Assured Guaranty Ltd. Reports Results for Third Quarter 2023
•GAAP Highlights:
•Net income attributable to Assured Guaranty Ltd. was $157 million, or $2.60 per share,(1) for third quarter 2023.
•Shareholders’ equity attributable to Assured Guaranty Ltd. per share was $90.84 as of September 30, 2023.
•Gross written premiums (GWP) were $40 million for third quarter 2023.
•Non-GAAP Highlights:
•Adjusted operating income(2) was $206 million, or $3.42 per share, for third quarter 2023.
•Adjusted operating shareholders’ equity(2) per share and adjusted book value (ABV)(2) per share were $99.18 and $148.03, respectively, as of September 30, 2023.
•Present value of new business production (PVP)(2) was $46 million for third quarter 2023.
•Sound Point and AHP Transaction Gain
•Gain on Sound Point and AHP transactions(3) of $241 million (pre-tax, net of transaction expenses).
•Return of Capital to Shareholders:
•Third quarter 2023 capital returned to shareholders was $80 million including share repurchases of $64 million and dividends of $16 million.
•Share repurchase authorization was increased by $300 million on November 1, 2023.
Hamilton, Bermuda, November 7, 2023 -- Assured Guaranty Ltd. (NYSE: AGO) (AGL and, together with its subsidiaries, Assured Guaranty or the Company) announced today its financial results for the three-month period ended September 30, 2023 (third quarter 2023).
“Assured Guaranty achieved important strategic objectives in asset management, new business production and capital management during the third quarter and first nine months of 2023,” said Dominic Frederico, President and CEO. “In July, we completed our transactions with Sound Point Capital Management and AHP, which resulted in a third quarter $241 million pre-tax gain, net of expenses. We now continue our asset management participation through our 30% ownership interest in Sound Point, furthering our strategy of generating fee-based earnings to complement our risk-based financial guaranty earnings. The earnings from that stake will be reflected for the first time in our fourth quarter reporting. We also expect enhanced returns on our investment portfolio based on a broader range of alternative investment options with Sound Point.
“In new business production year-to-date, we increased our municipal bond insurance market share, with a 62% share of insured par sold in the primary market. Additionally, increased production in global structured finance further validates our diversified underwriting strategy of U.S. public finance, international infrastructure, and global structured finance.
“In capital management during the third quarter, we refinanced $330 million of senior debt that was due to mature next year. We also picked up the pace of our share repurchases, buying $64 million of shares in the quarter, and in November, our board of directors increased our repurchase authorization by $300 million.”
(1) Per share information for net income and adjusted operating income is based on diluted shares.
(2) Please see “Explanation of Non-GAAP Financial Measures.”
(3) Sound Point Capital Management, LP (Sound Point) and Assured Healthcare Partners LLC (AHP).
1
Summary Financial Results
(in millions, except per share amounts)
| | | | | | | | | | | |
| Quarter Ended |
| | September 30, |
| | 2023 | | 2022 |
| | | |
GAAP (1) | | | |
| Net income (loss) attributable to AGL | $ | 157 | | | $ | 11 | |
| Net income (loss) attributable to AGL per diluted share | $ | 2.60 | | | $ | 0.18 | |
| Weighted average diluted shares | 59.6 | | | 62.9 | |
| | | |
| Non-GAAP | | | |
Adjusted operating income (loss) (2) | $ | 206 | | | $ | 133 | |
Adjusted operating income per diluted share (2) | $ | 3.42 | | | $ | 2.11 | |
| Weighted average diluted shares | 59.6 | | | 62.9 | |
| | | |
Gain (loss) related to FG VIE and CIV consolidation (3) included in adjusted operating income | $ | (8) | | | $ | 7 | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income per share | $ | (0.13) | | | $ | 0.12 | |
| | | |
| Components of total adjusted operating income (loss) | | | |
| Insurance segment | $ | 59 | | | $ | 159 | |
| Asset Management segment | — | | | (3) | |
| Corporate division | 155 | | | (30) | |
| Other | (8) | | | 7 | |
| Adjusted operating income (loss) | $ | 206 | | | $ | 133 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| Amount | | Per Share | | Amount | | Per Share |
| | | | | | | |
| Shareholders’ equity attributable to AGL | $ | 5,252 | | | $ | 90.84 | | | $ | 5,064 | | | $ | 85.80 | |
Adjusted operating shareholders’ equity (3) | 5,735 | | | 99.18 | | | 5,543 | | | 93.92 | |
ABV (3) | 8,559 | | | 148.03 | | | 8,379 | | | 141.98 | |
| | | | | | | |
| Common Shares Outstanding | 57.8 | | | | | 59.0 | | | |
________________________________________________
(1) Generally accepted accounting principles in the United States of America.
