Assured Guaranty Ltd. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context
Assured Guaranty provides financial-guaranty insurance and related credit protection, primarily for public finance and structured finance obligations, and operates an asset-management business through AssuredIM. Its results include consolidated financial-guaranty variable interest entities (FG VIEs) and consolidated investment vehicles (CIVs), which can materially affect reported assets, liabilities, earnings and cash flows.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $90 million | $196 million | $390 million | $373 million |
| Net income (loss) attributable to AGL | $(47) million | $98 million | $19 million | $109 million |
| Diluted EPS | $(0.74) | $1.29 | $0.29 | $1.42 |
| Adjusted operating income (non-GAAP) | $30 million | $120 million | $120 million | $163 million |
| Net earned premiums | $82 million | $102 million | $296 million | $205 million |
| Net investment income | $62 million | $68 million | $124 million | $138 million |
| Asset-management fees | $21 million | $21 million | $55 million | $45 million |
Q2’s GAAP loss reflected foreign-exchange remeasurement losses, investment losses and the absence of prior-year equity-method investment gains, along with lower earned premiums. In the first half, higher earned premiums—largely from Puerto Rico-related premium accelerations—partly offset foreign-exchange and investment losses. Q2 adjusted operating income also declined amid alternative-investment losses, lower earned premiums, trading-portfolio losses and lower CIV fair-value gains. The filing does not present a single consolidated operating-margin measure.
- Insurance and asset management: Insurance segment adjusted operating income was $55 million in Q2 versus $152 million, and $188 million for the first half versus $231 million. Asset Management segment adjusted operating income was approximately break-even in Q2 and first half, compared with losses of $2 million and $9 million, respectively.
- Cash flow: Consolidated operating cash outflow was $1.794 billion for the first half, versus $949 million outflow in 2021. Excluding FG VIE and CIV consolidation effects, operating cash flow was a $621 million outflow versus $46 million inflow, primarily reflecting Puerto Rico resolution claim payments net of recoveries and higher tax payments. Investing activities provided $1.058 billion; financing activities provided $659 million. Period-end cash and cash equivalents and restricted cash were $263 million, including $125 million held by consolidated investment vehicles.
- Liquidity and debt: At June 30, cash was $138 million and short-term investments were $863 million. Consolidated long-term debt was $1.674 billion. The U.S. Holding Companies reported $1.996 billion of debt principal, including intercompany loans and debt held within the group. Management said AGL expected sufficient liquidity for its needs over the following 12 months; insurance subsidiaries’ needs were expected to be met from liquid assets and operating cash flow.
- Equity and investments: Shareholders’ equity attributable to AGL was $5.304 billion, down from $6.292 billion at year-end 2021; the decline mainly reflected unrealized investment losses as interest rates rose and share repurchases. Available-for-sale fixed-maturity securities had fair value of $7.396 billion, down from $8.202 billion. Accumulated other comprehensive loss was $370 million, versus income of $300 million at year-end.
- Insured exposure: Net financial-guaranty par outstanding was $232.8 billion, compared with $236.4 billion at year-end. Below-investment-grade (BIG) net par declined to $5.386 billion from $7.356 billion.
Material changes and notable developments
- Puerto Rico net insured par fell to $2.227 billion from $3.572 billion, following March 2022 resolutions of Commonwealth GO/PBA, PRCCDA and PRIFA exposures. The Company received cash, recovery bonds and contingent value instruments (CVIs); some securities were sold and retained securities remain subject to valuation changes.
- At quarter-end, PRHTA exposure was $1.256 billion net par and PREPA exposure was $748 million. The PRHTA adjustment plan was awaiting court confirmation, with a hearing scheduled for August 17–18, 2022. PREPA restructuring support had been terminated and mediation was ongoing. After quarter-end, on July 8, the Company received $147 million cash and CVIs with $668 million original notional under the PRHTA-related arrangements.
- AssuredIM assets under management were $17.9 billion at June 30, 2022, compared with $17.5 billion at year-end. The increase reflected net flows, partly offset by lower asset values. First-half third-party inflows were $1.361 billion.
- The Company repurchased 5.344 million shares for $306 million during the first half and paid $33 million in dividends. On August 3, 2022, the Board authorized an additional $250 million of repurchases; remaining authorization was $365 million as of that date.
Outlook, risks and unusual items
- Outlook: The filing gives no specific earnings or revenue guidance. Management noted that higher rates and spreads may support insurance demand and future investment income, but can also reduce fixed-income portfolio values, pressure distressed RMBS excess spread and strain some insured obligors. Management said it expected adequate parent-company liquidity for 12 months and was preparing for potential PRHTA-related claims and recoveries.
- Credit and economic risks: Management cited inflation, rising rates, weaker economic activity, the Ukraine conflict, COVID-19 uncertainty, municipal fiscal and pension pressures, and possible investment-market volatility. It reported no material direct insurance exposure to Russia or Ukraine; direct eastern European exposure was approximately $297 million net par, including $68 million BIG exposure to a Hungarian toll road.
- Puerto Rico and other contingencies: Puerto Rico exposures remain sensitive to court outcomes, negotiations, economic and political developments, and the value and timing of recoveries. The Company also disclosed ongoing recovery litigation and other ordinary-course proceedings. Management stated that litigation against the Company was not expected to materially affect financial position or liquidity, while an adverse outcome could materially affect results in a particular period.
- Other exposures: Leveraged-lease strip policies could generate liquidity claims on approximately $436 million gross exposure if all affected leases terminated early and lessees failed to pay; no such policy claim had occurred. Reinsurers could potentially recapture assumed business, requiring approximately $267 million of payments in aggregate if all eligible parties exercised recapture rights.
- Unusual accounting items: The quarter included two out-of-period adjustments totaling $9.0 million of net income attributable to AGL; the first-half total was $6.9 million. Management said the adjustments were not material to prior periods or the financial statements as a whole. The filing also identifies a pending decision in the Lehman Brothers International (Europe) litigation; the claimant’s stated damages range for the remaining transactions was approximately $200 million to $500 million, with a decision anticipated in the second half of 2022.
Most important facts for investors to verify
- Whether the PRHTA plan was confirmed and implemented as expected, and the ultimate cash, bond and CVI recoveries; track PREPA mediation and remaining Puerto Rico exposure.
- How much of the Q2 and first-half earnings decline arose from recurring insurance and asset-management performance versus foreign exchange, investment marks and other fair-value effects.
- Whether the unrealized investment losses, reduced equity and liquidity use affect statutory capital, ratings, dividends or future capital returns.
- Whether expected-loss assumptions and recoveries—particularly for Puerto Rico and U.S. RMBS—change materially as rates, home prices and obligor performance evolve.
- The outcome and potential financial effect of the Lehman litigation and any other material legal or regulatory developments.