Assured Guaranty Ltd. Reports Results for Third Quarter 2019

GAAP Highlights – Third Quarter 2019

  • Net income of $69 million, or $0.70 per diluted share
  • Gross written premiums of $69 million
  • Shareholders’ equity per share of $68.94, a record high

Non-GAAP Highlights1 – Third Quarter 2019

  • Non-GAAP operating income1 of $77 million, or $0.79 per diluted share
  • PVP1 of $81 million
  • Non-GAAP operating shareholders’ equity1 per share of $64.48, a record high
  • Non-GAAP adjusted book value1 per share of $90.18, a record high

Share Repurchases

  • Common share repurchases of $150 million, or 3.4 million shares in third quarter 2019

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 September 30, 2019 (third quarter 2019).

“The third quarter of 2019 was Assured Guaranty’s best third quarter for new business production since 2010, with each of our three financial guaranty businesses – U.S. public finance, international infrastructure and global structured finance – producing substantial PVP,” said Dominic Frederico, President and CEO of Assured Guaranty. “We continued our share repurchase program and, on October 1, completed a major step to diversify our opportunities and revenue sources by expanding into the asset management field. By completing our acquisition of BlueMountain Capital Management, we now have an asset management platform to provide a fee-based revenue source to complement our risk-based premium revenues while lowering the relative amount of capital at risk.”

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

Summary Financial Results

(in millions, except per share amounts)

 

 

Quarter Ended

 

September 30,

 

2019

 

2018

 

 

 

 

GAAP Highlights

 

 

 

Net income

$

69

 

 

$

161

 

Net income per diluted share

0.70

 

 

1.47

 

Weighted average diluted shares

98.9

 

 

109.3

 

Gross written premiums (GWP)

69

 

 

50

 

 

 

 

 

Non-GAAP Highlights(1)

 

 

 

Non-GAAP operating income(1)

77

 

 

161

 

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

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

income

(2

)

 

(2

)

Non-GAAP operating income(1) per diluted share

0.79

 

 

1.47

 

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

operating income per diluted share

(0.01

)

 

(0.02

)

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

81

 

 

52

 

Gross par written

4,909

 

 

3,001

 

 

 

As of

 

September 30, 2019

 

December 31, 2018

 

Amount

 

Per Share

 

Amount

 

Per Share

 

 

 

 

 

 

 

 

Shareholders’ equity

$

6,652

 

 

$

68.94

 

 

$

6,555

 

 

$

63.23

 

Non-GAAP operating shareholders’ equity (1)

6,222

 

 

64.48

 

 

6,342

 

 

61.17

 

Non-GAAP adjusted book value (1)

8,702

 

 

90.18

 

 

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

 

 

 

 

(15

)

 

(0.15

)

 

 

 

 

 

 

 

 

Common shares outstanding

96.5

 

 

 

 

103.7

 

 

 

______________________________________________

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

Third Quarter Results

GAAP Financial Information

Net income for third quarter 2019 was $69 million, compared with $161 million for the three-month period ended September 30, 2018 (third quarter 2018). Third quarter 2018 net income included a $31 million pretax gain related to the Company’s minority interest in the parent company of TMC Bonds LLC, which it sold in third quarter 2018. In addition, third quarter 2019 net income was lower than third quarter 2018 due to lower net earned premiums, lower fair value gains on credit derivatives, higher loss and loss adjustment expenses (LAE), higher fair value losses on committed capital securities (CCS) and a higher effective tax rate, as described below.

