RAM Holdings Earnings Rebound
Bermuda-based Ram Holdings Ltd. has reported net earnings of $26.3 million for the second quarter of 2010 — a sharp turn-around from the $4.6 million loss reported in the same period last year.
In a letter to shareholders released today (Dec. 14), Ram Holdings CEO David Steel said the company’s income had rebounded largely as a result of a Senior Note repurchase programme along with decreases in unrealised losses on its reinsured credit derivative portfolio. In addition, he said the BSX-listed company had reduced operating expenses throughout 2010 and made staff reductions.
Operating through wholly owned subsidiary RAM Reinsurance (RAM Re), Bermuda-domiciled RAM Holdings provides financial guaranty reinsurance. The company’s customers are primary financial guaranty insurers — such as Assured Guaranty, Financial Guaranty Insurance, and Syncora Guaranty — who cede some of the risk of their financial guaranty policies to RAM Re. (Financial guaranty insurance protects investors in bonds and other securities against non-payment of debt). The firm takes on reinsurance risk for public finance and structured finance obligations originated in the US and internationally.
Mr. Steel’s full letter to shareholders appears below:
RAM Holdings Ltd.eported second quarter 2010 net income available to common shareholders of $26.3 million, or net income of $1.00 per diluted share. This compares to a net loss of $4.6 million, or a net loss of $0.17 per diluted share, for the second quarter 2009.
Commenting on financial results, RAM Chief Executive Officer David Steel noted that, “Our second quarter net income was largely driven by a gain on the previously announced repurchase of the Company’s remaining Senior Notes, along with decreases in unrealized losses on our reinsured credit derivative portfolio. In our view, the Company’s operating income for the second quarter 2010, which is defined later in this earnings release, reflects a better measure of the core financial performance of the Company.”
Summary of Operating Results
Net income was $26.3 million for the quarter ended June 30, 2010. While net income is calculated in conformity with US generally accepted accounting principles (GAAP), RAM provides other information 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 earnings, which excludes realized investment gains or losses, unrealized gains or losses on credit derivatives, foreign currency gains or losses and other one-time gains or losses.
During the second quarter of 2010, operating income was $2.2 million, or $0.08 per diluted share, compared to an operating loss of $6.4 million, or $0.24 per diluted share in the second quarter 2009.
Earned premiums in the quarter of $4.2 million were 35% lower than the $6.5 million earned in the second quarter of 2009. By eliminating accelerated premiums from refundings of $1.0 million from total earned premiums, normal earned premiums in the second quarter 2010 were $3.2 million, which was 7% higher than the comparative 2009 period, which included accelerated premiums from refundings of $3.5 million.
Net change in fair value of credit derivatives totaled a gain of $13.0 million in the second quarter 2010, which was $22.4 million more than the $9.4 million loss in the second quarter of 2009. Net change in fair value of credit derivatives for the second quarters of 2010 and 2009 were comprised of $12.0 million and $(10.5) million of unrealized gains (losses) on derivatives, respectively, and $1.0 million and $1.1 million of realized gains, respectively.
The net unrealized gain in the second quarter 2010 was primarily attributable to (i) the decrease in gross unrealized losses on credit derivative policies of $6.6 million due to improvements in pricing on the non-CDO and RMBS portions of the portfolio, and (ii) the increase in the adjustment for RAM’s own non-performance risk of $4.9 million.
In accordance with The FASB Accounting Standards Codification 820 -“Fair Value Measurements and Disclosures” (“ASC 820”) RAM calculates an adjustment for its own non-performance risk. The effect of the ASC 820 requirement on RAM’s derivative liabilities on the balance sheet was a reduction of approximately $130.7 million at June 30, 2010.
Net investment income for the second quarter 2010 was $2.8 million, 20% below the $3.5 million recorded in the second quarter of 2009. The decrease in investment income in the second quarter 2010 is primarily the result of a decrease in cash and invested assets due to payments on commutations in 2009 totaling $99.2 million, together with a decrease of $25.3 million in cash and invested assets due to payments associated with the repurchases of the Company’s unsecured senior notes (the “Notes”) and Series A and B preference shares during the first half of 2010.
Realized gains on investments for the second quarter 2010 were $0.9 million compared to $3.5 million in realized gains for the same period in 2009. Realized gains were offset by immaterial other-than-temporary impairment losses for the second quarter of 2010 compared to $0.6 million for the comparable 2009 period.
Net realized gains of $10.8 million were recognized on the repurchase of the Company’s remaining Notes during the second quarter 2010. During the comparable quarter ended June 30, 2009, the Company repurchased $5.0 million of its Notes, realizing a gain of $3.4 million. The Notes that were repurchased were cancelled immediately after such repurchase.
Losses and loss adjustment expenses were $(1.2) million in the second quarter 2010, contributing to a loss ratio of (29)%. This loss ratio is attributable to several factors including improved delinquency experience and an increase in representation and warranties repurchase credit on RAM’s exposure to insured transactions with residential mortgage-backed securities. This compares to $(3.5) million of incurred losses in the comparable 2009 period.
Acquisition expenses were $1.9 million in the second quarter of 2010 compared to $10.0 million for the comparable 2009 period. Acquisition expenses for the second quarter 2010 are $8.1 million below the comparable 2009 period primarily due to the following items recorded in 2009, (i) the write off of $4.7 million of Deferred Acquisition Costs (“DAC”) which were not considered recoverable, and (ii) an increase in the recognition of previously deferred operating expenses of $1.9 million due to the commutation with Ambac.
Apart from these non-recurring items such as DAC write-off, acquisition expenses are closely related to earned premiums. Thus the decrease in acquisition expenses in the second quarter 2010 as compared to the comparable 2009 period was also due to the decrease in earned premiums in the period. Second quarter 2010 operating expenses of $3.7 million were $1.2 million, or 24%, below the level in the second quarter of 2009.
The decrease in operating expenses for 2010 as compared to 2009 is primarily due to (i) reductions in staff made during 2009 and 2010 and (ii) other expense reducing measures taken in 2009 such as de-listing from the NASDAQ and withdrawal of RAM Re’s financial strength ratings, which had their full impact in 2010.
Balance Sheet Total assets of $427.7 million at June 30, 2010, were $30.1 million, or 7%, below the level at December 31, 2009. This decrease is primarily related to the reduction in invested assets due to the payment for the repurchase of the Notes and Series A and B preference shares. Shareholders’ equity of $110.4 million was $34.6 million, or 46%, above the level at December 31, 2009, primarily due to the improvement in unrealized gains on investments together with net income earned in the first six months of 2010. Book value per share was $4.18, an increase of 45% from year-end 2009. Operating book value and
adjusted operating book value per share, both of which are non-GAAP financial measures, were $5.40 and $9.25 respectively at June 30, 2010, an increase of 29% and 8%, respectively, from year-end 2009.
