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Restatement of Previously Issued Financial Statements
3 Months Ended
Mar. 31, 2011
Restatement of Previously Issued Financial Statements 
Restatement of Previously Issued Financial Statements

2. Restatement of Previously Issued Financial Statements

 

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

 

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

 

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

 

 

 

As of March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

10,505.1

 

$

32.6

 

$

—

 

$

10,537.7

 

Cash

 

95.9

 

15.7

 

—

 

111.6

 

Premiums receivable, net of ceding commissions payable

 

1,118.0

 

—

 

—

 

1,118.0

 

Ceded unearned premium reserve

 

794.3

 

—

 

—

 

794.3

 

Deferred acquisition costs

 

236.0

 

—

 

—

 

236.0

 

Reinsurance recoverable on unpaid losses

 

18.6

 

—

 

—

 

18.6

 

Salvage and subrogation recoverable

 

1,057.0

 

—

 

—

 

1,057.0

 

Credit derivative assets

 

619.3

 

—

 

—

 

619.3

 

Deferred tax asset, net

 

1,004.5

 

23.9

 

3.3

 

1,031.7

 

Current income tax receivable

 

159.6

 

—

 

—

 

159.6

 

Financial guaranty variable interest entities’ assets, at fair value

 

3,679.0

 

—

 

—

 

3,679.0

 

Other assets

 

221.9

 

—

 

—

 

221.9

 

Total assets

 

$

19,509.2

 

$

72.2

 

$

3.3

 

$

19,584.7

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

Unearned premium reserve

 

$

6,637.2

 

$

—

 

$

—

 

$

6,637.2

 

Loss and loss adjustment expense reserve

 

407.9

 

—

 

11.7

 

419.6

 

Reinsurance balances payable, net

 

268.2

 

—

 

—

 

268.2

 

Long-term debt

 

1,049.7

 

—

 

—

 

1,049.7

 

Credit derivative liabilities

 

2,761.5

 

—

 

(2.2

)

2,759.3

 

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

 

2,757.8

 

116.4

 

—

 

2,874.2

 

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

 

1,373.0

 

—

 

—

 

1,373.0

 

Other liabilities

 

359.4

 

—

 

—

 

359.4

 

Total liabilities

 

15,614.7

 

116.4

 

9.5

 

15,740.6

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Common stock

 

1.8

 

—

 

—

 

1.8

 

Additional paid-in capital

 

2,589.2

 

—

 

—

 

2,589.2

 

Retained earnings

 

1,215.9

 

(45.0

)

(6.2

)

1,164.7

 

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

 

85.6

 

0.8

 

—

 

86.4

 

Deferred equity compensation

 

2.0

 

—

 

—

 

2.0

 

Total shareholders’ equity

 

3,894.5

 

(44.2

)

(6.2

)

3,844.1

 

Total liabilities and shareholders’ equity

 

$

19,509.2

 

$

72.2

 

$

3.3

 

$

19,584.7

 

 

 

 

As of December 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

 

Total investment portfolio

 

$

10,729.9

 

$

11.0

 

$

—

 

$

10,740.9

 

Cash

 

107.2

 

1.2

 

—

 

108.4

 

Premiums receivable, net of ceding commissions payable

 

1,167.6

 

—

 

—

 

1,167.6

 

Ceded unearned premium reserve

 

821.8

 

—

 

—

 

821.8

 

Deferred acquisition costs

 

239.8

 

—

 

—

 

239.8

 

Reinsurance recoverable on unpaid losses

 

22.3

 

—

 

—

 

22.3

 

Salvage and subrogation recoverable

 

1,032.4

 

—

 

—

 

1,032.4

 

Credit derivative assets

 

592.9

 

—

 

—

 

592.9

 

Deferred tax asset, net

 

1,224.0

 

32.1

 

3.0

 

1,259.1

 

Financial guaranty variable interest entities’ assets, at fair value

 

4,334.4

 

—

 

(676.9

)

3,657.5

 

Other assets

 

199.2

 

—

 

—

 

199.2

 

Total assets

 

$

20,471.5

 

$

44.3

 

$

(673.9

)

$

19,841.9

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

Unearned premium reserve

 

$

6,972.9

 

$

—

 

$

—

 

$

6,972.9

 

Loss and loss adjustment expense reserve

 

563.0

 

—

 

11.4

 

574.4

 

Reinsurance balances payable, net

 

274.4

 

—

 

—

 

274.4

 

Long-term debt

 

1,052.9

 

—

 

—

 

1,052.9

 

Credit derivative liabilities

 

