Assured Guaranty Ltd. Reports Results for Second Quarter 2019

GAAP Highlights – Second Quarter 2019

  • Net income of $142 million, or $1.39 per share
  • Gross written premiums of $51 million
  • Shareholders’ equity per share of $67.35, a record high

Non-GAAP Highlights1 – Second Quarter 2019

  • Non-GAAP operating income1 of $141 million, or $1.38 per share
  • PVP1 of $54 million
  • Non-GAAP operating shareholders’ equity1 per share of $63.48 and non-GAAP adjusted book value1 per share of $88.67, both record highs

Share Repurchases

  • Common share repurchases of $111 million, or 2.5 million shares in second quarter 2019
  • On August 7, 2019, the Board of Directors approved an incremental $300 million in share repurchases

BlueMountain Acquisition

  • Assured Guaranty has executed a purchase agreement to acquire BlueMountain Capital Management, LLC (BlueMountain), an alternative asset manager with $19.3 billion in assets under management, and its associated entities for $160 million. Assured Guaranty will contribute $60 million of cash to BlueMountain at closing and intends to contribute an additional $30 million in cash within a year from closing.

 

HAMILTON, Bermuda–(BUSINESS WIRE)–Assured Guaranty Ltd. (NYSE: AGO) (AGL and, together with its consolidated entities, Assured Guaranty or the Company) announced today its financial results for the three-month period ended June 30, 2019 (second quarter 2019).

1 Please see “Explanation of Non-GAAP Financial Measures.” When a financial measure is described as “operating,” it is a non-GAAP financial measure.

“Assured Guaranty performed well in the second quarter, once again achieving record highs per share in shareholders’ equity, non-GAAP operating shareholders’ equity and adjusted book value. We saw solid new business production in an extremely challenging interest rate and credit spread environment. And we achieved a milestone by bringing the below-investment-grade portion of our insured portfolio down to 3.8%, the first time we have reported a BIG percentage that low in almost 10 years,” said Dominic Frederico, President and CEO of Assured Guaranty.

“We are excited about our agreement to acquire BlueMountain, a seasoned and scaled asset management firm with a compatible credit culture, valuable business synergies and the ability to diversify our revenue sources while making a meaningful contribution to Assured Guaranty’s profitability. We are looking forward to Andrew Feldstein, the current CEO of BlueMountain, coming on board as our Chief Investment Officer and Head of Asset Management.”

Summary Financial Results

(in millions, except per share amounts)

 

Quarter Ended

 

June 30,

 

2019

 

2018

 

 

 

 

GAAP Highlights

 

 

 

Net income

$

142

 

 

$

75

 

Net income per diluted share

1.39

 

 

0.67

 

Weighted average diluted shares

101.9

 

 

112.9

 

Gross written premiums (GWP)

51

 

 

393

 

 

 

 

 

Non-GAAP Highlights(1)

 

 

 

Non-GAAP operating income(1)

141

 

 

74

 

Gain (loss) related to the effect of consolidating financial guaranty variable

interest entities (FG VIE consolidation) included in non-GAAP operating

income

6

 

 

(4

)

Non-GAAP operating income(1) per diluted share

1.38

 

 

0.66

 

Gain (loss) related to FG VIE consolidation included in non-GAAP

operating income per diluted share

0.05

 

 

(0.03

)

Present value of new business production (PVP)(1)

54

 

 

454

 

Gross par written

4,183

 

 

14,571

 

Summary Financial Results (continued)

(in millions, except per share amounts)

 

As of

 

June 30, 2019

 

December 31, 2018

 

Amount

 

Per Share

 

Amount

 

Per Share

 

 

 

 

 

 

 

 

Shareholders’ equity

$

6,722

 

 

$

67.35

 

 

$

6,555

 

 

$

63.23

 

Non-GAAP operating shareholders’ equity (1)

6,335

 

 

63.48

 

 

6,342

 

 

61.17

 

Non-GAAP adjusted book value (1)

8,849

 

 

88.67

 

 

8,922

 

 

86.06

 

Gain (loss) related to FG VIE consolidation

included in non-GAAP operating shareholders’

equity

12

 

 

0.12

 

 

3

 

 

0.03

 

Gain (loss) related to FG VIE consolidation

included in non-GAAP adjusted book value

(2

)

 

(0.02

)

 

(15

)

 

(0.15

)

 

 

 

 

 

 

 

 

Common shares outstanding

99.8

 

 

 

 

103.7

 

 

 

___________________________________________

(1) Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.

