RAM Reports $2.8 Million In Losses
RAM Holdings, a Bermuda-based provider of financial guaranty reinsurance, today [Feb.4] reported losses of $2.8 million in the third quarter of 2010. Listed on the Bermuda Stock Exchange (BSX), RAM Holdings conducts substantially all of its operations through its wholly owned subsidiary, RAM Reinsurance Company Ltd.
RAM CEO David Steele said the third quarter performance resulted from an increase in the unrealised losses on the company’s reinsured credit derivative portfolio.
“For the first nine months of 2010, our net income was largely driven by gains on the previously announced repurchases of the company’s unsecured senior notes and a portion of the Series A preference shares,” he said. “In our view, the Company’s operating income for the third quarter and first nine months of 2010, which is defined later in this earnings release, reflects a better measure of the core financial performance of the company.”
Founded in 1998, RAM Holdings Ltd. was founded in 1998. The company provides financial guaranty reinsurance for public finance and structured finance obligations, covering risks in both the United States and international markets.
The full BSX bulletin on RAM’s third quarter earnings appears below:
RAM Holdings Ltd. reported third quarter 2010 net loss available to
common shareholders of $2.8 million, or a net loss of $0.11 per diluted share. This
compares to net income of $26.8 million, or net income of $1.02 per diluted share, for
the third quarter 2009. Net income available to common shareholders for the nine
months ended September 30, 2010, was $25.3 million or net income of $0.96 per diluted
share, compared to net income of $20.3 million or $0.76 per diluted share for the nine
months ended September 30, 2009.Commenting on the financial results, RAM Chief Executive Officer David Steel noted
that, “Our third quarter net loss was largely driven by an increase in the unrealized
losses on our reinsured credit derivative portfolio. For the first nine months of 2010, our
net income was largely driven by gains on the previously announced repurchases of the
Company’s unsecured senior notes and a portion of the Series A preference shares. In
our view, the Company’s operating income for the third quarter and first nine months of
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 (loss) income for the three and nine months ended September 30, 2010, was $(2.8)
million and $25.3 million, respectively. The Company’s net income is calculated in
conformity with U.S. generally accepted accounting principles (“GAAP”). RAM 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 earnings, 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.During the third quarter of 2010, operating income was $2.2 million, or $0.08 per diluted
share, compared to operating income of $2.4 million, or $0.09 per diluted share in the
third quarter 2009. Operating income for the first nine months of 2010 was $0.6 million
or $0.03 per diluted share, compared to an operating loss of $19.5 million or $0.74 per
diluted share for the first nine months of 2009.Earned premiums in the third quarter 2010 of $3.6 million were 53% lower than the $7.7
million earned in the third quarter of 2009. By eliminating accelerated premiums from
refundings of $0.3 million from total earned premiums, normal earned premiums in the
third quarter 2010 were $3.3 million, which was 3% higher than the comparative 2009
period, which included accelerated premiums from refundings of $4.5 million. Earned
premiums for the first nine months of 2010 were $11.5 million, including accelerated
premiums from refundings of $1.5 million. Earned premiums for the first nine months of
2010 were 51% lower than the $23.4 million of earned premiums for the first nine
months of 2009, which included accelerated premiums from refundings of $10.4 million.
After eliminating accelerated premiums from refundings, earned premiums for the first
nine months of 2010 and 2009, were $10.0 million and $13.0 million, respectively. This
reduction primarily reflects the reduction in ongoing earnings due to the commutation of
a treaty with Ambac Assurance Corporation (“Ambac”) in the first quarter of 2009.
Net change in fair value of credit derivatives totaled a loss of $6.6 million in the third
quarter 2010, which was $32.9 million less than the $26.3 million gain in the third
quarter of 2009. Net change in fair value of credit derivatives for the third quarters of
2010 and 2009 were comprised of $(7.5) million and $25.2 million of unrealized gains
(losses) on derivatives, respectively, and $0.9 million and $1.1 million of realized gains,
respectively. The net unrealized loss in the third quarter 2010 was primarily attributable
to: (i) the decrease in the adjustment for RAM’s own non-performance risk of $9.6
million, partially offset by (ii) the decrease in gross unrealized losses on credit derivative
policies of $2.1 million, primarily due to improvements in pricing on the residential
mortgage backed securities (“RMBS”) portion of the portfolio. In accordance with the
Financial Accounting Standards Board (“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
$119.8 million at September 30, 2010. Net change in fair value of credit derivatives for
the first nine months of 2010 and 2009 were $(2.7) million and $29.8 million,
respectively.Net investment income for the third quarter 2010 was $2.7 million, 21% below the $3.4
million recorded in the third quarter of 2009. For the first nine months of 2010, net
investment income was $8.7 million, 23% below the $11.3 million for the first nine
months of 2009. The decrease in investment income in the third quarter and nine
months ended September 30, 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”), Series A preference shares (“Series A Preference Shares”) and Class B
preference shares (“Class B Preference Shares”) of RAM Reinsurance Company Ltd.