(2) Please see “Explanation of Non-GAAP Financial Measures” at the end of this press release.
(3) The effect of consolidating financial guaranty variable interest entities (FG VIEs) and consolidated investment vehicles (CIVs).
GAAP net income increased primarily due to the gain associated with the Sound Point and AHP transactions, partially offset by higher loss and loss adjustment expense (LAE). On a per share basis, shareholders’ equity attributable to AGL increased to $90.84 as of September 30, 2023 from $85.80 as of December 31, 2022, primarily due to net income and share repurchases, partially offset by dividends and unrealized losses in the investment portfolio. On a per share basis, ABV increased to $148.03 as of September 30, 2023 from $141.98 as of December 31, 2022, primarily due to adjusted operating income, new business production and share repurchases, partially offset by loss development and dividends.
Insurance Segment
The Insurance segment primarily consists of the Company’s insurance subsidiaries that provide credit protection products to the United States (U.S.) and non-U.S. public finance (including infrastructure) and structured finance markets.
Insurance Segment Results
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Segment revenues | | | |
| Net earned premiums and credit derivative revenues | $ | 99 | | | $ | 92 | |
| Net investment income | 101 | | | 69 | |
| Fair value gains (losses) on trading securities | 4 | | | (8) | |
| Foreign exchange gains (losses) on remeasurement and other income (loss) | 4 | | | (6) | |
| Total segment revenues | 208 | | | 147 | |
| | | |
| Segment expenses | | | |
| Loss expense (benefit) | 101 | | | (75) | |
| | | |
| Amortization of deferred acquisition costs (DAC) | 4 | | | 4 | |
| Employee compensation and benefit expenses | 37 | | | 34 | |
| Other operating expenses | 23 | | | 21 | |
| Total segment expenses | 165 | | | (16) | |
| Equity in earnings (losses) of investees | 25 | | | (11) | |
| Segment adjusted operating income (loss) before income taxes | 68 | | | 152 | |
| Less: Provision (benefit) for income taxes | 9 | | | (7) | |
| Segment adjusted operating income (loss) | $ | 59 | | | $ | 159 | |
Insurance segment adjusted operating income decreased to $59 million in third quarter 2023, from $159 million in the three-month period ended September 30, 2022 (third quarter 2022). The decrease was primarily due to higher loss expense in third quarter 2023, partially offset by higher income from the investment portfolio in third quarter 2023. The components of premiums, losses and income from the investment portfolio are presented below.
Insurance Segment Net Earned Premiums and Credit Derivative Revenues
Insurance Segment
Net Earned Premiums and Credit Derivative Revenues
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Scheduled net earned premiums and credit derivative revenues | $ | 84 | | | $ | 80 | |
| Accelerations | 15 | | | 12 | |
| Total | $ | 99 | | | $ | 92 | |
Insurance Segment Loss Expense (Benefit) and the Roll Forward of Expected Losses
Loss expense is a function of net economic loss development (benefit), as well as the amortization of deferred premium revenue.
Insurance Segment
Loss Expense (Benefit)
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Public finance | $ | 138 | | | $ | 4 | |
| U.S. residential mortgage-backed securities (RMBS) | (38) | | | (82) | |
| Other structured finance | 1 | | | 3 | |
| Total | $ | 101 | | | $ | (75) | |
The table below presents the roll forward of net expected losses for third quarter 2023.
Roll Forward of Net Expected Loss to be Paid (Recovered) (1)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Expected Loss to be Paid (Recovered) as of June 30, 2023 | | Net
Economic Loss Development (Benefit) | | Net (Paid) Recovered
Losses | | Net Expected Loss to be Paid (Recovered) as of September 30, 2023 |
| | | | | | | |
| Public finance | $ | 443 | | | $ | 134 | | | $ | (169) | | | $ | 408 | |
| U.S. RMBS | 73 | | | (48) | | | 13 | | | 38 | |
| Other structured finance | 44 | | | 1 | | | (1) | | | 44 | |
| Total | $ | 560 | | | $ | 87 | | | $ | (157) | | | $ | 490 | |
________________________________________________
(1) Net economic loss development (benefit) represents the change in net expected loss to be paid (recovered) attributable to the effects of changes in the economic performance of insured transactions, changes in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of loss mitigation efforts, each net of reinsurance. Net economic loss development (benefit) is the principal measure that the Company uses to evaluate the loss experience in its insured portfolio. Expected loss to be paid (recovered) includes all transactions insured by the Company, regardless of the accounting model prescribed under GAAP and without consideration of deferred premium revenue.
