Assured Guaranty Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Assured Guaranty provides financial guaranty insurance and asset management services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Total revenue | $177 | $96 in Q1 2020 |
| Net income (loss) attributable to AGL | $11; diluted EPS $0.14 | $(55); diluted EPS $(0.59) |
| Adjusted operating income, non-GAAP | $43; $0.55 per diluted share | $33; $0.36 per diluted share |
| Net earned premiums | $103 | $103 |
| Net investment income | $70 | $80 |
| Asset management fees | $24 | $23 |
| Loss and loss adjustment expenses | $30 | $20 |
| Operating cash flow, consolidated | $(466) | $(164) |
| Operating cash flow before VIE consolidation | $(42) | $(97) |
| Cash and short-term investments | $796 | $1,013 at December 31, 2020 |
| Total assets / total liabilities | $16,018 / $9,525 | $15,334 / $8,629 at December 31, 2020 |
| Long-term debt on balance sheet | $1,225 | $1,224 at December 31, 2020 |
| Shareholders’ equity attributable to AGL | $6,430 | $6,643 at December 31, 2020 |
There is no conventional operating margin metric highlighted in the filing. Consolidated cash flows and balance-sheet totals include consolidated variable interest entities (VIEs), including investment vehicles; their assets and liquidity are generally ring-fenced and are not freely available for corporate needs.
Changes and operating results
- GAAP results improved from a loss to income. Management attributed the change principally to much smaller fair-value losses on credit derivatives, negligible foreign-exchange remeasurement losses versus substantial losses a year earlier, and gains on consolidated investment vehicles. These were partly offset by losses on committed capital securities and a $16 million write-off of MAC insurance licenses.
- Adjusted operating income rose to $43 million from $33 million. Insurance segment income declined to $79 million from $85 million; Asset Management’s loss narrowed to $7 million from $9 million; and the Corporate loss narrowed to $29 million from $39 million.
- Insurance new-business production strengthened: gross written premiums were $87 million versus $64 million, present value of new business production was $86 million versus $51 million, and gross par written was $5.472 billion versus $3.033 billion. U.S. municipal par insured was $5.5 billion, the highest first-quarter level since 2010, according to management.
- Investment income fell, reflecting lower average portfolio balances and reinvestment yields. Net expected loss to be paid declined to $472 million from $529 million at year-end; Q1 included $13 million of adverse economic loss development and $70 million of net paid/recovered losses.
- Comprehensive loss attributable to AGL was $114 million, compared with $259 million in Q1 2020, principally reflecting unrealized investment losses. AOCI declined to $373 million from $498 million at year-end.
- The company repurchased 1.99 million shares through its program for $77 million and paid $18 million in dividends. The quarterly dividend was $0.22 per share. A further 0.61 million shares were repurchased through May 6, 2021; $147 million remained authorized on that date.
Outlook, risks, and unusual items
- Outlook and liquidity: No specific earnings or production guidance is provided. Management said AGL and its holding companies expect sufficient liquidity for the next 12 months; insurance subsidiaries expect to meet liquidity needs from cash, short-term investments, operating cash flow, premium collections, and investment receipts. Holding-company liquidity depends substantially on subsidiary distributions and access to financing.
- Puerto Rico: Net par exposure was $3.725 billion, all internally rated below investment grade. As of the filing date, support agreements covered $3.484 billion, or 93.5%, of that exposure. The agreements and related recoveries depend on court approval, final documentation, implementation, and potential legal challenges; no assurance is given that the proposed resolutions will be achieved. Puerto Rico developments could materially affect results and equity.
- COVID-19 and credit risk: Management said COVID-related first-time claims paid through May 6 were relatively small and were expected to be nearly fully reimbursed. The pandemic’s ultimate effect remains uncertain, particularly for stressed public finance obligors and revenue-sensitive exposures. RMBS loss estimates depend on assumptions about defaults, recoveries, home prices, and forbearance performance.
- Other exposures and contingencies: The company disclosed possible liquidity claims of approximately $631 million if all specified leveraged leases terminate early and obligors fail to pay; none had produced a claim through the filing. Reinsurer recapture rights could require approximately $284 million in aggregate payments if all eligible ceding companies exercised them. The company’s assessment is that litigation is not expected to materially harm financial position or liquidity, though a case could materially affect a particular period’s results.
- Significant litigation: In the Lehman Brothers International (Europe) dispute, the counterparty’s reported damages estimate for remaining claims ranged from approximately $200 million to $500 million, excluding interest; the company calculated amounts owed to it. Trial was expected to be scheduled for fall 2021.
- Other notable items: MAC merged into AGM effective April 1, 2021, after the final regulatory approval; the $16 million license write-off was recorded in Q1. The company also identified LIBOR transition risks across insured obligations, holding-company debt, committed capital securities, and investment vehicles.
Most important facts for investors to verify
- Progress, court approvals, final terms, and realized recoveries under the Puerto Rico support agreements, especially given the $3.725 billion net exposure and $472 million total net expected loss.
- Whether improved insurance production translates into sustained premiums and earnings, and how lower investment yields affect income.
- The liquidity implications of consolidated VIE cash flows, subsidiary dividend limits, share repurchases, and potential claims or reinsurance recapture payments.
- Changes in COVID-related credit performance and the assumptions underlying public finance and RMBS loss estimates.
- Developments in the Lehman litigation and the LIBOR transition, including effects on contracts with less robust fallback provisions.