HAMILTON, Bermuda, May 1, 2013 (GLOBE NEWSWIRE) -- American Overseas Group Limited (BSX:AORE) (Pink Sheets:AORE) ("AOG" or the "Company") today reported a net loss available to common shareholders of $21.8 million, or $8.08 per diluted share, for the fourth quarter ended December 31, 2012. This compares to a net loss available to common shareholders of $30.5 million, or $11.55 per diluted share, for the fourth quarter ended December 31, 2011. Net loss available to common shareholders for the year ended December 31, 2012 was $22.9 million, or $8.58 per diluted share, compared to net income available to common shareholders of $0.9 million, or $0.34 per diluted share, for the year ended December 31, 2011.
During the fourth quarter of 2012, the operating loss, a non GAAP financial measure, was $9.5 million, or $3.54 per diluted share, compared to an operating loss of $11.0 million, or $4.15 per diluted share, during the fourth quarter of 2011. The operating loss during the full year 2012 was $6.9 million, or $2.57 per diluted share, compared to an operating loss of $16.6 million, or $6.29 per diluted share, for the full year 2011.
The Company's net income (loss) is calculated in conformity with U.S. generally accepted accounting principles ("GAAP"). The Company also provides information regarding its operating income (loss), a non-GAAP financial measure, because the Company's management and Board of Directors, as well as many research analysts and investors, also evaluate financial performance on the basis of operating income (loss), which excludes non-operating items such as realized investment gains or losses, unrealized gains or losses on credit derivatives and foreign currency gains or losses. Please refer to "Explanation of Non-GAAP Financial Measures" below for a description of operating income and for a reconciliation of operating income to net income.
Commenting on the financial results, the Company's Chief Executive Officer, David Steel, noted that, "Our 2012 full year net loss was largely the result of a $17.1 million unrealized loss within the change in fair value of credit derivatives during the year and a $13.2 million realized loss on our commutation with Financial Guaranty Insurance Company ("FGIC"). As noted in the past, we view operating income, which excludes unrealized gains and losses on derivatives, as a better measure of annual performance. Our full year operating loss of $6.9 million was largely driven by the loss on the FGIC commutation, which we viewed as an economically attractive settlement of all claims and liabilities with FGIC."
"In the fourth quarter of 2012 we completed the re-domestication of our operating subsidiary, American Overseas Reinsurance Company Limited ("AORE") from Bermuda to Barbados and began writing new business in the short-tail, non-catastrophe property/casualty reinsurance markets. This new business fits well with the long-tail run-off of the remaining financial guaranty portfolio. We plan to build our property/casualty book prudently as AORE emerges from run-off. The operating loss related to the property/casualty business for 2012 totaled $0.5 million."
FGIC Commutation
On October 22, 2012 AORE completed a commutation agreement with FGIC. Pursuant to the commutation agreement, AORE made a commutation payment to FGIC in the amount of $64.8 million in return for a full commutation and release of all of AORE's obligations to FGIC. The FGIC commutation resulted in a GAAP loss of $13.2 million.
Re-domestication
On December 7, 2012 AORE completed its re-domestication from Bermuda to Barbados. In connection with the re-domestication, the Barbados Financial Services Commission (the "Barbados FSC") licensed AORE as an Exempt Insurance Company in accordance with the Barbados Exempt Insurance Act 1983. AORE has engaged the services of a local Barbados management company and established a principal representative in Barbados. The Barbados FSC also approved AORE's business plan to begin writing property/casualty reinsurance while continuing to run-off its existing financial guaranty reinsurance portfolio.
Summary of Operating Results
The Company reported a net loss of $21.8 million for the quarter ended December 31, 2012 and a net loss of $22.9 million for the year then ended.
Earned premiums in the fourth quarter 2012 of $9.3 million were 151% higher than the $3.7 million earned in the fourth quarter 2011. After eliminating property/casualty earned premiums of $6.0 million and accelerated premiums from refundings of $1.5 million, core financial guarantee earned premiums in the fourth quarter of 2012 were $1.8 million. This was $0.6 million, or 25% lower than the core financial guarantee earned premiums of $2.4 million for the comparable period of 2011 after eliminating the accelerated premiums from refundings of $1.3 million. Earned premiums for the year ended December 31, 2012 were $21.5 million, including property/casualty earned premiums of $6.0 million and accelerated premiums from refundings of $6.4 million. Earned premiums for the 2012 year were 35.8% higher than the $15.8 million of earned premiums for the 2011 year, which included accelerated premiums from refundings of $4.1 million. After eliminating property casualty earned premiums and accelerated premiums from refundings, core financial guarantee earned premiums for the years ended December 31, 2012 and 2011 were $9.1 million and $11.7 million, respectively. The decrease in core financial guarantee earned premiums in the fourth quarter and full year 2012 as compared to the comparable 2011 periods was primarily due to commutations and run off of the insured portfolio.
