Assured Guaranty Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Assured Guaranty provides financial guaranty insurance and, following its October 2019 BlueMountain acquisition, asset-management services. Comparisons with 2019 are affected by the inclusion of AssuredIM in 2020.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $268 | $206 | $736 | $667 |
| Net income attributable to AGL | $86 | $69 | $214 | $265 |
| Diluted EPS | $1.02 | $0.70 | $2.43 | $2.61 |
| Adjusted operating income (non-GAAP) | $48 | $77 | $200 | $304 |
| Net investment income | $71 | $88 | $229 | $296 |
| Loss and LAE expense | $73 | $30 | $130 | $75 |
Q3 GAAP net income increased, primarily reflecting $40 million of foreign-exchange remeasurement gains, gains on consolidated investment vehicles, and a tax benefit from releasing uncertain-tax-position reserves. These items more than offset higher loss expense, lower investment income and lower earned premiums. Nine-month net income and adjusted operating income declined year over year. Adjusted operating income is a company-defined non-GAAP measure and is not directly comparable across companies.
- Segments: Insurance adjusted operating income was $81 million in Q3 and $320 million for nine months, versus $107 million and $379 million in the comparable 2019 periods. Asset Management reported adjusted operating losses of $12 million and $30 million, respectively; it was not a reported segment in 2019.
- Insurance production: Q3 gross written premiums were $121 million, present value of new business production (PVP) $117 million and gross par written $7.4 billion. Nine-month PVP was $264 million, versus $187 million in 2019. PVP is a non-GAAP management measure.
- Asset management: September 30 AUM was $17.0 billion, including $11.3 billion of fee-earning AUM. CLO fee payments were partly deferred following over-collateralization trigger breaches.
- Cash flows: Nine-month operating cash flow was negative $664 million, versus negative $365 million in 2019; this consolidated figure includes VIE cash flows. Before VIE consolidation, operating cash outflow was $97 million. Investing cash flow was positive $906 million and financing cash flow negative $12 million. Ending cash and restricted cash was $406 million, including cash held by consolidated investment vehicles.
- Balance sheet and debt: Total assets were $14.7 billion, liabilities $8.1 billion and shareholders’ equity attributable to AGL $6.5 billion. The investment portfolio totaled $9.5 billion, including $858 million in short-term investments and $223 million in cash. Long-term debt carrying value was $1.2 billion; the filing also reports $1.429 billion of principal across debt issuers before specified eliminations and repurchases.
- Capital returns: The company repurchased $320 million of shares and paid $53 million in dividends during the first nine months. It had 82.2 million shares outstanding at September 30. On November 2, the Board authorized an additional $250 million in repurchases; remaining authorization was $332 million as of November 5.
Material changes and insured portfolio
- Total financial-guaranty net par outstanding declined to $233.1 billion from $236.8 billion at year-end 2019; BIG exposure was $8.0 billion, or 3.4% of net par, compared with $8.5 billion, or 3.6%.
- Net expected loss to be paid was $471 million at September 30, down from $737 million at year-end. However, economic loss development was adverse by $70 million in Q3 and $101 million for nine months, primarily due to Puerto Rico. Net claims paid, after recoveries, were $367 million for nine months.
- Puerto Rico net par exposure was $4.1 billion, all internally rated below investment grade. Nine-month loss development included $142 million for U.S. public finance, primarily Puerto Rico. The company reassumed $336 million of previously ceded par during the period, including $118 million of Puerto Rico exposure, and recorded a $38 million commutation gain.
- The available-for-sale investment portfolio had a $76 million credit-loss allowance at September 30. The company said unrealized losses without a credit-loss allowance were not considered credit-related and that it did not intend or expect to be required to sell those securities before recovery.
Outlook, commentary and risks
- Management said it expects sufficient holding-company liquidity for the next 12 months and believes insurance-subsidiary liquidity needs over that period can be met with cash, short-term investments and operating cash flows. Access to subsidiary dividends is subject to regulatory and rating-agency constraints; much of the group’s cash and investments is held in regulated, restricted or consolidated entities.
- Management reported that new insurance production rebounded after market disruption early in 2020, but said the medium-term effect of COVID-19 on insurance demand and asset-management fundraising remains uncertain. Through November 5, the company had paid no first-time financial-guaranty claims it believed were specifically due to COVID-19 stress.
- COVID-19 could still worsen obligor credit quality and claims, particularly for stressed public-finance credits and obligations tied to affected revenues. Mortgage forbearances also affected RMBS delinquencies and loss estimates. The company’s loss projections depend on judgmental, probability-weighted assumptions and may change materially.
- Puerto Rico restructuring outcomes, litigation, fiscal plans and recovery timing remain uncertain; the company’s filings state that developments could materially affect results in a particular period. Its PREPA restructuring support agreement remains subject to court, creditor and documentation conditions.
- Other notable exposures and uncertainties include possible LIBOR-transition effects on insured obligations and debt, rating-agency actions and reinsurance recapture or collateral requirements. Management reported no material change in market risks since year-end and no material change in risk factors during the quarter.
- The filing provides no numerical earnings or production guidance. It states that the company’s disclosure controls and procedures were effective as of September 30, 2020.
Investor facts to verify
- Reconcile the Q3 GAAP profit increase with foreign-exchange gains, investment-vehicle fair-value gains and the tax-reserve release; assess the weaker nine-month adjusted operating result.
- Review the assumptions, recoveries and litigation sensitivity behind the $471 million expected-loss estimate, especially Puerto Rico and COVID-affected credits.
- Distinguish unrestricted parent and insurer liquidity from cash and assets held in consolidated investment vehicles or subject to regulatory restrictions.
- Assess whether asset-management fee deferrals, fund outflows and performance support can offset the segment’s operating losses.
- Track share repurchases, subsidiary dividend capacity, ratings and the progress and potential recoveries in Puerto Rico proceedings.