The net economic loss development in third quarter 2023 of $87 million was mainly attributable to insured exposure to Puerto Rico Electric Power Authority, partially offset by a benefit in RMBS which was primarily due to higher recovery assumptions. The effect of changes in risk-free rates used to discount expected losses was a benefit of $12 million.
Insurance Segment Income from Investment Portfolio
Insurance Segment
Income from Investment Portfolio
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Net investment income | $ | 101 | | | $ | 69 | |
Fair value gains (losses) on trading securities (1) | 4 | | | (8) | |
Equity in earnings (losses) of investees (2) | 25 | | | (11) | |
| Total | $ | 130 | | | $ | 50 | |
________________________________________________
(1) Represents contingent value instruments issued by Puerto Rico that are classified as trading securities with changes in fair value reported in the condensed consolidated statements of operations.
(2) Equity in earnings (losses) of investees relates to funds managed by Sound Point and AHP, and certain other managers, as well as, prior to July 1, 2023, AssuredIM. Investments in funds are generally reported on a one-quarter lag. The Company’s share of Sound Point earnings will be reported for the first time in the fourth quarter of 2023.
Net investment income, which represents interest income on fixed-maturity debt securities and short-term investments, was higher in third quarter 2023 compared with third quarter 2022 primarily due to higher short-term interest rates and average balances, and accelerated accretion on certain loss mitigation securities.
As of September 30, 2023, the Insurance segment had $620 million in alternative investments, which had a blended return of approximately 12% for the nine months ended September 30, 2023.
In the Insurance segment, alternative investments consist primarily of funds managed by Sound Point, AHP and other managers, and are generally recorded at net asset value (NAV), with changes in NAV reported in “equity in earnings (losses) of investees.” Equity in earnings of investees is more volatile than net investment income on fixed-maturity securities and short-term investments. To the extent that the amounts invested in alternative fund investments increase and available-for-sale fixed-maturity securities decrease, net investment income may decline and mark-to-market volatility related to equity in earnings of investees may increase.
Insurance Segment New Business Production
Insurance Segment
New Business Production
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, |
| 2023 | | 2022 |
| GWP | | PVP (1) | | Gross Par Written (1) | | GWP | | PVP (1) | | Gross Par Written (1) |
| | | | | | | | | | | |
| Public finance - U.S. | $ | 29 | | | $ | 30 | | | $ | 5,098 | | | $ | 54 | | | $ | 57 | | | $ | 3,622 | |
| Public finance - non-U.S. | (5) | | | 2 | | | 61 | | | 44 | | | 37 | | | 194 | |
| Structured finance - U.S. | 15 | | | 12 | | | 267 | | | (2) | | | 1 | | | 30 | |
| Structured finance - non-U.S. | 1 | | | 2 | | | 522 | | | (2) | | | — | | | — | |
| Total | $ | 40 | | | $ | 46 | | | $ | 5,948 | | | $ | 94 | | | $ | 95 | | | $ | 3,846 | |
________________________________________________
(1) PVP, a non-GAAP financial measure, measures the value of the Insurance segment’s new business production for all contracts regardless of form or GAAP accounting model. See “Explanation of Non-GAAP Financial Measures” at the end of this press release. PVP and Gross Par Written in the table above are based on “close date,” when the transaction settles. GWP may be negative due to changes in debt service assumptions.
U.S. public finance GWP and PVP in third quarter 2023 were lower than the comparable GWP and PVP in third quarter 2022, due to a large transportation revenue transaction in third quarter 2022 that did not recur in third quarter 2023, and higher credit quality new business that carry lower premium rates in third quarter 2023, compared with third quarter 2022. The Company’s direct par written represented 61% of the total U.S. municipal market insured issuance in third quarter 2023, compared with 56% in third quarter 2022, and the Company’s penetration of all municipal issuance was 4.6% in third quarter 2023 compared with 3.2% in third quarter 2022.
