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Assured Guaranty Ltd. Reports Results for First Quarter 2024
"Assured Guaranty produced excellent first quarter 2024 results," said Dominic Frederico, President and CEO. "First quarter net income increased 35% year over year, and adjusted operating income increased 66%. Shareholders' equity per share, adjusted operating shareholders' equity per share, and adjusted book value per share all reached record levels of $102.19, $107.69 and $157.31, respectively. New business written produced $61 million of GWP and $63 million of PVP, reflecting strong production in U.S. public finance and global structured finance.
"In U.S. public finance, we continued to lead the bond insurance industry in primary market par sold. Premiums were strong in the first quarter, with new municipal business producing approximately twice as much GWP and PVP as in last year's first quarter, on a similar amount of gross par written, due to several large transportation revenue issuances this year.
"In April of this year, we celebrated the 20th anniversary of our IPO. Since that time through the end of the first quarter, our share price has increased almost 385%, more than those of the S&P 500 Financials, the S&P 500, the Dow Jones Industrial Average and the NYSE Composite Index, and we have paid common share dividends of $1 billion. For 2024, we have ramped up our share repurchase program, repurchasing $129 million of common shares in the first quarter alone, which equals 2.7% of our shares outstanding on December 31, 2023."
(1)
All per share information for net income and adjusted operating income is based on diluted shares.
Summary Financial Results
(in millions, except per share amounts)
Quarter Ended
March 31,
------------------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- -------------- -------------------- -------------------- ------ --------------------
GAAP (1)
$ 109 $ 81
Net income (loss) attributable to AGL
$ 1.89 $ 1.34
Net income (loss) attributable to AGL per diluted share
57.1 60.4
Weighted average diluted shares
Non-GAAP
$ 113 $ 68
Adjusted operating income (loss) (2)
$ 1.96 $ 1.12
Adjusted operating income per diluted share (2)
57.1 60.4
Weighted average diluted shares
Gain (loss) related to FG VIE and CIV consolidation (3) included in adjusted operating income $ -- $ (4 )
Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share $ -- $ (0.06 )
Components of total adjusted operating income (loss)
$ 149 $ 117
Insurance segment
1 (1 )
Asset Management segment
(37 ) (44 )
Corporate division
-- (4 )
Other
-------------------- -------------- -------------------- -------------------- ------ --------------------
As of
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
March 31, 2024 December 31, 2023
---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------
Amount Per Share Amount Per Share
---------------------------------------------- ---------------------------------------------- ---------------------------------------------- ----------------------------------------------
Shareholders' equity attributable to AGL $ 5,629 $ 102.19 $ 5,713 $ 101.63
Adjusted operating shareholders' equity (2) 5,932 107.69 5,990 106.54
ABV (2) 8,665 157.31 8,765 155.92
________________________________________________
(1)
Generally accepted accounting principles in the United States of America.
(2)
Please see "Explanation of Non-GAAP Financial Measures" at the end of this press release.
On a per share basis, shareholders' equity attributable to AGL increased to $102.19 as of March 31, 2024 from $101.63 as of December 31, 2023, primarily due to net income and share repurchases, partially offset by dividends and unrealized losses in the investment portfolio. On a per share basis, ABV increased to $157.31 primarily due to adjusted operating income, new business production and share repurchases, partially offset by dividends.
Insurance Segment
The Insurance segment primarily consists of the Company's insurance subsidiaries that provide credit protection products to the United States (U.S.) and non-U.S. public finance (including infrastructure) and structured finance markets.
