Assured Guaranty Ltd. — Q2 2020 Form 10-Q
Business context and reporting period. Bermuda-based Assured Guaranty provides financial guaranty insurance and asset management services. This unaudited filing covers the quarter and six months ended June 30, 2020. Results include BlueMountain, acquired October 1, 2019, so year-over-year comparisons for asset management are not like-for-like.
Financial performance and position
Dollar amounts are in millions except per-share data. Consolidated GAAP results include mark-to-market and other items that management says can cause volatility and may not reflect underlying credit performance.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $372 | $266 | $468 | $461 |
| Net income attributable to AGL | $183 | $142 | $128 | $196 |
| Diluted EPS | $2.10 | $1.39 | $1.42 | $1.90 |
| Adjusted operating income, non-GAAP | $119 | $141 | $152 | $227 |
| Net earned premiums | $121 | $112 | $224 | $230 |
| Net investment income | $78 | $110 | $158 | $208 |
| Loss and LAE expense | $37 | $(1) | $57 | $45 |
- Q2 GAAP income improved principally on a $100 million fair-value gain on credit derivatives, a $38 million commutation gain, gains on consolidated investment vehicles and foreign exchange. These were partly offset by a $25 million CCS fair-value loss, higher claims expense and lower investment income. Six-month income fell primarily on lower investment income, foreign-exchange losses, FG VIE losses and asset-management losses.
- Net investment income declined as average invested assets fell; the pre-tax book yield was 3.33% at June 30, versus 3.56% a year earlier. Q2 asset-management fees were $20 million and six-month fees were $43 million. Asset Management reported adjusted operating losses of $9 million and $18 million, respectively.
- Insurance adjusted operating income was $154 million in Q2 and $239 million for six months, compared with $161 million and $272 million. Corporate adjusted operating losses were $26 million and $65 million, respectively.
- At June 30, total assets were $14.780 billion, total liabilities $8.271 billion, and shareholders’ equity $6.489 billion, including $6.444 billion attributable to AGL. Long-term debt carrying value was $1.222 billion.
- Cash was $293 million and short-term investments $821 million. Cash and restricted cash totaled $473 million, including $175 million held by consolidated investment vehicles and generally unavailable for corporate liquidity needs. Management said it expected sufficient liquidity for the next 12 months, while noting holding-company liquidity depends significantly on subsidiary distributions and access to financing.
- Six-month consolidated operating cash flow was negative $445 million, versus negative $198 million in 2019; before the effect of VIE consolidation, it was positive $79 million versus negative $197 million. Investing cash flow was positive $733 million and financing cash flow positive $9 million. These consolidated cash flows include VIE activity.
Material changes and operating developments
- Financial guaranty net par outstanding declined to $231.959 billion from $236.807 billion at year-end 2019. $8.376 billion, or 3.6%, was internally rated below investment grade (BIG), unchanged as a percentage from year-end.
- Net expected loss to be paid was $735 million, versus $737 million at year-end. Q2 economic loss development was $34 million, versus a $37 million benefit in Q2 2019; six-month development was a $31 million loss, versus a $39 million benefit in 2019. U.S. public finance drove much of the current-period loss development, particularly Puerto Rico.
- Puerto Rico net par exposure rose to $4.388 billion from $4.270 billion, including $118 million reassumed from a reinsurer; all Puerto Rico exposure was rated BIG. The broader insured portfolio’s net debt-service exposure was $362.529 billion.
- New insurance production strengthened: Q2 gross written premiums were $149 million versus $51 million, and present value of new business production (PVP, non-GAAP) was $96 million versus $56 million. Six-month PVP was $147 million versus $98 million. Management said U.S. municipal-market disruption reduced activity in late March and April, followed by higher production as Q2 progressed.
- Asset-management AUM was $17.016 billion at June 30. Six-month net flows were negative $635 million, largely due to wind-down fund distributions; fee-earning AUM increased to $9.946 billion from $7.971 billion at year-end. CLO overcollateralization triggers deferred some management fee payments.
- AGL repurchased 9.6 million shares for $280 million in the first half and paid $37 million in dividends. Shares outstanding fell to 84.1 million from 93.3 million at year-end. A further $149 million of repurchase authorization remained as of August 6, 2020.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic’s duration and ultimate effects were unknown. It highlighted potential deterioration in municipal, tourism- and other revenue-dependent credits, as well as mortgage forbearances, increased claims and reserve needs, investment impairments, asset-management outflows and limits on subsidiary dividends. RMBS estimates assumed a 20% liquidation rate for pandemic-related early-stage forbearances.
- Puerto Rico: Title III restructuring plans, disputes over pledged revenues and bond priority, litigation and mediation remain significant uncertainties. Proceedings and resolution timetables were delayed by the pandemic. The company disagreed with the Oversight Board’s proposed plans and said outcomes could materially affect results in a particular period.
- Other exposure and contingencies: If all leveraged-lease transactions subject to rating-triggered early termination ended without required obligor payments, possible liquidity claims could reach approximately $660 million; no such lease-default claims had occurred to date. A continuing Lehman Brothers International litigation claim has been estimated by the claimant’s expert at $200 million–$500 million, excluding possible interest; trial was postponed due to COVID-19. Management stated litigation was not expected to materially adversely affect financial position or liquidity, but an adverse resolution could affect period results.
- Accounting and valuation: Adoption of the credit-loss standard resulted in a $62 million opening allowance for certain purchased credit-deteriorated securities, with no opening equity impact. The June allowance was $75 million; the company recorded $14 million of credit-loss expense in the first half. Significant Level 3 valuations rely on models and unobservable inputs, including credit spreads and collateral assumptions.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management described the 12-month liquidity outlook as adequate, subject to the risks and restrictions on subsidiary distributions discussed above.
- Management change: On August 6, 2020, Andrew Feldstein resigned as Chief Investment Officer and Head of Asset Management and from BlueMountain leadership roles. David Buzen succeeded him. Feldstein was to remain as a transition-period senior advisor through October 31, 2020.
- Other risks include the LIBOR transition, rating-agency actions, market and interest-rate changes, asset-management performance and retention, and regulatory limits on capital distributions. The company reported disclosure controls were effective and no material change in internal control over financial reporting during Q2.
Key facts for investors to verify
- How pandemic-driven municipal credit stress and Puerto Rico restructuring outcomes affect claims, recoveries and the $735 million expected-loss estimate.
- Whether the large Q2 GAAP earnings contribution from fair-value and commutation items is repeatable; compare GAAP results with the company’s non-GAAP adjusted operating income.
- Whether investment income stabilizes and whether asset-management fee deferrals, wind-down outflows and the leadership transition affect AUM and profitability.
- Holding-company liquidity, regulatory approval and capacity for subsidiary dividends, continued share repurchases and planned investment commitments.
- Developments in Puerto Rico litigation and the Lehman dispute, alongside the potential leveraged-lease liquidity exposure and LIBOR-related contract changes.