American Overseas Group Limited Announces Q3 2012 Results (Excerpt)

Hamilton, Bermuda – 24 December, 2012 - American Overseas Group Limited (the “Company” or "AOG"; BSX Ticker: AORE.BH; Pink Sheets: AORE.PK) reported third quarter 2012 net income available to common shareholders of $5.8 million, or $2.20 per diluted share. This compares to net income available to common shareholders of $26.9 million, or $10.17 per diluted share, for the third quarter 2011. Net loss available to common shareholders for the nine month period ended September 30, 2012 was $1.1 million, or $0.41 per diluted share, compared to net income of $31.4 million, or $11.86 per diluted share, for the nine month period ended September 30, 2011.

During the third quarter of 2012, operating income, a non GAAP financial measure, was $0.9 million, or $0.35 per diluted share, compared to an operating loss of $8.0 million, or $3.02 per diluted share, during the third quarter of 2011. Operating income for the first nine months of 2012 was $2.7 million, or $1.01 per diluted share, compared to an operating loss of $5.7 million, or $2.13 per diluted share, for the nine month period ended September 30, 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, 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, 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.

Summary of Operating Results

Commenting on the financial results, the Company’s Chief Executive Officer, David Steel, noted that, “Our 2012 third quarter net income was largely the result of a $4.8 million net change in fair value of credit derivatives during the period. As noted in the past, we view operating income, which excludes among other items unrealized gains and losses on derivatives, as a better measure of quarterly performance. Our 2012 third quarter operating income of $0.9 million was largely driven by earned premiums net of our loss development primarily related to our US RMBS exposures. For the first nine months of 2012, operating income was $2.7 million.”

Earned premiums in the third quarter 2012 of $3.8 million were 7% lower than the $4.1 million earned in the third quarter 2011. After eliminating accelerated premiums from refundings of $1.1 million from total earned premiums, earned premiums in the third quarter 2012 were $2.7 million; this was the same as the comparable 2011 period, which included accelerated premiums from refundings of $1.4 million. Earned premiums for the nine month period ended September 30, 2012 of $12.2 million were 1% higher than the $12.1 million of earned premiums for the nine month period ended September 30, 2011. After eliminating accelerated premiums from refundings of $4.9 million, earned premiums for the first nine months of 2012 were $7.3 million; this was 22% lower than the comparable period in 2011, which included accelerated premiums from refundings of $2.8 million. The decrease in earned premiums in the first nine months of 2012 as compared to the respective 2011 period was primarily due to commutations and run off of the reinsured portfolio.

Net change in fair value of credit derivatives totaled a gain of $4.8 million in the third quarter of 2012, compared to a $34.2 million gain in the third quarter of 2011. Net change in fair value of credit derivatives for the third quarter of 2012 was comprised of $4.2 million in unrealized gains and $0.6 million of realized gains. Net change in fair value of credit derivatives for the third quarter of 2011 was comprised of $33.4 million in unrealized gains on derivatives, and $0.8 million of realized gains. The net unrealized gain in the third quarter 2012 was primarily attributable to: (i) the decrease in gross unrealized losses on credit derivative policies of $41.0 million as reported to us by our primary insurers, offset by (ii) the decrease in the adjustment for the Company’s own non-performance risk of $36.8 million. The decrease in gross unrealized losses on credit derivative policies was primarily due to improvements in pricing across the portfolio of collateralized debt obligations and other asset backed securities written in credit derivative form. 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 the ASC 820 requirement on AOG’s derivative liabilities on the balance sheet was a reduction of $71.6 million at September 30, 2012. Net change in fair value of credit derivatives for the nine month periods ended September 30, 2012 and 2011 were a $3.3 million loss and a $35.3 million gain, respectively.

Net investment income for the third quarter 2012 was $1.6 million, 33% below the $2.4 million recorded in the third quarter 2011. For the nine month period ended September 30, 2012, net investment income was $5.5 million, 24% below the $7.2 million recorded in the nine month period ended September 30, 2011. The decrease in investment income in the three and nine months ended September 30, 2012 was primarily the result of a decline in the book yield on the Company’s investments from 3.1% as of September 30, 2011, to 2.51% as of September 30, 2012.

Realized gains on investments for the third quarter 2012 were $0.4 million compared to $1.5 million in realized gains for the same period in 2011. For the nine month periods ended September 30, 2012 and 2011, realized gains on investments were $0.4 million and $2.2 million, respectively.

Losses and loss adjustment expenses were $1.7 million in the third quarter 2012, contributing to a loss ratio of 45%, compared to losses and loss adjustment expenses of $9.3 million and a loss ratio of 227% for the comparable 2011 period. For the nine month period ended September 30, 2012, losses and loss adjustment expenses were $5.8 million, contributing to a loss ratio of 48%, compared to losses of $12.9 million and a loss ratio of 107% for the comparable period in 2011. The decrease in the loss ratio during the nine months ended September 30, 2012 compared to the same period in 2011 was primarily attributable to adverse development on US residential mortgage backed securities (“RMBS”) policies in the first nine months of 2011.

Acquisition expenses were $1.5 million in the third quarter of 2012 compared to $3.7 million for the comparable 2011 period. Acquisition expenses for the nine months ended September 30, 2012 and 2011 were $5.3 million and $7.2 million, respectively. The decrease in acquisition expenses in the three and nine month periods ended September 30, 2012 was primarily due to the write off, during the nine months ended September 30, 2011, of $2.1 million on Deferred Acquisition Costs (“DAC”) which were considered irrecoverable. There was no such comparable write off for the nine months ended September 30, 2012. Excluding this write off, acquisition expenses are closely related to earned premiums, and the change in acquisition costs for the three and nine month periods ended September 30, 2012 and 2011 is consistent with the change in earned premiums in the respective periods.

Third quarter 2012 operating expenses of $1.6 million were $0.1 million, or 6%, below the level in the third quarter of 2011. For the nine months ended September 30, 2012 and 2011, operating expenses were $4.7 million and $5.3 million, respectively. The decrease in operating expenses reflects the Company’s cost reduction efforts.

Balance Sheet

Total assets of $374.3 million at September 30, 2012 were $26.9 million below the level at December 31, 2011. This decrease was primarily attributable to losses that were settled in 2012 as well as the reduction in DAC and net reinsurance balances receivable due to the run off of the Company’s reinsured portfolio. Shareholders' equity of $93.4 million at September 30, 2012 was $0.5 million, or 0.1%, below the level at December 31, 2011, primarily due to the net loss from operations for the first nine months of 2012. Book value per share was $34.96, a decrease of 1.6% from year-end 2011. Operating book value per share and adjusted operating book value per share, both of which are non-GAAP financial measures, were $52.45 and $77.14, respectively, at September 30, 2012, compared to $51.64 and $80.20, respectively, at December 31, 2011. 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 for a reconciliation of each to book value.

Subsequent Events:

FGIC Commutation

On October 22, 2012 the Company completed a commutation entered into by its operating subsidiary, American Overseas Reinsurance Company Limited (“AORE”) and Financial Guaranty Insurance Company (“FGIC”). Pursuant to the commutation, 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 would have resulted in a GAAP loss of approximately $13.7 million if it had been completed at September 30, 2012.

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.

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. More information can be found at www.aoreltd.com.

The Company will post its third quarter 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

SOURCE: American Overseas Group Limited