  • Net earned premiums were $123 million in third quarter 2019, compared with $142 million in third quarter 2018. The decline in net earned premiums was consistent with the Company’s reduced insurance portfolio. Accelerations of net earned premiums due to refundings and terminations were $37 million in third quarter 2019, compared with $40 million in third quarter 2018.
  • Fair value gains on credit derivatives were $5 million in third quarter 2019, primarily due to price improvements on the underlying collateral of certain public finance transactions, partially offset by losses on certain structured finance transactions. Fair value gains on credit derivatives were $21 million in third quarter 2018 which were primarily attributable to price improvements on the underlying collateral. 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.
  • Loss and LAE was $30 million in third quarter 2019, compared with $17 million in third quarter 2018. In both periods, loss and LAE mainly consisted of loss development on Puerto Rico exposures, partially offset by a benefit in United States (U.S.) residential mortgage-backed securities (RMBS) transactions.
  • Fair value losses on CCS recorded in other income of $14 million in third quarter 2019 were primarily due to a tightening in market spreads during the quarter. Fair value losses on CCS were $1 million in third quarter 2018.
  • The effective tax rate in third quarter 2019 was 19%, compared with 8% in third quarter 2018. The effective tax rate fluctuates from period to period based on the proportion of income in different tax jurisdictions.

These decreases were offset in part by realized gains in third quarter 2019, as described below.

  • Realized gains on the investment portfolio were $16 million in third quarter 2019, primarily attributable to the sale of Puerto Rico Sales Tax Financing Corporation Exchange Senior Bonds, compared with realized losses in third quarter 2018 of $7 million, which were mainly attributable to other-than-temporary impairments.

Condensed Consolidated Statements of Operations (unaudited)

(in millions)

 

 

Quarter Ended

 

September 30,

 

2019

 

2018

Revenues:

 

 

 

Net earned premiums

$

123

 

 

$

142

 

Net investment income

88

 

 

99

 

Net realized investment gains (losses)

16

 

 

(7

)

Net change in fair value of credit derivatives

5

 

 

21

 

Fair value gains (losses) on FG VIEs

4

 

 

5

 

Foreign exchange gain (loss) on remeasurement

(21

)

 

(9

)

Fair value gains (losses) on equity investments

 

 

32

 

Loss on extinguishment of debt

 

 

(9

)

Other income (loss)

(9

)

 

1

 

Total revenues

206

 

 

275

 

Expenses:

 

 

 

Loss and LAE

30

 

 

17

 

Amortization of deferred acquisition costs

3

 

 

3

 

Interest expense

22

 

 

23

 

Other operating expenses

65

 

 

56

 

Total expenses

120

 

 

99

 

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

86

 

 

176

 

Equity in net earnings of investees

 

 

(1

)

Income (loss) before income taxes

86

 

 

175

 

Provision (benefit) for income taxes

17

 

 

14

 

Net income (loss)

$

69

 

 

$

161

 

Economic Loss Development

 

Total economic loss development was $25 million in third quarter 2019, which primarily consisted of increased U.S. public finance losses for certain Puerto Rico exposures, partially offset by a benefit in U.S. RMBS. The economic benefit for first lien U.S. RMBS was $27 million in third quarter 2019, primarily attributable to higher excess spread on certain transactions supported by large portions of fixed rate assets with insured floating rate debt linked to London Interbank Offered Rate, which decreased in third quarter 2019. The economic benefit in second lien U.S. RMBS was $13 million in third quarter 2019, primarily attributable to improved performance of the underlying collateral. The economic development attributable to changes in discount rates was a loss of $1 million in third quarter 2019.

 

 

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

(in millions)

 
 

 

Net Expected

Loss to be

Paid (Recovered)

as of

June 30, 2019

 

Economic Loss

Development/

(Benefit)

 

Losses (Paid)/

Recovered

 

Net Expected

Loss to be

Paid (Recovered)

as of

September 30, 2019

 

 

 

 

 

 

 

 

Public finance

$

772

 

 

$

55

 

 

$

(279

)

 

$

548

 

U.S. RMBS

162

 

 

(40

)

 

13

 

 

135

 

Other structured finance

26

 

 

10

 

 

(1

)

 

35

 

Total

$

960

 

 

$

25

 

 

$

(267

)

 

$

718

 

_______________________________________________

(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).

Non-GAAP Operating Income

Non-GAAP operating income was $77 million in third quarter 2019, compared with $161 million in third quarter 2018. Similar to net income results, non-GAAP operating income decreased mainly due to a non-recurring gain in third quarter 2018 on its TMC Bonds LLC investment, as well as higher losses, lower net earned premiums and a higher effective tax rate in third quarter 2019.

