Assured Guaranty Ltd. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Assured Guaranty provides financial-guaranty and related credit protection, and since July 1 participates in asset management through its 30% interest in Sound Point. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $403 | $41 | $1,046 | $431 |
| Net income attributable to AGL | $157 | $11 | $363 | $30 |
| Diluted EPS | $2.60 | $0.18 | $5.99 | $0.46 |
| Adjusted operating income, non-GAAP | $206 | $133 | $310 | $253 |
| Net investment income | $100 | $67 | $270 | $191 |
| Net earned premiums | $95 | $89 | $261 | $385 |
| Loss and loss-adjustment expense | $100 expense | $75 benefit | $159 expense | $29 benefit |
- Drivers and earnings quality: Q3 included a $255 gain on the Sound Point and AHP transactions, offset by $14 of related expenses; management cited a $241 net pre-tax gain. The nine-month net pre-tax transaction gain was $215 after $46 of transaction expenses. These transactions were a major reason earnings rose; the reported profit increase should not be read as entirely recurring. Adjusted operating income is non-GAAP and also reflects the transaction gain.
- Insurance and loss estimates: Net economic loss development was $87 in Q3 and $147 for nine months, compared with benefits of $72 and $148 in the 2022 periods. U.S. public finance, particularly PREPA, drove much of the 2023 deterioration; RMBS produced benefits. Net expected losses to be paid were $490 at September 30, down from $522 at year-end 2022.
- New business: Nine-month gross written premiums were $221 versus $229; present value of new business production (PVP, non-GAAP) was $249 versus $240. Gross par written increased to $20.3 billion from $15.0 billion. Q3 PVP was $46 versus $95, with management citing a large prior-year transportation transaction that did not recur.
- Balance sheet and capital: Total assets were $11.9 billion versus $16.8 billion at year-end, largely reflecting deconsolidation of investment vehicles. Total shareholders’ equity was $5.3 billion; equity attributable to AGL was $5.25 billion, or $90.84 per share. Adjusted book value, non-GAAP, was $8.56 billion, or $148.03 per share.
- Investments and liquidity: Total investments were $8.81 billion, including $6.27 billion of available-for-sale fixed maturities and $1.43 billion of short-term investments; cash was $108. Available-for-sale securities had $648 of gross unrealized losses and $30 of gross unrealized gains; management attributed unrealized losses primarily to higher interest rates and said it could hold securities to recovery. Net cash from operating activities was $258 for nine months, versus a $1.85 billion outflow in 2022. Excluding FG VIE and CIV cash flows, operating cash flow was a $217 outflow versus a $534 outflow. Period-end cash and cash equivalents plus restricted cash were $115.
- Debt and distributions: Long-term debt carrying value was $1.69 billion. AGUS issued $350 of 6.125% notes due 2028 and used proceeds to redeem $330 of 5% notes due 2024. Nine-month dividends were $51 and share repurchases were $90. A further $300 repurchase authorization was approved November 1; $372 remained authorized as of November 7.
- Margins: The filing does not present a conventional operating-margin measure; reported results are affected by insurance loss estimates, investment marks, currency movements and consolidation accounting.
Material changes and unusual items
- Assured Guaranty contributed most of AssuredIM to Sound Point and sold AHP in July. It received a 30% Sound Point participation interest, initially valued at $419, and recognized a $255 accounting gain. Sound Point earnings are recorded under the equity method on a one-quarter lag; the company no longer reports consolidated asset-management fee revenue after the transaction.
- Following the transactions, the company deconsolidated CIV assets of $4.7 billion and liabilities of $4.4 billion, materially changing the balance sheet and cash-flow comparisons. CIV cash is generally not available for corporate liquidity needs.
- Q3 other comprehensive loss was $107, mainly reflecting investment valuation declines; nine-month other comprehensive loss was $50. Accumulated other comprehensive loss was $565 at September 30.
- The insurance portfolio’s net par outstanding grew to $241.8 billion from $233.3 billion at year-end. Below-investment-grade (BIG) net par declined to $5.17 billion from $5.89 billion.
Outlook, risks and contingencies
- Guidance: The filing provides no specific earnings or revenue guidance. Management said it expects AGL to have sufficient liquidity for the next 12 months, and expects insurance-subsidiary liquidity needs over that period to be met from liquid assets and operating cash flow.
- Puerto Rico / PREPA: Remaining Puerto Rico net par was $1.105 billion, all BIG, including $624 of PREPA exposure. The court estimated PREPA bondholders’ unsecured net revenue claim at $2.4 billion; Assured Guaranty opposed the FOMB plan, which estimated a 12.5% recovery for non-settling bondholders, and said it expected to appeal aspects of the rulings. Mediation was extended through March 29, 2024; plan confirmation was scheduled for March 2024. Outcomes and recoveries remain uncertain and could materially affect results.
- Other material exposures: Certain leveraged leases could create up to $393 of liquidity claims if all leases terminated early and lessees failed to make required payments; no such policy claims had occurred. Assumed-reinsurance counterparties could recapture business, potentially requiring approximately $264 of payments. These are contingent amounts, not reported losses.
- Market and valuation risk: Management cited interest rates, credit spreads, inflation, foreign exchange, economic conditions and obligor performance as potential drivers of investment values, insured losses and demand. Credit derivatives and other Level 3 valuations rely on models and significant unobservable inputs. The filing reported no material change in market risks since year-end.
- Legal and tax matters: LBIE appealed a judgment in favor of an Assured Guaranty affiliate of approximately $54 plus interest; the company had not accrued the judgment or its attorneys’ fee claim. Management said litigation is not expected to materially adversely affect financial position, though an adverse outcome could materially affect a particular period’s results or liquidity. The U.K. Pillar Two minimum-tax rules and proposed Bermuda corporate tax changes may affect future taxes; the company was assessing their impact.
- Controls: Management concluded disclosure controls were effective as of September 30, 2023, with no reported material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring insurance and investment performance from the transaction gain and other volatile fair-value, foreign-exchange and loss-development effects; review the non-GAAP reconciliations.
- Track PREPA litigation, mediation and plan developments, and compare actual recoveries and claim payments with the $624 PREPA net par exposure and reported loss assumptions.
- Assess the $147 nine-month economic loss development, the $490 remaining expected-loss estimate and sensitivity of RMBS and public-finance assumptions to future conditions.
- Monitor Sound Point’s performance, the timing and amount of equity-method earnings, the $890 of unfunded alternative-investment commitments and liquidity restrictions on invested assets.
- Review holding-company liquidity and subsidiary dividend capacity alongside debt service, repurchases, and the potential tax effects of U.K. and Bermuda legislation.