Insurance Segment New Business Production
Insurance Segment
New Business Production
(in millions)
Quarter Ended March 31,
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2024 2023
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
GWP PVP (1) Gross Par GWP PVP (1) Gross Par
Written (2) Written (2)
---------------------------------------------- ---------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ ---------------------------------------------- ----------------------------------------------
Public finance - U.S. $ 44 $ 43 $ 2,909 $ 22 $ 22 $ 2,907
Public finance - non-U.S. 2 1 -- 36 30 360
Structured finance - U.S. 13 15 480 28 27 582
Structured finance - non-U.S. 2 4 354 -- 33 1,514
-------------------- ------ -------------------- -------------------- ------ -------------------- -------------------- -------------- -------------------- -------------------- -------------- -------------------- -------------------- ------ -------------------- -------------------- ------ --------------------
________________________________________________
(1)
PVP, a non-GAAP financial measure, measures the value of the Insurance segment's new business production for all contracts regardless of form or GAAP accounting model. See "Explanation of Non-GAAP Financial Measures" at the end of this press release. PVP is based on "close date," when the transaction settles. PVP was discounted at 5% and 4% in first quarter 2024 and in the three-month period ended March 31, 2023 (first quarter 2023), respectively.
U.S. public finance GWP and PVP in first quarter 2024 were higher than the comparable GWP and PVP in first quarter 2023, primarily due to several large transportation revenue transactions that closed in first quarter 2024. The Company's direct par written represented 53% of the total U.S. municipal market insured issuance in first quarter 2024, compared with 60% in first quarter 2023, and the Company's penetration of all municipal issuance was 3.8% in first quarter 2024 compared with 4.6% in first quarter 2023.
Structured finance GWP and PVP in first quarter 2024 were primarily attributable to insurance securitization and subscription finance transactions.
Business activity in the non-U.S. public finance and structured finance sectors often has long lead times and therefore may vary from period to period.
Insurance Segment Adjusted Operating Income
Insurance segment adjusted operating income increased to $149 million in first quarter 2024, from $117 million in first quarter 2023. The increase was primarily due to higher net earned premiums and fair value gains on trading securities in first quarter 2024.
Insurance Segment Results
(in millions)
Quarter Ended
March 31,
------------------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- -------------- -------------------- -------------------- ------ --------------------
Segment revenues
Net earned premiums and credit derivative revenues $ 122 $ 84
Net investment income 83 82
Fair value gains (losses) on trading securities 26 (2 )
Foreign exchange gains (losses) on remeasurement -- 1
Other income (loss) (2 ) 25
-------------------- -------------- -------------------- -------------------- ------ --------------------
229 190
Total segment revenues
Segment expenses
Loss expense (benefit) 4 9
Amortization of deferred acquisition costs (DAC) 6 3
Employee compensation and benefit expenses 48 39
Other operating expenses 27 28
-------------------- -------------- -------------------- -------------------- ------ --------------------
85 79
Total segment expenses
Equity in earnings (losses) of investees 40 30
-------------------- -------------- -------------------- -------------------- ------ --------------------
184 141
Segment adjusted operating income (loss) before income taxes
Less: Provision (benefit) for income taxes 35 24
-------------------- -------------- -------------------- -------------------- ------ --------------------
The components of the Insurance segment's premiums, losses and income from the investment portfolio are presented below.
Insurance Segment Net Earned Premiums and Credit Derivative Revenues
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
(in millions)
Quarter Ended
March 31,
----------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- ------ -------------------- -------------------- ------ --------------------
Scheduled net earned premiums and credit derivative revenues $ 83 $ 80
Accelerations 39 4
-------------------- ------ -------------------- -------------------- ------ --------------------
Net earned premiums and credit derivative revenues increased in first quarter 2024 compared with first quarter 2023 primarily due to a large refunded transaction in first quarter 2024.
Insurance Segment Loss Expense (Benefit) and the Roll Forward of Expected Losses
Loss expense is a function of net economic loss development (benefit) and deferred premium revenue.
Insurance Segment
Loss Expense (Benefit)
(in millions)
Quarter Ended
March 31,
------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- ---- -------------------- -------------------- ---- --------------------
Public finance $ 1 $ 1
U.S. residential mortgage-backed securities (RMBS) 2 6
Other structured finance 1 2
-------------------- ---- -------------------- -------------------- ---- --------------------
The table below presents the roll forward of net expected losses for first quarter 2024.
