ASSURED GUARANTY LTD quarterly report, Q2 FY2023

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Assured Guaranty Ltd. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Figures are in U.S. dollars; financial statements are unaudited. Assured Guaranty provides financial guaranty insurance and, through July 1, 2023, asset management services.

Financial performance

  • Q2 revenue: $360 million, versus $90 million in Q2 2022. Net income attributable to AGL was $125 million ($2.06 diluted EPS), compared with a $47 million loss ($0.74 loss per diluted share).
  • First-half revenue and earnings: Revenue was $643 million, versus $390 million; net income attributable to AGL was $206 million ($3.40 diluted EPS), versus $19 million ($0.29 diluted EPS).
  • Adjusted operating income, a non-GAAP measure: $36 million in Q2, versus $30 million; $104 million for the first half, versus $120 million. The filing cautions that non-GAAP measures are not substitutes for GAAP results.
  • Revenue drivers: Q2 and first-half GAAP results benefited from fair-value gains on credit derivatives, foreign-exchange gains on remeasurement, and higher net investment income. Q2 also included $40 million of fair-value gains on trading securities. These items can be volatile and may not represent recurring operating performance.
  • Premiums and production: Net earned premiums were $85 million in Q2 (versus $82 million) and $166 million for the first half (versus $296 million). The prior-year first half included $104 million of premium accelerations related to Puerto Rico resolutions. First-half gross written premiums were $181 million and present value of new business production was $203 million, compared with $135 million and $145 million, respectively.
  • Investment income and loss development: Net investment income was $89 million in Q2 and $170 million for the first half, up from $62 million and $124 million. Net economic loss development was adverse by $49 million in Q2 and $60 million for the first half, compared with benefits of $32 million and $76 million in the prior-year periods. Q2 adverse development primarily reflected certain Puerto Rico and healthcare exposures.
  • Margins and expenses: The filing does not provide a single consolidated operating-margin measure. Total expenses were $221 million in Q2 and $386 million in the first half. Transaction-related costs for the Sound Point and AHP transactions were $24 million in Q2 and $31 million in the first half.

Financial position, cash flow and capital

  • Balance sheet at June 30: Total assets were $16.852 billion, total liabilities $11.397 billion, and shareholders’ equity $5.455 billion. Equity attributable to AGL was $5.276 billion, up from $5.064 billion at year-end 2022.
  • Investments and liquidity: Total investments were $8.624 billion, including $1.650 billion of short-term investments; cash was $114 million. Cash, cash equivalents and restricted cash totaled $184 million, including cash held by consolidated vehicles and businesses held for sale.
  • Cash flow: First-half operating cash flow was $436 million, versus an outflow of $1.794 billion in 2022. Excluding the effects of consolidating financial guaranty VIEs and consolidated investment vehicles, operating cash flow was an outflow of $7 million, versus an outflow of $621 million. The filing attributes much of the improvement to lower claim payments and taxes compared with 2022.
  • Debt: Consolidated long-term debt on the balance sheet was $1.677 billion. Separately, the filing reports $1.996 billion of U.S. holding-company debt and intercompany loans, including $270 million of intercompany loans and an adjustment for AGMH debt held by AGUS. Interest expense was $22 million in Q2 and $43 million in the first half.
  • Capital returns: The company paid $35 million in dividends and repurchased $26 million of shares in the first half. As of August 8, $158 million remained authorized for repurchases. Common shares outstanding were approximately 58.9 million at June 30.
  • Management liquidity view: Management said AGL had sufficient liquidity for its needs over the next 12 months. The company targets liquid assets equal to 1.5 times stressed operating-company cash-flow needs; insurance subsidiary dividends and external financing access are important liquidity factors.

Material changes and portfolio

  • Insurance exposure: Net par outstanding was $244.0 billion at June 30, up from $233.3 billion at year-end. Public finance accounted for $234.0 billion and structured finance $10.0 billion. $5.634 billion, or 2.3%, was internally rated below investment grade (BIG), down from $5.892 billion.
  • Expected losses: Net expected loss to be paid or recovered was $560 million, versus $522 million at year-end. The estimate is based on management’s probability-weighted assumptions and is subject to significant uncertainty.
  • Puerto Rico: Net insured exposure was $1.349 billion, all rated BIG. PREPA, the remaining defaulted exposure, accounted for $720 million. A court estimated bondholders’ unsecured net-revenue claim at $2.4 billion, below bondholders’ approximately $8.5 billion claim; Assured Guaranty said it expected to appeal aspects of the rulings. The PREPA restructuring and recoveries remain uncertain.
  • Asset management transactions: Effective July 1, after quarter-end, the company contributed most of AssuredIM to Sound Point for a 30% participation interest and engaged Sound Point as the U.S. insurance subsidiaries’ sole alternative-credit manager. The company also sold AHP in July. The transactions change the company’s asset-management exposure to minority ownership and equity-method investment accounting; their Q3 accounting effects were still being evaluated.
  • Alternative investment commitments: Following the transactions, the company reported an aggregate commitment to invest $1.5 billion in alternative investments, including $1 billion with Sound Point, subject to regulatory approval; $991 million was unfunded.

Outlook, risks and unusual items

  • The filing gives no specific earnings or revenue guidance. Management described higher rates as potentially supportive of investment income and insurance pricing, but also as a risk to fixed-income fair values, municipal issuance and some insured obligors.
  • Key risks include PREPA restructuring outcomes, changing credit conditions and claim recoveries, interest-rate and foreign-exchange movements, and mark-to-market volatility in credit derivatives, Puerto Rico securities and consolidated vehicles.
  • The Sound Point investment is a minority interest: Assured Guaranty cannot control its operations or distributions and depends on Sound Point and AHP for timely, accurate financial information. The filing also identifies competition, key-person, regulatory and litigation risks for Sound Point.
  • In the LBIE litigation, judgment was entered for an Assured Guaranty affiliate for approximately $54 million, including damages and prejudgment interest; LBIE appealed. The affiliate also sought approximately $58 million in attorneys’ fees and expenses. Neither amount was accrued in the reported financial statements.
  • Management reported effective disclosure controls as of June 30, 2023 and no material second-quarter change in internal control over financial reporting.

Important facts for investors to verify

  • Progress, appeals and potential recoveries in PREPA proceedings, and how any revised plan affects the $720 million insured exposure and loss estimates.
  • Q3 accounting and financial effects of the Sound Point and AHP transactions, including the 30% Sound Point interest, investment commitments and consolidation of investment vehicles.
  • Whether earnings trends persist after excluding nonrecurring or market-sensitive fair-value, foreign-exchange and Puerto Rico-related items; compare GAAP net income with adjusted operating income.
  • Changes in expected losses, BIG exposure, claims paid and recoveries, particularly for Puerto Rico, healthcare and RMBS exposures.
  • Availability of insurance-subsidiary dividends and parent-level liquidity, alongside share repurchases, debt service and the company’s stated 12-month liquidity assessment.