Net change in fair value of credit derivatives totaled a loss of $11.5 million in the fourth quarter 2012, which was $6.7 million less than the $18.2 million loss in the fourth quarter of 2011. Net change in fair value of credit derivatives for the fourth quarters of 2012 and 2011 were comprised of $0.4 million and $0.7 million of realized gains, respectively, and $11.9 million and $18.9 million of unrealized losses on derivatives, respectively. The net unrealized loss in the fourth quarter 2012 was primarily attributable to (i) a decrease in the adjustment for the Company's own non-performance risk of $1.7 million, and (ii) an increase in gross unrealized losses on credit derivative policies of $10.2 million, the latter primarily due to the widening of credit spreads related to Trust preferred CDO contracts. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820 - "Fair Value Measurements and Disclosures" ("ASC 820"), the Company calculates an adjustment for its own non-performance risk. The effect of ASC 820 on the Company's derivative liabilities on its balance sheet was a reduction of approximately $69.9 million at December 31, 2012. Net change in fair value of credit derivatives was a $14.8 million loss in the full year 2012 and a $17.0 million loss in the full year 2011.
Net investment income for the fourth quarter 2012 was $1.4 million, 33% below the $2.1 million recorded in the fourth quarter 2011. For the full year 2012, net investment income was $7.0 million, 25% below the $9.3 million recorded in the full year 2011. The decrease in investment income in the fourth quarter and year ended December 31, 2012 was primarily due to a decrease in the book yield on the portfolio from 2.9% as of December 31, 2011 to 2.7% as of December 31, 2012 and the reduction of the size of the investment portfolio as a result of the commutation payment made to FGIC.
Realized gains on investments for the fourth quarter 2012 were $0.4 million compared to $0.1 million of realized gains on investments for the same period in 2011. For the full years ended December 31, 2012 and 2011, realized gains on investments were $0.7 million and $2.3 million, respectively.
Losses and loss adjustment expenses were $16.3 million in the fourth quarter 2012, contributing to a loss ratio of 175%, compared to losses and loss adjustment expenses of $13.2 million and a loss ratio of 352% for the comparable 2011 period. For the full year 2012, losses and loss adjustment expenses were $22.1 million, contributing to a loss ratio of 103%, compared to losses of $26.0 million and a loss ratio of 165% for the full year 2011. Losses and loss adjustment expenses during the fourth quarter and full year of 2012 included the loss on the FGIC commutation of $13.2 million and $4.7 million in reserves related to property/casualty business offset by a $1.7 million gain on the commutation of a print media whole business securitization. The decrease in the quarter and year ended December 31, 2012 loss ratios was primarily attributable to the Company's 2011 adverse loss development which included the Company's exposure to Greek sovereign debt, further adverse development on US residential mortgage backed securities ("RMBS") policies, declining revenues in a print media whole business securitization and the Chapter 9 bankruptcy filing of Jefferson County, Alabama.
Acquisition expenses were $3.8 million in the fourth quarter of 2012 compared to $3.5 million for the comparable 2011 period. Acquisition expenses for the full years 2012 and 2011 were $9.1 million and $10.7 million, respectively. The increase in acquisition expenses in the quarter ended December 31, 2012 as compared to the comparable 2011 period was primarily attributable to $1.72 million of acquisition expenses related to the property/casualty business. Acquisition expenses in the quarter and year ended December 31, 2011 were impacted by the write off of $1.8 million and $3.8 million, respectively, of deferred acquisition costs ("DAC") which were considered irrecoverable. Excluding these items, acquisition costs with respect to the business are closely related to earned premiums, and the change in acquisition expenses for the quarter and year ended December 31, 2012, as compared to prior year is consistent with the change in earned premiums in the respective periods.
