Business context and reporting period
Assured Guaranty Ltd. (AGL), a Bermuda-based financial guarantor and asset manager, filed this unaudited Form 10-Q for the three months ended March 31, 2020, compared with the first quarter of 2019. Following its October 2019 acquisition of BlueMountain Capital Management, the Company reports Insurance and Asset Management segments.
Financial performance and position
Amounts are in U.S. dollars; figures are in millions except per-share data.
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Total GAAP revenue | $96 | $195 |
| Total expenses | $154 | $139 |
| Net income (loss) attributable to AGL | $(55) | $54 |
| Diluted EPS | $(0.59) | $0.52 |
| Adjusted operating income (non-GAAP) | $33 | $86 |
| Net cash from (used in) operating activities | $(164) | $(332) |
- GAAP revenue included net earned premiums of $103 (down from $118), net investment income of $80 (down from $98), and asset management fees of $23; the latter reflect the acquired business. Significant fair-value and foreign-exchange items included a $77 loss on credit derivatives, a $62 foreign-exchange loss, and a $48 gain on committed capital securities.
- Lower earnings primarily reflected foreign-exchange losses, credit-derivative fair-value losses, asset-management losses and lower investment income. These were partly offset by CCS fair-value gains and lower loss and loss-adjustment expenses ($20 versus $46).
- Adjusted operating income comprised Insurance $85 (prior year $111), Asset Management $(9), and Corporate $(39) (prior year $(25)), with other items of $(4). The filing’s segment revenue measure differs from consolidated GAAP revenue because it excludes specified fair-value, realized-gain and foreign-exchange items.
- Cash and short-term investments were $1.072 billion at March 31 ($139 cash and $933 short-term investments). Cash and restricted cash totaled $221, including $82 held by consolidated investment vehicles that is not available for general corporate liquidity. Total investment portfolio was $9.622 billion, down from $10.240 billion at year-end.
- Operating cash outflow improved year over year, mainly because Q1 2019 included a significant Puerto Rico COFINA claim payment; Q1 2020 operating cash flow before VIE consolidation was $(97). Investing cash flow was $389 and financing cash flow was $(180). Cash and restricted cash increased $38 during the quarter.
- At March 31, total assets were $13.745 billion, liabilities $7.472 billion, and shareholders’ equity $6.265 billion. Long-term debt was $1.221 billion. AGL’s equity was $6.240 billion, down from $6.639 billion at December 31; the decline reflected investment-related OCI losses, repurchases, net loss and dividends.
- Net par outstanding in the financial-guaranty portfolio was $230.9 billion, down from $236.8 billion at year-end; 3.6% was rated below investment grade. Net expected losses to be paid declined to $660 from $737, while U.S. public-finance economic loss development was a $56 loss, primarily related to Puerto Rico.
Changes, outlook and material risks
- COVID-19 drove sharp market volatility and economic disruption. Management said consequences for insured obligors, claims, reserves, investments and asset-management AUM remained uncertain. It identified stressed state and local issuers and revenue-sensitive sectors—including transit, toll roads, hotels, stadiums and commercial receivables—as potential areas of increased claims risk.
- Management reported reduced new-policy issuance in late March and into April versus the prior year, but continued secondary-market business. Demand could rise with heightened focus on issuer credit, or fall due to legislative responses or reduced financial strength ratings. The filing gives no earnings guidance or quantified forecast of COVID-19 impacts.
- Puerto Rico exposure was $4.27 billion net par, all rated below investment grade. Several related issuers had defaulted and were in Title III proceedings. The Company opposed the proposed Commonwealth plan of adjustment and said outcomes, recoveries, litigation and timing were uncertain; pandemic-related delays were also noted.
- In April 2020, after quarter-end, the Company reassumed $336 million of par from its largest remaining legacy financial-guaranty reinsurer. The Company also reported $30 million of aircraft residual-value exposure rated below investment grade.
- The Board authorized an additional $250 million of repurchases in February. AGL repurchased 3.6 million shares for $116 million during Q1 and a further 3.3 million shares for $93 million through May 7; $239 million of authorization remained on that date. The quarterly dividend was $0.20 per share.
- Management believed AGL had sufficient liquidity for the next 12 months and that insurance subsidiaries could meet near-term liquidity needs. However, holding-company liquidity depends substantially on subsidiary distributions, which may be constrained by regulatory capital, rating requirements or pandemic-related deterioration.
- Other notable uncertainties include Level 3 valuations, the LIBOR transition, ratings actions, reinsurer recoveries and Puerto Rico litigation. The filing also disclosed a pending Lehman Brothers International (Europe) dispute; the trial was postponed due to COVID-19. Management stated litigation was not expected to materially adversely affect financial position or liquidity, although an adverse outcome could materially affect results in a particular period.
Important facts for investors to verify
- Track subsequent insured-portfolio ratings, claims and reserve revisions as COVID-19 effects develop, especially for public finance and revenue-sensitive exposures.
- Review developments in Puerto Rico Title III proceedings, plan confirmation, litigation and recoveries against the Company’s $4.27 billion net-par exposure.
- Assess the quality and liquidity of investments, including the $73 million credit-loss allowance, unrealized losses, and significant Level 3 valuations.
- Monitor insurance-subsidiary capital and dividend capacity, holding-company liquidity, debt obligations and the pace of share repurchases.
- Evaluate Asset Management performance, AUM flows and fee generation; Q1 AUM fell to $16.479 billion from $17.827 billion at year-end, largely reflecting wind-down fund distributions and market-value declines.