Assured Guaranty Ltd. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with fiscal 2021 unless noted. Assured Guaranty provides financial guaranty insurance and asset management services. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and condition
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue | $723 | $848 | Down 15% |
| Net income attributable to AGL | $124 | $389 | Down 68%; diluted EPS was $1.92 versus $5.23 |
| Adjusted operating income (non-GAAP) | $267 | $470 | Down 43%; $4.14 per diluted share versus $6.32 |
| Net earned premiums | $494 | $414 | Up 19%, largely due to Puerto Rico-related premium accelerations |
| Net investment income | $269 | $269 | Flat |
| Asset management fees | $93 | $88 | Up 6% |
| Loss and loss adjustment expense | $16 expense | $220 benefit | Material year-over-year swing |
| Net cash from operations, before FG VIE/CIV consolidation | $(1,056) | $420 | Outflow primarily reflected higher claims, including Puerto Rico resolutions |
| Total investments | $8,365 | $9,608 | Down 13% |
| Shareholders’ equity attributable to AGL | $5,064 | $6,292 | Down; primarily affected by investment-related OCI losses, repurchases and dividends |
| Long-term debt carrying value | $1,675 | $1,673 | Principal amount was $1,726 at year-end 2022; $330 principal is due in 2024 |
The company reported a $815 million comprehensive loss attributable to AGL, including $804 million of net unrealized investment losses, mainly reflecting rising interest rates. AOCI moved from positive $300 million to negative $515 million. The filing does not provide a single traditional operating-margin measure that is especially meaningful for this insurance and investment business.
At year-end, total assets were $16.8 billion and total liabilities were $11.6 billion. Balance-sheet cash was $107 million; cash, cash equivalents and restricted cash in the consolidated cash flow statement totaled $207 million, including cash held in consolidated investment vehicles. Consolidated operating cash flow was a $2.5 billion outflow, substantially affected by consolidated FG VIEs and CIVs. Management said holding-company liquidity was sufficient for the next 12 months and described a target of liquid assets equal to 1.5 times stressed operating-company cash-flow needs.
Businesses, portfolio and material changes
- Insurance: Segment adjusted operating income was $413 million, down from $722 million. Gross written premiums were $360 million versus $377 million; present value of new business production (a non-GAAP measure) rose to $375 million from $361 million. Total insured net par outstanding declined to $233.3 billion from $236.4 billion. The portfolio was 2.5% below investment grade (BIG) by net par, compared with 3.1% a year earlier.
- Puerto Rico: Resolutions completed in 2022 reduced insured exposure by about $2.2 billion, to approximately $1.4 billion net par; all remaining Puerto Rico exposure was rated BIG. PREPA remained in payment default, with $720 million net par outstanding, and its restructuring and lien issues remained unresolved. The company received cash, new bonds and contingent value instruments (CVIs) in the completed resolutions.
- Expected insured losses: Net expected loss to be paid (recovered) was $522 million, up from $411 million. The year included $125 million of net economic loss-development benefit, but the year-end estimate increased, notably in U.S. public finance. Estimates depend on management assumptions and are subject to significant uncertainty.
- Asset management: Segment adjusted operating loss narrowed to $6 million from $19 million. Assets under management were $17.5 billion, broadly flat year over year; CLO AUM was $15.2 billion. Performance fees rose, while legacy wind-down fund AUM declined to $182 million from $582 million.
- Capital returns: The company repurchased 8.85 million shares for approximately $503 million at an average $56.79 per share and paid $64 million in dividends. The quarterly dividend was increased to $0.28 per share in February 2023. As of February 28, 2023, $201 million remained authorized for repurchases.
Outlook, commentary and risks
- Outlook: The filing gives no quantified earnings or production guidance. Management said wider municipal credit spreads, if they occur in 2023, could support higher insurance premiums; it also noted that higher rates may raise future investment income. These potential benefits are balanced by rate-related investment valuation pressure, lower issuance, housing-market weakness and possible stress for insured obligors.
- Market and investment risks: Inflation, interest-rate and credit-spread changes, recession, geopolitical events and foreign-exchange movements may affect insured credits, investments, AUM and reported results. The company does not actively hedge interest-rate or foreign-exchange risk in its investment portfolio. Alternative investments may be less liquid and more difficult to value.
- Puerto Rico and contingencies: PREPA’s restructuring, related litigation and the value and recoverability of Puerto Rico consideration remain important uncertainties. Management stated that ordinary-course litigation was not expected to materially harm financial position, but an adverse outcome could materially affect results or liquidity in a particular period. The filing identifies the valuation of insurance loss reserves and recoverables as a critical audit matter.
- Reported-result volatility: GAAP results can fluctuate with fair-value movements in credit derivatives, committed capital securities, FG VIEs and CIVs, as well as foreign-exchange remeasurement and investment marks. Adjusted operating income is non-GAAP and excludes specified items; it should be considered alongside GAAP results.
- Capital and liquidity constraints: The holding company relies substantially on subsidiary distributions, which are subject to regulatory, capital and rating-agency restrictions. The filing also identifies rating downgrades, large claims, access to external capital, cyber risk, asset-management competition and tax-rule changes as material risks.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Track PREPA negotiations, court rulings and expected recoveries, and reconcile remaining Puerto Rico exposure and claim-payment needs with reported loss estimates.
- Review the assumptions behind the $522 million net expected-loss estimate, including discount rates and recovery expectations; actual claims and recoveries may differ.
- Assess whether investment portfolio unrealized losses, credit quality and liquidity improve or worsen, and distinguish portfolio marks from realized losses and cash effects.
- Monitor subsidiary statutory capital, permitted distributions and the holding company’s ability to fund debt service, dividends and repurchases without relying on constrained or uncertain subsidiary payments.
- Evaluate asset-management profitability and fee-earning AUM, including the effects of CLO performance tests, fund distributions and the company’s ongoing strategic-growth discussions.
- Compare GAAP results with adjusted operating income and other non-GAAP measures, noting the exclusions and consolidation effects described in the filing.