Roll Forward of Net Expected Loss to be Paid (Recovered) (1)
(in millions)
Net Expected Loss to be Paid (Recovered) as of December 31, 2023 Net Net (Paid) Recovered Net Expected Loss to be Paid (Recovered) as of March 31, 2024
Economic Loss Development (Benefit) Losses
-------------------------------------------------------------- --------------------------------- --------------------------- -----------------------------------------------------------
Public finance $ 418 $ (3 ) $ (17 ) $ 398
U.S. RMBS 43 (3 ) (42 ) (2 )
Other structured finance 44 (1 ) (6 ) 37
--------------------- --- -------------------------------------- -------------------- -- ----------- -------------------- ------ - -------------------- --- ------------------------------------
________________________________________________
The net economic loss development was a benefit of $7 million in first quarter 2024, mainly attributable to improved performance across various public finance exposures and higher recoveries in second-lien RMBS. The effect of changes in risk-free rates used to discount expected losses was a benefit of $3 million.
Insurance Segment Income from Investment Portfolio
Insurance Segment
Income from Investment Portfolio
(in millions)
Quarter Ended
March 31,
------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- ---- -------------------- -------------------- ---- --------------------
Net investment income $ 83 $ 82
Fair value gains (losses) on trading securities (1) 26 (2 )
Equity in earnings (losses) of investees (2) 40 30
-------------------- ---- -------------------- -------------------- ---- --------------------
________________________________________________
(1)
Represents contingent value instruments issued by Puerto Rico that are classified as trading securities with changes in fair value reported in the condensed consolidated statements of operations.
Net investment income, which represents interest income on available-for-sale fixed-maturity debt securities and short-term investments, increased to $83 million in first quarter 2024 from $82 million in first quarter 2023 primarily due to higher short-term interest rates and average balances, partially offset by lower income on loss mitigation securities.
As of March 31, 2024, the Insurance segment had $796 million in alternative investments, which had an inception-to-date annualized internal rate of return of approximately 14.4%. In the Insurance segment, alternative investments consist primarily of funds managed by Sound Point, AHP and other managers, and are generally recorded at net asset value (NAV), with changes in NAV reported in "equity in earnings (losses) of investees." Equity in earnings of investees is more volatile than net investment income on available-for-sale fixed-maturity securities and short-term investments. To the extent that the amounts invested in alternative fund investments increase and available-for-sale fixed-maturity securities decrease, net investment income may decline and mark-to-market volatility related to equity in earnings of investees may increase.
Ratings Action
On April 30th 2024, Moody's Ratings (Moody's) upgraded the insurance financial strength rating of Assured Guaranty Corp. (AGC) and affirmed the rating of Assured Guaranty Municipal Corp. (AGM), both with a stable outlook. In the report, Moody's cited AGC's strong risk-adjusted capital adequacy, the significant improvement in the credit quality of its insured portfolio, and an increased strategic role within Assured Guaranty. About AGM, Moody's noted AGM's strong capital profile and leading market position in the financial guaranty sector.
Asset Management Segment
Since July 2023, the Company participates in the asset management business through its ownership interest in Sound Point. Prior to July 1, 2023, the Company participated in the asset management business through AssuredIM. Asset Management segment adjusted operating income was $1 million for first quarter 2024 and a loss of $1 million for first quarter 2023. Sound Point's results are reported on a one quarter lag and are included in "equity in earnings (losses) of investees." In first quarter 2024, equity in earnings (losses) of investees consisted of a $4 million gain on the Company's ownership interest in Sound Point and a $3 million impairment loss related to a legacy investment in a small financial services advisory firm.
Corporate Division
The Corporate division primarily consists of interest expense on the debt of Assured Guaranty US Holdings Inc. and Assured Guaranty Municipal Holdings Inc., as well as other operating expenses attributed to holding company activities. Adjusted operating loss for the Corporate division was $37 million in first quarter 2024 compared with $44 million in first quarter 2023. The decrease in the net loss attributable to the Corporate division is primarily due to an additional value added tax in the United Kingdom and expenses related to the Sound Point transaction in first quarter 2023, offset in part by increases in premises related expenses.
