Assured Guaranty Ltd. Reports Results for Fourth Quarter 2018 and Full Year 2018
- Gross written premiums were
$96 million in fourth quarter 2018, bringing FY 2018 gross written premiums to$612 million . PVP1 was$96 million in fourth quarter 2018, bringing FY 2018 PVP to$663 million . For FY 2018, gross written premiums and PVP were the highest reported in the last 10 years. - Shareholders' equity per share, non-GAAP operating shareholders' equity1 per share and non-GAAP adjusted book value1 per share reached new records at
$63.23 ,$61.17 and$86.06 , respectively. - Net income was
$88 million , or$0.83 per share, for fourth quarter 2018 and$521 million , or$4.68 per share, for FY 2018. - Non-GAAP operating income1 was
$92 million , or$0.87 per share, for fourth quarter 2018, and$482 million , or$4.34 per share, for FY 2018. - Share repurchases totaled
$120 million , or 3.0 million shares, in fourth quarter 2018, for a total of$500 million , or 13.2 million shares, in FY 2018. OnFebruary 27, 2019 , the Board of Directors authorized an additional$300 million in share repurchases.
“Assured Guaranty continued to be the leading financial guarantor in 2018, successfully executing on its strategic priorities while maintaining its strong financial position and creating more shareholder value,” said
1 Please see “Explanation of Non-GAAP Financial Measures.” When a financial measure is described as "operating," it is a non-GAAP financial measure.
Summary Financial Results | |||||||||||||||
(in millions, except per share amounts) |
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Quarter Ended | Year Ended | ||||||||||||||
|
|
||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 88 | $ | 52 | $ | 521 | $ | 730 | |||||||
Non-GAAP operating income (1) | 92 | 91 | 482 | 661 | |||||||||||
Gain (loss) related to the effect of consolidating financial guaranty variable interest entities (FG VIE consolidation) included in non-GAAP operating income |
(3 | ) | 2 | (4 | ) | 11 | |||||||||
Net income per diluted share | $ | 0.83 | $ | 0.44 | $ | 4.68 | $ | 5.96 | |||||||
Non-GAAP operating income (1) per diluted share | 0.87 | 0.77 | 4.34 | 5.41 | |||||||||||
Gain (loss) related to FG VIE consolidation included in non-GAAP operating income per diluted share |
(0.02 | ) | 0.02 | (0.03 | ) | 0.10 | |||||||||
Weighted average diluted shares |
106.4 | 118.9 | 111.3 | 122.3 | |||||||||||
Gross written premiums (GWP) | $ | 96 | $ | 72 | $ | 612 | $ | 307 | |||||||
Present value of new business production (PVP) (1) |
96 | 77 | 663 | 289 | |||||||||||
Gross par written | 4,850 | 4,776 | 24,624 | 18,024 | |||||||||||
As of | ||||||||||||||||
|
|
|||||||||||||||
Amount | Per Share | Amount | Per Share | |||||||||||||
Shareholders' equity | $ | 6,555 | $ | 63.23 | $ | 6,839 | $ | 58.95 | ||||||||
Non-GAAP operating shareholders' equity (1) | 6,342 | 61.17 | 6,521 | 56.20 | ||||||||||||
Non-GAAP adjusted book value (1) | 8,922 | 86.06 | 9,020 | 77.74 | ||||||||||||
Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity |
3 | 0.03 | 5 | 0.03 | ||||||||||||
Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value |
(15 | ) | (0.15 | ) | (14 | ) | (0.12 | ) | ||||||||
Common shares outstanding | 103.7 | 116.0 | ||||||||||||||
________________________________________________
(1) Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.
