Assured Guaranty Ltd. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless stated otherwise. Assured Guaranty provides financial guaranty and other insurance, principally for public finance, infrastructure and structured finance obligations.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $274 million | $623 million | $788 million | $1.458 billion |
| Net income | $161 million | $208 million | $433 million | $678 million |
| Diluted EPS | $1.47 | $1.72 | $3.83 | $5.48 |
| Non-GAAP operating income | $161 million | $156 million | $390 million | $570 million |
| Net earned premiums | $142 million | $186 million | $423 million | $512 million |
| Net investment income | $98 million | $99 million | $298 million | $322 million |
| Loss and loss adjustment expenses | $17 million | $223 million | $43 million | $354 million |
At September 30, 2018, total assets were $13.739 billion, shareholders’ equity was $6.583 billion, and long-term debt carrying value was $1.249 billion. Cash was $82 million. The investment portfolio totaled $11.025 billion, including $10.192 billion of fixed-maturity securities and $738 million of short-term investments. Nine-month operating cash flow was $352 million, compared with $354 million in 2017. Financing cash outflow was $606 million, including $380 million of share repurchases and $55 million of dividends.
Material changes and business developments
- Reported earnings comparisons were affected by unusual prior-year gains. 2017 included $255 million of Q3 commutation gains and, for the first nine months, $328 million of commutation gains and $58 million from the MBIA UK acquisition. Excluding commutation gains, management said Q3 net income increased year over year; nine-month non-GAAP operating income increased when the 2017 commutation and acquisition gains were excluded.
- SGI portfolio transaction: Effective June 1, 2018, Assured Guaranty assumed substantially all of Syncora Guarantee’s insured portfolio and reassumed certain business previously ceded to SGI. The transaction involved approximately $12 billion of net par exposure, including about $1.5 billion of credit derivatives; SGI paid $363 million and assigned future premiums. The assumed portfolio added $131 million of expected losses to be paid.
- Production: Nine-month gross written premiums were $516 million versus $235 million, and present value of new business production (non-GAAP) was $567 million versus $212 million; the increase primarily reflected the SGI transaction. Q3 gross written premiums were $50 million versus $45 million.
- Portfolio and expected losses: Financial-guaranty net par outstanding decreased to $246.940 billion from $264.952 billion at year-end 2017. Below-investment-grade (BIG) net par fell to $10.293 billion from $12.238 billion. Net expected losses to be paid were $1.191 billion, down from $1.303 billion. Nine-month economic loss development was a $5 million benefit; Q3 development was approximately break-even.
- Capital returns and equity: The company repurchased $380 million of shares in the first nine months and declared $0.48 per share in dividends. Equity declined from $6.839 billion at year-end, primarily due to repurchases and unrealized investment losses, partly offset by net income. The share count fell from 116.0 million to 106.6 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management stated it expected AGL to have sufficient liquidity for its needs over the next 12 months; operating subsidiaries’ liquidity was expected to be supported by cash, short-term investments, operating cash flow and portfolio maturities/paydowns. Holding-company liquidity depends substantially on subsidiary distributions, which are subject to regulatory and other restrictions.
- Puerto Rico is the principal disclosed stressed exposure: Assured Guaranty had $4.767 billion of net insured par, all rated BIG, and had paid claims on most affected exposures. The Commonwealth and several authorities are in PROMESA Title III proceedings. The company signed a COFINA plan support agreement and estimated recoveries in the mid-90% range on senior bonds and close to 60% on subordinate bonds, subject to court approval and implementation. It had not agreed to the announced PREPA restructuring proposal. Fiscal-plan assumptions, legal challenges, hurricane recovery and ultimate recoveries remain uncertain.
- Other significant risks include the long-duration and estimation-sensitive nature of insured losses; changes in interest rates, credit spreads and fair values; possible rating actions; reinsurance collectability and recapture; and collateral or termination payments under certain contracts. The company’s credit-derivative and FG VIE fair values rely substantially on Level 3 inputs and models.
- In the Lehman Brothers International (Europe) litigation, a remaining breach-of-contract claim has triable factual issues concerning termination-payment calculations. The claimant’s previously disclosed damages estimate for the relevant transactions ranged from approximately $200 million to $500 million, excluding potential interest; Assured Guaranty disputes the claim and appealed part of the ruling.
- Management reported no material change in disclosed risk factors during the nine months and no material change in market risks since year-end 2017. Disclosure controls and procedures were assessed as effective.
Most important facts for investors to verify
- How much reported earnings and premium production depend on nonrecurring commutations, acquisitions, fair-value movements and the SGI assumption, versus recurring underwriting and investment results.
- Developments in Puerto Rico proceedings, COFINA court approval and recoveries, PREPA negotiations, and the resulting claims and reserve estimates.
- Whether the $1.191 billion expected-loss estimate and key RMBS, public-finance and recovery assumptions remain supportable as claims and collateral performance evolve.
- Availability of subsidiary dividends and holding-company liquidity, including regulatory limits, debt service and the pace of share repurchases.
- Changes in investment unrealized losses, Level 3 valuations, credit-derivative fair values, ratings and reinsurance recoverables.