Assured Guaranty Ltd. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are identified where available. Assured Guaranty is a Bermuda-based financial guaranty insurer covering U.S. and international public finance, infrastructure and structured finance obligations.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $1.608 billion | $954 million |
| Net income | $808 million | $110 million |
| Diluted EPS | $4.30 | $0.57 |
| Operating income (non-GAAP) | $609 million; $3.25 per share | $535 million; $2.81 per share |
| Net earned premiums | $752 million | $853 million |
| Net investment income | $393 million | $404 million |
| Loss and loss-adjustment expenses | $154 million | $504 million |
| Operating cash flow | $244 million | $(165) million |
| Investments and cash | $10.969 billion | $11.223 billion |
| Total assets | $16.287 billion | $17.242 billion |
| Shareholders’ equity | $5.115 billion | $4.994 billion |
| Long-term debt, carrying value | $816 million | $836 million |
| Long-term debt, principal amount | $1.114 billion | $1.141 billion |
Fourth-quarter 2013 net income was $349 million, or diluted EPS of $1.90, versus $74 million and $0.38 in fourth-quarter 2012. The filing does not provide a conventional operating-margin measure; reported earnings are materially affected by fair-value movements and other items.
- Net income improved mainly because credit-derivative fair-value results swung to a $107 million gain from a $477 million loss, loss expenses declined, and fair-value gains on financial guaranty variable interest entities (FG VIEs) increased. These items make GAAP earnings volatile and do not all represent current-period cash earnings.
- Operating income, the company’s non-GAAP measure, increased 14% to $609 million, primarily on lower loss expense. Net earned premiums declined 12%, mainly from scheduled runoff of the insured portfolio; investment income fell modestly as reinvestment rates declined.
- Cash increased to $184 million from $138 million. Investing cash flow was $681 million and financing cash flow was $(878) million, including FG VIE paydowns and share repurchases.
- Book value per share rose to $28.07 from $25.74. Adjusted book value, a non-GAAP measure, was $9.033 billion, or $49.58 per share, versus $9.151 billion, or $47.17 per share.
Material changes and portfolio developments
- Net par outstanding declined to $459.1 billion from $518.8 billion, reflecting runoff, terminations and portfolio actions. Public finance represented most exposure; U.S. exposure was 89.5% of net par.
- Below-investment-grade (BIG) net par rose to $22.5 billion from $22.3 billion, or 4.9% of total net par versus 4.3%. The company changed its internal rating approach in 2013, so comparisons should be read with that methodology change in mind.
- Puerto Rico exposure was $5.4 billion net par, of which $5.2 billion was rated BIG by the company. All insured Puerto Rico credits were current at year-end. In February 2014, major rating agencies downgraded much of Puerto Rico’s debt to below investment grade.
- U.S. RMBS net par fell to $13.7 billion from $17.0 billion; $7.7 billion was BIG. The company recorded a $712 million net expected benefit for RMBS representation-and-warranty recoveries and reported approximately $3.6 billion of gross payments, agreed payments and repurchases achieved through its recovery efforts.
- Estimated net expected loss to be paid increased to $982 million from $677 million. Troubled U.S. public-finance expected losses rose to $264 million from $7 million, largely due to Puerto Rico, Detroit and Harrisburg developments.
- New-business present value (PVP, non-GAAP) declined to $141 million from $210 million; gross par written fell to $9.35 billion from $16.82 billion. The company launched Municipal Assurance Corp. (MAC) as a U.S. public-finance-only insurer in 2013.
Outlook, risks and unusual items
- Management expected U.S. municipal issuance to remain low in 2014, with persistent low interest rates, limited refinancing activity, municipal budget pressures and competition weighing on demand. It saw potential longer-term opportunities in infrastructure and structured finance as markets recover; no quantified earnings guidance was provided.
- Management stated it expected sufficient liquidity for the next 12 months. Holding-company liquidity depends substantially on regulated subsidiary dividends and external financing. 2014 ordinary dividend capacity was approximately $173 million for AGM and $69 million for AGC, subject to legal and regulatory limits.
- Key credit and liquidity risks include municipal deterioration, especially Puerto Rico; uncertain RMBS loss and recovery estimates; and approximately $3.0 billion of infrastructure exposure with refinancing risk. For the two largest such transactions, claims could reach $1.8 billion gross if refinancing does not occur, with payments potentially due in 2017–2022 and recovery taking 10–35 years.
- Credit-derivative liabilities were $1.787 billion. The company had posted approximately $677 million of collateral under CDS contracts. A further downgrade could trigger additional collateral needs or termination payments; some termination amounts cannot be reliably estimated.
- Reinsurance and counterparty performance remain important risks. Approximately 6% of principal outstanding was ceded to third-party reinsurers, some financially weakened. A new aggregate excess-of-loss facility effective January 1, 2014 covers specified public-finance losses above $1.5 billion, subject to a $500 million layer and exclusions including Puerto Rico.
- AGL became U.K. tax resident in November 2013 while remaining Bermuda-based. Management did not expect a material change in the group’s overall tax charge, but group supervision, tax treatment and regulatory requirements could change.
- Management said litigation was not expected to materially affect financial position or liquidity, but certain outcomes could materially affect results in an individual period. The filing cites, among other matters, RMBS recovery litigation and an interpleader proceeding with an estimated $10–$20 million potential adverse loss. The SEC closed its investigation of AGMH’s former financial-products business without recommending enforcement action in January 2014.
- The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- How much of 2013’s earnings improvement reflects recurring underwriting and investment performance versus noncash fair-value changes, settlements and FG VIE accounting.
- Assumptions behind the $982 million expected-loss estimate, the $712 million RMBS recovery benefit and the company’s ability to collect projected future recoveries.
- Puerto Rico’s payment capacity, rating developments and the potential effect of claims on liquidity and capital.
- Refinancing outcomes for the $3.0 billion infrastructure-risk exposure, including the timing and recoverability of potential claims.
- Subsidiary statutory capital, dividend capacity, collateral requirements, reinsurer credit quality and the terms and continuing availability of the 2014 reinsurance facility.
- Whether declining premiums and new-business production, competition, rating actions or low issuance constrain future profitability and capital generation.