Assured Guaranty Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods. Dollar amounts are in millions unless stated otherwise. Assured Guaranty provides financial guaranty and specialty insurance and operates an asset-management business, AssuredIM.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $196 | $372 | $373 | $468 |
| Net income attributable to AGL | $98 | $183 | $109 | $128 |
| Diluted EPS | $1.29 | $2.10 | $1.42 | $1.42 |
| Adjusted operating income (non-GAAP) | $120 | $119 | $163 | $152 |
| Net earned premiums | $102 | $121 | $205 | $224 |
| Net investment income | $68 | $78 | $138 | $158 |
| Asset-management fees | $21 | $20 | $45 | $43 |
- Q2 GAAP income fell primarily because 2021 had fair-value losses on credit derivatives rather than the prior-year gains, and lacked the $38 million 2020 commutation gain. Lower loss expense and equity-method earnings partly offset these effects. For the six-month comparison, credit-derivative and committed-capital-security fair-value losses and the absence of the 2020 commutation gain were partly offset by foreign-exchange gains, investee earnings and lower loss expense.
- Adjusted operating income was broadly stable in Q2 and increased for the six-month period. Q2 segment results: Insurance $152; Asset Management loss $2; Corporate loss $34; Other income $4. Six-month results were $231, loss $9, loss $63 and income $4, respectively.
- Q2 insurance-segment loss and loss-adjustment expense was a $12 benefit, versus $39 expense in Q2 2020. Six-month expense was $18, versus $57. Net expected loss to be paid or recovered was $466 at June 30, down from $529 at year-end 2020; the filing emphasizes that these estimates depend on uncertain assumptions and may change materially.
- Insurance new-business production: gross par written was $6.1 billion in Q2 and $11.6 billion for six months. Six-month present value of new business production (PVP, non-GAAP) was $167, up from $147; gross written premiums were $171, down from $213. Management reported $10.8 billion of municipal new-issue par insured in the first half, its highest first-half volume since 2010.
- AssuredIM had $17.6 billion of AUM at June 30, including $16.3 billion of fee-earning AUM. Total AUM rose modestly from $17.3 billion at year-end; fee-earning AUM increased from $12.9 billion. Asset-management adjusted results remained negative, though fee revenue rose as CLO fee-earning assets grew and prior-year fee deferrals did not recur.
Cash flow, liquidity and debt
- Six-month consolidated operating cash flow was negative $949, compared with negative $445 a year earlier. The filing attributes much of the reported outflow to consolidation of investment vehicles. Before the effect of VIE consolidation, operating cash flow was positive $46, down from $79.
- Investing cash flow was negative $256, versus positive $733; financing cash flow was positive $1.203 billion, versus positive $9. Financing included $495 net proceeds from debt issuance, $165 of share repurchases and $35 of dividends. Consolidated cash and restricted cash ended at $296; balance-sheet cash was $144, and short-term investments were $1.087 billion.
- Total assets were $17.226 billion and shareholders’ equity was $6.552 billion. Consolidated investment-vehicle assets and liabilities grew substantially with new vehicle consolidations; these vehicle assets are generally not available for corporate liquidity needs, and their creditors generally have no recourse to the parent’s assets.
- Long-term debt carrying value was $1.720 billion, versus $1.224 billion at year-end. AGUS issued $500 million of 3.15% senior notes due 2031 in May. After quarter-end, $200 million of AGMH debt was redeemed; the company expects a Q3 pretax loss of approximately $66 million ($52 million after tax) on that redemption.
- Management stated that holding-company liquidity should be sufficient for the next 12 months. Insurance subsidiaries target liquid assets equal to 1.5 times projected operating cash needs over the next four quarters. Availability of subsidiary dividends remains subject to regulatory, financial and rating-agency restrictions.
Material changes, outlook and risks
- Puerto Rico: Net exposure was $3.725 billion, all internally rated below investment grade; $3.5 billion, or about 94%, was covered by support agreements. Agreements and proposed recoveries remain conditional on court approval and may face legal challenge or implementation risk. The company warns Puerto Rico developments could materially affect results and equity.
- Other credit exposures: BIG net par outstanding was $7.649 billion, about 3.3% of total financial-guaranty net par. U.S. Virgin Islands BIG exposure increased to $474 million of $478 million net par. Management said COVID-related claims paid through August 5 were relatively small and expected to be nearly fully reimbursed, but pandemic effects and future claims remain uncertain.
- Market-sensitive results: GAAP earnings can fluctuate with credit spreads, interest rates, foreign exchange and fair-value movements in credit derivatives, committed capital securities and VIEs. Credit-derivative valuations rely on Level 3 models and significant unobservable inputs. The filing reports no material change in market risks since year-end.
- Capital actions: The company repurchased $165 million of shares during the first half and authorized an additional $350 million buyback on August 4; remaining authorization was $379 million as of August 5. The quarterly dividend was $0.22 per share.
- Corporate change: Municipal Assurance Corp. merged into AGM on April 1. The company wrote off $16 million of insurance-license value in Q1; management expects the restructuring to simplify the organization, reduce costs and increase future dividend capacity.
- Legal and regulatory matters: A major Puerto Rico restructuring-related litigation portfolio remains unresolved. In the LBIE dispute, the counterparty has asserted a claim of approximately $1.4 billion; the company says it is owed amounts instead. Trial was scheduled for October 18, 2021. The company believes litigation outcomes are not expected to materially harm financial position or liquidity, but adverse outcomes could materially affect a particular period’s results.
- Outlook: No quantitative earnings or revenue guidance is provided in the supplied filing text. Management cites low interest rates and tight municipal credit spreads as constraints on insurance pricing, while describing improved first-half municipal production and growth in fee-earning CLO assets. LIBOR transition, including contract-specific fallback issues, remains an operational and valuation risk.
Most important facts for investors to verify
- Progress, court approval and expected recoveries under Puerto Rico support agreements, and how these affect loss estimates and claims cash flows.
- Underlying performance of BIG exposures, including U.S. public finance, U.S. RMBS and the U.S. Virgin Islands; sensitivity of expected losses to assumptions and recoveries.
- How much of reported cash flow and balance-sheet growth reflects consolidated investment vehicles, and the liquidity actually available to the parent and insurers.
- Execution and economics of the 2031 note issuance, post-quarter debt redemption and expected $66 million pretax redemption loss.
- Whether buybacks and dividends remain consistent with holding-company liquidity, insurance-subsidiary dividend limits and capital needs.
- Changes in AssuredIM fee-earning AUM, third-party inflows, CLO performance and the continuing wind-down of legacy funds.
- Resolution of the LBIE litigation, LIBOR fallback arrangements and any material change in pandemic-related claims or risk monitoring.