.4

 

$

333.5

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.74

 

 

 

 

 

$

1.81

 

Diluted

 

$

1.69

 

 

 

 

 

$

1.75

 

 

11



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

The effect of the restatement on the consolidated statements of comprehensive income is shown in the tables below.

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Net income

 

$

125.4

 

$

15.7

 

$

(0.5

)

$

140.6

 

Unrealized holding gains (losses) arising during the period

 

(25.2

)

(0.3

)

 

(25.5

)

Less: reclassification adjustment for gains (losses)

 

1.0

 

 

 

1.0

 

Change in net unrealized gains on investments

 

(26.2

)

(0.3

)

 

(26.5

)

Change in cumulative translation adjustment

 

1.2

 

 

 

1.2

 

Change in cash flow hedge

 

(0.1

)

 

 

(0.1

)

Other comprehensive income(loss)

 

(25.1

)

(0.3

)

 

(25.4

)

Comprehensive income (loss)

 

$

100.3

 

$

15.4

 

$

(0.5

)

$

115.2

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Net income

 

$

322.0

 

$

7.1

 

$

4.4

 

$

333.5

 

Unrealized holding gains (losses) arising during the period

 

9.2

 

 

 

9.2

 

Less: reclassification adjustment for gains (losses)

 

6.6

 

 

 

6.6

 

Change in net unrealized gains on investments

 

2.6

 

 

 

2.6

 

Change in cumulative translation adjustment

 

(3.9

)

 

 

(3.9

)

Change in cash flow hedge

 

(0.1

)

 

 

(0.1

)

Other comprehensive income(loss)

 

(1.4

)

 

 

(1.4

)

Comprehensive income (loss)

 

$

320.6

 

$

7.1

 

$

4.4

 

$

332.1

 

 

12



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

The effect of the restatement on the consolidated statements of cash flows is shown in the tables below.

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously
Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

Restated

 

 

 

(in millions)

 

Net cash flows provided by (used in) operating activities

 

$

(158.2

)

$

36.1

 

$

(122.1

)

Investing activities

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

Purchases

 

(511.7

)

 

(511.7

)

Sales

 

299.9

 

 

299.9

 

Maturities

 

184.2

 

(0.6

)

183.6

 

Net sales (purchases) of short-term investments

 

263.3

 

(21.0

)

242.3

 

Net proceeds from paydowns on financial guaranty variable interest entities’ assets

 

162.5

 

 

162.5

 

Other

 

4.2

 

 

4.2

 

Net cash flows provided by (used in) investing activities

 

402.4

 

(21.6

)

380.8

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

(8.3

)

 

(8.3

)

Share activity under option and incentive plans

 

(2.3

)

 

(2.3

)

Net paydowns of financial guaranty variable interest entities’ liabilities

 

(241.6

)

 

(241.6

)

Repayment of long-term debt

 

(5.1

)

 

(5.1

)

Net cash flows provided by (used in) financing activities

 

(257.3

)

 

(257.3

)

Effect of exchange rate changes

 

1.8

 

 

1.8

 

Increase (decrease) in cash

 

(11.3

)

14.5

 

3.2

 

Cash at beginning of period

 

107.2

 

1.2

 

108.4

 

Cash at end of period

 

$

95.9

 

$

15.7

 

$

111.6

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously
Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

Restated

 

 

 

(in millions)

 

Net cash flows provided by (used in) operating activities

 

$

(236.6

)

$

26.2

 

$

(210.4

)

Investing activities

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

Purchases

 

(418.0

)

 

(418.0

)

Sales

 

187.8

 

 

187.8

 

Maturities

 

265.3

 

 

265.3

 

Net sales (purchases) of short-term investments

 

246.0

 

(26.2

)

219.8

 

Net proceeds from paydowns on financial guaranty variable interest entities’ assets

 

60.7

 

 

60.7

 

Other

 

4.8

 

 

4.8

 

Net cash flows provided by (used in) investing activities

 

346.6

 

(26.2

)

320.4

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

(8.3

)

 

(8.3

)

Share activity under option and incentive plans

 

(2.6

)

 

(2.6

)

Net paydowns of financial guaranty variable interest entities’ liabilities

 

