Assured Guaranty Ltd. — Q3 2019 Form 10-Q
Business context and reporting period. Bermuda-based financial guaranty insurer Assured Guaranty reported the quarter and nine months ended September 30, 2019, compared with the same 2018 periods. The company insures scheduled debt payments, principally in public finance and structured finance. On October 1, 2019, after quarter-end, it completed its acquisition of BlueMountain Capital Management.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $206 million | $275 million | $667 million | $788 million |
| Net income | $69 million | $161 million | $265 million | $433 million |
| Diluted EPS | $0.70 | $1.47 | $2.61 | $3.83 |
| Net earned premiums | $123 million | $142 million | $353 million | $423 million |
| Net investment income | $88 million | $99 million | $296 million | $297 million |
| Loss and loss-adjustment expenses | $30 million | $17 million | $75 million | $43 million |
Cash flow and balance sheet. Nine-month operating cash flow was negative $365 million, versus positive $352 million in 2018; investing activities provided $1.070 billion and financing activities used $578 million. Cash and restricted cash was $229 million at September 30. Total assets were $13.367 billion, total liabilities $6.715 billion, and shareholders’ equity $6.652 billion. The investment portfolio totaled $10.476 billion, including $1.142 billion of short-term investments. Long-term debt had a $1.234 billion carrying value; reported principal, before reflecting debt held within the group, was $1.453 billion. The filing does not provide a clear consolidated operating-margin measure.
Insurance portfolio and capital. Net par outstanding was $229.4 billion, down from $241.8 billion at year-end 2018; 3.7% was rated below investment grade (BIG), compared with 4.2%. Net expected loss to be paid declined to $718 million from $1.183 billion. The company repurchased $340 million of shares and paid $56 million of dividends during the first nine months. GAAP equity increased from $6.555 billion at year-end, while non-GAAP adjusted book value was $8.702 billion, down from $8.922 billion.
Material changes and management commentary
- Net income fell year over year in both the quarter and nine-month period. Management attributed the declines to lower earned premiums, higher loss expenses, and less favorable credit-derivative fair-value results over nine months. Q3 2018 also included a $31 million gain from the sale of a minority investment in TMC Bonds.
- Nine-month 2019 gross written premiums were $159 million and present value of new business production (PVP, a non-GAAP measure) was $177 million, compared with $516 million and $567 million, respectively, in 2018. The prior-year figures included the substantial Syncora portfolio assumption, which management identified as the primary reason for the comparison.
- Puerto Rico-related U.S. public finance exposures drove much of the adverse public-finance loss development. The company reported $4.27 billion of net Puerto Rico exposure, all rated BIG. It recorded $204 million of U.S. public-finance economic loss development for the first nine months, primarily attributed to Puerto Rico; structured finance generated a $214 million economic benefit, principally from U.S. RMBS.
- Management said low interest rates and relatively tight municipal credit spreads dampened bond-insurance demand, while defaults and financial stress among municipal obligors have raised awareness of the product. No specific earnings or revenue guidance is provided in the supplied filing text.
Outlook, significant events, and risks
- BlueMountain acquisition: AGUS acquired the asset manager for approximately $160 million on October 1 and contributed $60 million at closing, with another $30 million planned within a year. Insurance subsidiaries made $250 million of 10-year intercompany loans at 3.5% to fund the purchase and contributions. Purchase accounting was incomplete at filing. The filing describes BlueMountain assets under management as $18.3 billion in one passage and $15.4 billion in another; investors should confirm the appropriate figure and scope.
- Puerto Rico: Restructuring proposals, claims priorities, pledged-revenue disputes, and litigation remain unresolved. The company disagreed with the Oversight Board’s proposed adjustment plan and noted that court stays and mandatory mediation were extended through December 31, 2019. PREPA restructuring remained conditional on court and creditor approvals.
- Liquidity and capital: Management believed holding-company liquidity would be sufficient for the next 12 months and described liquidity resources and subsidiary distributions as key funding sources. Such distributions are subject to regulatory, rating-agency, and subsidiary-capital constraints. Certain investment assets are pledged or held in trust; consolidated cash and short-term investments should not be assumed to be freely available at the parent.
- Other risks: Results are sensitive to subjective expected-loss estimates, recovery assumptions, market values of Level 3 assets and liabilities, interest and foreign-exchange rates, rating actions, and municipal credit conditions. BlueMountain adds integration, client-retention, personnel, competitive, regulatory, performance-fee, and investment-liquidity risks. LIBOR transition and Brexit were also identified as uncertainties.
- The company disclosed a continuing Lehman Brothers International (Europe) dispute, with a trial scheduled for March 2020; the counterparty’s historical damages estimate was $200–$500 million, while the company asserted amounts were owed to it. Management said litigation outcomes could affect results in a particular period, although it did not expect litigation against the company, individually or in aggregate, to materially adversely affect financial position or liquidity.
Most important facts for investors to verify
- How Puerto Rico plan negotiations, litigation, recoveries, and claim payments change the $4.27 billion net exposure and the $718 million expected-loss estimate.
- Whether operating cash flow remains negative and how much liquid capital is available at the holding company after statutory restrictions, acquisition funding, and subsidiary distributions.
- BlueMountain’s actual assets under management, integration progress, retention of investment professionals and clients, and performance relative to the acquisition rationale.
- Drivers of lower premiums and earnings, including portfolio runoff, refunding activity, recurring versus fair-value results, and future loss development.
- Whether the assumptions underlying RMBS recoveries, municipal credit exposures, Level 3 valuations, and rating-sensitive reinsurance arrangements remain reasonable.