Fourth Quarter Results
GAAP Financial Information
Net income for fourth quarter 2018 was
The effective tax rate was 12.8% for fourth quarter 2018, compared with 66.6% for fourth quarter 2017. The lower effective tax rate in fourth quarter 2018 was primarily due to a lower statutory corporate tax rate in
Loss and LAE was
Fair value gains on CCS were
Net earned premiums in fourth quarter 2018 were
Foreign exchange gains and losses primarily relate to premiums receivable, driven by changes in the exchange rate of the British pound sterling relative to the
Consolidated Statements of Operations (unaudited) | ||||||||
(in millions) |
||||||||
Quarter Ended | ||||||||
|
||||||||
2018 | 2017 | |||||||
Revenues: | ||||||||
Net earned premiums | $ | 125 | $ | 178 | ||||
Net investment income | 100 | 96 | ||||||
Net realized investment gains (losses) | (18 | ) | (14 | ) | ||||
Net change in fair value of credit derivatives | 9 | 5 | ||||||
Fair value gains (losses) on FG VIEs | 3 | 5 | ||||||
Other income (loss) | (5 | ) | 11 | |||||
Total revenues | 214 | 281 | ||||||
Expenses: | ||||||||
Loss and LAE | 21 | 34 | ||||||
Amortization of deferred acquisition costs | 4 | 6 | ||||||
Interest expense | 23 | 24 | ||||||
Other operating expenses | 65 | 61 | ||||||
Total expenses | 113 | 125 | ||||||
Income (loss) before income taxes | 101 | 156 | ||||||
Provision (benefit) for income taxes | 13 | 104 | ||||||
Net income (loss) | $ | 88 | $ | 52 | ||||
Net economic loss development in fourth quarter 2018 included a benefit of
Roll Forward of Net Expected Loss to be Paid (1) | ||||||||||||||||
(in millions) |
||||||||||||||||
Net Expected Loss to be Paid (Recovered) as of 2018 |
Economic Loss Development/ (Benefit) |
Losses (Paid)/ Recovered |
Net Expected Loss to be Paid (Recovered) as of 2018 |
|||||||||||||
Public finance | $ | 870 | $ | 6 | $ | (12 | ) | $ | 864 | |||||||
|
303 | (17 | ) | 7 | 293 | |||||||||||
Other structured finance | 18 | 11 | (3 | ) | 26 | |||||||||||
Total | $ | 1,191 | $ | — | $ | (8 | ) | $ | 1,183 |
________________________________________________
(1) Economic loss development represents the change in net expected loss to be paid attributable to the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. Economic loss development is the principal measure that the Company uses to evaluate the loss experience in its insured portfolio. Expected loss to be paid includes all transactions insured by the Company, whether written in insurance or credit derivative form, regardless of the accounting model prescribed under accounting principles generally accepted in
New Business Production
GWP relates to both financial guaranty insurance and non-financial guaranty insurance contracts. Credit derivatives are accounted for at fair value and therefore not included in GWP. Financial guaranty GWP includes amounts collected upfront on new business written, the present value of future premiums on new business written (discounted at risk free rates), as well as the effects of changes in the estimated lives of transactions in the inforce book of business. Non-financial guaranty GWP is recorded as premiums are received. Non-GAAP PVP includes upfront premiums and future installments on new business that are estimated at the time of issuance, discounted at 6% for all contracts, whether in insurance or credit derivative form.
New Business Production | |||||||||||||||||||||||
(in millions) |
|||||||||||||||||||||||
Quarter Ended |
|||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
GWP | PVP (1) |
Gross Par Written |
GWP | PVP (1) |
Gross Par Written |
||||||||||||||||||
Public finance - |
$ | 93 | $ | 89 | $ | 4,555 | $ | 58 | $ | 59 | $ | 4,367 | |||||||||||
Public finance - non- |
4 | 3 | 96 | 13 | 8 | 116 | |||||||||||||||||
Structured finance - |
(1 | ) | 1 | 25 | (4 | ) | 7 | 246 | |||||||||||||||
Structured finance - non- |
— | 3 | 174 | 5 | 3 | 47 | |||||||||||||||||
Total |
$ | 96 | $ | 96 | $ | 4,850 | $ | 72 | $ | 77 | $ | 4,776 | |||||||||||
________________________________________________
(1) PVP and Gross Par Written in the table above are based on "close date," when the transaction settles. Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.
The increase in GWP was attributable to
Outside the
Quarterly business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from quarter to quarter.