(“RAM Re”), the operating subsidiary of the Company, during the first half of 2010.Realized gains on investments for the third quarter 2010 were $0.4 million compared to
$0.2 million in realized gains for the same period in 2009. Realized gains were offset by
$nil and $0.1 million of other-than-temporary impairment losses for the third quarter of
2010 and 2009, respectively. For the first nine months of 2010 and 2009, realized gains
on investments were $1.7 million and $8.3 million, respectively, offset by immaterial and
$1.7 million of other-than-temporary impairment losses, respectively.Net gains on extinguishment of debt of $15.3 million were recognized on the repurchase
of the Company’s remaining Notes during the first nine months of 2010. During the
comparable 2009 period, the Company repurchased $5.0 million of its Notes, realizing a
gain of $3.4 million. The Notes that were repurchased in each such period, were
cancelled immediately after such repurchase. Gains of $11.5 million were recognized on
the repurchase of 15,300 of the Company’s Series A Preference Shares during the first
nine months of 2010.Losses and loss adjustment expenses were $0.5 million in the third quarter 2010,
contributing to a loss ratio of 13%, compared to losses and loss adjustment expenses of
$3.6 million and a loss ratio of 48% for the comparable 2009 period. For the first nine
months of 2010, losses and loss adjustment expenses were $5.2 million, contributing to
a loss ratio of 45% compared to losses of $16.9 million and a loss ratio of 72% for the
comparable 2009 period. The improvement in the 2010 loss ratios is attributable to
several factors including improved delinquency experience and an increase in
representation and warranties repurchase credits on RAM’s exposure to insured RMBS
transactions.Acquisition expenses were $1.6 million in the third quarter of 2010 compared to $3.5
million for the comparable 2009 period. The decrease in acquisition expenses for the
third quarter of 2010 as compared to the comparable 2009 period was directly related to
the decline in earned premiums. For the first nine months of 2010, acquisition expenses
were $5.1 million, compared to $17.5 million for the comparable 2009 period. Acquisition
expenses for the first nine months of 2010 were $12.4 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 the above items, acquisition
expenses are closely related to earned premiums. Thus, the decrease in acquisition
expenses in the first nine months of 2010 as compared to the comparable 2009 period
was also due to the decrease in earned premiums in the period.Third quarter 2010 operating expenses of $1.8 million were $1.3 million, or 42%, below
the level in the third quarter of 2009. For the first nine months of 2010 and 2009,
operating expenses were $9.4 million and $13.2 million, respectively. 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 $427.9 million at September 30, 2010, were $29.9 million, or 7%, below
the level at December 31, 2009. This decrease is primarily related to the reduction in
invested assets due to the payments for the repurchase of the Notes and a portion of
the Series A Preference Shares of the Company along with a payment for the
repurchase of a portion of the Class B Preference Shares of RAM Re. Shareholders’
equity of $111.3 million was $35.5 million, or 47%, 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 nine months of 2010. Book value per share was $4.22, an
increase of 46% from year-end 2009. Operating book value and adjusted operating
book value per share, both of which are non-GAAP financial measures, were $5.67 and
$9.31 respectively at September 30, 2010, an increase of 35% and 9%, respectively,
from year-end 2009.Subsequent Events:
On December 22, 2010, RAM Re entered into a Settlement, Reassumption and Release
Agreement (the “Agreement”) with Assured Guaranty Corp. (“Assured”). The Agreement
provided, among other things, for RAM Re to make a $10.3 million payment to commute
seven policies previously assumed from Assured, with par in-force of $123.0 million as
of September 30, 2010, primarily relating to RMBS securities. In return, each party was
released from all liabilities and obligations of the commuted policies. The effect of this
transaction will be recorded by the Company in the fourth quarter of 2010.
In accordance with the terms of the Class B Preference Shares, RAM Re has called a
special general meeting of holders of Class B Preference Shares to be held on February
14, 2011, for the purpose of electing two additional directors as directors of RAM Re. A
copy of the proxy statement related to the meeting is available on the Company’s
website under “Investor Information – Annual Reports and Proxy Statements”.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 its current run off strategy, the financial results related to its
security repurchases 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 forwardlooking
statements.Among the factors that could cause actual results to differ materially are: (i) RAM’s
ability to execute its business strategy; (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 RAM Re has a concentration of its
reinsurance in force; (iv) legislative and regulatory developments; (v) changes in
regulation or tax laws applicable to RAM or its customers; (vi) more severe or more
frequent losses associated with RAM Re’s insured portfolio; (vii) losses on credit
derivatives; (viii) changes in RAM’s accounting policies and procedures that impact
RAM’s reported financial results; and (ix) other risks and uncertainties that have not
been identified at this time. RAM 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
RAM believes that the following non-GAAP financial measures included in this release
serve to supplement GAAP information and are meaningful to investors.
Operating earnings: The Company believes operating earnings are 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 earnings are 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: RAM
believes the presentation of operating and adjusted operating book value per share to
be useful because it gives a measure of the value of RAM, 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 1.80% at September 30, 2010, and 2.20% at December 31, 2009);
d. Unrealized appreciation or depreciation of investments; and
e. Non-controlling interest in subsidiary.Credit Impairments on Insured Credit Default Swap (“CDS”) Contracts: Management measures and monitors credit impairments on RAM Re’s credit derivatives, which are
expected to be paid out over the term of the credit default swap policies. The credit
impairments are a non-GAAP financial measure reported as management believes this
information to be useful to analysts and investors to review the results of our entire
portfolio of policies. Management considers credit derivative policies as a normal
extension of RAM Re’s financial guarantee business and reinsurance in substance.
RAM Holdings Ltd. is a Bermuda-based holding company. Its operating subsidiary,
RAM Reinsurance Company Ltd., provides financial guaranty reinsurance for U.S. and
international public finance and structured finance transactions. More information can be
found at www.ramre.com