Structured finance GWP and PVP in third quarter 2023 is primarily attributable to an insurance securitization.
Asset Management Segment
Upon the effective date of the Sound Point and AHP transactions in July 2023, the Company continues to participate in the asset management business through its ownership interest in Sound Point. The Company did not report any asset management income in third quarter 2023 because Sound Point’s results are reported on a one quarter lag. The Company will report its first quarter of earnings from its interest in Sound Point in the fourth quarter of 2023. In third quarter 2022, asset management adjusted operating loss was $3 million.
Corporate Division
Corporate Division Results
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Revenues | | | |
| Gain on sale of asset management subsidiaries | $ | 255 | | | $ | — | |
| Other | 4 | | | 1 | |
| Total revenues | 259 | | | 1 | |
| Expenses | | | |
| Interest expense | 26 | | | 22 | |
| Employee compensation and benefit expenses | 10 | | | 7 | |
| Other operating expenses | 21 | | | 5 | |
| Total expenses | 57 | | | 34 | |
| Equity in earnings (losses) of investees | — | | | — | |
| Adjusted operating income (loss) before income taxes | 202 | | | (33) | |
| Less: Provision (benefit) for income taxes | 47 | | | (3) | |
| Adjusted operating income (loss) | $ | 155 | | | $ | (30) | |
Corporate division adjusted operating income in third quarter 2023 includes a pre-tax gain resulting from the Sound Point and AHP transactions in third quarter 2023 of $241 million, which is net of $14 million in transaction costs (primarily advisory and legal expenses reported in other operating expenses). The increase in interest expense in third quarter 2023 compared with third quarter 2022 is primarily due to interest expense on newly issued 6.125% Senior Notes in August 2023, whose proceeds were used to redeem 5% Senior Notes at the end of September 2023.
Other (Effect of FG VIE and CIV consolidation)
The effect of consolidating FG VIEs and CIVs was a loss of $8 million in third quarter 2023 compared with a gain of $7 million in third quarter 2022. Third quarter 2023 includes a $16 million loss on the deconsolidation of all the collateralized loan obligations (CLOs), CLO warehouses and an AHP fund. Upon closing of the Sound Point and AHP transactions, the Company was no longer the primary beneficiary of these vehicles under GAAP. The net effect of FG VIE consolidation is primarily a function of changes in fair value.
Reconciliation to GAAP
The following table presents a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Reconciliation of Net Income (Loss) Attributable to AGL to
Adjusted Operating Income (Loss)
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Total | | Per Diluted Share | | Total | | Per Diluted Share |
| Net income (loss) attributable to AGL | $ | 157 | | | $ | 2.60 | | | $ | 11 | | | $ | 0.18 | |
| Less pre-tax adjustments: | | | | | | | |
| Realized gains (losses) on investments | (9) | | | (0.16) | | | (14) | | | (0.22) | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 6 | | | 0.12 | | | (49) | | | (0.78) | |
| Fair value gains (losses) on committed capital securities (CCS) | (20) | | | (0.33) | | | 1 | | | 0.02 | |
| Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves | (37) | | | (0.61) | | | (78) | | | (1.25) | |
| Total pre-tax adjustments | (60) | | | (0.98) | | | (140) | | | (2.23) | |
| Less tax effect on pre-tax adjustments | 11 | | | 0.16 | | | 18 | | | 0.30 | |
| Adjusted operating income (loss) | $ | 206 | | | $ | 3.42 | | | $ | 133 | | | $ | 2.11 | |
| | | | | | | |
| Gain (loss) related to FG VIE and CIV consolidation included in adjusted operating income | $ | (8) | | | $ | (0.13) | | | $ | 7 | | | $ | 0.12 | |
Non-credit impairment-related unrealized fair value gains on credit derivatives in third quarter 2023 were primarily generated by lower collateral asset spreads. Non-credit impairment-related unrealized fair value losses on credit derivatives in third quarter 2022 were generated primarily as a result of wider asset spreads and a tightening of Assured Guaranty Corp. spreads. 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.
Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss. Fair value losses on CCS in third quarter 2023 were primarily due to a tightening in market spreads.
Foreign exchange gains (losses) in both periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rate relative to the U.S. dollar of the pound sterling and, to a lesser extent, the euro.
