ASSURED GUARANTY LTD quarterly report, Q3 FY2022

Assured Guaranty Ltd. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Assured Guaranty provides financial-guaranty insurance and asset-management services. Amounts are in U.S. dollars.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$41 million	$212 million	$431 million	$585 million
Net income attributable to AGL	$11 million	$17 million	$30 million	$126 million
Diluted EPS	$0.18	$0.22	$0.46	$1.66
Adjusted operating income (non-GAAP)	$133 million	$34 million	$253 million	$197 million

Q3 revenue fell sharply, principally reflecting an $80 million foreign-exchange remeasurement loss, $48 million of credit-derivative fair-value losses and a $20 million loss on equity-method investees. For nine months, foreign-exchange losses were $181 million and equity-method losses were $31 million.
Net income comparisons are affected by the $175 million pre-tax debt-extinguishment loss recorded in Q3 2021, which did not recur. Adjusted operating income is a company-defined non-GAAP measure; it excludes specified investment, derivative, committed-capital-security and foreign-exchange effects.
Net earned premiums were $89 million in Q3 and $385 million for nine months, compared with $102 million and $307 million. Nine-month premiums benefited from $104 million of accelerations related to the March Puerto Rico resolutions. Net investment income was $67 million in Q3 and $191 million for nine months, versus $66 million and $204 million.
Insurance-segment adjusted operating income was $159 million in Q3 and $347 million for nine months, down from $214 million and $445 million. Asset Management reported adjusted operating losses of $3 million and $3 million, respectively. Asset-management fees were $16 million in Q3 and $71 million for nine months; assets under management were $17.5 billion at quarter-end.

Financial position, cash flow and capital

Total assets were $16.7 billion at September 30, 2022, versus $18.2 billion at year-end 2021. Shareholders’ equity attributable to AGL was $4.9 billion, down from $6.3 billion; total shareholders’ equity was $5.2 billion, down from $6.5 billion.
The equity decline included $952 million of other comprehensive loss for nine months, largely reflecting unrealized investment losses as interest rates rose. Available-for-sale fixed maturities had $6.8 billion fair value versus $8.2 billion at year-end, with $717 million of gross unrealized losses. Management said it did not intend, and was not required, to sell loss-position securities before expected recovery.
Cash was $131 million and short-term investments were $1.177 billion. Cash, cash equivalents and restricted cash, including consolidated investment vehicles, totaled $271 million at period-end. Management said AGL expected sufficient liquidity for the next 12 months; insurance subsidiaries also reported that anticipated needs could be met from liquid assets and operating cash flow.
Nine-month operating cash flow was negative $1.848 billion, compared with negative $1.792 billion. Excluding the effect of consolidating financial-guaranty VIEs and investment vehicles, operating cash flow was negative $534 million, primarily reflecting Puerto Rico-related claim payments net of recoveries and higher tax payments. Investing cash flow was positive $1.128 billion; financing cash flow was positive $655 million, including vehicle financing activity.
Consolidated long-term debt was $1.675 billion. U.S. holding-company debt was reported as $1.996 billion principal, including intercompany loans and debt purchased by AGUS; this is a different presentation from consolidated debt. Interest expense was $60 million for nine months. Consolidated investment-vehicle liabilities are largely vehicle-specific and are not generally available for corporate liquidity needs.
The company repurchased 7.1 million shares for $403 million in the first nine months and paid $49 million in dividends. Common shares outstanding fell to 60.7 million from 67.5 million at year-end. The board authorized an additional $250 million repurchase program in August; $261 million of authorization remained as of November 7, 2022.

Material changes, outlook and risks

Net par outstanding on the insured financial-guaranty portfolio declined to $227.1 billion from $236.4 billion at year-end. Below-investment-grade (BIG) net par fell to $5.8 billion from $7.4 billion.
Puerto Rico exposure declined to $2.1 billion from $3.6 billion, but remained entirely BIG. March resolutions extinguished PRCCDA and PRIFA exposure and substantially reduced GO/PBA exposure. The PRHTA plan was confirmed on October 12, after quarter-end; its effective date had not been announced as of November 7. Remaining PREPA exposure was $720 million, with mediation and litigation ongoing.
Net expected loss to be paid (recovered), a management estimate across insured contracts, increased to $727 million from $411 million at year-end. The quarter-end amount reflects, among other factors, Puerto Rico developments and changes in assumptions and discount rates; it is sensitive to future credit performance, recoveries and management estimates. The company reported a $148 million economic loss-development benefit for nine months, including a $127 million benefit for U.S. RMBS, partially offset by U.S. public-finance pressures. A large healthcare system with $820 million net par was downgraded to BIG in Q3 because of weak operating results and liquidity.
Management gave no numerical earnings guidance in the provided filing text. It noted that higher rates may support future investment income and insurance pricing but can reduce fixed-income asset values and RMBS excess spread, and may affect municipal issuance and obligor finances. Inflation, recession risk, widening credit spreads, foreign-exchange movements, Ukraine-related disruption and continuing COVID-19 uncertainty were identified as risks.
Fair-value and investment volatility was significant: nine-month foreign-exchange losses were $181 million, credit-derivative fair-value losses were $42 million, and trading-security fair-value losses were $30 million. The company noted that credit-derivative valuations rely on models and significant unobservable inputs. Its available-for-sale portfolio’s large unrealized losses were attributed primarily to rising rates rather than credit quality.
Other notable items: the filing reports $6.9 million of net income attributable to AGL from two out-of-period adjustments, which management said were not material. A long-running Lehman Brothers International (Europe) case remained pending after trial; the company described a claimed amount substantially exceeding its own asserted counterclaim. Management judged litigation unlikely to materially affect financial position or liquidity overall, but noted an adverse resolution could materially affect results in a particular period.

Important facts for investors to verify

Progress and final recoveries under the PRHTA plan, its effective date, and the resolution and liquidity consequences of the $720 million PREPA exposure.
Whether BIG exposures, especially U.S. public finance and the downgraded healthcare system, lead to losses beyond current estimates; also monitor the assumptions underlying the $727 million expected-loss measure.
Realized versus unrealized effects of higher rates, credit spreads, foreign exchange and investment valuations on GAAP earnings, equity and liquidity.
Cash available at the parent and regulated insurance subsidiaries, dividend capacity and restrictions, and planned share repurchases relative to claim payments and capital needs.
Asset-management AUM, fee generation and investment performance, including the impact of vehicle-level leverage and the distinction between consolidated vehicle balances and resources available to AGL.