Assured Guaranty Ltd. — Q1 2022 Form 10-Q
Business context and period. Bermuda-based financial guaranty insurer and asset manager. This unaudited report covers the three months ended March 31, 2022, compared with Q1 2021. Results include consolidated financial guaranty and investment vehicles, which can materially affect reported assets, liabilities, cash flows and fair-value income.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Prior comparable / date |
|---|---|---|
| Total revenue | $300 million | $177 million |
| Net income attributable to AGL | $66 million; diluted EPS $0.98 | $11 million; diluted EPS $0.14 |
| Adjusted operating income (non-GAAP) | $90 million; $1.34 per diluted share | $43 million; $0.55 per diluted share |
| Operating cash flow | $(892) million consolidated; $(640) million before VIE/CIV consolidation | $(466) million consolidated; $(42) million before VIE/CIV consolidation |
| Cash, cash equivalents and restricted cash | $289 million, including $119 million company cash | $346 million total at March 31, 2021 |
| Total investments | $9.067 billion | $9.608 billion at December 31, 2021 |
| Total assets / shareholders’ equity | $17.845 billion / $5.995 billion; AGL-attributable equity $5.802 billion | $18.208 billion / $6.478 billion at December 31, 2021 |
| Long-term debt | $1.673 billion on consolidated balance sheet | $1.673 billion at December 31, 2021 |
Revenue growth principally reflected net earned premiums of $214 million versus $103 million, including $128 million of premium accelerations, of which $104 million related to Puerto Rico resolutions. Asset management fees rose to $34 million from $24 million, including higher performance fees. Net investment income declined to $62 million from $70 million. Loss and loss adjustment expenses increased to $57 million from $30 million. Foreign-exchange remeasurement reduced revenue by $30 million; equity in investee results was a loss of $11 million versus earnings of $9 million.
Q1 other comprehensive loss was $378 million, mainly unrealized investment losses as interest rates rose. AGL-attributable shareholders’ equity fell from $6.292 billion at year-end, reflecting these losses, buybacks and dividends. The filing reports an investment portfolio pre-tax book yield of 3.15% at March 31, 2022, versus 3.23% a year earlier.
Net financial-guaranty par outstanding was $233.4 billion, down from $236.4 billion at year-end; $5.639 billion, or 2.4%, was rated below investment grade (BIG), down from $7.356 billion. Net expected loss to be paid increased to $432 million from $411 million; the quarter’s $44 million economic benefit was primarily driven by discount-rate changes and Puerto Rico developments. The reported loss expense and expected-loss estimates are distinct measures.
AGL paid $17 million in dividends and repurchased shares for $152 million in Q1. The quarterly dividend was $0.25 per share. The Board authorized an additional $350 million of repurchases in February; $240 million remained authorized as of May 5, 2022. Holding-company debt principal was $1.996 billion, including intercompany loans and AGMH debt held by AGUS; this differs from consolidated long-term debt.
Material changes and business developments
- Puerto Rico: March 15 consummation of the GO/PBA plan and PRCCDA and PRIFA modifications substantially reduced insured exposure. Net par exposure fell to $2.237 billion from $3.572 billion at year-end. The company received cash, recovery bonds and contingent value instruments (CVIs); it reported that recoveries on the March resolutions were higher than expected.
- Remaining Puerto Rico risk: $1.256 billion of PRHTA net par and $748 million of PREPA net par remained. The FOMB filed an HTA plan on May 2, after quarter-end; it requires court confirmation and the consensual resolution is not assured. PREPA’s restructuring support agreement was terminated March 8, 2022; court-ordered mediation began after quarter-end. All Puerto Rico exposure remained BIG.
- Insurance production: Q1 gross written premiums were $70 million versus $87 million; present value of new business production (non-GAAP) was $69 million versus $86 million; gross par written was $4.471 billion versus $5.472 billion. Management attributed lower U.S. public finance production partly to a large prior-year transaction that did not recur.
- Asset management: Assets under management were $16.990 billion at March 31, down from $17.494 billion at year-end. Third-party inflows were $91 million, while distributions and other outflows reduced AUM. Segment adjusted operating income was break-even versus a $7 million loss in Q1 2021; higher performance fees were offset by higher compensation costs.
- Ratings: Moody’s upgraded AGM and AGUK financial strength ratings to A1 and AGC to A2 on March 18, 2022, all with stable outlooks.
Outlook, risks and unusual items
No numerical earnings or revenue guidance is provided. Management said it expects AGL to have sufficient liquidity for the next 12 months and believes insurance-subsidiary liquidity needs can be met from available liquid assets and operating cash flow. It may use secured short-term financing to bridge future Puerto Rico claim payments until securities received in restructurings can be sold. The company used and repaid a $400 million short-term borrowing to help fund the March resolutions.
Management said further interest-rate and credit-spread increases could improve demand for financial guaranty insurance and pricing, and eventually increase investment income. Conversely, higher rates reduce fixed-income portfolio values and may reduce excess spread supporting distressed RMBS; inflation and economic stress could also pressure insured obligors. U.S. inflation was 8.5% year over year in March, and the 30-year AAA municipal market rate rose from 1.49% to 2.53% during the quarter.
Key uncertainties include Puerto Rico plan outcomes and recoveries; credit losses and recovery assumptions; COVID-19’s continuing effects; the Ukraine conflict and broader market volatility; interest rates, inflation and credit spreads; asset-management performance and investor flows; and LIBOR transition. The company reported no material direct Russia or Ukraine exposure and no material change in market risks or previously disclosed risk factors. It also reported that disclosure controls were effective and no material Q1 change in internal control over financial reporting.
Fair-value and insurance-loss estimates involve substantial judgment. The company reported $1.1 billion of Level 3 fixed-maturity securities and uses models and unobservable inputs for certain derivatives, VIEs and investments. A disclosed legal contingency includes the LBIE litigation: the plaintiff’s expert previously estimated damages of approximately $200 million to $500 million, while the company maintains that the terminations and calculations were proper; a bench-trial decision was pending after the November 2021 trial. Management stated litigation is not expected to materially affect financial position or liquidity, but an adverse resolution could materially affect results in a period.
Important facts for investors to verify
- Progress, court approval and expected cash and non-cash recoveries under the PRHTA plan; PREPA mediation and the effect of the terminated support agreement.
- Whether operating cash outflows and claim payments normalize after the Puerto Rico resolutions, and which reported cash balances are available to the parent versus restricted or held in consolidated vehicles.
- Sensitivity of expected losses to discount rates, RMBS performance and recovery assumptions; distinguish economic loss development from GAAP loss expense.
- Effect of rising rates on investment marks, capital and liquidity, alongside any benefit to new insurance pricing and reinvestment yields.
- Sustainability of asset-management performance fees, AUM and third-party inflows, and the pace and funding of share repurchases and dividends.
- Updates on the LBIE litigation, LIBOR transition, and any other material claims or contingencies.