Other Non-GAAP Financial Measures
Non-GAAP operating income was
Year-to-Date Results
GAAP Financial Information
Net income was
The lower effective tax rate in FY 2018 was primarily due to a lower statutory corporate tax rate in
Loss and LAE expense was
Net earned premiums in FY 2018 were
Foreign exchange gains and losses primarily relate to premiums receivable, driven by changes in the exchange rate of the British pound sterling relative to the
Net realized investment losses were
The loss on the repurchase of debt is related to the purchase by
Consolidated Statements of Operations (unaudited) | |||||||
(in millions) |
|||||||
Year Ended | |||||||
|
|||||||
2018 | 2017 | ||||||
Revenues: | |||||||
Net earned premiums | $ | 548 | $ | 690 | |||
Net investment income | 398 | 418 | |||||
Net realized investment gains (losses) | (32 | ) | 40 | ||||
Net change in fair value of credit derivatives | 112 | 111 | |||||
Fair value gains (losses) on FG VIEs | 14 | 30 | |||||
Bargain purchase gain and settlement of pre-existing relationships, net | — | 58 | |||||
Commutation gains (losses) | (16 | ) | 328 | ||||
Other income (loss) | (22 | ) | 64 | ||||
Total revenues | 1,002 | 1,739 | |||||
Expenses: | |||||||
Loss and LAE | 64 | 388 | |||||
Amortization of deferred acquisition costs | 16 | 19 | |||||
Interest expense | 94 | 97 | |||||
Other operating expenses | 248 | 244 | |||||
Total expenses | 422 | 748 | |||||
Income (loss) before income taxes | 580 | 991 | |||||
Provision (benefit) for income taxes | 59 | 261 | |||||
Net income (loss) | $ | 521 | $ | 730 | |||
The economic benefit for FY 2018 was
Roll Forward of Net Expected Loss to be Paid | |||||||||||||||||||
(in millions) |
|||||||||||||||||||
Net Expected Loss to be Paid (Recovered) as of 2017 |
Net Expected Loss to be Paid on SGI Transaction as of 2018 |
Economic Loss Development/ (Benefit) |
Losses (Paid)/ Recovered |
Net Expected Loss to be Paid (Recovered) as of 2018 |
|||||||||||||||
Public finance | $ | 1,203 | $ | 1 | $ | 56 | $ | (396 | ) | $ | 864 | ||||||||
|
73 | 130 | (69 | ) | 159 | 293 | |||||||||||||
Other structured finance | 27 | — | 8 | (9 | ) | 26 | |||||||||||||
Total | $ | 1,303 | $ | 131 | $ | (5 | ) | $ | (246 | ) | $ | 1,183 | |||||||
New Business Production
New Business Production | |||||||||||||||||||||||
(in millions) |
|||||||||||||||||||||||
Year Ended |
|||||||||||||||||||||||
2018 | 2017 | ||||||||||||||||||||||
GWP | PVP (1) |
Gross Par Written |
GWP | PVP (1) |
Gross Par Written |
||||||||||||||||||
Public finance - |
$ | 320 | $ | 391 | $ | 19,572 | $ | 190 | $ | 196 | $ | 15,957 | |||||||||||
Public finance - non - |
115 | 94 | 3,817 | 105 | 66 | 1,376 | |||||||||||||||||
Structured finance - |
167 | 166 | 902 | (1 | ) | 12 | 489 | ||||||||||||||||
Structured finance - non- |
10 | 12 | 333 | 13 | 15 | 202 | |||||||||||||||||
Total | $ | 612 | $ | 663 | $ | 24,624 | $ | 307 | $ | 289 | $ | 18,024 |
________________________________________________
(1) Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.
GWP and PVP for FY 2018 reached 10-year records due to the assumption of substantially all of the insured portfolio of
On a GAAP basis, the SGI Transaction generated GWP of
Assumed SGI Insured Portfolio | |||||||||||||||||||
(in millions) |
|||||||||||||||||||
GWP | PVP (1) | ||||||||||||||||||
Financial Guaranty |
Financial Guaranty |
Credit
Derivatives |
Total | Gross Par
Written (1) |
|||||||||||||||
Public Finance—U.S. | $ | 123 | $ | 118 | $ | 67 | $ | 185 | $ | 7,559 | |||||||||
Public Finance—non- |
50 | 38 | 12 | 50 | 3,345 | ||||||||||||||
Structured Finance—U.S. | 157 | 156 | — | 156 | 349 | ||||||||||||||
Structured Finance—non- |
— | — | — | — | 19 | ||||||||||||||
Total | $ | 330 | $ | 312 | $ | 79 | $ | 391 | $ | 11,272 | |||||||||
________________________________________________
(1) Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.