Common Share Repurchases
On November 1, 2023, the Board of Directors (the Board) authorized the repurchase of an additional $300 million of its common shares. From the beginning of the repurchase program in 2013 through November 7, 2023, the Company repurchased a total of 143 million common shares at an average price of $33.49, representing approximately 74% of the total shares outstanding. As of November 7, 2023, the Company was authorized to purchase $372 million of its common shares. These repurchases can be made from time to time in the open market or in privately negotiated transactions.
The following table summarizes share repurchase activity in 2023.
Summary of Share Repurchases
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Amount | | Number of Shares | | Average Price Per Share |
| | | | | |
| 2023 (January 1 - March 31) | $ | 2 | | | 0.04 | | | $ | 62.23 | |
| 2023 (April 1 - June 30) | 24 | | | 0.45 | | | 53.08 | |
| 2023 (July 1 - September 30) | 64 | | | 1.07 | | | 59.67 | |
| 2023 (October 1 - November 7) | 42 | | | 0.68 | | | 61.17 | |
| Total 2023 | $ | 132 | | | 2.24 | | | 58.83 | |
The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements 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.
Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
(in millions)
| | | | | | | | | | | |
| Quarter Ended |
| September 30, |
| 2023 | | 2022 |
| Revenues | | | |
| Net earned premiums | $ | 95 | | | $ | 89 | |
| Net investment income | 100 | | | 67 | |
| Asset management fees | — | | | 16 | |
| Net realized investment gains (losses) | (9) | | | (14) | |
| Fair value gains (losses) on credit derivatives | 9 | | | (48) | |
| Fair value gains (losses) on CCS | (20) | | | 1 | |
| Fair value gains (losses) on FG VIEs | 6 | | | 11 | |
| Fair value gains (losses) on CIVs | (4) | | | 8 | |
| Foreign exchange gain (loss) on remeasurement | (39) | | | (80) | |
| Fair value gains (losses) on trading securities | 4 | | | (8) | |
| Gain on sale of asset management subsidiaries | 255 | | | — | |
| Other income (loss) | 6 | | | (1) | |
| Total revenues | 403 | | | 41 | |
| Expenses | | | |
| Loss and LAE (benefit) | 100 | | | (75) | |
| Interest expense | 24 | | | 20 | |
| Amortization of DAC | 4 | | | 4 | |
| Employee compensation and benefit expenses | 47 | | | 57 | |
| Other operating expenses | 44 | | | 37 | |
| Total expenses | 219 | | | 43 | |
| Income (loss) before income taxes and equity in earnings (losses) of investees | 184 | | | (2) | |
| Equity in earnings (losses) of investees | 18 | | | (20) | |
| Income (loss) before income taxes | 202 | | | (22) | |
| Less: Provision (benefit) for income taxes | 43 | | | (27) | |
| Net income (loss) | 159 | | | 5 | |
| Less: Noncontrolling interests | 2 | | | (6) | |
| Net income (loss) attributable to AGL | $ | 157 | | | $ | 11 | |
Condensed Consolidated Balance Sheets (unaudited)
(in millions)
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| Assets | | | |
| Investments: | | | |
| Fixed-maturity securities available-for-sale, at fair value | $ | 6,267 | | | $ | 7,119 | |
| Fixed-maturity securities, trading, at fair value | 350 | | | 303 | |
| Short-term investments, at fair value | 1,426 | | | 810 | |
| Other invested assets | 765 | | | 133 | |
| Total investments | 8,808 | | | 8,365 | |
| Cash | 108 | | | 107 | |
| Premiums receivable, net of commissions payable | 1,376 | | | 1,298 | |
| DAC | 158 | | | 147 | |
| Salvage and subrogation recoverable | 282 | | | 257 | |
| FG VIEs’ assets | 327 | | | 416 | |
| Assets of CIVs | 330 | | | 5,493 | |
| Goodwill and other intangible assets | 6 | | | 163 | |
| Other assets | 549 | | | 597 | |
| Total assets | $ | 11,944 | | | $ | 16,843 | |
| | | |
| Liabilities | | | |
| Unearned premium reserve | $ | 3,600 | | | $ | 3,620 | |
| Loss and LAE reserve | 361 | | | 296 | |
| Long-term debt | 1,693 | | | 1,675 | |
| Credit derivative liabilities, at fair value | 50 | | | 163 | |
| FG VIEs’ liabilities, at fair value | 542 | | | 715 | |
| Liabilities of CIVs | 4 | | | 4,625 | |
| Other liabilities | 393 | | | 457 | |
| Total liabilities | 6,643 | | | 11,551 | |
| | | |
| Shareholders’ equity | | | |
| Common shares | 1 | | | 1 | |
| Retained earnings | 5,815 | | | 5,577 | |
| Accumulated other comprehensive income (loss) | (565) | | | (515) | |
| Deferred equity compensation | 1 | | | 1 | |
| Total shareholders’ equity attributable to AGL | 5,252 | | | 5,064 | |
| Nonredeemable noncontrolling interests | 49 | | | 228 | |
| Total shareholders’ equity | 5,301 | | | 5,292 | |
| Total liabilities and shareholders’ equity | $ | 11,944 | | | $ | 16,843 | |
Explanation of Non-GAAP Financial Measures
The Company discloses both: (i) financial measures determined in accordance with GAAP; and (ii) 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.
