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AGO > SEC Filings for AGO > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ASSURED GUARANTY LTD



Quarterly Report


Forward Looking Statements

This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. ("AGL" and, together with its subsidiaries, "Assured Guaranty" or the "Company"). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance.

Any or all of Assured Guaranty's forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty's actual results may vary materially. Among factors that could cause actual results to differ materially are:

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         rating agency action, including a ratings downgrade, a change in
          outlook, the placement of ratings on watch for downgrade, or a change
          in rating criteria, at any time, of Assured Guaranty or any of its
          subsidiaries and/or of transactions that Assured Guaranty's
          subsidiaries have insured;

         reduction in the amount of available insurance opportunities and/or in
          the demand for Assured Guaranty's insurance;

         developments in the world's financial and capital markets that
          adversely affect obligors' payment rates, Assured Guaranty's loss
          experience, or its exposure to refinancing risk in transactions (which
          could result in substantial liquidity claims on its guarantees);

         the possibility that budget shortfalls or other factors will result in
          credit losses or impairments on obligations of state and local
          governments that the Company insures or reinsures;

         the failure of Assured Guaranty to realize insurance loss recoveries or
          damages through loan putbacks, settlement negotiations or litigation;

         deterioration in the financial condition of Assured Guaranty's
          reinsurers, the amount and timing of reinsurance recoverables actually
          received and the risk that reinsurers may dispute amounts owed to
          Assured Guaranty under its reinsurance agreements;

         increased competition, including from new entrants into the financial
          guaranty industry;

         rating agency action on obligors, including sovereign debtors,
          resulting in a reduction in the value of securities in the Company's
          investment portfolio and in collateral posted by and to the Company;

         the inability of Assured Guaranty to access external sources of capital
          on acceptable terms;

         changes in the world's credit markets, segments thereof or general
          economic conditions;

         the impact of market volatility on the mark-to-market of Assured
          Guaranty's contracts written in credit default swap form;

changes in applicable accounting policies or practices;

changes in applicable laws or regulations, including insurance and tax laws;

other governmental actions;

difficulties with the execution of Assured Guaranty's business strategy;

contract cancellations;

loss of key personnel;

adverse technological developments;

the effects of mergers, acquisitions and divestitures;

natural or man-made catastrophes;

other risks and uncertainties that have not been identified at this time;

management's response to these factors; and

other risk factors identified in Assured Guaranty's filings with the U.S. Securities and Exchange Commission (the "SEC").

The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise,

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except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company's reports filed with the SEC.

If one or more of these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company's current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.

For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Available Information

The Company maintains an Internet web site at The Company makes available, free of charge, on its web site (at the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC. The Company also makes available, free of charge, through its web site (at links to the Company's Corporate Governance Guidelines, its Code of Conduct and the charters for its Board Committees.

The Company routinely posts important information for investors on its web site (at The Company uses this web site as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD. Accordingly, investors should monitor the Investor Information portion of the Company's web site, in addition to following the Company's press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company's web site is not incorporated by reference into, and is not a part of, this report.

Executive Summary

This executive summary of management's discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to Assured Guaranty's 2013 Annual Report on Form 10-K.

Economic Environment

The overall economic environment in the United States ("U.S.") has consistently, albeit slowly, recovered over the last few years in a volatile market environment. Weak job growth in December 2013 and January 2014 appeared to result from extreme weather conditions, as job growth rebounded in February and March of 2014. The stock market remained near record levels during the three-month period ended March 31, 2014 ("First Quarter 2014") but was volatile and finished little higher than at December 31, 2013. Although the Federal Reserve began to taper its quantitative easing program in December 2013, management expects the Federal Reserve to do so at a measured pace and to employ conventional methods to maintain a low interest environment until it considers unemployment sufficiently reduced. A persistently low interest rate environment would continue to present challenges for the financial guaranty industry. Low interest rates tend to suppress demand for bond insurance as the potential savings for issuers are less compelling and some investors prefer to forgo insurance in favor of greater yield.

Although few municipalities have fully rebuilt reserves to pre-recession levels, most have been taking steps to address the ongoing fiscal challenges they have experienced since the global credit crisis of 2008 and the ensuing recession. This includes, in many cases, significant underfunded pension and retiree healthcare liabilities. Stock market gains have recently relieved some pressure on underfunded pension plans, but such gains could be reversed and are no substitute for prudent public policy. Revenues at the state level have been rebounding in general, and while the strength of the housing recovery varies from region to region, property tax and other revenues have stabilized for most local governments. Although municipal defaults remain rare, a small number of municipal credits have sought, though not always obtained, bankruptcy protection.