Excluding the assumed business from SGI,
In addition, the Company closed insurance and reinsurance aircraft residual value insurance policies in non-
Other Non-GAAP Financial Measures
Non-GAAP operating income for FY 2018 was
On a per-share basis, shareholders' equity increased due to positive income, as well as the accretive effect of the share repurchase program that has been in effect since
Common Share Repurchases
Summary of Share Repurchases | ||||||||||
(in millions, except per share amounts) |
||||||||||
Amount |
Number of Shares |
Average Price Per Share |
||||||||
2018 ( |
$ | 98 | 2.79 | $ | 35.20 | |||||
2018 ( |
152 | 4.16 | 36.48 | |||||||
2018 ( |
130 | 3.30 | 39.41 | |||||||
2018 ( |
120 | 2.99 | 40.09 | |||||||
Total 2018 | 500 | 13.24 | 37.76 | |||||||
2019 ( |
$ |
48 |
1.20 |
$ |
40.03 |
|||||
From
As in the past, the Company's execution of its capital management strategy is contingent upon its available free cash and the capital position of the parent company, market conditions, the maintenance of its strong financial strength ratings and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date.
Consolidated Balance Sheets (unaudited) | |||||||
(in millions) |
|||||||
As of | |||||||
|
|
||||||
Assets | |||||||
Investment portfolio: | |||||||
Fixed maturity securities, available-for-sale, at fair value | $ | 10,089 | $ | 10,674 | |||
Short-term investments, at fair value | 729 | 627 | |||||
Other invested assets | 55 | 94 | |||||
Total investment portfolio | 10,873 | 11,395 | |||||
Cash | 104 | 144 | |||||
Premiums receivable, net of commissions payable | 904 | 915 | |||||
Ceded unearned premium reserve | 59 | 119 | |||||
Deferred acquisition costs | 105 | 101 | |||||
Salvage and subrogation recoverable | 490 | 572 | |||||
FG VIEs’ assets, at fair value | 569 | 700 | |||||
Other assets | 499 | 487 | |||||
Total assets | $ | 13,603 | $ | 14,433 | |||
Liabilities and shareholders' equity | |||||||
Liabilities | |||||||
Unearned premium reserve | $ | 3,512 | $ | 3,475 | |||
Loss and LAE reserve | 1,177 | 1,444 | |||||
Long-term debt | 1,233 | 1,292 | |||||
Credit derivative liabilities | 209 | 271 | |||||
FG VIEs’ liabilities with recourse, at fair value | 517 | 627 | |||||
FG VIEs’ liabilities without recourse, at fair value | 102 | 130 | |||||
Other liabilities | 298 | 355 | |||||
Total liabilities | 7,048 | 7,594 | |||||
Shareholders' equity | |||||||
Common stock | 1 | 1 | |||||
Additional paid-in capital | 86 | 573 | |||||
Retained earnings | 6,374 | 5,892 | |||||
Accumulated other comprehensive income | 93 | 372 | |||||
Deferred equity compensation | 1 | 1 | |||||
Total shareholders' equity | 6,555 | 6,839 | |||||
Total liabilities and shareholders' equity | $ | 13,603 | $ | 14,433 | |||
Explanation of Non-GAAP Financial Measures
To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and financial measures not determined in accordance with GAAP (non-GAAP financial measures).
Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.
By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. The Company believes its presentation of non-GAAP financial measures, along with the effect of FG VIE consolidation, provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on
GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company. However, the Company does not own such VIEs and its exposure is limited to its obligation under its financial guaranty insurance contract. Management and the Board of Directors use non-GAAP financial measures adjusted to remove FG VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses these core financial measures in its decision making process and in its calculation of certain components of management compensation. Wherever possible, the Company has separately disclosed the effect of FG VIE consolidation.
Many investors, analysts and financial news reporters use non-GAAP operating shareholders’ equity, adjusted to remove the effect of FG VIE consolidation, as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.
Many investors, analysts and financial news reporters also use non-GAAP adjusted book value, adjusted to remove the effect of FG VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Non-GAAP operating income adjusted for the effect of FG VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.