New Business Production

GWP relates to both financial guaranty insurance and non-financial guaranty insurance contracts. 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 September 30,

 

2019

 

2018

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

 

 

 

 

 

 

 

 

 

 

 

Public finance – U.S.

$

46

 

 

$

46

 

 

$

4,212

 

 

$

24

 

 

$

33

 

 

$

2,338

 

Public finance – non – U.S.

20

 

 

13

 

 

237

 

 

17

 

 

12

 

 

189

 

Structured finance – U.S.

2

 

 

19

 

 

438

 

 

9

 

 

7

 

 

473

 

Structured finance – non-U.S.

1

 

 

3

 

 

22

 

 

 

 

 

 

1

 

Total

$

69

 

 

$

81

 

 

$

4,909

 

 

$

50

 

 

$

52

 

 

$

3,001

 

________________________________________________

(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 increased $19 million in third quarter 2019, compared with third quarter 2018, primarily due to a large U.S. public finance healthcare transaction in third quarter 2019. PVP also increased by $29 million in third quarter 2019, compared with third quarter 2018, primarily due to that large U.S. public finance healthcare transaction, as well as a committed insurance reserve financing transaction in the U.S. structured finance sector. In third quarter 2019, Assured Guaranty once again guaranteed the majority of the insured U.S. public finance par issued and maintained an average rating on new business of A-, based on par.

In third quarter 2019, the Company guaranteed a debt financing for the construction of university student accommodation in the United Kingdom. This is the sixteenth consecutive quarter the Company generated non-U.S. GWP and PVP.

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

 

 

1.91

 

 

$

41.62

 

2019 (April 1 – June 30)

110.6

2.52

43.89

2019 (July 1 – September 30)

150.0

 

 

3.40

 

 

 

44.11

 

2019 (October 1 – November 7)

58.7

 

 

1.28

 

 

45.98

 

Total 2019

$

398.7

 

9.11

 

$

43.79

 

From 2013 through November 7, 2019, the Company repurchased a total of 103.7 million common shares at an average price of $30.05, representing approximately 53% of the total shares outstanding when the repurchase program began in 2013. The remaining authorization to purchase common shares as of November 7, 2019 was $299 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.

Condensed Consolidated Balance Sheets (unaudited)

(in millions)

 

 

As of

 

September 30, 2019

 

December 31, 2018

Assets

 

 

 

Investment portfolio:

 

 

 

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

$

9,277

 

 

$

10,089

 

Short-term investments, at fair value

1,142

 

 

729

 

Other invested assets

57

 

 

55

 

Total investment portfolio

10,476

 

 

10,873

 

Cash

229

 

 

104

 

Premiums receivable, net of commissions payable

844

 

 

904

 

Deferred acquisition costs

107

 

 

105

 

Salvage and subrogation recoverable

725

 

 

490

 

FG VIEs’ assets, at fair value

469

 

 

569

 

Other assets

517

 

 

558

 

Total assets

$

13,367

 

 

$

13,603

 

Liabilities and shareholders’ equity

 

 

 

Liabilities

 

 

 

Unearned premium reserve

$

3,334

 

 

$

3,512

 

Loss and LAE reserve

1,007

 

 

1,177

 

Long-term debt

1,234

 

 

1,233

 

Credit derivative liabilities

214

 

 

209

 

FG VIEs’ liabilities with recourse, at fair value

388

 

 

517

 

FG VIEs’ liabilities without recourse, at fair value

105

 

 

102

 

Other liabilities

433

 

 

298

 

Total liabilities

6,715

 

 

7,048

 

Shareholders’ equity

 

 

 

Common stock

1

 

 

1

 

Additional paid-in capital

 

 

86

 

Retained earnings

6,331

 

 

6,374

 

Accumulated other comprehensive income

319

 

 

93

 

Deferred equity compensation

1

 

 

1

 

Total shareholders’ equity

6,652

 

 