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The publicity surrounding high-profile defaults and bankruptcy filings, especially those few where bond insurers are paying claims, provides evidence of the value of bond insurance; the Company believes this may stimulate demand for its product, especially at the retail level.

Business conditions have been difficult for the entire financial guaranty insurance industry since mid-2007 and the onset of the financial crisis, during which a number of the Company's competitors ceased writing business. While the industry continues to face challenges in maintaining its market penetration, there have been recent signs of improvement in market perception of bond insurance and the Company. After a number of years in which Assured Guaranty was essentially the only active financial guarantor, a second monoline guarantor insured a number of small and medium-size issuances in 2013 and was active during First Quarter 2014. There has also been market acceptance of Municipal Assurance Corp. ("MAC"), Assured Guaranty's U.S.-only municipal bond insurance company launched in July of 2013. MAC insured approximately 20% of the par amount of new municipal issues sold with Assured Guaranty insurance in First Quarter 2014.

Additionally, in March 2014, Standard and Poor's Ratings Services ("S&P") upgraded the financial strength ratings of Assured Guaranty Municipal Corp. ("AGM"), MAC and Assured Guaranty Corp. ("AGC") to AA (stable outlook) from AA- (stable outlook), citing the Company's reduced exposure to its legacy residential mortgage-backed securities ("RMBS") portfolio and noting that the Company's full payment of claims in "high-profile" municipal bankruptcies "demonstrates and reiterates to various constituents the value of bond insurance and the credit position and capacity of the company." Also in March, S&P upgraded an inactive legacy insurer that had been a competitor of the Company to AA- (stable outlook), a level that may allow that company to reenter the municipal bond insurance market.

Perception of the Company has also improved based on credit spread data. AGM's and AGC's credit spreads narrowed during the twelve months ended March 31, 2014 by 20% and 27%, respectively. The wider the Company's credit spread, the lower the perceived benefit of the Company's guaranty is to certain investors. If investors view the Company as being only marginally less risky, or perhaps even as risky, as the uninsured security, they may require almost as much, or as much, yield on a security insured by the Company as on a comparable security offered without insurance by the same issuer. Accordingly, issuers may be unwilling to pay a premium for the Company to insure their securities if the insurance does not lower the costs of borrowing.

During First Quarter 2014, the Company continued to guarantee the majority of insured par sold in the U.S. municipal bond market as a result of its financial strength and its ability to attract investors through its default protection, credit selection, underwriting and surveillance, as well as the increased market liquidity associated with its insured paper. During First Quarter 2014, $1.4 billion in par amount of new municipal issues was sold with Assured Guaranty insurance, compared with $1.2 billion in the three-month period ended March 31, 2013 ("First Quarter 2013"), a 21% increase. The Company increased production in a quarter when market issuance was down 26% compared with issuance in First Quarter 2013 and the pricing environment continued to be unfavorable, with interest rates remaining low and credit spreads remaining tight. Industry insurance penetration of the municipal market was 4.6% of par volume issued, compared with 2.6% in First Quarter 2013, an increase that may reflect increasing market recognition of the value of insurance, especially in light of evidence that insured bonds of Detroit and Puerto Rico tended to hold their market value better than comparable uninsured bonds of these distressed credits.

The Company has been active in efforts to resolve municipal bankruptcy or receivership cases involving Jefferson County, Alabama and the cities of Harrisburg, Pennsylvania; Stockton, California; and Detroit, Michigan, and it has reached final or preliminary settlements with each of these municipalities. Harrisburg, Pennsylvania emerged from receivership on March 1, 2014. A tentative settlement with Detroit regarding unlimited tax general obligation bonds insured by the Company was announced on April 9, 2014.

The Company is also closely following developments in the Commonwealth of Puerto Rico, which has significant economic challenges. Puerto Rico faces high debt levels, a declining population and an economy that has been in recession since 2006. While there can be no assurance the Company will not incur losses on its Puerto Rico exposure, announcements and actions by the current Governor and his administration indicate the island's officials are focused on measures that are intended to help Puerto Rico operate within its financial resources and maintain its access to capital. Despite decisions by three rating agencies in February 2014 to downgrade Puerto Rico below investment grade, the Commonwealth issued $3.5 billion of debt the following month, which should allow it more time to find solutions. For additional information on the Company's exposure to Puerto Rico, please refer to "Insured Portfolio-Exposure to Puerto Rico" below.