The Company believes its presentation of non-GAAP financial measures 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 entities where it is deemed to be the primary beneficiary which include:
•FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
•CIVs in which certain subsidiaries invest.
The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.
Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV 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 core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; and (4) PVP.
Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures 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. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy.
Adjusted operating income, further adjusted for the effect of FG VIE and CIV 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 following paragraphs 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.
Adjusted Operating Income
Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted 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-related 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.
See “Reconciliation to GAAP” above for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).
Adjusted Operating Shareholders’ Equity and Adjusted Book Value
Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.
Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:
1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, 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, credit spreads and other market factors and are not expected to result in an economic gain or loss.
2) Elimination of fair value gains (losses) on the Company’s CCS. 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.
3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss.
4) 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.
Management uses adjusted book value, further adjusted to remove the effect of FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following:
1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.
2) Addition of the net present value of estimated net future revenue. See below.
3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.
4) 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.
The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
Reconciliation of Shareholders’ Equity Attributable to AGL to
Adjusted Operating Shareholders’ Equity and ABV
(in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
| Total | | Per Share | | Total | | Per Share |
| | | | | | | |
| Shareholders’ equity attributable to AGL | $ | 5,252 | | | $ | 90.84 | | | $ | 5,064 | | | $ | 85.80 | |
| Less pre-tax adjustments: | | | | | | | |
| Non-credit impairment-related unrealized fair value gains (losses) on credit derivatives | 38 | | | 0.66 | | | (71) | | | (1.21) | |
| Fair value gains (losses) on CCS | 12 | | | 0.21 | | | 47 | | | 0.80 | |
| Unrealized gain (loss) on investment portfolio | (609) | | | (10.52) | | | (523) | | | (8.86) | |
| Less taxes | 76 | | | 1.31 | | | 68 | | | 1.15 | |
| Adjusted operating shareholders’ equity | 5,735 | | | 99.18 | | | 5,543 | | | 93.92 | |
| Pre-tax adjustments: | | | | | | | |
| Less: DAC | 158 | | | 2.73 | | | 147 | | | 2.48 | |
| Plus: Net present value of estimated net future revenue | 190 | | | 3.28 | | | 157 | | | 2.66 | |
| Plus: Net deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed | 3,404 | | | 58.88 | | | 3,428 | | | 58.10 | |
| Plus taxes | (612) | | | (10.58) | | | (602) | | | (10.22) | |
| ABV | $ | 8,559 | | | $ | 148.03 | | | $ | 8,379 | | | $ | 141.98 | |
| | | | | | | |
| Gain (loss) related to FG VIE and CIV consolidation included in: | | | | | | | |
| Adjusted operating shareholders’ equity | $ | 4 | | | $ | 0.06 | | | $ | 17 | | | $ | 0.28 | |
| ABV | (2) | | | (0.03) | | | 11 | | | 0.19 | |
| | | | | | | |
| Shares outstanding at the end of the period | 57.8 | | | | | 59.0 | | | |
Net Present Value of Estimated Net Future Revenue
Management believes that this amount is a useful measure because it enables an evaluation of the present value of estimated net future revenue for non-financial guaranty insurance contracts. This amount represents the net present value of estimated future revenue from these contracts (other than credit derivatives with net expected losses), net of reinsurance, ceding commissions and premium taxes.
Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Net present value of estimated future revenue for an obligation may change from period to period due to a change in the discount rate or due to a change in estimated net future revenue for the obligation, which may change due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation. There is no corresponding GAAP financial measure.