The core financial measures that the Company uses to help determine compensation are: (1) non-GAAP operating income, adjusted to remove the effect of FG VIE consolidation, (2) non-GAAP operating shareholders' equity, adjusted to remove the effect of FG VIE consolidation, (3) growth in non-GAAP adjusted book value per share, adjusted to remove the effect of FG VIE consolidation, and (4) PVP.
The following paragraphs and tables define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.
Non-GAAP Operating Income
Management believes that non-GAAP operating income is a useful measure because it clarifies the understanding of the underwriting results and financial condition of the Company and presents the results of operations of the Company excluding the fair value adjustments on credit derivatives and CCS that are not expected to result in economic gain or loss, as well as other adjustments described below. Management adjusts non-GAAP operating income further by removing FG VIE consolidation to arrive at its core operating income measure. Non-GAAP operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:
1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.
2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company's credit spreads, and other market factors and are not expected to result in an economic gain or loss.
3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.
4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.
5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
Summary Reconciliation of | ||||||||||||||||
GAAP Net Income to Non-GAAP Operating Income | ||||||||||||||||
(in millions, except per share amounts) |
||||||||||||||||
Quarter Ended |
||||||||||||||||
2018 | 2017 | |||||||||||||||
Total |
Per Diluted Share |
Total |
Per Diluted Share |
|||||||||||||
Net income (loss) | $ | 88 | $ | 0.83 | $ | 52 | $ | 0.44 | ||||||||
Less pre-tax adjustments: | ||||||||||||||||
Realized gains (losses) on investments | (18 | ) | (0.17 | ) | (14 | ) | (0.12 | ) | ||||||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives |
10 | 0.09 | (17 | ) | (0.14 | ) | ||||||||||
Fair value gains (losses) on CCS | 17 | 0.16 | 2 | 0.01 | ||||||||||||
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves |
(12 | ) | (0.11 | ) | 8 | 0.07 | ||||||||||
Total pre-tax adjustments | (3 | ) | (0.03 | ) | (21 | ) | (0.18 | ) | ||||||||
Less tax effect on pre-tax adjustments | (1 | ) | (0.01 | ) | (18 | ) | (0.15 | ) | ||||||||
Non-GAAP operating income | $ | 92 | $ | 0.87 | $ | 91 | $ | 0.77 | ||||||||
Gain (loss) related to FG VIE consolidation (net of tax provision (benefit) of non-GAAP operating income |
$ | (3 | ) | $ | (0.02 | ) | $ | 2 | $ | 0.02 | ||||||
Year Ended |
||||||||||||||||
2018 | 2017 | |||||||||||||||
Total |
Per Diluted Share |
Total |
Per Diluted Share |
|||||||||||||
Net income (loss) | $ | 521 | $ | 4.68 | $ | 730 | $ | 5.96 | ||||||||
Less pre-tax adjustments: | ||||||||||||||||
Realized gains (losses) on investments | (32 | ) | (0.29 | ) | 40 | 0.33 | ||||||||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives |
101 | 0.90 | 43 | 0.35 | ||||||||||||
Fair value gains (losses) on CCS | 14 | 0.13 | (2 | ) | (0.02 | ) | ||||||||||
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves |
(32 | ) | (0.29 | ) | 57 | 0.46 | ||||||||||
Total pre-tax adjustments | 51 | 0.45 | 138 | 1.12 | ||||||||||||
Less tax effect on pre-tax adjustments | (12 | ) | (0.11 | ) | (69 | ) | (0.57 | ) | ||||||||
Non-GAAP operating income | $ | 482 | $ | 4.34 | $ | 661 | $ | 5.41 | ||||||||
Gain (loss) related to FG VIE consolidation (net of tax provision (benefit) of non-GAAP operating income |
$ | (4 | ) | $ | (0.03 | ) | $ | 11 | $ | 0.10 | ||||||
Non-GAAP Operating Income Adjustments and | ||||||||||||||||
Effect of FG VIE Consolidation | ||||||||||||||||
(in millions) |
||||||||||||||||
Quarter Ended |
Quarter Ended |
|||||||||||||||
Non-GAAP Operating Income Adjustments (1) |
