Assured Guaranty Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. Financial amounts are in U.S. dollars unless noted.
Business context
Bermuda-based Assured Guaranty provides financial-guaranty insurance and related credit protection, principally for public finance, infrastructure and structured finance obligations. On October 1, 2019, it acquired BlueMountain Capital Management for $157 million, adding an asset-management business that operates as Assured Investment Management. Results include BlueMountain only from the acquisition date.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $963 million | $1,001 million |
| Net income attributable to AGL | $402 million | $521 million |
| Diluted earnings per share | $4.00 | $4.68 |
| Adjusted operating income (non-GAAP) | $391 million | $482 million |
| Net earned premiums | $476 million | $548 million |
| Net investment income | $378 million | $395 million |
| Loss and loss-adjustment expenses | $93 million | $64 million |
| Cash flow from operations | $(509) million | $462 million |
| Long-term debt, carrying value | $1.235 billion | $1.233 billion |
| Shareholders’ equity attributable to AGL | $6.639 billion | $6.555 billion |
Revenue and net income declined year over year. Management attributed lower earnings mainly to unfavorable fair-value changes in credit derivatives and committed capital securities versus gains in 2018, lower earned premiums and premium accelerations, higher losses, and BlueMountain-related compensation and operating costs. These effects were partly offset by foreign-exchange gains, realized investment gains, higher gains on financial-guaranty VIEs, and BlueMountain fees. GAAP results are also affected by significant market-sensitive fair-value items.
Cash flow from operations was negative in 2019, including a significant Puerto Rico COFINA claim payment and lower premium receipts; cash flow from operations before VIE consolidation was $(255) million. Cash flows from investing activities were $1.169 billion, including proceeds from investment sales and the acquisition. Financing cash outflows were $584 million, including $500 million of share repurchases and $74 million of dividends. Year-end cash and restricted cash was $183 million, including cash held by consolidated investment vehicles. AGL reported $135 million of cash and short-term investments at the parent, and $223 million at AGUS and AGMH combined.
The investment portfolio and cash totaled $10.409 billion at year-end, down from $10.977 billion. Fixed-maturity and short-term investments had a 4.1-year duration; the portfolio’s overall pre-tax book yield was 3.51%. Total assets were $14.326 billion and total liabilities $7.674 billion.
Material changes and capital
- BlueMountain contributed $32 million of revenue and a $10 million net loss from acquisition through year-end. Year-end AUM was $17.827 billion, including $12.758 billion in CLOs, $1.023 billion in opportunity funds and $4.046 billion in wind-down funds. Asset-management fees were $22 million for the post-acquisition period; the segment reported a $10 million adjusted operating loss.
- Insurance gross written premiums were $677 million versus $612 million, while present value of new business production (non-GAAP) was $463 million versus $663 million. The 2018 figures included the Syncora portfolio transaction; excluding it, management said 2019 production increased. U.S. municipal bond insurance penetration by par was 5.9% in both 2019 and 2018.
- Net insured par outstanding declined to $236.807 billion from $241.802 billion. Below-investment-grade (BIG) net par fell to $8.506 billion from $10.160 billion. Puerto Rico net par exposure was $4.270 billion, all rated BIG; the company continued making claims and pursuing recoveries and legal remedies.
- Net expected loss to be paid across the insured portfolio was $737 million at year-end, down from $1.183 billion. The decrease included $445 million of net claims paid/recovered and a $234 million expected-loss benefit on U.S. RMBS, while U.S. public-finance economic loss development was $224 million, primarily due to Puerto Rico.
- AGL repurchased 11.164 million shares for $500 million at an average $44.79 per share. It declared $0.72 per share of dividends for 2019, up from $0.64 in 2018. The Board authorized an additional $250 million repurchase in February 2020; $408 million remained authorized as of February 27, 2020. A quarterly dividend of $0.20 per share was declared in February 2020.
Liquidity, outlook and risks
Management stated it expects sufficient holding-company liquidity for the next 12 months, relying on subsidiary distributions, investment income, existing cash and short-term investments, and possible external financing. Insurance subsidiaries’ dividends and other distributions are subject to regulatory, statutory-capital and rating-agency limits. For 2020, estimated ordinary dividend capacity without regulatory approval included approximately $218 million for AGM, $166 million for AGC and $21 million for MAC, subject to applicable conditions.
The company intends initially to invest $500 million in funds managed by Assured Investment Management; $79 million had been invested at year-end, with additional commitments outstanding. This strategy may improve investment returns but can increase valuation, credit and liquidity risks. Management provided no earnings or revenue guidance in the supplied filing text.
- Credit and claims: Puerto Rico restructurings, litigation, natural disasters and uncertain recoveries could materially affect claims, liquidity and loss estimates. The company’s recovery assumptions are significant, and expected losses rely on management scenarios and judgments.
- Market and valuation: Persistently low rates and narrow municipal spreads constrain insurance demand and pricing. Credit spreads, interest rates, foreign exchange and less-liquid Level 3 valuations can create earnings and equity volatility.
- Ratings and funding: Insurance-subsidiary downgrades could reduce new business, trigger claims or recaptures, and constrain capital access. Regulatory limits also restrict dividends from operating subsidiaries to holding companies.
- Other uncertainties: The filing identifies LIBOR transition exposure, Brexit-related regulatory and operating uncertainty, BlueMountain integration and retention risks, tax-law uncertainty, and potential cyber and operational risks.
- Litigation: The LBIE dispute over terminated credit derivatives remained unresolved, with trial scheduled for March 2020. LBIE’s expert estimated a $200–$500 million claim range, excluding possible interest; the company disputes liability and says AGFP calculated the termination amount properly. Management said litigation was not expected to materially affect financial position or liquidity overall, but an adverse quarterly or annual outcome could affect results.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. BlueMountain, acquired late in the year, was excluded from management’s and the auditor’s internal-control assessment; it represented approximately 2% of consolidated assets and 3% of revenues.
Important facts for investors to verify
- How Puerto Rico plan-of-adjustment outcomes, court decisions and actual recoveries compare with assumptions underlying the $737 million expected-loss estimate and $819 million recovery credit on troubled U.S. public-finance exposures.
- Whether operating cash flow, claim payments and premium collections improve, and how much parent-company liquidity is available after regulatory restrictions and commitments.
- Whether Assured Investment Management can retain clients, grow fee-earning AUM and achieve returns sufficient to justify the planned $500 million investment and BlueMountain integration costs.
- How much of the reported earnings and equity movement reflects recurring operations versus fair-value changes, investment gains, reserve assumptions and other non-GAAP adjustments.
- Whether the LBIE matter, Puerto Rico proceedings, LIBOR transition and post-Brexit arrangements produce material claims, costs or changes to the company’s business.