6,555

 

Total liabilities and shareholders’ equity

$

13,367

 

 

$

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 September 30,

 

2019

 

2018

 

Total

 

Per Diluted

Share

 

Total

 

Per Diluted

Share

 

 

 

 

 

 

 

 

Net income (loss)

$

69

 

 

$

0.70

 

 

$

161

 

 

$

1.47

 

Less pre-tax adjustments:

 

 

 

 

 

 

 

Realized gains (losses) on investments

16

 

 

0.16

 

 

(7

)

 

(0.07

)

Non-credit impairment unrealized fair value

gains (losses) on credit derivatives

11

 

 

0.11

 

 

17

 

 

0.16

 

Fair value gains (losses) on CCS

(14

)

 

(0.14

)

 

(1

)

 

(0.01

)

Foreign exchange gains (losses) on

remeasurement of premiums receivable and

loss and LAE reserves

(20

)

 

(0.20

)

 

(8

)

 

(0.07

)

Total pre-tax adjustments

(7

)

 

(0.07

)

 

1

 

 

0.01

 

Less tax effect on pre-tax adjustments

(1

)

 

(0.02

)

 

(1

)

 

(0.01

)

Non-GAAP operating income

$

77

 

 

$

0.79

 

 

$

161

 

 

$

1.47

 

 

 

 

 

 

 

 

 

Gain (loss) related to FG VIE consolidation

included in non-GAAP operating income

$

(2

)

 

$

(0.01

)

 

$

(2

)

 

$

(0.02

)

Non-GAAP Operating Income Adjustments and

Effect of FG VIE Consolidation

(in millions)

 

 

 

Quarter Ended

 

Quarter Ended

 

 

September 30, 2019

 

September 30, 2018

 

 

Non-GAAP

Operating

Income

Adjustments

(1)

 

Effect of FG

VIE

Consolidation

(2)

 

Non-GAAP

Operating

Income

Adjustments

(1)

 

Effect of FG

VIE

Consolidation

(2)

Adjustments to revenues:

 

 

 

 

 

 

 

 

Net earned premiums

 

$

 

 

$

(2

)

 

$

 

 

$

(3

)

Net investment income

 

 

 

(1

)

 

 

 

(1

)

Net realized investment gains (losses)

 

16

 

 

 

 

(7

)

 

 

Net change in fair value of credit derivatives

 

1

 

 

 

 

16

 

 

 

Fair value gains (losses) on FG VIEs

 

 

 

4

 

 

 

 

5

 

Foreign exchange gain (loss) on remeasurement

 

(20

)

 

 

 

(8

)

 

 

Other income (loss)

 

(14

)

 

 

 

(1

)

 

 

Total revenue adjustments

 

(17

)

 

1

 

 

 

 

1

 

Adjustments to expenses:

 

 

 

 

 

 

 

 

Loss expense

 

(10

)

 

3

 

 

(1

)

 

3

 

Total expense adjustments

 

(10

)

 

3

 

 

(1

)

 

3

 

Pre-tax adjustments

 

(7

)

 

(2

)

 

1

 

 

(2

)

Tax effect of adjustments

 

1

 

 

 

 

1

 

 

 

After-tax adjustments

 

$

(8

)

 

$

(2

)

 

$

 

 

$

(2

)

_______________________________________________

(1) The “Non-GAAP Operating Income Adjustments” column represents the amounts recorded in the condensed consolidated statements of operations that the Company removes to arrive at non-GAAP operating income.

(2) The “Effect of FG VIE Consolidation” column represents the amounts included in the condensed consolidated statements of operations and non-GAAP operating income that the Company removes to arrive at the core financial measures that management uses in certain of its compensation calculations and its decision making process.

Non-GAAP Operating Shareholders’ Equity and Non-GAAP Adjusted Book Value

Management believes that non-GAAP operating shareholders’ equity is a useful measure because it presents the equity of the Company excluding the fair value adjustments on investments, credit derivatives and CCS, that are not expected to result in economic gain or loss, along with other adjustments described below.

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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