Assured Guaranty Ltd. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. Assured Guaranty provides financial guaranty and specialty insurance and participates in asset management through its investment in Sound Point. Figures are in U.S. dollars.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable |
|---|---|---|
| Total revenue | $245 million | $283 million in Q1 2023 |
| Net income attributable to AGL | $109 million; diluted EPS $1.89 | $81 million; diluted EPS $1.34 |
| Adjusted operating income (non-GAAP) | $113 million; $1.96 per diluted share | $68 million; $1.12 per diluted share |
| Net earned premiums | $119 million | $81 million |
| Net investment income | $84 million | $81 million |
| Operating cash flow | $(74) million | $312 million inflow |
| Total assets / shareholders’ equity | $12.168 billion / $5.682 billion | $12.539 billion / $5.765 billion at December 31, 2023 |
| Investments / cash | $8.887 billion / $115 million | $9.115 billion / $97 million at December 31, 2023 |
| Long-term debt on consolidated balance sheet | $1.695 billion | $1.694 billion at December 31, 2023 |
Consolidated revenue declined despite higher earnings. Asset management fees fell to zero from $26 million following the 2023 transfer of most AssuredIM operations to Sound Point. Q1 earnings also benefited from a $39 million acceleration of financial guaranty premiums from refundings and terminations, compared with $4 million in Q1 2023, and $26 million of fair-value gains on trading securities versus a $2 million loss. The company reported a $12 million foreign-exchange remeasurement loss, versus a $20 million gain, and other income was lower, partly because Q1 2023 included reversal of a $20 million litigation accrual.
Cash flow from operations excluding financial guaranty VIEs and consolidated investment vehicles was a $62 million outflow, compared with a $34 million outflow. Management attributed the larger outflow primarily to a $48 million increase in net claim payments. Ending cash and cash equivalents plus restricted cash was $137 million. Cash flows and assets of consolidated VIEs and investment vehicles are not necessarily available for general corporate liquidity.
Material changes and business indicators
- Insurance segment adjusted operating income increased to $149 million from $117 million. Insurance net earned premiums and credit derivative revenues rose to $122 million from $84 million, primarily due to a large refunded transaction.
- New-business production was lower: gross written premiums were $61 million versus $86 million; present value of new business production (PVP, non-GAAP) was $63 million versus $112 million; and gross par written was $3.743 billion versus $5.363 billion. U.S. public finance activity included several large transportation transactions.
- Net par outstanding in the insured financial guaranty portfolio was $248.144 billion, down from $249.153 billion at year-end. Below-investment-grade (BIG) net par was $5.193 billion, or 2.1% of total net par, versus $5.437 billion, or 2.2%.
- Net expected loss to be paid (recovered) decreased to $433 million from $505 million. Q1 economic loss development was a $7 million benefit, compared with an $11 million loss in Q1 2023. These estimates are sensitive to management assumptions and future credit performance.
- Shareholders’ equity attributable to AGL was $5.629 billion, down from $5.713 billion, reflecting share repurchases, dividends and unrealized investment losses, partly offset by net income. Equity per share increased to $102.19 from $101.63, in part due to repurchases.
Outlook, liquidity, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said it believes AGL and its insurance subsidiaries can meet liquidity needs over the next 12 months from available resources and operating cash flows. AGL targets liquid assets equal to 1.5 times stressed operating-company net cash flows.
- Capital returns: The company repurchased shares for $129 million in Q1 and paid $19 million in dividends. On May 2, 2024, the board authorized an additional $300 million of repurchases; as of May 7, total remaining authorization was $414 million.
- Debt and liquidity constraints: U.S. holding-company debt and intercompany loans totaled $2.016 billion of principal, a different measure from consolidated balance-sheet long-term debt. Holding-company liquidity depends substantially on distributions from insurance subsidiaries, which are subject to regulatory and rating-agency limits. The filing reports $143 million of certain pledged or restricted investment assets and another $1.144 billion restricted for other subsidiaries’ benefit.
- Puerto Rico / PREPA: PREPA remains the company’s only defaulted Puerto Rico exposure subject to payment default, with $624 million net par outstanding. Litigation over bondholder liens and claim value continues; the company opposes the FOMB’s proposed plan of adjustment and has appealed key rulings. The plan’s confirmation was under advisement at quarter-end, and mediation was extended to July 31, 2024. Outcomes and recoveries are uncertain.
- Investment and valuation risks: Available-for-sale securities had $438 million of gross unrealized losses at March 31, largely attributed by the company to higher interest rates rather than credit quality. Management said it intended and was able to hold affected securities until anticipated recovery. Fair values for credit derivatives, VIEs and some investments rely on models and significant unobservable inputs.
- Other risks and contingencies: The company identifies sensitivity to interest rates, credit spreads, foreign exchange, economic and geopolitical conditions, insured credit losses, investment valuations, and the performance and liquidity of alternative investments. It has agreed to invest $1.5 billion in alternative investments, including $1 billion in Sound Point-managed investments, subject to terms and regulatory approval; $743 million was unfunded at quarter-end. Management reported no material change in risk factors or market risks and said disclosure controls were effective.
- Notable legal development: The New York Appellate Division affirmed a judgment in Assured Guaranty’s favor in the LBIE litigation on March 14, 2024. LBIE subsequently sought reargument or leave to appeal; the company had not accrued the judgment or requested attorneys’ fees.
Investor verification priorities
- Assess how much Q1 earnings depended on the large premium acceleration and trading-security fair-value gains, and whether these are repeatable.
- Review the PREPA appeals, plan-of-adjustment proceedings, mediation and potential effect on the $624 million net par exposure and expected recoveries.
- Track new-business production, particularly the decline in PVP and gross par written, alongside insured-market penetration.
- Evaluate the assumptions behind expected-loss estimates, especially RMBS recovery and default assumptions, and the sensitivity of Level 3 valuations.
- Confirm parent-company liquidity, permitted insurance-subsidiary distributions, restricted assets, alternative-investment commitments and the pace of share repurchases.