Assured Guaranty Ltd. — 2015 Form 10-K
Business context and reporting period. Bermuda-based holding company Assured Guaranty provides financial-guaranty insurance and reinsurance for U.S. and international public-finance, infrastructure and structured-finance obligations. This annual filing covers the fiscal year ended December 31, 2015; comparisons are primarily with 2014. The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Financial performance and condition
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total revenue | $2.207 billion | $1.994 billion | Up about 11%; included large credit-derivative fair-value gains and Radian acquisition gains. |
| Net earned premiums | $766 million | $570 million | Up about 34%, driven by premium accelerations and the acquired Radian portfolio. |
| Net investment income | $423 million | $403 million | Up about 5%. |
| Loss and loss-adjustment expenses | $424 million | $126 million | Increased substantially, primarily reflecting Puerto Rico and other credit deterioration. |
| Net income | $1.056 billion | $1.088 billion | Down about 3%; diluted EPS was $7.08 versus $6.26, helped by fewer shares outstanding. |
| Operating income (non-GAAP) | $699 million | $491 million | Up about 42%; management said 2015 was a record. This measure excludes specified fair-value and other items. |
| Operating cash flow | $(52) million | $577 million | Reported consolidated operating cash flow turned negative; lower RMBS recoveries were a stated factor. |
| Investing / financing cash flow | $994 million / $(847) million | $(96) million / $(585) million | Investing inflows included investment activity and FG VIE cash flows; financing outflows included share repurchases. |
| Investments and cash | $11.358 billion | $11.459 billion | Includes a $11.192 billion investment portfolio and $166 million cash at year-end 2015. |
| Shareholders’ equity / book value per share | $6.063 billion / $43.96 | $5.758 billion / $36.37 | Equity rose; repurchases reduced shares outstanding. |
| Long-term debt | $1.300 billion carrying value | $1.297 billion | Principal outstanding was $1.592 billion at year-end 2015; the filing’s principal and carrying values differ mainly because of accounting adjustments. |
Net par outstanding declined to $358.6 billion from $403.7 billion. The portfolio remained predominantly public finance; 4.2% of total net par was internally rated below investment grade (BIG). Net expected loss to be paid increased to $1.391 billion from $1.169 billion. Statutory claims-paying resources were reported at $12.306 billion.
Material changes versus 2014
- Radian Asset acquisition: AGC acquired Radian Asset on April 1, 2015 for $804.5 million. The acquisition added $13.6 billion of net par exposure. Assured Guaranty recorded $214 million of pre-tax bargain-purchase and settlement gains; the acquired business contributed reported revenue of approximately $560 million and net income of $366 million from the acquisition date through year-end.
- Credit losses: Economic loss development was $319 million in 2015, compared with a $30 million benefit in 2014, primarily due to Puerto Rico public-finance exposures. The reported insurance loss reserve rose to $1.067 billion from $799 million.
- Puerto Rico concentration: Net par exposure increased to $5.1 billion from $4.9 billion; all was internally rated BIG at year-end. The company paid approximately $451,000 on insured PRIFA interest defaults on January 1, 2016.
- Portfolio run-off and production: Net par contracted despite $17.336 billion of gross par written, as maturities, terminations and portfolio runoff outweighed new production. U.S. municipal insurance penetration increased to 6.7% from 5.9%; Assured Guaranty insured an estimated 60% of insured U.S. public-finance par issued.
- Capital returns: The company repurchased 21.0 million shares for $555 million in 2015 and paid $72 million in dividends. A new $250 million repurchase authorization was approved in February 2016.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: Management expected liquidity needs over the following 12 months to be met through subsidiary distributions, investment income, operating cash flows, existing liquid assets and potential external financing. It noted that subsidiary dividends and access to financing are subject to regulatory, rating-agency and market constraints. No quantified earnings guidance is provided in the supplied filing text.
- Market conditions: Persistently low interest rates and narrow credit spreads constrained insurance demand and pricing, although U.S. municipal insurance penetration improved. Management viewed future rate increases and recovery as uncertain amid weak global growth and market volatility.
- Puerto Rico and restructuring risk: Puerto Rico’s fiscal distress, debt-restructuring proposals, pledged-revenue disputes and litigation could increase claims and pressure liquidity. The company had entered a conditional restructuring support agreement with PREPA; implementation remained subject to conditions. Its $5.1 billion net par exposure was all BIG.
- Infrastructure refinancing: The company disclosed approximately $2.9 billion of exposure to infrastructure transactions with refinancing risk. Under specified no-refinancing assumptions, estimated gross claims on its two largest transactions could total $1.9 billion during 2017–2022. Separately, the Chicago Skyway sale closed February 25, 2016, and the insured obligations were retired without a claim.
- Fair-value and estimate volatility: 2015 included $728 million of net credit-derivative fair-value gains and $38 million of FG VIE fair-value gains; the filing cautions that derivative marks can materially affect GAAP earnings without corresponding current cash flows. Credit-derivative and FG VIE valuations rely substantially on Level 3 inputs and management estimates.
- Capital, ratings and collateral: Subsidiary ratings affect new business, premiums, potential claims and collateral requirements. The company posted approximately $305 million of collateral under CDS at year-end. Reinsurer downgrades may reduce capital credit or prompt recapture; potential recapture payments for certain assumed business were estimated at $55 million for AG Re and $34 million for AGC.
- Other contingencies: A Lehman-related CDS lawsuit remained unresolved; the company said any potential loss could not be reasonably estimated. An adverse outcome in a Wells Fargo interpleader proceeding could increase losses by an estimated $10–$20 million, net of expected settlements and reinsurance. Management said litigation was not expected to materially affect financial position or liquidity, while acknowledging quarter- or year-specific earnings effects were possible.
Most important facts for investors to verify
- Reconcile GAAP net income with non-GAAP operating income and assess how much earnings depend on credit-derivative and FG VIE fair-value movements.
- Review Puerto Rico exposure by issuer, collateral and priority, and track the effect of restructuring developments, pledged-revenue litigation and PREPA agreement conditions.
- Test the expected-loss assumptions and liquidity consequences for the $2.9 billion infrastructure refinancing-risk exposure, including the effect of the Skyway retirement.
- Assess whether operating cash flows, available liquid assets and legally distributable subsidiary dividends support parent-company obligations, dividends and repurchases.
- Monitor insurer financial-strength ratings, CDS collateral calls, reinsurance recoverability and any related recapture rights.
- Check subsequent developments in the disclosed litigation and regulatory matters, including the unestimable Lehman-related claim.