Second Quarter Results

GAAP Financial Information

Net income for second quarter 2019 increased to $142 million, from $75 million for the three-month period ended June 30, 2018 (second quarter 2018) mainly due to changes in: loss and loss adjustment expenses (LAE), fair value of financial guaranty variable interest entities (FG VIEs), foreign exchange rates and other income items, as described below.

  • Loss and LAE was a benefit of $1 million in second quarter 2019, which consisted of a benefit for United States (U.S.) residential mortgage-backed securities (RMBS) transactions that was partially offset by an increase in public finance losses. Loss and LAE was a loss of $44 million in second quarter 2018, which was primarily attributable to Puerto Rico exposures.
  • FG VIE gains were $33 million in second quarter 2019, primarily attributable to higher recoveries on second lien U.S. RMBS FG VIEs’ assets, compared with FG VIE gains of $2 million in second quarter 2018.
  • Foreign exchange losses were $14 million in second quarter 2019, compared with losses of $36 million in second quarter 2018. Foreign exchange gains and losses relate primarily to remeasurement of premiums receivable and are mainly due to changes in the exchange rate of the British pound sterling relative to the U.S. dollar.
  • Fair value gains on committed capital securities (CCS) recorded in other income were $19 million in second quarter 2019 and were primarily due to widening of spreads of comparable securities relative to changes in treasury yields during the quarter, compared with fair value losses on CCS of $1 million in second quarter 2018.
  • Commutation gains recorded in other income were $1 million in second quarter 2019, compared with commutation losses of $18 million in second quarter 2018 related to the transaction closed on June 1, 2018 with Syncora Guarantee Inc. (SGI) (SGI Transaction).

These increases were offset in part by changes in fair value of credit derivatives, lower net earned premiums and a higher effective tax rate as described below.

  • Fair value losses on credit derivatives were $8 million in second quarter 2019, primarily due to changes in the Company’s spreads, partially offset by price improvements on the underlying collateral, compared with gains of $48 million in second quarter 2018 which were primarily attributable to price improvements on the underlying collateral of the Company’s insured credit default swaps. Except for credit impairment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.
  • Net earned premiums were $112 million in second quarter 2019, compared with $136 million in second quarter 2018; the decline was due to lower accelerations from refundings and terminations, which were $20 million in second quarter 2019, compared with $39 million in second quarter 2018.
  • The effective tax rate in second quarter 2019 was 22% compared with 13% in second quarter 2018. The effective tax rate fluctuates from period to period based on the proportion of income in different tax jurisdictions.

Condensed Consolidated Statements of Operations (unaudited)

(in millions)

 

Quarter Ended

 

June 30,

 

2019

 

2018

Revenues:

 

 

 

Net earned premiums

$

112

 

 

$

136

 

Net investment income

110

 

 

98

 

Net realized investment gains (losses)

8

 

 

(2

)

Net change in fair value of credit derivatives

(8

)

 

48

 

Fair value gains (losses) on FG VIEs

33

 

 

2

 

Foreign exchange gain (loss) on remeasurement

(14

)

 

(36

)

Other income (loss)

25

 

 

(26

)

Total revenues

266

 

 

220

 

Expenses:

 

 

 

Loss and LAE

(1

)

 

44

 

Amortization of deferred acquisition costs

4

 

 

4

 

Interest expense

22

 

 

24

 

Other operating expenses

60

 

 

62

 

Total expenses

85

 

 

134

 

Income (loss) before income taxes and equity in net earnings of investees

181

 

 

86

 

Equity in net earnings of investees

1

 

 

1

 

Income (loss) before income taxes

182

 

 

87

 

Provision (benefit) for income taxes

40

 

 

12

 

Net income (loss)

$

142

 

 

$

75

 

Economic Loss Development

Total economic loss development was a benefit of $37 million in second quarter 2019, which primarily consisted of a $118 million benefit in U.S. RMBS, partially offset by increased U.S. public finance loss, mainly for certain Puerto Rico exposures.