In the international arena, the economic environment since 2008 has had a significant negative impact on the demand by investors for financial guaranty policies, and it is uncertain when or if demand for financial guaranties will return to their

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pre-economic crisis level. There was limited new issue activity and also limited demand for financial guaranties in First Quarter 2014 and the years 2013 and 2012 in both the global structured finance and international infrastructure finance markets.

Europe began an economic recovery during 2013, described by the European Commission as "slow and fragile" and uneven across countries. The Company continues to monitor closely its exposures in Italy, Ireland, Spain, Hungary and Portugal. The Company's exposure to troubled Eurozone countries is described below under "Results of Operations-Consolidated Results of Operations-Losses in the Insured Portfolio" and "Insured Portfolio-Selected European Exposures." The United Kingdom, which saw four consecutive quarters of economic growth during 2013, currently presents the best international opportunities for the Company. From July 2013 to March 2014, the Company guaranteed four United Kingdom ("U.K.") public-private partnership transactions, the first such wrapped infrastructure bonds issued since 2008.

Management believes that, following the success of these U.K. transactions, there may be growing demand in a number of countries for financial guarantees of infrastructure financings, which have typically required such guarantees for capital market access. Assured Guaranty is currently the only company offering such guarantees outside the United States.

In general, the Company expects that global structured finance and international infrastructure opportunities will increase in the future as the global economy recovers, interest rates rise, more issuers return to the capital markets for financings and institutional investors again utilize financial guaranties. The Company considers its involvement in such transactions to be a competitive advantage because such transactions diversify both the Company's business opportunities and its risk profile.

Financial Performance of Assured Guaranty

                               Financial Results

                                                                        First Quarter
                                                                   2014                  2013
                                                           (in millions, except per share amounts)
Selected income statement data
Net earned premiums                                        $            132         $        248
Net investment income                                                   103                   94
Realized gains (losses) and other settlements on credit
derivatives                                                              19                   18
Net unrealized gains (losses) on credit derivatives                    (230 )               (610 )
Fair value gains (losses) on financial guaranty variable
interest entities                                                       157                   70
Loss and loss adjustment (expenses) benefit                             (41 )                 48
Other operating expenses                                                (60 )                (60 )
Net income (loss)                                                        42                 (144 )
Diluted earnings (loss) per share                          $           0.23         $      (0.74 )
Selected non-GAAP measures(1)
Operating income                                           $            132         $        260
Operating income per share                                 $           0.72         $       1.34
Present value of new business production ("PVP")           $             31         $         18


(1) Please refer to "-Non-GAAP Financial Measures" for a definition of the financial measures that were not promulgated in accordance with accounting principles generally accepted in the United States of America ("GAAP") and a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure, if available.

Net Income (Loss)

There are several primary drivers of volatility in reported net income or loss that are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses: changes in credit spreads of insured credit derivative obligations and financial guaranty variable interest entities' ("FG VIEs") assets and liabilities, changes in the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Changes in credit spreads have the most

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significant effect on changes in fair value of credit derivatives and FG VIE assets and liabilities. In addition to these factors, changes in expected losses, the timing of refundings and terminations, realized gains and losses on the investment portfolio (including other-than-temporary impairments), the effects of large settlements or transactions, and the effects of the Company's various loss mitigation strategies, among other factors, may also have a significant effect on reported net income or loss in a given reporting period.

Net income for First Quarter 2014 was $42 million compared with net loss of $144 million in First Quarter 2013. The increase in net income was primarily attributable to lower unrealized losses on credit derivatives, the increase in fair value gains on FG VIEs due primarily to deconsolidation of seven VIEs, and higher other income due to commutation gains on previously ceded business. These were partially offset by lower net earned premiums and higher loss and loss adjustment expenses ("LAE"). Net earned premiums decreased in First Quarter 2014 due to lower accelerations and the scheduled amortization of the insured portfolio. Loss and LAE were higher in First Quarter 2014 due primarily to a representations and warranties ("R&W") settlement in First Quarter 2013 and higher U.S. public finance losses in First Quarter 2014.