Effect of FG VIE Consolidation (2) |
Non-GAAP Operating Income Adjustments (1) |
Effect of FG VIE Consolidation (2) |
|||||||||||||
Adjustments to revenues: | ||||||||||||||||
Net earned premiums | $ | — | $ | (3 | ) | $ | — | $ | (3 | ) | ||||||
Net investment income | — | (1 | ) | — | (1 | ) | ||||||||||
Net realized investment gains (losses) | (18 | ) | — | (14 | ) | — | ||||||||||
Net change in fair value of credit derivatives | 4 | — | 1 | — | ||||||||||||
Fair value gains (losses) on FG VIEs | — | 3 | — | 5 | ||||||||||||
Other income (loss) | 5 | — | 10 | — | ||||||||||||
Total revenue adjustments | (9 | ) | (1 | ) | (3 | ) | 1 | |||||||||
Adjustments to expenses: | ||||||||||||||||
Loss expense | (6 | ) | 3 | 18 | (2 | ) | ||||||||||
Total expense adjustments | (6 | ) | 3 | 18 | (2 | ) | ||||||||||
Pre-tax adjustments | (3 | ) | (4 | ) | (21 | ) | 3 | |||||||||
Tax effect of adjustments | 1 | (1 | ) |
18 |
(3) |
1 | ||||||||||
After-tax adjustments | $ | (4 | ) | $ | (3 | ) | $ | (39 | ) | $ | 2 | |||||
________________________________________________
(1) The "Non-GAAP Operating Income Adjustments" column represents the amounts recorded in the consolidated statements of operations that the Company removes to arrive at non-GAAP operating income.
(2) The "Effect of FG VIE Consolidation" column represents the amounts included in the consolidated statements of operations and non-GAAP operating income that the Company removes to arrive at the core financial measures that management uses in certain of its compensation calculations and its decision making process.
(3) Fourth quarter 2017 includes
Non-GAAP Operating Income Adjustments and | ||||||||||||||||
Effect of FG VIE Consolidation | ||||||||||||||||
(in millions) |
||||||||||||||||
Year Ended |
Year Ended |
|||||||||||||||
Non-GAAP Operating Income Adjustments (1) |
Effect of FG VIE Consolidation (2) |
Non-GAAP Operating Income Adjustments (1) |
Effect of FG VIE Consolidation (2) |
|||||||||||||
Adjustments to revenues: | ||||||||||||||||
Net earned premiums | $ | — | $ | (12 | ) | $ | — | $ | (15 | ) | ||||||
Net investment income | — | (4 | ) | — | (5 | ) | ||||||||||
Net realized investment gains (losses) | (32 | ) | — | 40 | — | |||||||||||
Net change in fair value of credit derivatives | 92 | — | 86 | — | ||||||||||||
Fair value gains (losses) on FG VIEs | — | 14 | — | 30 | ||||||||||||
Other income (loss) | (18 | ) | — | 55 | — | |||||||||||
Total revenue adjustments | 42 | (2 | ) | 181 | 10 | |||||||||||
Adjustments to expenses: | ||||||||||||||||
Loss expense | (9 | ) | 3 | 43 | (7 | ) | ||||||||||
Total expense adjustments | (9 | ) | 3 | 43 | (7 | ) | ||||||||||
Pre-tax adjustments | 51 | (5 | ) | 138 | 17 | |||||||||||
Tax effect of adjustments | 12 | (1 | ) | 69 |
(3) |
6 | ||||||||||
After-tax adjustments | $ | 39 | $ | (4 | ) | $ | 69 | $ | 11 | |||||||
________________________________________________
(1) The "Non-GAAP Operating Income Adjustments" column represents the amounts recorded in the consolidated statements of operations that the Company removes to arrive at non-GAAP operating income.
(2) The "Effect of FG VIE Consolidation" column represents the amounts included in the consolidated statements of operations and non-GAAP operating income that the Company removes to arrive at the core financial measures that management uses in certain of its compensation calculations and its decision making process.
(3) FY 2017 includes
Non-GAAP Operating Shareholders’ Equity and Non-GAAP Adjusted Book Value
Management believes that non-GAAP operating shareholders’ equity is a useful measure because it presents the equity of the Company excluding the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss, along with other adjustments described below. Management adjusts non-GAAP operating shareholders’ equity further by removing FG VIE consolidation to arrive at its core operating shareholders' equity and core adjusted book value.
