ASSURED GUARANTY LTD annual report, FY2020

Abrir documento

Assured Guaranty Ltd. — FY 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. Amounts are U.S. dollars. The company provides financial-guaranty insurance and asset-management services. AssuredIM, acquired in October 2019, is included for a full year in 2020 but only the fourth quarter in 2019, limiting some year-over-year comparisons.

Financial performance and position

  • Revenue: $1.115 billion, up 16% from $963 million in 2019. Net earned premiums were $485 million (2019: $476 million); investment income was $297 million (2019: $378 million); asset-management fees were $89 million (2019: $22 million).
  • Profit: GAAP net income attributable to AGL was $362 million, down 10% from $402 million; diluted EPS was $4.19 versus $4.00. Non-GAAP adjusted operating income was $256 million, down 35% from $391 million; adjusted operating EPS was $2.97 versus $3.91. Derived GAAP net margin was approximately 32.5%, compared with 41.7% in 2019.
  • Segments: Insurance adjusted operating income was $429 million (2019: $512 million). Asset Management recorded a $50 million loss (2019: $10 million loss; only one quarter included). Corporate loss was $111 million, unchanged. Asset-management AUM was $17.3 billion at year-end.
  • Cash flow and liquidity: Consolidated operating cash flow was negative $853 million (2019: negative $509 million), materially affected by consolidated investment vehicles. Before VIE consolidation, operating cash flow was positive $67 million versus negative $255 million. Year-end cash was $162 million and short-term investments were $851 million. Management said expected holding-company and insurance-subsidiary liquidity needs for the next 12 months could be met.
  • Debt and equity: Consolidated long-term debt carrying value was $1.224 billion; U.S. holding-company debt was reported at $1.706 billion principal, including intercompany debt and net of debt purchased by an affiliate. Shareholders’ equity attributable to AGL was $6.643 billion. The company repurchased 15.8 million shares for $446 million and paid $69 million in dividends during 2020.
  • Insurance exposure and reserves: Net insured par outstanding was $234.2 billion, down from $236.8 billion; below-investment-grade net par was $8.0 billion versus $8.5 billion. Net expected loss to be paid (recovered) was $529 million versus $737 million. 2020 economic loss development was $145 million, mainly from Puerto Rico, partly offset by U.S. RMBS benefits. Loss and LAE expense was $203 million versus $93 million.

Material changes versus 2019

  • Net income declined primarily because of higher loss expense, lower investment income and a larger Asset Management segment loss; fair-value gains on credit derivatives and consolidated investment vehicles and commutation gains partly offset these effects.
  • Net investment income fell 21%, reflecting lower average investment balances and yields. The overall pre-tax book yield declined to 3.25% from 3.51%.
  • Insurance production shifted toward U.S. public finance: gross written premiums were $454 million versus $677 million, while present value of new business production was $390 million versus $569 million. U.S. public-finance premiums rose 48%; non-U.S. public-finance production declined from the unusually high 2019 level.
  • U.S. municipal bond-insurance penetration increased to 7.6% of par issued from 5.9%. Assured Guaranty insured approximately 58% of the insured U.S. public-finance market.
  • Investment portfolio carrying value declined to $9.838 billion from $10.240 billion. AGL’s year-end share count fell to 77.5 million from 93.3 million, supporting higher per-share book-value measures despite lower adjusted operating shareholders’ equity.

Outlook, risks and unusual items

  • Outlook: The filing provides no quantified earnings or revenue guidance. Management said 2020 U.S. public-finance production was strong and liquidity was adequate for the next 12 months, but the path and duration of COVID-19 effects remained uncertain. A quarterly dividend of $0.22 per share was declared in February 2021, up 10% from $0.20.
  • COVID-19: The pandemic increased uncertainty around insured obligors, investment values, claims and asset-management fundraising. Through February 25, 2021, the company reported only relatively small first-time claims believed partly attributable to COVID-19 and projected full reimbursement; further losses or reserve increases remained possible.
  • Puerto Rico and litigation: Net par exposure was $3.725 billion, all rated below investment grade; most affected entities had defaulted and the company had paid claims. Recoveries depend on restructurings, litigation and other outcomes. The company also reported ongoing legal disputes concerning Puerto Rico debt and pledged revenues.
  • Other contingencies: Potential liquidity claims on approximately $640 million of gross leveraged-lease exposure could arise if leases terminate and obligors fail to make required termination payments; no such policy claims had occurred to date. Rating downgrades could also trigger claims, recapture of reinsured business or constraints on new business.
  • Unusual items and accounting: The year included $38 million of commutation gains, $81 million of net gains from changes in credit-derivative fair value, a $13 million Asset Management lease impairment, and a $12 million benefit related to a former executive’s separation. Fair-value movements and VIE consolidation can make GAAP results volatile and are not necessarily equivalent to realized cash gains or losses.
  • Other risks: Low interest rates may pressure insurance demand and investment income. LIBOR transition, market and credit-spread movements, foreign exchange, model-based loss estimates, alternative-investment liquidity, ratings actions and regulatory limits on subsidiary dividends may affect results or parent-company liquidity. The auditor issued an unqualified opinion and reported effective internal control over financial reporting; valuation of loss reserves and recoverables was identified as a critical audit matter.

Important facts for investors to verify

  • Review the assumptions, recoveries and litigation developments underlying Puerto Rico loss estimates and the $3.725 billion net exposure.
  • Reconcile GAAP net income with adjusted operating income, particularly credit-derivative fair values, VIE effects and other non-GAAP adjustments.
  • Assess the Asset Management segment’s path to profitability, fee-earning AUM, third-party fundraising and any goodwill or intangible-asset impairment risk.
  • Check insurance-subsidiary statutory capital, permitted dividend capacity, claims liquidity and ratings; reported holding-company liquidity depends materially on subsidiary distributions.
  • Track COVID-19-related credit deterioration, leveraged-lease obligations, LIBOR fallback decisions and the effects of share repurchases on capital and per-share measures.