Fourth quarter 2012 operating expenses of $1.5 million were $0.1 million, or 6%, below the level of operating expenses in the fourth quarter of 2011. For the full years ended December 31, 2012 and 2011, operating expenses were $6.2 million and $6.8 million, respectively. The decrease in operating expenses for the year ended December 31, 2012 as compared to 2011 was primarily due to (i) a decline in management fees; and (ii) a reduction in legal fees.
Balance Sheet
Total assets of $297.4 million at December 31, 2012 were $103.8 million, or 26%, below the level of total assets at December 31, 2011. This decrease was primarily related to the commutation payment to FGIC of $64.8 million and the settlement of prior claims payable of $20.5 million. Shareholders' equity of $70.0 million at December 31, 2012 was $23.9 million, or 25%, below the level of shareholders' equity at December 31, 2011, primarily due to the net loss in the full year 2012. Book value per share was $26.2, a decrease of 26% from year-end 2011, when book value per share was $35.5. Operating book value per share and adjusted operating book value per share, both of which are non-GAAP financial measures, were $48.4 and $66.6, respectively, at December 31, 2012, a decrease of 6% and 17%, respectively, from year-end 2011 when operating book value per share and adjusted operating book value per share were $51.6 and $80.2, respectively. The Company provides information regarding operating book value per share and adjusted operating book value per share because the Company's management and Board of Directors, as well as many research analysts and investors, evaluate book value on the basis of operating book value, the calculation of which includes adding back the unrealized gain or loss portion of the Company's derivative liability, excluding the impact of credit impairments. Please refer to "Explanation of Non-GAAP Financial Measures" below for a description of operating book value per share and adjusted operating book value per share and a reconciliation of those measures to book value per share.
Forward-Looking Statements
This release contains statements that may be considered "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, the Company's expectations respecting the volatility of its insured portfolio, losses, loss reserves and loss development, the adequacy and availability of its liquidity and capital resources, its current run off strategy, its strategy for writing other reinsurance businesses and its expense reduction measures. These statements are based on current expectations and the current views of the economic and operating environment and are not guarantees of future performance. A number of risks and uncertainties, including economic competitive conditions, could cause actual results to differ materially from those projected in forward-looking statements. The Company's actual results could differ materially from those expressed or implied in the forward-looking statements. Among the factors that could cause actual results to differ materially are: (i) the Company's ability to execute its business strategy, including with respect to new reinsurance businesses; (ii) changes in general economic conditions, including inflation, foreign currency exchange rates, interest rates and other factors; (iii) the loss of significant customers with which AORE has a concentration of its reinsurance in force; (iv) legislative and regulatory developments; (v) changes in regulations or tax laws applicable to the Company or AORE or its customers; (vi) more severe or more frequent losses associated with AORE's reinsured portfolio; (vii) losses on credit derivatives; (viii) changes in the Company's accounting policies and procedures that impact the Company's reported financial results; (ix) the effects of ongoing and future litigation and (x) other risks and uncertainties that have not been identified at this time. The Company undertakes no obligation to revise or update any forward-looking statement to reflect changes in conditions, events, or expectations, except as required by law.
Explanation of Non-GAAP Financial Measures
The Company believes that the following non-GAAP financial measures included in this release serve to supplement GAAP information and are meaningful to investors.
Operating income (loss): The Company believes operating income (loss) is a useful measure because it measures income from operations, unaffected by non-operating items such as realized investment gains or losses, unrealized gains or losses on credit derivatives and foreign currency gains or losses. Operating income (loss) is typically used by research analysts and rating agencies in their analysis of the Company.
Operating book value per share and adjusted operating book value per share: The Company believes the presentation of operating book value per share and adjusted operating book value per share to be useful because they give a measure of the value of the Company, excluding non-operating items such as unrealized gains and losses on credit derivatives. The Company derives operating book value by beginning with GAAP book value and adding back the unrealized gain or loss portion of its derivative liability, excluding the impact of credit impairments. Adjusted operating book value per share begins with operating book value as calculated above and then adding or subtracting the value of:
a. GAAP unearned premium reserves (on policies classified as financial guarantee);
b. Deferred acquisition costs;
c. Unearned premiums reserves and the present value of estimated future installment premiums net of ceding commissions on credit derivative policies (discounted at 0.72% at December 31, 2012, and 0.83% at December 31, 2011);
d. Unrealized appreciation or depreciation of investments; and
e. Noncontrolling interest in subsidiary – Class B preference shares.