(46.2

)

 

(46.2

)

Repayment of long-term debt

 

(6.3

)

 

(6.3

)

Net cash flows provided by (used in) financing activities

 

(63.4

)

 

(63.4

)

Effect of exchange rate changes

 

(0.2

)

 

(0.2

)

Increase (decrease) in cash

 

46.4

 

 

46.4

 

Cash at beginning of period

 

44.1

 

 

44.1

 

Cash at end of period

 

$

90.5

 

$

 

$

90.5

 

 

13



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 


(1)                                  Represents adjustments related to the correction of financial guaranty VIE intercompany eliminations.

 

(2)                              Represents other adjustments of immaterial errors. These corrections related to (a) errors in expected losses that had previously been corrected by the Company in the period such errors were identified, but which are now being recorded in the period in which they arose, (b) an error related to one credit derivative contract that resulted from the use of an incorrect par outstanding balance in the pricing model and (c) the correction of an error related to the classification of financial guaranty VIE assets and liabilities that resulted from a misinterpretation of a trustee report.

 

The Company also revised certain disclosures in Note 16 as part of the restatement of these financial statements.

 

3. Business Changes, Risks, Uncertainties and Accounting Developments

 

Summarized below are updates of the most significant events since the year-end 2010 that have had, or may have in the future, a material effect on the financial position, results of operations or business prospects of the Company.

 

Bank of America Agreement

 

On April 14, 2011, Assured Guaranty reached a comprehensive agreement with Bank of America Corporation and its subsidiaries, including Countrywide Financial Corporation and its subsidiaries (collectively, “Bank of America”), regarding their liabilities with respect to 29 RMBS transactions insured by Assured Guaranty, including claims relating to reimbursement for breaches of representations and warranties (“R&W”) and historical loan servicing issues (“Bank of America Agreement”). Of the 29 RMBS transactions, eight are second lien transactions and 21 are first lien transactions. The Bank of America Agreement covers Bank of America sponsored securitizations that AGM or AGC has insured, as well as certain other securitizations containing concentrations of Countrywide originated loans that AGM or AGC has insured. The transactions covered by the Bank of America Agreement have a gross par outstanding of $5.2 billion ($4.8 billion net par outstanding) as of March 31, 2011, or 29% of Assured Guaranty’s total below investment grade (“BIG”) RMBS net par outstanding.

 

Bank of America paid Assured Guaranty $850 million on April 14, 2011 and is obligated to pay another $250 million by March 2012. In addition, Bank of America will reimburse Assured Guaranty 80% of claims Assured Guaranty pays on the 21 first lien transactions, up to collateral losses of $6.6 billion. On April 14, 2011, Bank of America placed $1 billion of eligible assets into trust in order to collateralize the reimbursement obligation relating to the first lien transactions. The amount of assets required to be posted may increase or decrease from time to time, as determined by rating agency requirements. As of March 31, 2011, cumulative collateral losses on these first lien RMBS transactions were approximately $1.5 billion, AGM had paid $2.0 million in claims and the Company’s estimated gross economic loss before considering R&W benefit on these transactions was $538.3 million, which assumes cumulative projected collateral losses of $4.8 billion.

 

The execution of the Bank of America Agreement is considered a Type 1 subsequent event, meaning that the terms of the Bank of America Agreement provide additional evidence about the estimates inherent in the loss estimation process at March 31, 2011. A Type 1 subsequent event requires that such additional information obtained subsequent to the reporting date be used when preparing the financial statements if financial statements have not yet been issued for the previous reporting period. Therefore, the March 31, 2011 loss estimates incorporate updated assumptions and estimates reflecting the terms of the Bank of America Agreement. The First Quarter 2011 benefit for R&W reflects higher expected recoveries across all transactions as a result of the Bank of America Agreement. For transactions covered under the Bank of America Agreement, the R&W benefit has been updated to reflect amounts collected and expected to be collected subsequent to March 31, 2011 under the terms of the Bank of America Agreement. For transactions with other sponsors of U.S. RMBS, against which the Company is pursuing R&W claims, the Company has increased the benefit for R&W to reflect the probability that actual recovery rates may be higher than originally expected. For transactions with counterparties other than Bank of America, the Company has continued to review additional loan files and has found breach rates consistent with those in the Bank of America and Countrywide transactions. Therefore, the Company assumed higher recovery rates in First Quarter 2011.