Reconciliation to GAAP
The following table presents a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Reconciliation of Net Income (Loss) Attributable to AGL to
Adjusted Operating Income (Loss)
(in millions, except per share amounts)
Quarter Ended
March 31,
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2024 2023
-------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------
Total Per Diluted Share Total Per Diluted Share
------------------------------------------------------ ------------------------------------------------------ ---------------------------------------------- ----------------------------------------------
Net income (loss) attributable to AGL $ 109 $ 1.89 $ 81 $ 1.34
Less pre-tax adjustments:
8 0.14 (2 ) (0.03 )
Realized gains (losses) on investments
10 0.16 13 0.21
Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives
(10 ) (0.17 ) (16 ) (0.26 )
Fair value gains (losses) on committed capital securities (CCS)
(12 ) (0.20 ) 20 0.32
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and loss adjustment expense (LAE) reserves
-------------------- -------------- -------------------- -------------------- -------------- -------------------- -------------------- ------ -------------------- -------------------- ------ --------------------
(4 ) (0.07 ) 15 0.24
Total pre-tax adjustments
Less tax effect on pre-tax adjustments -- -- (2 ) (0.02 )
-------------------- -------------- -------------------- -------------------- -------------- -------------------- -------------------- ------ -------------------- -------------------- ------ --------------------
Adjusted operating income (loss) $ 113 $ 1.96 $ 68 $ 1.12
==================== ============== ==================== ==================== ============== ==================== ==================== ====== ==================== ==================== ====== ====================
Non-credit impairment-related unrealized fair value gains on credit derivatives in first quarter 2024 were generated primarily as a result of the termination of certain structured finance contracts. Non-credit impairment-related unrealized fair value gains on credit derivatives in first quarter 2023 were generated primarily as a result of the increased cost to buy protection on AGC. Except for credit impairment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
Fair value losses on CCS in first quarter 2024 and first quarter 2023 were primarily due to a tightening in market spreads. Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market interest rates, credit spreads and other market factors and is not expected to result in an economic gain or loss.
Foreign exchange gains (losses) in both periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rate relative to the U.S. Dollar of the pound sterling and, to a lesser extent, the euro.
Common Share Repurchases
On May 2, 2024, AGL's Board of Directors (the Board) authorized the repurchase of an additional $300 million of the Company's common shares. From the beginning of the repurchase program in 2013 through May 7, 2024, the Company repurchased a total of 146 million common shares at an average price of $34.50, representing approximately 75% of the total shares outstanding. As of May 7, 2024, the Company was authorized to purchase $414 million of its common shares. These repurchases can be made from time to time in the open market or in privately negotiated transactions.
Summary of Share Repurchases
(in millions, except per share amounts)
Amount (1) Number of Shares Average Price Per Share
---------------------------------------------- ------------------------------ -----------------------------------------------
2024 (January 1 - March 31) $ 129 1.54 $ 84.07
2024 (April 1 - May 7) 61 0.75 80.70
-------------------- ------ -------------------- ---------- --------------------
________________________________________________
The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time. It does not have an expiration date.
Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
(in millions)
Quarter Ended
March 31,
-------------------------------------------------------------------------------------------------------------------------
2024 2023
-------------------- -------------- -------------------- -------------------- ------- --------------------
Revenues
$ 119 $ 81
Net earned premiums
84 81
Net investment income
-- 26
Asset management fees
8 (2 )
Net realized investment gains (losses)
10 15
Fair value gains (losses) on credit derivatives
(10 ) (16 )
Fair value gains (losses) on CCS
(3 ) (5 )
Fair value gains (losses) on FG VIEs
22 58
Fair value gains (losses) on CIVs
(12 ) 20
Foreign exchange gain (loss) on remeasurement
26 (2 )
Fair value gains (losses) on trading securities
1 27
Other income (loss)
-------------------- -------------- -------------------- -------------------- ------- --------------------
245 283
Total revenues
Expenses
(1 ) 4
Loss and LAE (benefit)
23 21
Interest expense
6 3
Amortization of DAC
58 82
Employee compensation and benefit expenses
39 55
Other operating expenses
-------------------- -------------- -------------------- -------------------- ------- --------------------
125 165
Total expenses
-------------------- -------------- -------------------- -------------------- ------- --------------------
Income (loss) before income taxes and equity in earnings (losses) of investees 120 118
Equity in earnings (losses) of investees 24 2
-------------------- -------------- -------------------- -------------------- ------- --------------------
Income (loss) before income taxes 144 120
Less: Provision (benefit) for income taxes 31 23
-------------------- -------------- -------------------- -------------------- ------- --------------------
Net income (loss) 113 97
Less: Noncontrolling interests 4 16
-------------------- -------------- -------------------- -------------------- ------- --------------------
Condensed Consolidated Balance Sheets (unaudited)
(in millions)
As of
----------------------------------------------------------------------------------------------------------------
March 31, 2024 December 31, 2023
---------------------------------------------- ----------------------------------------------
Assets
Investments:
$ 6,091 $ 6,307
Fixed-maturity securities available-for-sale, at fair value
272 318
Fixed-maturity securities, trading, at fair value
1,649 1,661
Short-term investments, at fair value
875 829
Other invested assets
-------------------- ------ -------------------- -------------------- ------ --------------------
8,887 9,115
Total investments
Cash 115 97
Premiums receivable, net of commissions payable 1,450 1,468
DAC 164 161
Salvage and subrogation recoverable 295 298
FG VIEs' assets 167 328
Assets of CIVs 377 366
Other assets 713 706
-------------------- ------ -------------------- -------------------- ------ --------------------
$ 12,168 $ 12,539
Total assets
==================== ====== ==================== ==================== ====== ====================
Liabilities
Unearned premium reserve $ 3,612 $ 3,658
Loss and LAE reserve 307 376
Long-term debt 1,695 1,694
Credit derivative liabilities, at fair value 43 53
FG VIEs' liabilities, at fair value 399 554
Other liabilities 430 439
-------------------- ------ -------------------- -------------------- ------ --------------------
6,486 6,774
Total liabilities
Shareholders' equity
Common shares 1 1
Retained earnings 6,014 6,070
Accumulated other comprehensive income (loss) (387 ) (359 )
Deferred equity compensation 1 1
-------------------- ------ -------------------- -------------------- ------ --------------------
5,629 5,713
Total shareholders' equity attributable to AGL
53 52
Nonredeemable noncontrolling interests
-------------------- ------ -------------------- -------------------- ------ --------------------
5,682 5,765
Total shareholders' equity
-------------------- ------ -------------------- -------------------- ------ --------------------
Explanation of Non-GAAP Financial Measures
The Company discloses both: (i) financial measures determined in accordance with GAAP; and (ii) 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.
The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty's financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty's financial results.
GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include:
FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and CIVs in which certain subsidiaries invest.
The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty's financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.
Management of the Company and AGL's Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV 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 core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders' equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; and (4) PVP.
Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders' equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures 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. Management also believes that many of the Company's fixed income investors also use adjusted operating shareholders' equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company's capital adequacy.
Adjusted operating income, further adjusted for the effect of FG VIE and CIV 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 following paragraphs 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.
Adjusted Operating Income
Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted 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-related 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) 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.
See "Reconciliation to GAAP" above for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Adjusted Operating Shareholders' Equity and Adjusted Book Value
Management believes that adjusted operating shareholders' equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.
Adjusted 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-related 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). 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 would not recognize an economic gain or loss.
4) 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 adjusted book value, further adjusted to remove the effect of FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV 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 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. Adjusted book value is adjusted 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 present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.
4) 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 adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of Shareholders' Equity Attributable to AGL to
Adjusted Operating Shareholders' Equity and ABV
(in millions, except per share amounts)