American Overseas Group Q/3 Earnings
American Overseas Group Limited today [Dec.20] reported net income available to common shareholders of $26.9 million, or a net income of $1.02 per diluted share for the third quarter ended September 30, 2011.
This compares to a net loss of $2.8 million, or a net loss of $0.11 per diluted share, for the third quarter ended September 30, 2010.
Net income available to common shareholders for the nine month period ended September 30, 2011 was $31.4 million, or net income of $1.19 per diluted share, compared to net income of $25.3 million, or $0.96 per diluted share, for the nine month period ended September 30, 2010.
The company’s net income is calculated in conformity with US 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 realised investment gains or losses, unrealised gains or losses on credit derivatives and foreign currency gains or losses.
During the third quarter of 2011, the operating loss, a non GAAP financial measure, was $8.0 million, or $0.30 per diluted share, compared to operating income of $2.2 million, or $0.08 per diluted share, during the third quarter of 2010.
The operating loss during the nine month period ended September 30, 2011 was $5.7 million, or $0.21 per diluted share, compared to an operating income of $0.6 million, or $0.03 per diluted share, for the nine month period ended September 30, 2010.
Commenting on the financial results, the company’s CEO, David Steel, noted that, “Our third quarter net income was largely the result of a $33.4 million unrealised gain within the change in fair value of credit derivatives during the period.
“As I have pointed out in the past, we view operating income, which excludes unrealised gains on derivatives, as a better measure of quarterly performance. In the third quarter our operating income suffered from a pick-up in losses on our insured financial guaranty portfolio.
“The losses were related to further loss development on US RMBS, declining revenues in a print media whole business securitisation and the Chapter 9 Bankruptcy filing of Jefferson County, Alabama. In addition, our reserves also increased due to declining interest rates, which reduced the discount rates we use to calculate them.
“In Q3 2011 we continued work on our plan to begin writing new business in the short-tail, non-catastrophe property/casualty reinsurance markets. Any such new business remains subject to regulatory approval. In connection with this strategic initiative, we are pleased to announce our change of name and new address.”
Name Change and New Address
The company has discontinued writing financial guaranty reinsurance and is currently considering writing new lines of business, specifically short-tail, non-catastrophe, property/casualty reinsurance.
In connection with the company’s new business focus and to reflect the run-off of the financial guaranty business line, on December 2, 2011, as previously approved by the company’s shareholders, the company changed its name from RAM Holdings Ltd. to American Overseas Group Limited and the name of its operating subsidiary, RAM Reinsurance Company Ltd., to American Overseas Reinsurance Company Limited. The company’s ticker symbol on the OTC Pink Sheets, which was previously “RAMR.PK”, was changed effective December 19, 2011, to “AORE.PK”.
The company’s ticker symbol with the Bermuda Stock Exchange is “RAMR.BH” and the company has applied for the ticker to be changed to “AORE.BH”.
The Bermuda Stock Exchange is working with Bloomberg to reflect this change. The company has also moved its corporate offices to Schroders House, 131 Front Street, Hamilton, HM 12, Bermuda.
Commutations and Settlements
Effective September 14, 2011, the Operating Subsidiary entered into a settlement agreement with one of the ceding companies from its financial guaranty business line. The agreement provided, among other things, for the operating subsidiary to make a $1.2 million commutation payment to terminate the reinsurance with respect to certain policies previously assumed, with par in-force of $26.2 million. In return, each party was released from all liabilities and obligations with respect to the released risks. In addition the agreement includes, agreements regarding certain retained risk that will continue to be covered under the existing treaty. The effect of the agreement on the company’s results of operations was a gain of $0.1 million.
Summary of Operating Results
Net income for the quarter and nine month period ended September 30, 2011 was $26.9 million and $31.4 million, respectively.
Earned premiums in the third quarter 2011 of $4.1 million, were 14% higher than the $3.6 million earned in the third quarter 2010. After eliminating accelerated premiums from refundings of $1.4 million from total earned premiums, core earned premiums in the third quarter 2011 were $2.7 million; this was $0.6 million, or 18%, lower than the core earned premiums during the comparable period in 2010, which included accelerated premiums from refundings of $0.3 million. Earned premiums for the nine month period ended September 30, 2011 were $12.1 million, including accelerated premiums from refundings of $2.8 million. Earned premiums for the nine month period ended September 30, 2011 were 5% higher than the $11.5 million of earned premiums for the nine month period ended September 30, 2010, which included accelerated premiums from refundings of $1.5 million. After eliminating accelerated premiums from refundings, earned premiums for the nine month periods ended September 30, 2011 and 2010, were $9.3 million and $10.0 million, respectively.
Net change in fair value of credit derivatives totaled a gain of $34.2 million in the third quarter 2011, which was $40.8 million more than the $6.6 million loss in the third quarter of 2010. Net change in fair value of credit derivatives for the third quarters of 2011 and 2010 were comprised of $0.8 million and $0.9 million of realized gains, respectively, and $33.4 million and $(7.5) million of unrealized gains/losses on derivatives, respectively. The net unrealised gain in the third quarter 2011 was primarily attributable to (i) the increase in the adjustment for the company’s own non-performance risk of $40.2 million, partially offset by (ii) the increase in gross unrealized losses on credit derivative policies of $6.8 million. The increase in gross unrealized losses on credit derivative policies was primarily due to the widening of credit spreads in the market.
