Assured Guaranty Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Amounts are in U.S. dollars. Assured Guaranty provides financial-guaranty insurance and related credit protection, primarily for public finance and structured finance obligations.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Prior comparable / period-end |
|---|---|---|
| Total revenue | $245 million | $369 million |
| Net income; diluted EPS | $59 million; $0.43 | $201 million; $1.28 |
| Operating income (non-GAAP); operating income per share | $113 million; $0.82 | $140 million; $0.89 |
| Net earned premiums | $183 million | $142 million |
| Loss and loss adjustment expenses | $90 million | $18 million |
| Net investment income | $99 million | $101 million |
| Operating cash flow | $(90) million | $23 million |
| Cash and total investment portfolio | $112 million cash; $11.214 billion portfolio | $166 million cash; $11.192 billion portfolio at Dec. 31, 2015 |
| Total assets; shareholders’ equity | $14.452 billion; $6.113 billion | $14.544 billion; $6.063 billion at Dec. 31, 2015 |
| Long-term debt | $1.302 billion carrying value; $1.591 billion principal | $1.300 billion carrying value at Dec. 31, 2015 |
Calculated GAAP net margin was approximately 24% in Q1 2016 versus 55% in Q1 2015. Revenue and earnings comparisons were affected by mark-to-market movements and other items; this ratio is not presented by management as an operating measure. Net income fell mainly because credit-derivative fair-value results swung to a $60 million loss from a $124 million gain, and loss expenses rose, largely on Puerto Rico exposures. The 2015 comparison also included a $49 million fair-value gain from a methodology refinement. Higher premium revenue, chiefly from refundings and terminations, partly offset these effects. Other income was $34 million, primarily reflecting loss-mitigation recoveries.
Material changes and portfolio developments
- Net par outstanding declined to $347.0 billion from $358.6 billion at year-end. Below-investment-grade (“BIG”) exposure was $15.1 billion, or 4.4% of net par.
- Net expected loss to be paid was $1.337 billion, down from $1.391 billion at year-end. Q1 economic loss development was unfavorable by $59 million: $99 million in public finance, mainly Puerto Rico, was partly offset by a $40 million structured-finance benefit. Changes in discount rates contributed $63 million of loss development.
- Net expected loss for troubled U.S. public-finance credits rose to $864 million from $771 million. Puerto Rico exposure was $5.054 billion net par, all BIG. PRIFA defaulted on part of an interest payment; Assured Guaranty paid approximately $451,000 on insured bonds.
- Operating cash flow was negative, while investing activities provided $172 million and financing activities used $136 million. Cash declined by $54 million during the quarter. Cash flow includes timing effects from claim payments, investments, and consolidated VIEs.
- Q1 share repurchases were $75 million for 3.0 million shares, and dividends were $18 million, or $0.13 per share. The board approved a new $250 million repurchase authorization; $230 million remained at March 31.
- After quarter-end, AGC agreed to acquire CIFG for expected cash consideration of $450 million, subject to adjustments, regulatory and antitrust approvals, and other closing conditions. Closing was expected mid-2016. CIFG reported $5.6 billion net par and approximately $637 million qualified statutory capital at year-end 2015.
Outlook, risks, and unusual items
- Management said it expected AGL to have sufficient liquidity for the next 12 months. This depends in part on regulated subsidiary dividends; stated 2016 ordinary dividend capacity without regulatory approval was approximately $236 million for AGM and $79 million for AGC, subject to applicable conditions.
- No specific earnings or revenue guidance was provided. Management cited continuing demand for bond insurance, while noting that low interest rates dampen demand and new competitors are active in a market the company has historically served with limited competition.
- The PREPA restructuring support agreement remained conditional. It contemplated insured bonds supported by securitization bonds, surety insurance of up to $113 million, and an approximately $15 million company share of bridge financing. The company cautioned that conditions might not be met or the arrangement might not be implemented; PREPA had suspended deposits into its debt-service fund.
- Puerto Rico’s fiscal distress, proposed payment moratoria and restructuring measures, and disputes over pledged revenues create substantial uncertainty. Assured Guaranty challenged the “clawback” orders in court. The impact of Puerto Rico legal and governmental actions on insured credits was uncertain.
- Credit-derivative valuations rely substantially on Level 3 models and unobservable inputs; market liquidity is limited, so fair-value changes can be volatile and may not reflect ultimate claims. The filing also emphasizes judgment and uncertainty in expected-loss estimates and RMBS assumptions.
- Potential liquidity and capital risks include collateral posting under credit derivatives (approximately $308 million posted at quarter-end), stressed claims, reinsurer collectability, and rating actions. A separate infrastructure exposure of approximately $561 million could generate claims in 2018–2022 if refinancing is unavailable, although management generally expects recovery over time.
- In the Lehman Brothers International (Europe) litigation, the claimant’s expert estimated damages of approximately $200 million to $500 million, excluding interest; the company said it could not reasonably estimate any possible loss. Management stated litigation outcomes were not expected to materially affect financial position or liquidity, though a particular period’s results could be affected.
Key facts for investors to verify
- How Puerto Rico developments, including the PREPA agreement, moratorium measures, and pledged-revenue litigation, affect claim expectations and cash needs.
- Whether expected-loss estimates and recoveries remain supportable, particularly the increase in public-finance losses and assumptions underlying RMBS and discount-rate estimates.
- Drivers of credit-derivative fair-value volatility, including the company’s own credit spreads and Level 3 valuation inputs.
- Operating cash flow, collateral requirements, subsidiary dividend capacity, and available parent-company liquidity relative to planned repurchases and the proposed CIFG acquisition.
- Regulatory approvals, financing, and closing conditions for the CIFG acquisition and the terms and execution of the PREPA restructuring.
- Developments in material litigation, especially the LBIE matter, and the financial condition and recoverability of amounts due from reinsurers.