The economic benefit in second lien U.S. RMBS was $99 million in second quarter 2019, primarily attributable to higher projected recoveries for previously charged-off loans, improved performance and loss mitigation efforts. The economic benefit for first lien U.S. RMBS was $19 million in second quarter 2019, primarily attributable to higher excess spread on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to London Interbank Offered Rate (LIBOR), which decreased in second quarter 2019. This benefit was partially offset by an increase in public finance losses primarily related to Puerto Rico exposures. The economic development attributable to changes in discount rates was a benefit of $1 million in second quarter 2019. Economic loss development differs from loss and LAE reported in income in any given period due to the consideration of unearned premium reserve in the calculation of loss and LAE.

Roll Forward of Net Expected Loss to be Paid (1)

(in millions)

 

Net Expected

Loss to be

Paid (Recovered)

as of

March 31, 2019

 

Economic Loss

Development/

(Benefit)

 

Losses (Paid)/

Recovered

 

Net Expected

Loss to be

Paid (Recovered)

as of

June 30, 2019

 

 

 

 

 

 

 

 

Public finance

$

697

 

 

$

84

 

 

$

(9

)

 

$

772

 

U.S. RMBS

237

 

 

(118

)

 

43

 

 

162

 

Other structured finance

29

 

 

(3

)

 

 

 

26

 

Total

$

963

 

 

$

(37

)

 

$

34

 

 

$

960

 

_______________________________________________

(1) Economic loss development represents the change in net expected loss to be paid attributable to the effects of changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts. Economic loss development is the principal measure that the Company uses to evaluate the loss experience in its insured portfolio. Expected loss to be paid includes all transactions insured by the Company, whether written in insurance or credit derivative form, regardless of the accounting model prescribed under accounting principles generally accepted in the United States of America (GAAP).

New Business Production

GWP relates to both financial guaranty insurance and non-financial guaranty insurance contracts. Credit derivatives are accounted for at fair value and therefore not included in GWP. Financial guaranty GWP includes amounts collected upfront on new business written, the present value of future premiums on new business written (discounted at risk free rates), as well as the effects of changes in the estimated lives of transactions in the inforce book of business. Non-financial guaranty GWP is recorded as premiums are received.

Non-GAAP PVP includes amounts collected upfront and estimated future installments on all new business at the time of issuance, discounted at 6% for all contracts, whether in insurance or credit derivative form.

New Business Production

(in millions)

 

Quarter Ended June 30,

 

2019

 

2018

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

 

 

 

 

 

 

 

 

 

 

 

Public finance – U.S.

$

43

 

 

$

44

 

 

$

3,657

 

 

$

170

 

 

$

234

 

 

$

10,675

 

Public finance – non – U.S.

12

 

 

7

 

 

299

 

 

55

 

 

53

 

 

3,345

 

Structured finance – U.S.

(4

)

 

3

 

 

227

 

 

158

 

 

158

 

 

393

 

Structured finance – non-U.S.

 

 

 

 

 

 

10

 

 

9

 

 

158

 

Total

$

51

 

 

$

54

 

 

$

4,183

 

 

$

393

 

 

$

454

 

 

$

14,571

 

______________________________________________

(1) PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.

GWP and PVP for second quarter 2018 included the assumption of substantially all of the insured portfolio of SGI which was the primary driver of the variance in GWP, PVP and gross par written between second quarter 2019 and second quarter 2018. The components of new business generated by the SGI Transaction in second quarter 2018 are presented below.

Assumed SGI Insured Portfolio (1)

(in millions)

 

GWP

 

PVP

 

 

 

Financial

Guaranty

 

Financial

Guaranty

 

Credit

Derivatives

 

Total

 

Gross Par

Written

Public Finance—U.S.

$

123

 

 

$

118

 

 

$

67

 

 

$

185

 

 

$

7,559

 

Public Finance—non-U.S.

50

 

 

38

 

 

12

 

 

50

 

 

3,345

 

Structured Finance—U.S.

157

 

 

156

 

 

 

 

156

 

 

349

 

Structured Finance—non-U.S.