Non-GAAP operating shareholders’ equity is the basis of the calculation of non-GAAP adjusted book value (see below). Non-GAAP operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
1) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.
2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company's credit spreads, price indications on the Company's publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.
3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI) (excluding foreign exchange remeasurement). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore should not recognize an economic gain or loss.
4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
Management uses non-GAAP adjusted book value, adjusted for FG VIE consolidation, to measure the intrinsic value of the Company, excluding franchise value. Growth in non-GAAP adjusted book value per share, adjusted for FG VIE consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that non-GAAP adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Non-GAAP adjusted book value is non-GAAP operating shareholders’ equity, as defined above, further adjusted for the following:
1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
2) Addition of the net present value of estimated net future revenue. See below.
3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the expected future net earned premiums, net of expected losses to be expensed, which are not reflected in GAAP equity.
4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.
The unearned premiums and revenues included in non-GAAP adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current non-GAAP adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of GAAP Shareholders' Equity to | ||||||||||||||||
Non-GAAP Operating Shareholders' Equity and Non-GAAP Adjusted Book Value | ||||||||||||||||
(in millions, except per share amounts) |
||||||||||||||||
As of | ||||||||||||||||
|
|
|||||||||||||||
Total | Per Share | Total | Per Share | |||||||||||||
Shareholders' equity | $ | 6,555 | 63.23 | $ | 6,839 | 58.95 | ||||||||||
Less pre-tax adjustments: | ||||||||||||||||
Non-credit impairment unrealized fair value gains (losses) on credit derivatives |
(45 | ) | (0.44 | ) | (146 | ) | (1.26 | ) | ||||||||
Fair value gains (losses) on CCS | 74 | 0.72 | 60 | 0.52 | ||||||||||||
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect |
247 | 2.39 | 487 | 4.20 | ||||||||||||
Less taxes | (63 | ) | (0.61 | ) | (83 | ) | (0.71 | ) | ||||||||
Non-GAAP operating shareholders' equity | 6,342 | 61.17 | 6,521 | 56.20 | ||||||||||||
Pre-tax adjustments: | ||||||||||||||||
Less: Deferred acquisition costs | 105 | 1.01 | 101 | 0.87 | ||||||||||||
Plus: Net present value of estimated net future revenue | 204 | 1.96 | 146 | 1.26 | ||||||||||||
Plus: Net unearned premium reserve on financial guaranty contracts in excess of expected loss to be expensed |
3,005 | 28.98 | 2,966 | 25.56 | ||||||||||||
Plus taxes | (524 | ) | (5.04 | ) | (512 | ) | (4.41 | ) | ||||||||
Non-GAAP adjusted book value | $ | 8,922 | 86.06 | $ | 9,020 | 77.74 | ||||||||||
Gain (loss) related to FG VIE consolidation included in non-GAAP operating shareholders' equity (net of tax provision of |
$ | 3 | $ | 0.03 | $ | 5 | $ | 0.03 | ||||||||
Gain (loss) related to FG VIE consolidation included in non-GAAP adjusted book value (net of tax benefit of |
$ | (15 | ) | $ | (0.15 | ) | $ | (14 | ) | $ | (0.12 | ) | ||||
Shares outstanding at the end of the period | 103.7 | 116.0 | ||||||||||||||
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it enables an evaluation of the value of future estimated revenue for contracts other than financial guaranty insurance contracts (such as non-financial guaranty insurance contracts and credit derivatives). There is no corresponding GAAP financial measure. This amount represents the present value of estimated future revenue from these contracts, net of reinsurance, ceding commissions and premium taxes, for contracts without expected economic losses, and is discounted at 6%. Estimated net future revenue may change from period to period due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.
PVP or Present Value of New Business Production
Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production for the Company by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as premium supplements and additional installment premium on existing contracts as to which the issuer has the right to call the insured obligation but has not exercised such right, whether in insurance or credit derivative contract form, which management believes GAAP gross written premiums and the net credit derivative premiums received and receivable portion of net realized gains and other settlements on credit derivatives (Credit Derivative Realized Gains (Losses)) do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums, discounted, in each case, at 6%. Under GAAP, financial guaranty installment premiums are discounted at a risk free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction. Actual future earned or written premiums and Credit Derivative Realized Gains (Losses) may differ from PVP due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.