Credit impairments on insured credit default swap ("CDS") contracts: Management measures and monitors credit impairments on AORE's credit derivatives, which are expected to be paid out over the term of the CDS contracts. The credit impairments are a non-GAAP financial measure which management believes to be useful to analysts and investors in reviewing the results of our entire portfolio of policies. Management considers credit derivative policies as a normal extension of AORE's financial guarantee business and reinsurance in substance.
Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are set forth below.
Information About the Company
American Overseas Group Limited is a Bermuda-based holding company. Its operating subsidiary, American Overseas Reinsurance Company Ltd., has historically provided financial guaranty reinsurance for U.S. and international public finance and structured finance transactions and in 2012 commenced writing short tail non-catastrophe property/casualty reinsurance. More information can be found at www.aoreltd.com.
| American Overseas Group Limited | ||
| Consolidated Balance Sheets | ||
| (unaudited) | ||
| As at December 31, 2012 and December 31, 2011 | ||
| (dollars in thousands) | ||
| December 31, 2012 | December 31, 2011 | |
| Assets | ||
| Investments: | ||
| Fixed-maturity securities held as available for sale, at fair value | ||
| (Amortized cost: $154,334 and $261,914) | $ 165,758 | $ 274,809 |
| Cash and cash equivalents | 36,317 | 13,253 |
| Restricted cash | 45,139 | 49,429 |
| Accrued investment income | 1,189 | 1,593 |
| Reinsurance balances receivable, net | 11,561 | 13,505 |
| Funds withheld | 1,533 | -- |
| Recoverables on paid losses | 6,687 | 6,158 |
| Deferred policy acquisition costs | 28,775 | 41,890 |
| Deferred expenses | 346 | 433 |
| Other assets | 90 | 153 |
| Total Assets | $ 297,396 | $ 401,223 |
| Liabilities and Equity | ||
| Liabilities: | ||
| Loss and loss expense reserve | $ 22,247 | $ 80,998 |
| Unearned premiums | 72,538 | 110,187 |
| Accounts payable and accrued liabilities | 698 | 1,121 |
| Derivative liabilities | 65,214 | 48,303 |
| Redeemable Series A preference shares ($1,000 redemption value and $0.10 par value; authorized shares - 75,000; issued and outstanding shares - 59,700 at December 31, 2012 and December 31, 2011) | 59,700 | 59,700 |
| Total Liabilities | 220,397 | 300,309 |
| Shareholders' Equity: | ||
| Common shares | 2,677 | 2,643 |
| Additional paid-in capital | 231,891 | 231,468 |
| Accumulated other comprehensive income | 11,424 | 12,895 |
| Retained deficit | (176,004) | (153,103) |
| Total Shareholders' Equity | 69,988 | 93,903 |
| Noncontrolling interest - Class B preference shares of subsidiary | 7,011 | 7,011 |
| Total Equity | 76,999 | 100,914 |
| Total Liabilities and Equity | $ 297,396 | $ 401,223 |
| American Overseas Group Limited | ||||
| Consolidated Statements of Operations | ||||
| (unaudited) | ||||
| For the three months and year ended December 31, 2012 and 2011 | ||||
| (dollars in thousands except share and per share amounts) | ||||
| Three Months Ended December 31, | Year Ended December 31, | |||
| 2012 | 2011 | 2012 | 2011 | |
| Revenues | ||||
| Net premiums earned | $ 9,316 | $ 3,739 | $ 21,508 | $ 15,837 |
| Change in fair value of credit derivatives | ||||
| Realized gains and other settlements | 425 | 667 | 2,271 | 1,439 |
| Unrealized gains (losses) | (11,886) | (18,905) | (17,073) | 15,596 |
| Net change in fair value of credit derivatives | (11,461) | (18,238) | (14,802) | 17,035 |
| Net investment income | 1,421 | 2,094 | 6,946 | 9,266 |
| Net realized gains on sale of investments | 382 | 142 | 737 | 2,348 |
| Total other-than-temporary impairment losses | -- | -- | -- | -- |
| Portion of impairment losses recognized in other comprehensive income (loss) | -- | -- | -- | -- |
| Net other-than-temporary impairment losses (recognized in earnings) | -- | -- | -- | -- |
