Business context and reporting period
Assured Guaranty Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The Bermuda-based holding company provides financial guaranty and specialty insurance, primarily in public and structured finance, and asset management through AssuredIM. Results include consolidated variable interest entities (VIEs), which can materially affect reported assets, liabilities and cash flows.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $212 million | $268 million | $585 million | $736 million |
| Net income attributable to Assured Guaranty | $17 million | $86 million | $126 million | $214 million |
| Diluted EPS | $0.22 | $1.02 | $1.66 | $2.43 |
| Adjusted operating income (non-GAAP) | $34 million | $48 million | $197 million | $200 million |
| Net investment income | $66 million | $71 million | $204 million | $229 million |
| Asset management fees | $20 million | $17 million | $65 million | $60 million |
| Loss and LAE expense (benefit) | $(68) million | $73 million | $(54) million | $130 million |
At September 30, 2021, total assets were $17.6 billion, total liabilities $11.2 billion, and shareholders’ equity $6.4 billion. The balance sheet included $101 million of cash and $694 million of short-term investments. Long-term debt carrying value was $1.67 billion. The investment portfolio totaled $9.62 billion, including $8.66 billion of fixed-maturity securities.
For the first nine months, consolidated operating cash flow was negative $1.79 billion; investing cash flow was positive $169 million and financing cash flow positive $1.57 billion. Management reports operating cash flow excluding VIE consolidation of negative $20 million. Consolidated cash flows include investment-vehicle activity and are not a direct measure of cash available to the parent.
Insured financial guaranty net par outstanding was $235.7 billion; net debt service outstanding was $366.4 billion. Below-investment-grade (BIG) net par was $7.35 billion, or 3.1% of total net par. AUM was $17.6 billion, including $16.3 billion of fee-earning AUM.
Material changes versus comparable periods
- Q3 GAAP earnings fell mainly because of a $175 million pre-tax debt-extinguishment loss ($138 million after tax) and a $27 million foreign-exchange loss, compared with a $40 million FX gain a year earlier. The debt charge arose from refinancing and redemption activity, including a $156 million acceleration of acquisition-related fair-value adjustments and a $19 million make-whole payment.
- Insurance-segment adjusted operating income rose to $214 million from $81 million in Q3, primarily reflecting a loss benefit rather than the prior-year loss expense and higher equity earnings from investees. Corporate adjusted operating loss widened to $169 million from $18 million, chiefly because of the debt charge.
- Nine-month GAAP earnings declined to $126 million from $214 million. Lower earnings reflected the debt charge, credit-derivative and committed-capital-security fair-value losses, and the absence of a prior-year $38 million commutation gain. Lower loss expense and higher equity earnings partly offset these items.
- Net investment income declined, mainly due to lower reinvestment yields and income from loss-mitigation securities. Asset-management fees increased, particularly CLO fees, as fee-earning CLO AUM grew.
- Net expected losses to be paid (recovered) fell to $199 million from $529 million at year-end 2020. The company reported $101 million of net economic loss benefit for the nine months, including benefits in U.S. RMBS and public finance.
- Shareholders’ equity attributable to the company decreased to $6.30 billion from $6.64 billion, primarily reflecting repurchases, dividends and other comprehensive losses. Adjusted book value per share, a non-GAAP measure, increased to $122.50 from $114.87.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management says it expects AGL to have sufficient liquidity for the next 12 months and expects insurance subsidiaries’ near-term liquidity needs to be met from cash, short-term investments and operating cash flows.
- Management reported $17.4 billion of municipal new-issue par insured in the first nine months, the highest first-nine-month total since 2010. It also noted that low interest rates and narrow municipal credit spreads have restrained bond-insurance demand, while pricing had returned to pre-pandemic levels.
- Puerto Rico net par exposure was $3.57 billion, all rated BIG. Approximately 95% was covered by support agreements, but outcomes depend on court approval, implementation and possible legal challenges. Management anticipated potentially substantial claim payments beginning as early as December 2021 and continuing through 2022 or later.
- COVID-19 remains an uncertainty. Through November 4, 2021, the company had paid less than $10 million in first-time claims it attributed at least partly to pandemic-related credit stress and projected nearly full reimbursement. Management cautions that further claims or reserve changes remain possible.
- Other matters to monitor include changing RMBS loss assumptions and recoveries, LIBOR transition impacts, market-driven fair-value volatility, and rating-agency actions. The company reported that there were no material changes in market risks from year-end 2020 and no material changes to the risk factors in its 2020 Form 10-K.
- Potential liquidity and legal exposures include up to approximately $612 million of gross liquidity claims on leveraged-lease strip policies if all affected leases terminate early and obligors fail to pay termination amounts; the company reports no such claim to date. Reinsurer recapture rights could require approximately $266 million of payments if exercised. The LBIE litigation trial began October 18, 2021; management says litigation is not expected to materially affect financial position or liquidity, though an adverse outcome could materially affect a particular period’s results.
- The company issued $500 million of 3.15% notes due 2031 and $400 million of 3.6% notes due 2051, using proceeds partly to redeem higher-coupon debt. It repurchased $305 million of shares and paid $51 million in dividends during the nine months. A further $350 million repurchase authorization was approved in August; $220 million remained authorized as of November 4.
Important facts for investors to verify
- Progress and court approvals for Puerto Rico plans and support agreements, related claim-payment timing, and realized recoveries versus current estimates.
- Whether RMBS delinquency, severity and recovery assumptions hold, particularly for second-lien loans and COVID-19 forbearances.
- Underlying parent and insurance-subsidiary liquidity, distinguishing cash available to the company from cash held within consolidated VIEs.
- Effects of debt refinancing, debt service, dividends from regulated insurance subsidiaries, and continued share repurchases on capital and liquidity.
- Changes in asset-management fee-earning AUM, third-party inflows, fund performance and the risks of consolidated CLO and warehouse financing activity.
- Developments in the LBIE trial and other litigation, leveraged-lease exposures, reinsurance recapture rights, and LIBOR-linked contracts.