2,465.5

 

—

 

(2.7

)

2,462.8

 

Current income tax payable

 

93.0

 

—

 

—

 

93.0

 

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

 

2,927.0

 

103.9

 

—

 

3,030.9

 

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

 

2,014.1

 

—

 

(676.9

)

1,337.2

 

Other liabilities

 

309.9

 

—

 

—

 

309.9

 

Total liabilities

 

16,672.7

 

103.9

 

(668.2

)

16,108.4

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Common stock

 

1.8

 

—

 

—

 

1.8

 

Additional paid-in capital

 

2,585.4

 

—

 

—

 

2,585.4

 

Retained earnings

 

1,098.9

 

(60.7

)

(5.7

)

1,032.5

 

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

 

110.7

 

1.1

 

—

 

111.8

 

Deferred equity compensation

 

2.0

 

—

 

—

 

2.0

 

Total shareholders’ equity

 

3,798.8

 

(59.6

)

(5.7

)

3,733.5

 

Total liabilities and shareholders’ equity

 

$

20,471.5

 

$

44.3

 

$

(673.9

)

$

19,841.9

 

 

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

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

254.0

 

$

—

 

$

—

 

$

254.0

 

Net investment income

 

96.4

 

(0.3

)

—

 

96.1

 

Net realized investment gains (losses)

 

2.8

 

—

 

—

 

2.8

 

Net change in fair value of credit derivatives

 

(235.7

)

—

 

(0.5

)

(236.2

)

Fair value gain (loss) on committed capital securities

 

0.5

 

—

 

—

 

0.5

 

Net change in financial guaranty variable interest entities

 

93.9

 

25.7

 

—

 

119.6

 

Other income

 

42.2

 

—

 

—

 

42.2

 

Total revenues

 

254.1

 

25.4

 

(0.5

)

279.0

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

(27.0

)

1.2

 

0.3

 

(25.5

)

Interest and other operating expenses

 

89.0

 

—

 

—

 

89.0

 

Total expenses

 

62.0

 

1.2

 

0.3

 

63.5

 

Income (loss) before income taxes

 

192.1

 

24.2

 

(0.8

)

215.5

 

Provision (benefit) for income taxes

 

 

 

 

 

 

 

 

 

Current

 

(197.6

)

—

 

—

 

(197.6

)

Deferred

 

264.3

 

8.5

 

(0.3

)

272.5

 

Total provision (benefit) for income taxes

 

66.7

 

8.5

 

(0.3

)

74.9

 

Net income (loss)

 

$

125.4

 

$

15.7

 

$

(0.5

)

$

140.6

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

 

 

 

 

$

0.76

 

Diluted

 

$

0.67

 

 

 

 

 

$

0.75

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

Net earned premiums

 

$

319.6

 

$

(4.9

)

$

—

 

$

314.7

 

Net investment income

 

84.3

 

—

 

—

 

84.3

 

Net realized investment gains (losses)

 

9.4

 

—

 

—

 

9.4

 

Net change in fair value of credit derivatives

 

278.8

 

—

 

—

 

278.8

 

Fair value gain (loss) on committed capital securities

 

(1.3

)

—

 

—

 

(1.3

)

Net change in financial guaranty variable interest entities

 

(10.6

)

1.7

 

—

 

(8.9

)

Other income

 

(12.9

)

—

 

—

 

(12.9

)

Total revenues

 

667.3

 

(3.2

)

—

 

664.1

 

Expenses

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses

 

130.5

 

(14.2

)

(5.4

)

110.9

 

Interest and other operating expenses

 

99.9

 

—

 

—

 

99.9

 

Total expenses

 

230.4

 

(14.2

)

(5.4

)

210.8

 

Income (loss) before income taxes

 

436.9

 

11.0

 

5.4

 

453.3

 

Provision (benefit) for income taxes

 

 

 

 

 

 

 

 

 

Current

 

(39.0

)

—

 

—

 

(39.0

)

Deferred

 

153.9

 

3.9

 

1.0

 

158.8

 

Total provision (benefit) for income taxes

 

114.9

 

3.9

 

1.0

 

119.8

 

Net income (loss)

 

$

322.0

 

$

7.1

 

$

4.4

 

$

333.5

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.74

 

 

 

 

 

$

1.81

 

Diluted

 

$

1.69

 

 

 

 

 

$

1.75

 

 

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

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Net income

 

$

125.4

 

$

15.7

 

$

(0.5

)

$

140.6

 

Unrealized holding gains (losses) arising during the period

 

(25.2

)

(0.3

)

—

 

