Assured Guaranty Ltd. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
Assured Guaranty is a Bermuda-based holding company whose subsidiaries provide financial guaranty and other credit protection, principally for U.S. and international public finance, infrastructure and structured finance obligations. The company’s guarantees generally cover scheduled principal and interest payments after an obligor default.
On June 1, 2018, the company completed the Syncora Guarantee transaction: AGC assumed substantially all of SGI’s insured portfolio, generally on a 100% quota-share basis, and AGM reassumed previously ceded business. The net par value of exposures reinsured and commuted was approximately $12 billion.
Financial and operating highlights
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1.002 billion | $1.739 billion |
| Net earned premiums | $548 million | $690 million |
| Net investment income | $398 million | $418 million |
| Net income | $521 million | $730 million |
| Diluted EPS | $4.68 | $5.96 |
| Non-GAAP operating income | $482 million | $661 million |
| Net cash from operating activities | $462 million | $433 million |
- Fourth-quarter 2018 revenue was approximately $214 million, net income $88 million and diluted EPS $0.83. Fourth-quarter 2017 net income was $52 million.
- 2018 revenue and net income were lower than 2017, which included substantial commutation gains and gains related to the MBIA UK acquisition and representations-and-warranties settlements. 2018 commutations produced a $16 million loss, compared with a $328 million gain in 2017.
- Net earned premiums fell 21%, primarily due to fewer refundings, including the effect of the 2017 tax law’s elimination of tax-exempt advance refundings, and a smaller insured portfolio. Loss and loss-adjustment expense was $64 million, down from $388 million, with lower expense chiefly reflecting the prior-year comparison and changes in Puerto Rico-related reserves.
- Reported 2018 net income included a $112 million gain from changes in credit-derivative fair value; these marks can be volatile and may not reflect cash flows or ultimate economic results. The 2018 effective tax rate was 10.2%, compared with 26.3% in 2017; the 2018 rate benefited in part from the release of $18 million in uncertain tax reserves and accrued interest.
Balance sheet, liquidity and portfolio
- At year-end, total assets were $13.603 billion, total liabilities $7.048 billion and shareholders’ equity $6.555 billion, down from $6.839 billion. Book value per share increased to $63.23 from $58.95, supported by the reduced share count.
- Investment portfolio and cash totaled $10.977 billion, including $729 million of short-term investments and $104 million of cash. Investment portfolio fair value was $10.873 billion. AGL, the parent, separately reported $45 million in cash and short-term investments; access to subsidiary funds is subject to regulatory and rating-agency restrictions.
- Balance-sheet long-term debt was $1.233 billion carrying value. The filing also reports $1.457 billion of total debt principal before eliminating $128 million of AGMH debt held by AGUS. Interest expense was $94 million, versus $97 million in 2017.
- Net par outstanding on the financial-guaranty portfolio was $241.8 billion, down from $265.0 billion. Below-investment-grade exposure was $10.16 billion, or 4.2% of net par. Net expected losses to be paid were $1.183 billion, compared with $1.303 billion a year earlier.
- Net claims paid, after reinsurance, were $246 million in 2018 versus $229 million in 2017. Cash and restricted cash declined to $104 million from $144 million; operating cash flow was positive, while financing cash outflow was $795 million, including $500 million of share repurchases and $71 million of dividends.
- Available-for-sale investments generated a $241 million after-tax unrealized loss in other comprehensive income, contributing to the decline in shareholders’ equity. Management said the unrealized losses on securities in loss positions were yield-related, not other-than-temporary impairment.
Material changes, outlook and risks
- SGI transaction: It contributed $330 million of gross written premiums and $131 million of expected losses to be paid at closing. Full-year gross written premiums reached $612 million and present value of new business production was $663 million; both were 10-year highs, driven substantially by SGI. Excluding SGI, U.S. public-finance new-business production was higher than 2017 despite lower municipal issuance.
- Capital returns: The company repurchased 13.2 million shares for approximately $500 million in 2018 and paid $0.64 per share in dividends. The board authorized an additional $300 million of repurchases in February 2019; $350 million remained authorized as of March 1, 2019. The quarterly dividend was increased to $0.18 per share in February 2019 from $0.16 in 2018.
- Management outlook: No specific earnings or revenue guidance is provided. Management expected parent-company liquidity needs over the following 12 months to be met, while noting reliance on subsidiary distributions, investment income, cash and external financing. It cited persistently low interest rates and narrow municipal credit spreads as constraints on insurance demand. U.S. public-finance bond-insurance market penetration was approximately 5.9% of par in 2018, and Assured Guaranty insured an estimated 56% of insured U.S. public-finance issuance.
- Puerto Rico concentration and litigation: Net par exposure was $4.767 billion, all rated below investment grade under the company’s methodology; many obligors had defaulted and the company had paid claims. Outcomes depend on restructuring, fiscal-plan implementation, recoveries and ongoing litigation. In February 2019, the COFINA plan became effective: the company received cash and $152 million of senior exchange bonds, representing a 60% par recovery on its official Title III claim. The First Circuit also ruled that Oversight Board appointments were unconstitutional but delayed the effect of its ruling for 90 days.
- Other material risks: Potentially significant claim and reserve-estimate changes; municipal budget and pension stress; investment and credit-spread volatility; ratings actions; competition and weak insurance demand; foreign-exchange exposure; and the uncertain effects of Brexit on AGE’s EEA passporting rights. The company was establishing a Paris subsidiary, which might not be fully licensed before a no-deal Brexit. LIBOR-linked contracts also face transition risk.
- Contingencies and unusual items: In the LBIE dispute, the remaining contract claim concerns whether AGFP calculated its termination loss reasonably and in good faith; the court found triable issues, and an appellate court affirmed that decision in January 2019. Management stated that litigation was not expected to materially affect financial position or liquidity, but an adverse resolution could affect results in a particular period. The company also notes that expected-loss estimates involve substantial judgment and may differ materially from ultimate claims.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Track Puerto Rico restructuring outcomes, litigation developments, claim payments and the assumptions underlying the $1.183 billion net expected-loss estimate.
- Separate recurring underwriting and investment performance from fair-value marks, commutation results, acquisition effects and other non-recurring items; review the company’s non-GAAP reconciliations.
- Assess the earnings contribution, expected losses and capital impact of the SGI portfolio, and whether new business production can replace runoff and declining earned premiums.
- Confirm parent-level liquidity and subsidiary dividend capacity, including restrictions, collateral needs and debt-service requirements; do not treat consolidated investments as freely available parent cash.
- Monitor insurer financial-strength ratings, rating-agency capital requirements, the remaining $350 million repurchase authorization and the sustainability of dividends.
- Review Brexit-related licensing and passporting arrangements, LIBOR replacement provisions, foreign-exchange exposure and the unresolved LBIE claim.