In accordance with the Financial Accounting Standards Board 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 the ASC 820 requirement on the company’s derivative liabilities on its balance sheet was a reduction of approximately $115.2 million at September 30, 2011. Net change in fair value of credit derivatives for the nine month period ended September 30, 2011 and 2010 were $35.3 million and $(2.7) million, respectively.
Net investment income for the third quarter 2011 was $2.4 million, 11% below the $2.7 million recorded in the third quarter 2010. For the nine month period ended September 30, 2011, net investment income was $7.2 million, 17% below the $8.7 million recorded in the nine month period ended September 30, 2010. The decrease in investment income in the three and nine month periods ended September 30, 2011 was primarily due to a decrease in the book yield on the portfolio from 3.6% as of September 30, 2010 to 3.1% as of September 30, 2011.
Realised gains on investments for the third quarter 2011 were $1.5 million compared to $0.4 million in realized gains for the same period in 2010. For the nine month periods ended September 30, 2011 and 2010, realised gains on investments were $2.2 million and $1.7 million, respectively.
During the nine month period ended September 30, 2010, net gains on extinguishment of debt of $15.3 million were recognized on the repurchase of the remaining portion of the Company’s unsecured senior notes. Gains of $11.5 million were recognized on the repurchase of 15,300 of the Company’s Series A preference shares during the nine month period ended September 30, 2010. During the nine month period ended September 30, 2011, there were no such repurchase activities.
Losses and loss adjustment expenses were $9.3 million in the third quarter 2011, contributing to a loss ratio of 228%, compared to losses and loss adjustment expenses of $0.5 million and a loss ratio of 13% for the comparable 2010 period. For the nine month period ended September 30, 2011, losses and loss adjustment expenses were $12.9 million, contributing to a loss ratio of 106%, compared to losses of $5.2 million and a loss ratio of 45% for the comparable period in 2010. The increase in the three and nine month periods ended September 30, 2011 loss ratios was primarily attributable to further adverse development on US residential mortgage backed securities [RMBS] policies, along with declining revenues in a print-media whole business securitisation and due to the Chapter 9 bankruptcy filing of Jefferson County, Alabama. Reserves also increased due to the general decline in interest rates, which caused the discount rates used to value the reserves to decrease.
Acquisition expenses were $3.7 million in the third quarter of 2011 compared to $1.6 million for the comparable 2010 period. Acquisition expenses for the nine month periods ended September 30, 2011 and 2010 were $7.2 million and $5.1 million, respectively. The increase in acquisition expenses in the three and nine month periods ended September 30, 2011 as compared to the respective comparable 2010 periods was primarily due to the write off of $2.1 million of DAC [Deferred Acquisition Costs] which are considered irrecoverable. Excluding this write off, acquisition expenses are closely related to earned premiums, and the change in acquisition expenses for the three and nine month periods ended September 30, 2011 as compared to prior year, is consistent with the change in earned premiums in the respective periods.
Third quarter 2011 operating expenses of $1.7 million were $0.1 million, or 6%, below the level of operating expenses in the third quarter of 2010. For the nine month periods ended September 30, 2011 and 2010, operating expenses were $5.3 million and $9.4 million, respectively. The decrease in operating expenses for the nine month period ended September 30, 2011 as compared to 2010 was primarily due to (i) reductions in staff made during May 2010, (ii) a decline in legal fees and (iii) non-recurring expenses in 2010 relating to the repurchase of a portion of the Company’s Series A Preference Shares and a portion of the Class B preference shares of the operating subsidiary.
Balance Sheet
Total assets of $403.3 million at September 30, 2011 were $5.1 million, or 1%, below the level of total assets at December 31, 2010. This decrease was primarily related to the reduction in deferred policy acquisition costs with the run off of the Company’s financial guaranty reinsurance portfolio and the write off of DAC discussed above. Shareholders’ equity of $124.6 million was $33.8 million, or 37%, above the level of shareholders’ equity at December 31, 2010, primarily due to the net income earned in the nine month period ended September 30, 2011. Book value per share was $4.71, an increase of 37% from year-end 2010. Operating book value and adjusted operating book value per share, both of which are non-GAAP financial measures, were $5.58 and $8.46, respectively, at September 30, 2011, a decrease of 1% and 9%, respectively, from year-end 2010.
Reverse Stock Split
On November 8, 2011, as previously approved by the company’s shareholders, the company effected a reverse stock split of its issued common shares. The company’s issued common shares of par value US$0.10 each were consolidated into common shares of par value US$1.00 each on a 1 for 10 basis.
After the consolidation, a portion of the company’s additional paid in capital account was capitalised in order to issue fractions of common shares to any common shareholder who held a fraction of a common share as a result of the Consolidation, in order to round up any fractional shares to the next whole share. A total of 65.1 common shares were issued to effect this round up of fractional shares.
Appropriate adjustments will be made in the company’s year-end 2011 financial statements, to the shareholders’ equity account on the company’s balance sheet, and to the notes to the company’s financial statements, to reflect the changes in the number of issued shares and the par value. The company does not anticipate that any other accounting consequences, including material changes to the amount of stock-based compensation expense to be recognised in any period, will arise as a result of the consolidation.
Net income/loss per share will increase as a result of the consolidation because there will be fewer common shares outstanding, although the consolidation will have no effect on the company’s aggregate earnings.
Subsequent to the consolidation, the issued shares impacted by the consolidation will have a par value of $1.00 per share. The remaining unissued shares which are not subject to the consolidation will continue to have a par value of $0.10 per share.