 

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Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

4. Outstanding Exposure

 

The Company’s insurance policies and credit derivative contracts are written in different forms, but collectively are considered financial guaranty contracts. They typically guarantee the scheduled payments of principal and interest (“Debt Service”) on public finance and structured finance obligations. The Company seeks to limit its exposure to losses by underwriting obligations that are investment grade at inception, diversifying its portfolio and maintaining rigorous subordination or collateralization requirements on structured finance obligations. The Company also has utilized reinsurance by ceding business to third- party reinsurers. The Company provides financial guaranties with respect to debt obligations of special purpose entities, including VIEs. Based on accounting standards in effect during any given reporting period, some of these VIEs are consolidated as described in Note 8. The outstanding par and Debt Service amounts presented below include outstanding exposures on VIEs whether or not they are consolidated.

 

Debt Service Outstanding

 

 

 

Gross Debt Service Outstanding

 

Net Debt Service Outstanding

 

 

 

March 31,
2011

 

December 31,
2010

 

March 31,
2011

 

December 31,
2010

 

 

 

(in millions)

 

Public finance

 

$

835,072

 

$

851,634

 

$

746,388

 

$

760,167

 

Structured finance

 

170,440

 

178,348

 

159,611

 

166,976

 

Total

 

$

1,005,512

 

$

1,029,982

 

$

905,999

 

$

927,143

 

 

Financial Guaranty Portfolio by Internal Rating

 

 

 

As of March 31, 2011

 

 

 

Public Finance
U.S.

 

Public Finance
Non-U.S.

 

Structured Finance
U.S

 

Structured Finance
Non-U.S

 

Total

 

Rating Category

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

 

 

(dollars in millions)

 

Super senior

 

$

 

%

1,486

 

3.6

%

$

22,256

 

19.7

%

$

8,081

 

27.0

%

$

31,823

 

5.3

%

AAA

 

5,587

 

1.3

 

1,382

 

3.3

 

41,376

 

36.6

 

12,911

 

43.1

 

61,256

 

10.2

 

AA

 

156,954

 

37.6

 

1,367

 

3.3

 

15,776

 

13.9

 

1,970

 

6.6

 

176,067

 

29.2

 

A

 

210,705

 

50.5

 

12,932

 

30.9

 

6,181

 

5.5

 

1,827

 

6.1

 

231,645

 

38.5

 

BBB

 

41,130

 

9.9

 

22,793

 

54.4

 

6,841

 

6.0

 

3,903

 

12.9

 

74,667

 

12.3

 

BIG

 

2,991

 

0.7

 

1,868

 

4.5

 

20,678

 

18.3

 

1,292

 

4.3

 

26,829

 

4.5

 

Total net par outstanding

 

$

417,367

 

100.0

%

$

41,828

 

100.0

%

$

113,108

 

100.0

 

$

29,984

 

100.0

%

$

602,287

 

100.0

%

 

 

 

As of December 31, 2010

 

 

 

Public Finance
U.S.

 

Public Finance
Non-U.S.

 

Structured Finance
U.S

 

Structured Finance
Non-U.S

 

Total

 

Rating Category

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

Net Par
Outstanding

 

%

 

 

 

(dollars in millions)

 

Super senior

 

$

 

%

$

1,420

 

3.5

%

$

21,837

 

18.4

%

$

7,882

 

25.7

%

$

31,139

 

5.0

%

AAA

 

5,784

 

1.4

 

1,378

 

3.4

 

45,067

 

37.9

 

13,573

 

44.3

 

65,802

 

10.7

 

AA

 

161,906

 

37.9

 

1,330

 

3.3

 

17,355

 

14.6

 

1,969

 

6.4

 

182,560

 

29.6

 

A

 

214,199

 

50.2

 

12,482

 

30.6

 

6,396

 

5.4

 

1,873

 

6.1

 

234,950

 

38.1

 

BBB

 

41,948

 

9.8

 

22,338

 