| Foreign currency gains (losses) | 57 | (1) | 66 | (9) |
| Total revenues | (284) | (12,264) | 14,455 | 44,477 |
| Expenses | ||||
| Losses and loss adjustment expenses | 16,267 | 13,175 | 22,052 | 26,031 |
| Acquisition expenses | 3,771 | 3,512 | 9,114 | 10,712 |
| Operating expenses | 1,502 | 1,578 | 6,190 | 6,836 |
| Total expenses | 21,539 | 18,265 | 37,356 | 43,579 |
| Net income (loss) available to common shareholders | $ (21,823) | $ (30,529) | $ (22,901) | $ 898 |
| Net income (loss) per common share: | ||||
| Basic | $ (8.16) | $ (11.55) | $ (8.60) | $ 0.34 |
| Diluted | (8.08) | (11.55) | (8.58) | 0.34 |
| Weighted average number of common shares outstanding: | ||||
| Basic | 2,675,284 | 2,643,088 | 2,662,318 | 2,642,136 |
| Diluted | 2,699,807 | 2,643,088 | 2,669,800 | 2,647,818 |
| Reconciliation of net income (loss) to operating income (loss): | ||||
| (Dollars in thousands except share and per share amounts) | ||||
| Three Months Ended December 31, | Year Ended December 31, | |||
| 2012 | 2011 | 2012 | 2011 | |
| Operating income | ||||
| Net income (loss) available to common shareholders | $ (21,823) | $ (30,529) | $ (22,901) | $ 898 |
| Less: Realized (gains) on sale of investments and other-than-temporary impairment losses | (382) | (142) | (737) | (2,348) |
| Less: Unrealized (gains) losses on credit derivatives | 11,886 | 18,905 | 17,073 | (15,596) |
| Add back: credit impairment on derivatives | 828 | 786 | (254) | 388 |
| Less: Foreign currency (gains) losses | (57) | 1 | (66) | 9 |
| Operating loss | $ (9,549) | $ (10,979) | $ (6,885) | $ (16,649) |
| Net income (loss) per diluted share | $ (8.08) | $ (11.55) | $ (8.58) | $ 0.34 |
| Less: Realized (gains) on sale of investments and other-than-temporary impairment losses | (0.14) | (0.05) | (0.28) | (0.89) |
| Less: Unrealized (gains) losses on credit derivatives | 4.40 | 7.15 | 6.39 | (5.89) |
| Add back: credit impairment on derivatives | 0.31 | 0.30 | (0.10) | 0.15 |
| Less: Foreign currency (gains) losses | (0.02) | 0.00 | (0.02) | 0.00 |
| Operating loss per diluted share | $ (3.54) | $ (4.15) | $ (2.57) | $ (6.29) |
| Reconciliation of book value per share to operating book value per share and adjusted operating book value per share: | ||
| (Thousands except per share amounts) | ||
| As at | As at | |
| Dec 31, 2012 | Dec 31, 2011 | |
| Shares outstanding | 2,677 | 2,643 |
| Book Value Per Share | 26.15 | 35.53 |
| Shareholders' Equity (Book Value) | 69,988 | 93,903 |
| Derivative liability (1) | 64,953 | 47,880 |
| Credit impairments on derivatives | (5,537) | (5,283) |
| Operating book value per share | 48.35 | 51.64 |
| Noncontrolling interest in subsidiary - Class B preference shares | 7,011 | 7,011 |
| Unearned premiums (2) | 73,205 | 111,123 |
| Deferred acquisition costs | (28,775) | (41,890) |
| Present value of installment premiums (3) | 8,942 | 12,117 |
| Unrealized gains on investments | (11,424) | (12,895) |
| Adjusted operating book value per share | $ 66.64 | $ 80.20 |
(1) Represents the unrealized gains (losses) portion of the derivative liability.
(2) Includes unearned premium balances on financial guaranty and credit derivative policies. The unearned premiums on financial guaranty policies include the present value of future installment premiums, net of ceding commissions.
(3) Estimated present value of future installments, net of ceding commissions, on policies written in credit derivative form only. At December 31, 2012 and 2011, the discount rate was 0.72% and 0.83%, respectively.
The Company has posted its 2012 financial results to its website at www.aoreltd.com under "Investor Information". If you are a shareholder of American Overseas Group Limited and wish to receive a hard copy of the financial statements by mail, please contact:
American Overseas Group Limited
Maiden House, 1st Floor
131 Front Street
Hamilton, HM 12
Bermuda
Attention: David Steel
Telephone: 441-296-6501
Email: info@aoreltd.com