Assured Guaranty Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Amounts are U.S. dollars. Assured Guaranty provides financial guaranty insurance and related credit protection for public finance and structured finance obligations.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $369 million | $195 million in Q1 2014 |
| Net income | $201 million; diluted EPS $1.28 | $42 million; diluted EPS $0.23 in Q1 2014 |
| Operating income (non-GAAP) | $140 million; $0.89 per diluted share | $132 million; $0.72 per diluted share in Q1 2014 |
| Net earned premiums | $142 million | $132 million in Q1 2014 |
| Net investment income | $101 million | $103 million in Q1 2014 |
| Loss and loss adjustment expenses | $18 million | $41 million in Q1 2014 |
| Operating cash flow | $23 million | $101 million in Q1 2014 |
| Cash | $885 million | $75 million at December 31, 2014 |
| Total assets / liabilities | $14.677 billion / $8.891 billion | $14.925 billion / $9.167 billion at December 31, 2014 |
| Shareholders’ equity | $5.786 billion | $5.758 billion at December 31, 2014 |
| Long-term debt | $1.304 billion carrying value; $1.595 billion principal | $1.303 billion carrying value at December 31, 2014 |
| Net par insured | $389.1 billion | $403.7 billion at December 31, 2014 |
The filing does not report a standard operating margin. Net income was materially affected by fair-value movements: credit derivatives contributed a $124 million gain, versus a $211 million loss in Q1 2014. These valuations rely substantially on Level 3 inputs and can be volatile; management’s non-GAAP operating income was $140 million.
Cash rose by $810 million, principally alongside substantial investment portfolio sales and maturities. Investing cash flow was $1.001 billion, while financing cash flow was negative $212 million, including $152 million of share repurchases and $19 million of dividends. The investment portfolio’s fair value was $10.314 billion, down from $11.384 billion at year-end, reflecting lower short-term investments and fixed maturities.
Material changes and business developments
- Net income increased to $201 million from $42 million, chiefly because credit derivative fair-value results reversed from a large loss to a gain and loss expense declined. Operating income rose more modestly, to $140 million from $132 million.
- Net earned premiums increased 8%; $41 million came from premium accelerations, compared with $19 million a year earlier. Scheduled premiums are expected to decline absent replacement business or reassumed business.
- Gross par written rose to $2.708 billion from $1.869 billion, and present value of new business production (PVP, non-GAAP) increased to $36 million from $31 million. U.S. municipal market penetration by par was 5.7%, versus 4.6%.
- Insured net par declined by $14.6 billion from year-end, including runoff and terminations. BIG exposure fell to $17.86 billion from $18.25 billion; 4.6% of total net par was rated below investment grade by the Company.
- On April 1, 2015, AGC acquired and merged Radian Asset for $804.5 million, funded from available resources. The acquisition added approximately $13.6 billion of net par and Radian Asset had approximately $1.3 billion of qualified statutory capital at March 31. Purchase accounting and pro forma information were not yet complete in this filing.
- The Company repurchased 5.86 million shares for $152 million during the quarter, at an average $25.87 per share. On May 6, the board authorized an additional $400 million in repurchases.
Outlook, risks, contingencies and unusual items
- Management stated it expects AGL to have sufficient liquidity for the next 12 months and expects operating subsidiaries’ near-term liquidity needs to be met through liquid assets and operating cash flow. These resources and dividend flows remain subject to insurance regulation, rating-agency requirements and market conditions. No earnings guidance was provided.
- Puerto Rico: Net insured par was $4.94 billion, of which $4.7 billion was internally rated BIG. PREPA forbearance was extended through June 4, 2015, with further extension uncertain; PREPA had suspended debt-service-fund deposits and used reserve funds to meet payments through May 8. The Recovery Act was ruled preempted by federal bankruptcy law, but Puerto Rico appealed; proposed federal legislation and ongoing fiscal and liquidity pressures add uncertainty.
- Infrastructure refinancing: Approximately $3.0 billion of insured exposure has refinancing risk. Under specified assumptions and no refinancing, claims on the two largest transactions could total $1.7 billion gross, payable in 2017–2022; recovery could take 10–35 years and is uncertain.
- Loss estimates and recoveries: Present value of net expected losses to be paid was $1.154 billion, down from $1.169 billion at year-end. Estimates depend on uncertain credit, mortgage-performance, discount-rate and recovery assumptions. The estimated net benefit from mortgage representations-and-warranties recoveries was $245 million, down from $317 million.
- Acquisition and legal exposures: Management cautioned that integrating Radian Asset and realizing expected benefits may prove difficult. In the Lehman Brothers International (Europe) litigation, the plaintiff’s expert estimated damages of $200–$500 million, excluding interest; the Company said any possible loss could not reasonably be estimated. A separate interpleader matter could increase losses by an estimated $10–$20 million. HCCE had presented approximately €14 million in reinsurance claims related to Radian Asset, with further claims possible.
- Rating downgrades could affect new business, reinsurance rights, collateral requirements and claims. Other risks include counterparty and reinsurer collectability, fair-value model uncertainty, interest-rate and market volatility, and regulatory or legal developments. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether Q1’s GAAP earnings strength persists when excluding volatile credit-derivative and FG VIE fair-value effects; review the non-GAAP reconciliation and Level 3 assumptions.
- Developments in Puerto Rico, particularly PREPA’s liquidity, the June 4 forbearance deadline, and legal or legislative changes affecting creditor rights.
- Radian Asset’s final purchase-price allocation, acquired loss estimates, integration costs and contribution to earnings and capital.
- Whether expected loss assumptions and the $245 million estimated R&W recovery benefit are realized, including the impact of mortgage performance and counterparty capacity.
- Liquidity and capital available at the parent and regulated insurers after the acquisition and further repurchases, including limits on dividends and potential claims from refinancing-risk exposures.