54.8

 

7,543

 

6.4

 

4,045

 

13.2

 

75,874

 

12.3

 

BIG

 

3,159

 

0.7

 

1,795

 

4.4

 

20,558

 

17.3

 

1,294

 

4.3

 

26,806

 

4.3

 

Total net par outstanding

 

$

426,996

 

100.0

%

$

40,743

 

100.0

%

$

118,756

 

100.0

%

$

30,636

 

100.0

%

$

617,131

 

100.0

%

 

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $3.7 billion for structured finance and $1.3 billion for public finance commitments at March 31, 2011. The structured finance commitments include the unfunded component of and delayed draws on pooled corporate transactions. Public finance commitments typically relate to primary and secondary public finance debt issuances. The expiration dates for the public finance commitments range between April 1, 2011 and February 1, 2019, with $0.9 billion expiring prior to December 31, 2011. All the commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be cancelled at the counterparty’s request. Therefore, the total commitment amount does not necessarily reflect actual future guaranteed amounts.

 

15



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

Significant Risk Management Activities

 

The Risk Oversight and Audit Committees of the Board of Directors of AGL oversee the Company’s risk management policies and procedures. With input from the board committees, specific risk policies and limits are set by the Portfolio Risk Management Committee, which includes members of senior management and senior Credit and Surveillance officers.

 

Risk Management and Surveillance personnel are responsible for monitoring and reporting on all transactions in the insured portfolio. The primary objective of the surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and recommend to management such remedial actions as may be necessary or appropriate. All transactions in the insured portfolio are assigned internal credit ratings, and Surveillance personnel are responsible for recommending adjustments to those ratings to reflect changes in transaction credit quality.

 

Work-out personnel are responsible for managing work-out and loss mitigation situations. They develop strategies designed to enhance the ability of the Company to enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction participants and, when necessary, manage (along with Legal personnel) the Company’s litigation proceedings.

 

Since the onset of the financial crisis, the Company has shifted personnel to loss mitigation and work-out activities and hired new personnel to augment its efforts. Although the Company’s loss mitigation efforts may extend to any transaction it has identified as having loss potential, much of the recent activity has been focused on RMBS.

 

Generally, when mortgage loans are transferred into a securitization, the loan originator(s) and/or sponsor(s) provide R&W that the loans meet certain characteristics, and a breach of such R&W often requires that the loan be repurchased from the securitization. In many of the transactions the Company insures, it is in a position to enforce these requirements. The Company uses internal resources as well as third party forensic underwriting firms and legal firms to pursue breaches of R&W. If a provider of R&W refuses to honor its repurchase obligations, the Company may choose to initiate litigation. See “Recovery Litigation” in Note 5 below.

 

The quality of servicing of the mortgage loans underlying an RMBS transaction influences collateral performance and ultimately the amount (if any) of the Company’s insured losses. The Company has established a group to mitigate RMBS losses by influencing mortgage servicing, including, if possible, causing the transfer of servicing or establishing special servicing.

 

In the fall of 2010, several large RMBS servicers suspended foreclosures because of allegations of a widespread failure to comply with foreclosure procedures and faulty loan documentation. These issues are being investigated by various state attorney general offices throughout the U.S. The suspension of foreclosures and subsequent investigation will lead to additional servicing costs and expenses, including without limitation, increased advances by the servicers for principal and interest, taxes, insurance and legal costs. The Company is increasing its monitoring efforts to ensure that the servicers comply with their obligations under servicing contracts, including bearing the losses and expenses incurred as a result of this issue. These same foreclosure issues are expected to impact the timing of losses to RMBS transactions that the Company has insured, which may impact the speed at which various classes of RMBS securities amortize, and so could impact the size of losses ultimately paid by the Company. The Company expects these issues to take some time to resolve.

 

The Company may also employ other strategies as appropriate to avoid or mitigate losses in U.S. RMBS or other areas. For example, the Company may pursue litigation or enter into other arrangements to alleviate all or a portion of certain risks.

 

Surveillance Categories

 

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The Company’s internal credit ratings are based on the Company’s internal assessment of the likelihood of default. The Company’s internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies.

