Assured Guaranty Ltd. — Q1 2018 Form 10-Q
Business and period. Bermuda-based holding company providing financial guaranty and other insurance through subsidiaries. The unaudited quarter ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Total revenue | $293 million | $527 million in Q1 2017 |
| Net income; diluted EPS | $197 million; $1.68 | $317 million; $2.49 |
| Non-GAAP operating income; per diluted share | $155 million; $1.33 | $273 million; $2.14 |
| Net earned premiums | $145 million | $164 million |
| Net investment income | $101 million | $122 million |
| Loss and loss-adjustment expense | $(18) million benefit | $59 million expense |
| Operating cash flow | $27 million | $102 million |
| Cash and restricted cash | $117 million | $144 million at Dec. 31, 2017 |
| Investment portfolio | $11.151 billion | $11.395 billion at Dec. 31, 2017 |
| Long-term debt, carrying value | $1.281 billion | $1.292 billion at Dec. 31, 2017 |
| Shareholders’ equity | $6.784 billion | $6.839 billion at Dec. 31, 2017 |
GAAP net income was approximately 67% of revenue in Q1 2018 versus 60% in Q1 2017; this ratio is affected by volatile fair-value and other items and is not a standalone measure of underwriting profitability. Financing cash outflow was $181 million, including $100 million of share repurchases and $18 million of dividends. Investing cash flow was $126 million.
Material changes and portfolio
- Revenue declined 44% year over year and net income declined 38%. Management attributed the comparison primarily to Q1 2017 commutation gains and the MBIA UK acquisition gains, which did not recur, as well as lower earned premiums. Q1 2017 included $73 million of commutation gains and $58 million of acquisition-related gains.
- Non-GAAP operating income fell to $155 million from $273 million. Lower loss expenses and a lower effective tax rate partly offset the prior-year unusual gains and lower earned premiums. The effective tax rate was 9.3%, compared with 14.7%.
- Net expected loss to be paid was $1.298 billion, little changed from $1.303 billion at year-end. Q1 economic loss development was a $24 million benefit, led by public finance; U.S. RMBS recorded $16 million of adverse development.
- Net par outstanding in the insured financial guaranty portfolio was $257.1 billion, down from $265.0 billion. BIG exposure was $11.6 billion, or 4.5% of net par, versus $12.2 billion, or 4.6%, at year-end.
- Puerto Rico net insured exposure was $4.967 billion, all internally rated below investment grade. The company had paid claims on most Puerto Rico exposures; several obligors were in Title III proceedings under PROMESA. The Commonwealth’s and related entities’ fiscal plans, hurricane recovery, and legal challenges remained uncertain.
- New business production weakened: gross written premiums were $73 million versus $111 million; present value of new business production was $61 million versus $99 million; and gross par written was $2.202 billion versus $4.691 billion. U.S. municipal bond issuance and insured volume were also lower.
Outlook, liquidity, risks and unusual items
- No specific earnings or revenue guidance was provided. Management stated it expected sufficient holding-company liquidity for the next 12 months. It relies substantially on subsidiary distributions, which are subject to statutory, regulatory and rating-agency constraints. At March 31, AGL held $35 million in cash and short-term investments; AGUS and AGMH together held $357 million.
- Management cited persistent low interest rates and the Tax Act’s elimination of advance refundings as factors that may constrain bond-insurance demand. International infrastructure and structured-finance opportunities have long lead times and may vary by quarter.
- On February 2, 2018, AGC agreed to reinsure substantially all of Syncora Guarantee’s insured portfolio and commute certain ceded business, covering approximately $14.5 billion of par. Consideration is $360 million in cash plus assigned installment premiums estimated at $55 million present value. Closing remained subject to approvals and other conditions and was expected in late Q2 or early Q3 2018.
- The company repurchased $98 million of shares in Q1 and a further $53 million through May 4; $197 million remained authorized. Q1 share repurchases reduced equity, while investment unrealized losses also contributed to the decline in GAAP equity.
- Key uncertainties include Puerto Rico recoveries and litigation, claims and reserve estimates, RMBS performance and recovery assumptions, reinsurer collectability, rating actions, and market-driven fair-value movements. Management noted credit-derivative and fair-value results can be volatile and may not represent economic credit improvement or impairment. Certain derivative and VIE valuations rely on Level 3 inputs.
- The company reported a $7 million loss on extinguishment of debt after purchasing $20 million principal amount of AGMH junior subordinated debentures. Adoption of a financial-instruments accounting standard changed presentation of certain own-credit fair-value movements between earnings and OCI; the adoption included a $32 million net-of-tax equity reclassification.
- Management said there were no material changes in market risks or disclosed risk factors during the quarter. It concluded disclosure controls were effective as of March 31, 2018.
Important facts for investors to verify
- Progress and final terms of the Syncora transaction, including regulatory approval and closing.
- Puerto Rico claims, fiscal-plan implementation, PROMESA proceedings, litigation outcomes, and actual recoveries versus modeled expectations.
- Changes in expected losses—especially RMBS assumptions—and the sensitivity of reserves to defaults, severities, recoveries and discount rates.
- Subsidiary dividend capacity, holding-company liquidity, and the availability of funds for debt service and continuing repurchases.
- Ratings, reinsurer creditworthiness and recoverables, and the effect of market spreads on reported earnings and fair values.
- Bond-insurance demand and production trends following reduced municipal issuance and the Tax Act’s advance-refunding change.