PVP or Present Value of New Business Production
Management believes that PVP is a useful measure because it enables the evaluation of the value of new business production in the Insurance segment by taking into account the value of estimated future installment premiums on all new contracts underwritten in a reporting period as well as additional installment premiums and fees on existing contracts (which may result from supplements or fees or from the issuer not calling an insured obligation the Company projected would be called), regardless of form, which management believes GAAP gross written
premiums and changes in fair value of credit derivatives do not adequately measure. PVP in respect of contracts written in a specified period is defined as gross upfront and installment premiums received and the present value of gross estimated future installment premiums.
Future installment premiums are discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturity securities such as Loss Mitigation Securities. The discount rate is recalculated annually and updated as necessary. Under GAAP, financial guaranty installment premiums are discounted at a risk-free rate. Additionally, under GAAP, management records future installment premiums on financial guaranty insurance contracts covering non-homogeneous pools of assets based on the contractual term of the transaction, whereas for PVP purposes, management records an estimate of the future installment premiums the Company expects to receive, which may be based upon a shorter period of time than the contractual term of the transaction.
Actual installment premiums may differ from those estimated in the Company’s PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults or other factors that affect par outstanding or the ultimate maturity of an obligation.
Reconciliation of GWP to PVP
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | September 30, 2023 |
| | Public Finance | | Structured Finance | | |
| | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total |
| GWP | | $ | 29 | | | $ | (5) | | | $ | 15 | | | $ | 1 | | | $ | 40 | |
Less: Installment GWP and other GAAP adjustments (1) | | 6 | | | (5) | | | 15 | | | 1 | | | 17 | |
| Upfront GWP | | 23 | | | — | | | — | | | — | | | 23 | |
Plus: Installment premiums and other (2) | | 7 | | | 2 | | | 12 | | | 2 | | | 23 | |
| PVP | | $ | 30 | | | $ | 2 | | | $ | 12 | | | $ | 2 | | | $ | 46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | September 30, 2022 |
| | Public Finance | | Structured Finance | | |
| | U.S. | | Non - U.S. | | U.S. | | Non - U.S. | | Total |
| GWP | | $ | 54 | | | $ | 44 | | | $ | (2) | | | $ | (2) | | | $ | 94 | |
Less: Installment GWP and other GAAP adjustments (1) | | — | | | 44 | | | (3) | | | (2) | | | 39 | |
| Upfront GWP | | 54 | | | — | | | 1 | | | — | | | 55 | |
Plus: Installment premiums and other (2) | | 3 | | | 37 | | | — | | | — | | | 40 | |
| PVP | | $ | 57 | | | $ | 37 | | | $ | 1 | | | $ | — | | | $ | 95 | |
________________________________________________
(1) Includes the present value of new business on installment policies discounted at the prescribed GAAP discount rates, GWP adjustments on existing installment policies due to changes in assumptions and other GAAP adjustments.
(2) Includes the present value of future premiums and fees on new business paid in installments, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, other than certain fixed-maturities such as loss mitigation securities.
Conference Call and Webcast Information
The Company will host a conference call for investors at 7:00 a.m. Eastern Time (8:00 a.m. Atlantic Time) on Wednesday, November 8, 2023. The conference call will be available via live webcast in the Investor Information section of the Company’s website at AssuredGuaranty.com or by dialing 1-833-470-1428 (in the U.S.) or 1-404-975-4839 (International); the access code is 749082.
A replay of the conference call will be available approximately three hours after the call ends. The webcast replay will be available for 90 days in the Investor Information section of the Company’s website at AssuredGuaranty.com and the telephone replay will be available for 30 days by dialing 1-866-813-9403 (in the U.S.) or 1-929-458-6194 (International); the access code is 947645.
Please refer to Assured Guaranty’s September 30, 2023 Financial Supplement, which is posted on the Company's website at assuredguaranty.com/agldata, for more information on the Company’s financial guaranty portfolio, investment portfolio and other items. In addition, the Company is posting at assuredguaranty.com/presentations its “September 30, 2023 Equity Investor Presentation”.
The Company plans to post by early next week on its website at assuredguaranty.com/agldata the following:
•“Public Finance Transactions in 3Q 2023,” which lists the U.S. public finance new issues insured by the Company in third quarter 2023, and
•“Structured Finance Transactions at September 30, 2023,” which lists the Company’s structured finance exposure as of that date.
In addition, the Company will post on its website, when available, the Company’s separate-company subsidiary financial supplements and its “Fixed Income Presentation” for the current quarter. Those documents will be furnished to the Securities and Exchange Commission in a Current Report on Form 8-K.