 

The Company monitors its investment grade credits to determine whether any new credits need to be internally downgraded to BIG. The Company refreshes its internal credit ratings on individual credits in quarterly, semi-annual or

 

16



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

annual cycles based on the Company’s view of the credit’s quality, loss potential, volatility and sector. Ratings on credits in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter. The Company’s insured credit ratings on assumed credits are based in large part on the ceding company’s credit rating of the transactions, although, to the extent information is available, the Company will conduct an independent review of low rated credits or credits in volatile sectors. For example the Company models all assumed RMBS credits with par above $1 million, as well as certain RMBS credits below that amount.

 

Credits identified as BIG are subjected to further review to determine the probability of a loss (see Note 5 “Loss estimation process”). Surveillance personnel then assign each BIG transaction to the appropriate BIG surveillance category based upon whether a lifetime loss is expected and whether a claim has been paid. The Company expects “lifetime losses” on a transaction when the Company believes there is more than a 50% chance that, on a present value basis, it will pay more claims over the life of that transaction than it will ultimately have been reimbursed. For surveillance purposes, the Company calculates present value using a constant discount rate of 5%. (A risk free rate is used for recording of reserves for financial statement purposes.) A “liquidity claim” is a claim that the Company expects to be reimbursed within one year.

 

Intense monitoring and intervention is employed for all BIG surveillance categories, with internal credit ratings reviewed quarterly. The three BIG categories are:

 

·                  BIG Category 1: Below investment grade transactions showing sufficient deterioration to make lifetime losses possible, but for which none are currently expected. Transactions on which claims have been paid but are expected to be fully reimbursed (other than investment grade transactions on which only liquidity claims have been paid) are in this category.

 

·                  BIG Category 2: Below investment grade transactions for which lifetime losses are expected but for which no claims (other than liquidity claims) have yet been paid.

 

·                  BIG Category 3: Below investment grade transactions for which lifetime losses are expected and on which claims (other than liquidity claims) have been paid. Transactions remain in this category when claims have been paid and only a recoverable remains.

 

Financial Guaranty Exposures

(Insurance and Credit Derivative Form)

 

 

 

March 31, 2011

 

 

 

BIG Net Par Outstanding

 

 

 

BIG Net Par as
a %

 

 

 

BIG 1

 

BIG 2

 

BIG 3

 

Total
BIG

 

Net Par
Outstanding

 

of Net Par
Outstanding

 

 

 

(in millions)

 

 

 

 

 

(restated)

 

(restated)

 

 

 

 

 

 

 

 

 

First lien U.S. RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prime first lien

 

$

82

 

$

519

 

$

 

$

601

 

$

813

 

0.1

%

Alt-A first lien

 

919

 

3,485

 

549

 

4,953

 

5,939

 

0.8

 

Option ARM

 

3

 

1,433

 

1,327

 

2,763

 

3,020

 

0.5

 

Subprime (including net interest margin securities)

 

62

 

2,734

 

185

 

2,981

 

8,726

 

0.5

 

Second lien U.S. RMBS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed end second lien

 

161

 

441

 

482

 

1,084

 

1,114

 

0.2

 

Home equity lines of credit (“HELOCs”)

 

495

 

 

3,314

 

3,809

 

4,513

 

0.6

 

Total U.S. RMBS

 

1,722

 

8,612

 

5,857

 

16,191

 

24,125

 

2.7

 

Other structured finance

 

2,887

 

457

 

2,435

 

5,779

 

118,967

 

1.0

 

Public finance

 

3,691

 

282

 

886

 

4,859

 

459,195

 

0.8

 

Total

 

$

8,300

 

$

9,351

 

$

9,178

 

$

26,829

 

$

602,287

 

4.5

%

 

17



Table of Contents

 

Assured Guaranty Ltd.

 

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

March 31, 2011

 

 

 

December 31, 2010

 

 

 

BIG Net Par Outstanding

 

 

 

BIG Net Par as
a %

 

 

 

BIG 1

 

BIG 2

 

BIG 3

 

Total BIG

 

Net Par
Outstanding

 

of Net Par
Outstanding

 

 

 

(in millions)

 

 

 

 

 

(restated)

 

(restated)