 

 

 

 

 

 

 

 

19

 

Total

$

330

 

 

$

312

 

 

$

79

 

 

$

391

 

 

$

11,272

 

_________________________________

(1) On a GAAP basis, in second quarter 2018, the SGI Transaction included transactions with $131 million in expected losses (discounted at a risk-free rate). On a non-GAAP basis, the SGI Transaction included transactions with expected losses of $83 million (discounted at 6%, consistent with the PVP discount rate).

In second quarter 2019, Assured Guaranty once again guaranteed the majority of the insured U.S. public finance par and number of transactions issued, and had an average rating on new business of A-, based on par.

For the fifteenth consecutive quarter, the Company generated non-U.S. GWP and PVP. In second quarter 2019, the Company guaranteed a debt refinancing of Spanish solar plants, the first wrapped issuance in Spain since the financial crisis, as well as a Scottish housing association transaction.

Other Non-GAAP Financial Measures

Non-GAAP operating income was $141 million in second quarter 2019, compared with $74 million in second quarter 2018. Non-GAAP operating income increased mainly due to lower losses and higher FG VIE gains in second quarter 2019, as well as higher commutation and debt extinguishment losses in second quarter 2018. This was offset in part by lower net earned premiums and a higher effective tax rate.

Common Share Repurchases

Summary of Share Repurchases

(in millions, except per share amounts)

 

Amount

 

Number of

Shares

 

Average Price

Per Share

 

 

 

 

 

 

2019 (January 1 – March 31)

$

 

79.4

 

1.909

 

$

41.62

2019 (April 1 – June 30)

 

110.6

 

2.519

 

 

43.89

2019 (July 1 – August 7)

 

57.5

 

1.317

 

 

43.59

Total 2019

$

 

247.5

 

5.745

 

$

43.07

From 2013 through August 7, 2019, the Company repurchased a total of 100.3 million common shares at an average price of $29.55, representing approximately 52% of the total shares outstanding when the repurchase program began in 2013. On February 27, 2019, the Board of Directors authorized the repurchase of $300 million of common shares and on August 7, 2019 authorized the repurchase of another $300 million of common shares. The remaining authorization to purchase common shares as of August 7, 2019 was $450 million. These repurchases can be made from time to time in the open market or in privately negotiated transactions.

As in the past, the Company’s execution of its capital management strategy is contingent upon its available free cash and the capital position of the parent company, market conditions, the maintenance of its strong financial strength ratings and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time. It does not have an expiration date.

Insurance Company Subsidiaries’ Share Repurchases

In May 2019, the Maryland Insurance Administration approved and in June 2019 Assured Guaranty Corp. implemented the repurchase of $100 million of its shares of common stock from Assured Guaranty US Holdings Inc.

Condensed Consolidated Balance Sheets (unaudited)

(in millions)

 

As of

 

June 30, 2019

 

December 31, 2018

Assets

 

 

 

Investment portfolio:

 

 

 

Fixed maturity securities, available-for-sale, at fair value

$

9,574

 

 

$

10,089

 

Short-term investments, at fair value

1,159

 

 

729

 

Other invested assets

60

 

 

55

 

Total investment portfolio

10,793

 

 

10,873

 

Cash

190

 

 

104

 

Premiums receivable, net of commissions payable

866

 

 

904

 

Deferred acquisition costs

106

 

 

105

 

Salvage and subrogation recoverable

580

 

 

490

 

FG VIEs’ assets, at fair value

526

 

 

569

 

Other assets

520

 

 

558

 

Total assets

$

13,581

 

 

$

13,603

 

Liabilities and shareholders’ equity

 

 

 

Liabilities

 

 

 

Unearned premium reserve

$

3,387

 

 

$

3,512

 

Loss and LAE reserve

1,102

 

 

1,177

 

Long-term debt

1,233

 

 

1,233

 

Credit derivative liabilities

224

 

 

209

 

FG VIEs’ liabilities with recourse, at fair value

446

 

 

517

 

FG VIEs’ liabilities without recourse, at fair value

105

 

 

102

 

Other liabilities

362

 

 

298

 

Total liabilities

6,859

 

 

7,048

 

Shareholders’ equity

 

 

 

Common stock

1

 

 

1

 

Additional paid-in capital

 

 

86

 

Retained earnings

6,425

 

 

6,374

 

Accumulated other comprehensive income

295

 

 

93

 

Deferred equity compensation

1

 

 

1

 

Total shareholders’ equity

6,722

 

 

6,555

 

Total liabilities and shareholders’ equity

$

13,581

 

 

$

13,603

 

Explanation of Non-GAAP Financial Measures

To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and financial measures not determined in accordance with GAAP (non-GAAP financial measures).

Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.

By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters access to information that management and the Board of Directors review internally. The Company believes its presentation of non-GAAP financial measures, along with the effect of FG VIE consolidation, provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.

GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company. However, the Company does not own such VIEs and its exposure is limited to its obligation under its financial guaranty insurance contract. Management and the Board of Directors use non-GAAP financial measures adjusted to remove FG VIE consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses these core financial measures in its decision making process and in its calculation of certain components of management compensation. Wherever possible, the Company has separately disclosed the effect of FG VIE consolidation.

Many investors, analysts and financial news reporters use non-GAAP operating shareholders’ equity, adjusted to remove the effect of FG VIE consolidation, as the principal financial measure for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Many of the Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.

Many investors, analysts and financial news reporters also use non-GAAP adjusted book value, adjusted to remove the effect of FG VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the AGL common shares. Non-GAAP operating income adjusted for the effect of FG VIE consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The core financial measures that the Company uses to help determine compensation are: (1) non-GAAP operating income, adjusted to remove the effect of FG VIE consolidation, (2) non-GAAP operating shareholders’ equity, adjusted to remove the effect of FG VIE consolidation, (3) growth in non-GAAP adjusted book value per share, adjusted to remove the effect of FG VIE consolidation, and (4) PVP.

The following paragraphs and tables define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.

Non-GAAP Operating Income

Management believes that non-GAAP operating income is a useful measure because it clarifies the understanding of the underwriting results and financial condition of the Company and presents the results of operations of the Company excluding the fair value adjustments on credit derivatives and CCS that are not expected to result in economic gain or loss, as well as other adjustments described below. Management adjusts non-GAAP operating income further by removing FG VIE consolidation to arrive at its core operating income measure. Non-GAAP operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

2) Elimination of non-credit-impairment unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads, and other market factors and are not expected to result in an economic gain or loss.

3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt, and other market factors and are not expected to result in an economic gain or loss.

4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.

5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

Summary Reconciliation of

GAAP Net Income to Non-GAAP Operating Income

(in millions, except per share amounts)

 

Quarter Ended June 30,

 

2019

 

2018

 

Total

 

Per Diluted

Share

 

Total

 

Per Diluted

Share

 

 

 

 

 

 

 

 

Net income (loss)

$

142

 

 

$

1.39

 

 

$

75

 

 

$

0.67

 

Less pre-tax adjustments:

 

 

 

 

 

 

 

Realized gains (losses) on investments

8

 

 

0.08

 

 

(2

)

 

(0.01

)

Non-credit impairment unrealized fair value

gains (losses) on credit derivatives

(12

)

 

(0.12

)

 

44

 

 

0.39

 

Fair value gains (losses) on CCS

19

 

 

0.19

 

 

(1

)

 

(0.01

)

Foreign exchange gains (losses) on

remeasurement of premiums receivable and loss and

LAE reserves

(12

)

 

(0.12

)

 

(34

)

 

(0.30

)

Total pre-tax adjustments

3

 

 

0.03

 

 

7

 

 

0.07

 

Less tax effect on pre-tax adjustments

(2

)

 

(0.02

)

 

(6

)

 

(0.06

)

Non-GAAP operating income

$

141

 

 

$

1.38

 

 

$

74

 

 

$

0.66

 

 

 

 

 

 

 

 

 

Gain (loss) related to FG VIE consolidation

included in non-GAAP operating income

$

6

 

 

$

0.05

 

 

$

(4

)

 

$

(0.03

)

Contacts

Robert Tucker

Senior Managing Director, Investor Relations and Corporate Communications

212-339-0861

rtucker@agltd.com


Ashweeta Durani

Vice President, Corporate Communications

212-408-6042

adurani@agltd.com

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