(25.5

)

Less: reclassification adjustment for gains (losses)

 

1.0

 

—

 

—

 

1.0

 

Change in net unrealized gains on investments

 

(26.2

)

(0.3

)

—

 

(26.5

)

Change in cumulative translation adjustment

 

1.2

 

—

 

—

 

1.2

 

Change in cash flow hedge

 

(0.1

)

—

 

—

 

(0.1

)

Other comprehensive income(loss)

 

(25.1

)

(0.3

)

—

 

(25.4

)

Comprehensive income (loss)

 

$

100.3

 

$

15.4

 

$

(0.5

)

$

115.2

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

(2)
Other
Adjustments

 

Restated

 

 

 

(in millions)

 

Net income

 

$

322.0

 

$

7.1

 

$

4.4

 

$

333.5

 

Unrealized holding gains (losses) arising during the period

 

9.2

 

—

 

—

 

9.2

 

Less: reclassification adjustment for gains (losses)

 

6.6

 

—

 

—

 

6.6

 

Change in net unrealized gains on investments

 

2.6

 

—

 

—

 

2.6

 

Change in cumulative translation adjustment

 

(3.9

)

—

 

—

 

(3.9

)

Change in cash flow hedge

 

(0.1

)

—

 

—

 

(0.1

)

Other comprehensive income(loss)

 

(1.4

)

—

 

—

 

(1.4

)

Comprehensive income (loss)

 

$

320.6

 

$

7.1

 

$

4.4

 

$

332.1

 

 

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

 

 

 

Three Months Ended March 31, 2011

 

 

 

As
Previously
Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

Restated

 

 

 

(in millions)

 

Net cash flows provided by (used in) operating activities

 

$

(158.2

)

$

36.1

 

$

(122.1

)

Investing activities

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

Purchases

 

(511.7

)

—

 

(511.7

)

Sales

 

299.9

 

—

 

299.9

 

Maturities

 

184.2

 

(0.6

)

183.6

 

Net sales (purchases) of short-term investments

 

263.3

 

(21.0

)

242.3

 

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

 

162.5

 

—

 

162.5

 

Other

 

4.2

 

—

 

4.2

 

Net cash flows provided by (used in) investing activities

 

402.4

 

(21.6

)

380.8

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

(8.3

)

—

 

(8.3

)

Share activity under option and incentive plans

 

(2.3

)

—

 

(2.3

)

Net paydowns of financial guaranty variable interest entities’ liabilities

 

(241.6

)

—

 

(241.6

)

Repayment of long-term debt

 

(5.1

)

—

 

(5.1

)

Net cash flows provided by (used in) financing activities

 

(257.3

)

—

 

(257.3

)

Effect of exchange rate changes

 

1.8

 

—

 

1.8

 

Increase (decrease) in cash

 

(11.3

)

14.5

 

3.2

 

Cash at beginning of period

 

107.2

 

1.2

 

108.4

 

Cash at end of period

 

$

95.9

 

$

15.7

 

$

111.6

 

 

 

 

Three Months Ended March 31, 2010

 

 

 

As
Previously
Filed

 

(1)
Financial
Guaranty
VIE
Eliminations

 

Restated

 

 

 

(in millions)

 

Net cash flows provided by (used in) operating activities

 

$

(236.6

)

$

26.2

 

$

(210.4

)

Investing activities

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

Purchases

 

(418.0

)

—

 

(418.0

)

Sales

 

187.8

 

—

 

187.8

 

Maturities

 

265.3

 

—

 

265.3

 

Net sales (purchases) of short-term investments

 

246.0

 

(26.2

)

219.8

 

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

 

60.7

 

—

 

60.7

 

Other

 

4.8

 

—

 

4.8

 

Net cash flows provided by (used in) investing activities

 

346.6

 

(26.2

)

320.4

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

(8.3

)

—

 

(8.3

)

Share activity under option and incentive plans

 

(2.6

)

—

 

(2.6

)

Net paydowns of financial guaranty variable interest entities’ liabilities

 

(46.2

)

—

 

(46.2

)

Repayment of long-term debt

 

(6.3

)

—

 

(6.3

)

Net cash flows provided by (used in) financing activities

 

(63.4

)

—

 

(63.4

)

Effect of exchange rate changes

 

(0.2

)

—

 

(0.2

)

Increase (decrease) in cash

 

46.4

 

—

 

46.4

 

Cash at beginning of period

 

44.1

 

—

 

44.1

 

Cash at end of period

 

$

90.5

 

$

—

 

$

90.5

 

 

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

 

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

 

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