Non-GAAP Financial Measures

Non-GAAP operating income in First Quarter 2014 was $132 million, compared with $260 million in First Quarter 2013. The decrease in operating income was driven primarily by the decrease in net earned premiums and credit derivative revenues due to lower accelerations and scheduled amortization on the insured portfolio, and higher losses due primarily to an R&W settlement in First Quarter 2013 and higher U.S. public finance losses in First Quarter 2014. This was partially offset by commutation gains in First Quarter 2014. The effective tax rate in First Quarter 2014 was higher than First Quarter 2013 due to a higher proportion of loss expense in non-taxable jurisdictions.

Adjusted book value per share was $49.79 as of March 31, 2014, as compared with $49.58 per share as of December 31, 2013. Adjusted book value value per share increased primarily due to share repurchases, PVP and reassumptions of ceded business during First Quarter 2014.

See "-Non-GAAP Financial Measures" for a description of these non-GAAP financial measures.

Key Business Strategies

In First Quarter 2014, the Company's key business strategies were comprised of:
new business development; loss mitigation and the continuation of the Company's capital management strategy.

New Business Production and Commutations

In First Quarter 2014, the Company continued to focus on new business production. During the quarter, it issued financial guaranty insurance policies and financial guarantees in all of its markets: U.S. public finance, structured finance, and international infrastructure. The average internal rating of the gross par written by the Company in First Quarter 2014 was BBB+. MAC, the Company's U.S. public finance-only insurance subsidiary, has obtained financial strength ratings of AA+ (stable outlook) from Kroll Bond Rating Agency and AA (stable outlook) from S&P. MAC issued its first financial guaranty insurance policy in August 2013 and has been increasing its market share since.

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                            New Business Production

                           First Quarter
                          2014       2013
                           (in millions)
PVP (1):
Public Finance-U.S.     $    23    $    16
Public Finance-non-U.S.       7          -
Structured Finance-U.S.       1          2
Total PVP               $    31    $    18
Gross Par Written:
Public Finance-U.S.     $ 1,737    $ 1,580
Public Finance-non-U.S.     128          -
Structured Finance-U.S.       4         14
Total gross par written $ 1,869    $ 1,594


(1) PVP represents the present value of estimated future earnings primarily on new financial guaranty contracts written in the period, before consideration of cessions to reinsurers. PVP and Gross Par Written in the table above are based on close date. See "-Non-GAAP Measures-PVP or Present Value of New Business Production."

In U.S. public finance, the Company achieved a 10% increase in gross par written and a 44% increase in PVP, despite a 26% decline in new issue volume. This was due primarily to overall improving demand for financial guaranty insurance products. In the U.K, the Company guaranteed another infrastructure bond during First Quarter 2014.

The following tables present summarized information about the U.S. municipal market's new debt issuance volume and the Company's share of that market.

                           U.S. Municipal Market Data
                               Based on Sale Date

                                First Quarter 2014           First Quarter 2013        Year Ended December 31, 2013
                                            Number of                    Number of                         Number of
                                Par          issues          Par          issues             Par            issues
                                                 (dollars in billions, except number of issues)
New municipal bonds issued  $     60.4         1,955     $     81.3         2,785     $         311.9        10,558
Total insured                      2.8           252            2.1           261                12.1         1,025
Insured by AGC, AGM and MAC        1.4           117            1.2           129                 7.5           488

                           Industry Penetration Rates
                             U.S. Municipal Market

                                                                           Year Ended
                                                     First Quarter            31,
                                                   2014          2013         2013
Market penetration par                             4.6%          2.6%         3.9%
Market penetration based on number of issues       12.9          9.4          9.7
% of single A par sold                             15.2          7.9          11.0
% of single A transactions sold                    39.8          29.0         30.6
% of under $25 million par sold                    15.5          10.8         10.9
% of under $25 million transactions sold           14.6          11.1         10.7

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In addition to PVP, in First Quarter 2014, the Company entered into commutation agreements to reassume ceded business consisting of approximately $856 million par of almost exclusively U.S. public finance and European (predominantly U.K.) utility and infrastructure exposures outstanding as of February 28, 2014. For such reassumptions, the Company received the statutory unearned premium outstanding as of the commutation dates plus, in one case, a commutation premium.

Loss Mitigation

The Company continued its risk remediation strategies in First Quarter 2014, which lowered losses and improved its rating agency capital position. The Company believes that it is often in a better position to manage the risks in its insured portfolio and to mitigate losses from troubled credits than a bondholder or security holder would be, due to its knowledge about the terms of the insured transactions, its surveillance and workout resources and, in some instances, the remedies available to it as an insurer. . . .

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