Reconciliation of GWP to PVP | |||||||||||||||||||
(in millions) |
|||||||||||||||||||
Quarter Ended | |||||||||||||||||||
|
|||||||||||||||||||
Public Finance | Structured Finance | ||||||||||||||||||
|
Non - |
|
Non - |
Total | |||||||||||||||
GWP | $ | 93 | $ | 4 | $ | (1 | ) | $ | — | $ | 96 | ||||||||
Less: Installment GWP and other GAAP |
|||||||||||||||||||
adjustments (1) |
25 | 3 | (1 |
) |
— | 27 | |||||||||||||
Upfront GWP | 68 | 1 | — | — | 69 | ||||||||||||||
Plus: Installment premium PVP | 21 | 2 | 1 | 3 | 27 | ||||||||||||||
PVP | $ | 89 | $ | 3 | $ | 1 | $ | 3 | $ | 96 | |||||||||
Quarter Ended | |||||||||||||||||||
|
|||||||||||||||||||
Public Finance | Structured Finance | ||||||||||||||||||
|
Non - |
|
Non - |
Total | |||||||||||||||
GWP | $ | 58 | $ | 13 | $ | (4 | ) | $ | 5 | $ | 72 | ||||||||
Less: Installment GWP and other GAAP |
|||||||||||||||||||
adjustments (1) |
(2 | ) | 13 | (4 | ) | 2 | 9 | ||||||||||||
Upfront GWP | 60 | — | — | 3 | 63 | ||||||||||||||
Plus: Installment premium PVP | (1 | ) | 8 | 7 | — | 14 | |||||||||||||
PVP | $ | 59 | $ | 8 | $ | 7 | $ | 3 | $ | 77 |
Year Ended | |||||||||||||||||||
|
|||||||||||||||||||
Public Finance | Structured Finance | ||||||||||||||||||
|
Non - |
|
Non - |
Total | |||||||||||||||
GWP | $ | 320 | $ | 115 | $ | 167 | $ | 10 | $ | 612 | |||||||||
Less: Installment GWP and other GAAP |
|||||||||||||||||||
adjustments(1) |
34 | 75 | 9 | 1 | 119 | ||||||||||||||
Upfront GWP | 286 | 40 | 158 | 9 | 493 | ||||||||||||||
Plus: Installment premium PVP (2) |
105 | 54 | 8 | 3 | 170 | ||||||||||||||
PVP | $ | 391 | $ | 94 | $ | 166 | $ | 12 | $ | 663 | |||||||||
Year Ended | |||||||||||||||||||
|
|||||||||||||||||||
Public Finance | Structured Finance | ||||||||||||||||||
|
Non - |
|
Non - |
Total | |||||||||||||||
GWP | $ | 190 | $ | 105 | $ | (1 | ) | $ | 13 | $ | 307 | ||||||||
Less: Installment GWP and other GAAP |
|||||||||||||||||||
adjustments (1) |
(3 | ) | 103 | (1 | ) | — | 99 | ||||||||||||
Upfront GWP | 193 | 2 | — | 13 | 208 | ||||||||||||||
Plus: Installment premium PVP | 3 | 64 | 12 | 2 | 81 | ||||||||||||||
PVP | $ | 196 | $ | 66 | $ | 12 | $ | 15 | $ | 289 | |||||||||
________________________________
(1) Includes present value of new business on installment policies, discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions, any cancellations of assumed reinsurance contracts, and other GAAP adjustments.
(2) Includes PVP of credit derivatives assumed in the SGI Transaction in the second quarter of 2018.
Conference Call and Webcast Information
The Company will host a conference call for investors at
Please refer to
- “Public Finance Transactions in 4Q 2018,” which lists the
U.S. public finance new issues insured by the Company in fourth quarter 2018, and - “Structured Finance Transactions at
December 31 , 2018,” which lists the Company's structured finance exposure as of that date.
In addition, the Company is posting at assuredguaranty.com/presentations the “December 31, 2018 Equity Investor Presentation.” Furthermore, the Company's separate-company subsidiary financial supplements and its Fixed Income Presentation for the current quarter will be posted on the Company's website when available. Those documents will be furnished to the
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statements made in this press release reflect the Company's current views with respect to future events and financial performance and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. For example,
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