ASSURED GUARANTY LTD quarterly report, Q1 FY2019

Assured Guaranty Ltd. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Amounts are in U.S. dollars unless stated otherwise. Assured Guaranty provides financial guaranty and related insurance, principally for public-finance and structured-finance obligations.

Financial performance and position

Metric	Q1 2019 / March 31, 2019	Q1 2018 / December 31, 2018
Total revenues	$195 million	$293 million
Net income; diluted EPS	$54 million; $0.52	$197 million; $1.68
Non-GAAP operating income; per diluted share	$86 million; $0.82	$155 million; $1.33
Net earned premiums	$118 million	$145 million
Net investment income	$98 million	$100 million
Loss and loss adjustment expenses	$46 million expense	$18 million benefit
Operating cash flow	$(332) million	$27 million
Total assets; shareholders’ equity	$13.551 billion; $6.669 billion	$13.603 billion; $6.555 billion
Long-term debt, carrying value	$1.232 billion	$1.233 billion

• Revenue fell about 33% and net income about 73% year over year. Management attributed the earnings decline mainly to higher loss expenses, a swing in credit-derivative fair value from gains to losses, and lower earned premiums.
• Credit-derivative fair-value change was a $22 million loss versus a $34 million gain in Q1 2018. Net realized investment losses were $12 million versus $5 million of losses.
• Comprehensive income was $222 million, including $168 million of other comprehensive income, largely unrealized investment gains. Investment portfolio fair value was $10.777 billion, including $727 million of short-term investments; cash was $123 million.
• Net expected loss to be paid declined to $963 million from $1.183 billion at year-end. The roll-forward included $218 million of net paid losses and a $2 million economic loss-development benefit. U.S. public-finance expected loss was $666 million, down from $832 million, while Q1 public-finance economic loss development was $61 million, primarily related to Puerto Rico.
• Financial-guaranty net par outstanding was $237.325 billion, down from $241.802 billion; 4.1% was rated below investment grade (BIG). Puerto Rico exposure was $4.494 billion, all BIG. The loss and loss adjustment expense reserve was $1.032 billion, and salvage and subrogation recoverable was $522 million.
• Operating cash flow was negative mainly because of higher net claim payments, including the COFINA settlement, and lower premium collections. Investing activities provided $492 million, including securities sales to fund the COFINA payment; financing activities used $142 million, including $80 million of share repurchases and $20 million of dividends.
• Reported liquidity includes cash and short-term investments, but insurance-subsidiary assets are subject to regulatory and rating-agency constraints. Management said it expected sufficient holding-company liquidity for the next 12 months and believed insurance subsidiaries could meet their liquidity needs over that period.
• Q1 share repurchases totaled $79 million under the program, with $80 million shown as cash paid in the cash-flow statement. The quarterly dividend was $0.18 per share. A further $300 million repurchase authorization was approved in February; $279 million remained available as of May 9, 2019.

Material changes and business developments

• Net earned premiums declined by $27 million, mainly because premium accelerations from refundings and terminations fell to $27 million from $52 million. Management noted that tax-law changes restricting tax-exempt advance refundings have reduced refunding activity.
• Loss and loss adjustment expenses shifted from an $18 million benefit to a $46 million expense. Higher losses on certain Puerto Rico exposures were partly offset by U.S. RMBS benefits. Separately, economic loss development on U.S. RMBS was a $65 million benefit, attributed mainly to higher excess spread and improved second-lien performance.
• Puerto Rico exposure fell from $4.767 billion to $4.494 billion, principally after the February 2019 COFINA plan paid off $273 million of insured net par. The Company received $152 million initial par of COFINA senior bonds plus cash; the bond fair value recorded as salvage was $139 million.
• On May 3, 2019, after quarter-end, subsidiaries AGM and AGC entered a PREPA restructuring support agreement. It contemplates exchanging insured PREPA revenue bonds into new securitization bonds backed by an electricity-bill transition charge. Completion is conditional on court and bondholder approvals and other requirements; the Company said its recovery could differ from the agreement’s stated terms if it elects to guarantee and market the new bonds.
• Net unrealized investment gains raised accumulated other comprehensive income to $261 million from $93 million at year-end. The company reported no material change in market-risk exposures since December 31, 2018.

Outlook, risks and contingencies

• The filing provides no numerical earnings or revenue guidance. Management described a generally positive U.S. economic environment but noted that low interest rates, tight municipal credit spreads, and reduced advance refundings have weighed on demand for bond insurance.
• Management expects future results to remain sensitive to claims and recoveries, refundings, investment gains or losses, credit spreads, fair-value movements, interest rates, and foreign exchange. The Company’s credit-derivative and certain VIE valuations rely substantially on Level 3 models and unobservable inputs.
• Puerto Rico remains a significant risk: defaults and Title III proceedings affect multiple insured obligations, and litigation, fiscal plans, recovery timing, and the ultimate treatment of insured claims remain uncertain. A First Circuit decision affirmed that special-revenue provisions did not require continued PRHTA bond payments during Title III proceedings; a rehearing petition was filed in April.
• On May 2, 2019, after quarter-end, the Puerto Rico Oversight Board and creditor committee sued bondholders and insurers, including AGC and AGM, disputing asserted liens on Commonwealth general-obligation bonds. The filing also describes other Puerto Rico litigation and a separate Lehman-related dispute with unresolved factual issues.
• Other risks include rating downgrades that could trigger claims, collateral requirements or reinsurance recapture; uncertainty in loss estimates and recoveries; access to external financing; and Brexit-related effects on European operations. The Company reported no material risk-factor changes during Q1.
• At March 31, AGC had posted $1 million against a maximum $221 million collateral requirement on specified CDS. Certain assumed-business agreements permit recapture; potential recapture payments were estimated at $41 million for AG Re and $312 million for AGC if all eligible cedents exercised their rights. The filing states that management did not expect litigation against the Company to materially adversely affect financial position or liquidity, but an adverse resolution could materially affect results in a particular period.

Important facts for investors to verify

• Progress and final terms of the PREPA restructuring, including court approval, required bondholder support, and the Company’s guarantee election and eventual recovery.
• Puerto Rico claim payments, recoveries and legal outcomes, including challenges to asserted Commonwealth bond liens and the effects on expected-loss estimates.
• Whether operating cash flow recovers after Q1’s $332 million outflow and how claim-payment timing compares with the Company’s liquidity resources and distribution plans.
• Drivers of the year-over-year earnings decline, particularly premium acceleration trends, public-finance losses, RMBS performance, and non-economic fair-value volatility.
• Capital returns and subsidiary dividend capacity, including the expected $100 million MAC dividend subject to board approval and the remaining share-repurchase authorization.