Assured Guaranty Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Assured Guaranty provides financial guaranty insurance and asset management services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 or comparison |
|---|---|---|
| Total revenue | $283 | $300 |
| Net income attributable to AGL | $81; diluted EPS $1.34 | $66; diluted EPS $0.98 |
| Adjusted operating income (non-GAAP) | $68; $1.12 per diluted share | $90; $1.34 per diluted share |
| Net investment income | $81 | $62 |
| Asset management fees | $26 | $34 |
| Loss and loss-adjustment expenses | $4 | $57 |
| Operating cash flow, consolidated | $312 provided | $892 used |
| Operating cash flow before FG VIE and CIV consolidation | $34 used | $640 used |
Net earned premiums were $81 versus $214, largely because Q1 2022 included $104 of premium accelerations related to Puerto Rico resolutions. The Q1 2023 tax provision was $23 and the effective tax rate was 19.1%, compared with 20.0% in Q1 2022. The filing does not provide a single comparable consolidated operating-margin measure.
At March 31, total assets were $16.778 billion, total liabilities $11.363 billion, and total shareholders’ equity $5.415 billion. AGL-attributable equity was $5.220 billion, or $88.07 per share. Cash was $118 million on the balance sheet; cash, cash equivalents and restricted cash totaled $130 million, down from $207 million at year-end. Investments totaled $8.582 billion, including $1.273 billion of short-term investments. Long-term debt was $1.676 billion on the consolidated balance sheet.
Available-for-sale fixed-maturity securities had fair value of $6.869 billion versus amortized cost of $7.359 billion. The company attributed unrealized losses primarily to higher interest rates, not credit quality, and said it intended and was able to hold the securities until recovery. Net expected losses to be paid (recovered) across insured contracts were $517 million, down from $522 million at year-end.
Material changes and business indicators
- GAAP net income attributable to AGL increased to $81 million from $66 million, while adjusted operating income declined to $68 million from $90 million. Management attributed the GAAP improvement chiefly to lower losses, foreign-exchange gains rather than losses, higher CIV fair-value gains, and higher investment income. The adjusted-income decline primarily reflects a $63 million after-tax benefit in Q1 2022 associated with Puerto Rico resolutions.
- Insurance segment adjusted operating income was $117 million, down from $133 million. Asset Management reported a $1 million adjusted operating loss, compared with break-even; Corporate’s adjusted operating loss widened to $44 million from $33 million.
- New insurance business strengthened on selected measures: gross written premiums were $86 million versus $70 million, present value of new business production (non-GAAP) was $112 million versus $69 million, and gross par written was $5.363 billion versus $4.471 billion. Results included a large insurance securitization and non-U.S. public finance transactions. U.S. municipal issuance was lower year over year.
- Net par outstanding under financial guaranties was $236.383 billion, up from $233.258 billion at year-end. Below-investment-grade exposure was $5.882 billion, or 2.5% of net par, broadly stable from $5.892 billion.
- Accumulated other comprehensive loss improved to $420 million from $515 million, mainly reflecting investment valuation changes. Investment income rose with higher short-term rates and balances.
Outlook, management commentary and risks
- Sound Point transaction: On April 5, 2023, after quarter-end, Assured Guaranty agreed to contribute most of its asset management business, excluding Assured Healthcare Partners, to Sound Point in exchange for a 30% participation interest and other interests. Closing was expected in Q3 2023, subject to customary conditions, consents and regulatory approval. The insurance subsidiaries also agreed to transition certain alternative investments and, subject to approval, make investments that would total $1 billion with transferred investments and commitments. Management cited earnings diversification and investment opportunities; the filing cautions that completion and expected benefits are not assured. Assets and liabilities of businesses designated for sale were classified as held for sale at March 31; no impairment was identified.
- Liquidity and capital: Management said AGL expected to have sufficient liquidity for the next 12 months and insurance subsidiaries expected to meet near-term liquidity needs from available resources and operating cash flow. Holding-company liquidity depends substantially on subsidiary distributions and access to financing; insurance-company dividends are subject to regulatory and rating-agency constraints. The company had $201 million remaining under its share-repurchase authorization as of May 9, 2023.
- Puerto Rico: Net insured Puerto Rico exposure was $1.351 billion, all rated below investment grade; $720 million was PREPA exposure in payment default. Resolution discussions and litigation continue. A March 2023 court ruling limited bondholders’ perfected liens to specified funds but recognized an unsecured net-revenue claim; its value remains to be determined. The outcome of PREPA proceedings and recoveries may materially affect results and equity.
- Other sensitivities: Management highlighted interest rates, credit spreads, foreign exchange, economic conditions, housing-market performance, insured-obligor credit quality, investment valuations, and loss-recovery assumptions. Expected-loss estimates are judgmental and can be volatile. Fair values for some derivatives and VIEs rely on Level 3 models and unobservable inputs. The filing reported no material change in market risks since year-end.
- Unusual items: Q1 2023 included a $20 million reversal of a previously recorded litigation accrual, reported in other income. Q1 2023 economic loss development was an $11 million charge, primarily from discount-rate changes. No quantitative full-year earnings guidance was provided.
- Legal proceedings: A court ruled for the company’s affiliate in the Lehman Brothers International (Europe) case in March 2023; entry of judgment was requested and the court’s decision on that request was pending as of the filing. Management said litigation was not expected to materially adversely affect financial position, but an adverse resolution could materially affect results or liquidity in a particular period.
Important facts for investors to verify
- Whether the Sound Point transaction closes on schedule, receives required approvals and delivers the anticipated economic and strategic benefits.
- Developments in PREPA restructuring, including the valuation of bondholders’ unsecured net-revenue claim, and the resulting claims, recoveries and liquidity needs.
- Changes in the $517 million expected-loss estimate, especially assumptions for U.S. RMBS, Puerto Rico and other troubled exposures.
- Underlying operating cash generation and holding-company liquidity, accounting for the fact that consolidated CIV and FG VIE cash is not generally available for corporate needs.
- Investment portfolio credit quality and valuation, including interest-rate-driven unrealized losses and the fair value of Puerto Rico recovery bonds and contingent value instruments.
- Insurance subsidiary dividend capacity, rating actions, and the company’s use of its remaining share-repurchase authorization.