# # #
Assured Guaranty Ltd. is a publicly traded (NYSE: AGO), Bermuda-based holding company. Through its subsidiaries, Assured Guaranty provides credit enhancement products to the U.S. and international public finance, infrastructure and structured finance markets. Assured Guaranty also participates in the asset management business through its ownership interest in Sound Point. More information on Assured Guaranty Ltd. and its subsidiaries can be found at AssuredGuaranty.com.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statements made in this press release reflect the Company’s current views with respect to future events and financial performance and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among factors that could cause actual results to differ adversely are: (1) significant changes in inflation, interest rates, the world’s credit markets or segments thereof, credit spreads, foreign exchange rates or general economic conditions, including the possibility of a recession or stagflation; (2) geopolitical risk, including Russia’s invasion of Ukraine and the resulting economic sanctions, volatility in energy prices, potential for increased cyberattacks, and risk of intentional or accidental escalation between The North Atlantic Treaty Organization (NATO) and Russia, conflict in the Middle East, confrontation over Iran’s nuclear program, and United States (U.S.) – China strategic competition and the pursuit of technological independence; (3) the possibility of a U.S. government shutdown, payment defaults on the debt of the U.S. government or instruments issued, insured or guaranteed by related institutions, agencies or instrumentalities, and downgrades to their credit ratings; (4) public health crises, including pandemics and endemics, and the governmental and private actions taken in response to such events; (5) developments in the world’s financial and capital markets, including stresses in the financial condition of banking institutions in the U.S., that adversely affect repayment rates related to commercial real estate, municipalities and other insured obligors, Assured Guaranty’s insurance loss or recovery experience, or investments of Assured Guaranty; (6) reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty’s insurance; (7) the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations that Assured Guaranty insures or reinsures; (8) insured losses, including losses with respect to related legal proceedings, in excess of those expected by Assured Guaranty or the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the final resolution of Assured Guaranty’s remaining Puerto Rico exposures or the amounts recovered on securities received in connection with the resolution of Puerto Rico exposures already resolved; (9) the impact of the Company satisfying its obligations under insurance policies with respect to legacy insured Puerto Rico bonds; (10) increased competition, including from new entrants into the financial guaranty industry, nonpayment insurance and other forms of capital saving or risk syndication available to banks and insurers; (11) the possibility that investments made by Assured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subject Assured Guaranty to reduced liquidity at a time it requires liquidity, or to other negative or unanticipated consequences; (12) the impacts of the completion of Assured Guaranty’s transactions with Sound Point Capital Management, LP (Sound Point) and/or Assured Healthcare Partners LLC (AHP) on Assured Guaranty and its relationships with its shareholders, regulators, rating agencies, employees and the obligors it insures and on the asset management business contributed to Sound Point and on the business of AHP and their relationships with their respective clients and employees; (13) the possibility that strategic transactions made by Assured Guaranty, including the consummation of the transactions with Sound Point and/or AHP, do not result in the benefits anticipated or subject Assured Guaranty to negative consequences; (14) the inability to control the business, management or policies of entities in which the Company holds a minority interest; (15) the impact of market volatility on the mark-to-market of Assured Guaranty’s assets and liabilities subject to mark-to-market, including certain of its investments, contracts accounted for as derivatives, and certain consolidated variable interest entities (VIEs); (16) rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s insurance subsidiaries have insured; (17) the inability of Assured Guaranty to access external sources of capital on acceptable terms; (18) changes in applicable accounting policies or practices; (19) changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; (20) difficulties with the execution of Assured Guaranty’s business strategy; (21) loss of key personnel; (22) the effects of mergers, acquisitions and divestitures; (23) natural or man-made catastrophes or pandemics; (24) the impact of climate change on Assured Guaranty’s business and regulatory actions taken related to such risk; (25) other risk factors identified in AGL’s filings with the U.S. Securities and Exchange Commission (SEC); (26) other risks and uncertainties that have not been identified at this time; and (27) management’s response to these factors. Readers are cautioned not to place
undue reliance on these forward-looking statements. These forward-looking statements are made as of November 7, 2023, and Assured Guaranty undertakes no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Contact Information
Robert Tucker
Senior Managing Director, Investor Relations and Corporate Communications
212-339-0861
rtucker@agltd.com
Ashweeta Durani
Vice President, Media Relations
212-408-6042
adurani@agltd.com
