Assured Guaranty Ltd. Reports Results for Second Quarter 2020

GAAP Highlights

  • Net income attributable to Assured Guaranty Ltd. was $183 million, or $2.10 per share,(1) for second quarter 2020.
  • Shareholders’ equity attributable to Assured Guaranty Ltd. per share reached a new record of $76.66 as of June 30, 2020.

Non-GAAP Highlights

  • Adjusted operating income(2) was $119 million, or $1.36 per share, for second quarter 2020.
  • Adjusted operating shareholders’ equity(2) per share and adjusted book value (ABV)(2) per share reached new records of $71.34 and $104.63, respectively, as of June 30, 2020.

Total Capital Returned to Shareholders

  • Total capital returned to shareholders was $181 million, including share repurchases of $164 million, or 6.0 million shares, in second quarter 2020.

Insurance Segment(3)

  • Adjusted operating income was $154 million for second quarter 2020.
  • Gross written premiums (GWP) were $149 million for second quarter 2020.
  • Present value of new business production (PVP)(4) was $96 million for second quarter 2020.

Asset Management Segment(3)

  • Andrew Feldstein has decided to leave Assured Guaranty and its subsidiary BlueMountain Capital Management, LLC.
  • David Buzen, Deputy Chief Investment Officer at BlueMountain, appointed Chief Executive Officer and Chief Investment Officer of BlueMountain and Head of Asset Management and Chief Investment Officer at Assured Guaranty.
  • Adjusted operating loss was $9 million for second quarter 2020, including $3 million in amortization of intangible assets.
  • Launched liquid asset strategy, with initial focus on municipal securities.
  • Liquidation of wind-down funds continued with $541 million in net outflows for second quarter 2020.

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, 2020 (second quarter 2020).

“During these unprecedented economic and market conditions, Assured Guaranty achieved its strongest second-quarter result for direct new insurance business production since the acquisition of AGM in July 2009, writing 71% more PVP than in last year’s second quarter,” said Dominic Frederico, President and CEO. “We generated premiums in each of our insurance product lines – U.S. public finance, international infrastructure and structured finance. Along with our continued capital management program, this helped drive our adjusted book value above $100 per share for the first time in our history.

We believe that we are well positioned to withstand the potential financial stress that could result from the pandemic, based on our low insured leverage, granular and diversified insured portfolio, strong liquidity position and significant excess capital. S&P Global Ratings concurred on July 16th, when it reaffirmed the financial strength ratings of our insurance subsidiaries at AA with a Stable Outlook, citing our ‘excellent capital and earnings,’ ‘exceptional’ liquidity, ‘very strong competitive position,’ and increased opportunities for new business underwriting.”

(1)

All per share information for net income and adjusted operating income is based on diluted shares.

(2)

Adjusted operating income, adjusted operating shareholders’ equity and adjusted book value were formerly known as “Non-GAAP operating income”, “Non-GAAP operating shareholders’ equity” and “Non-GAAP adjusted book value”, respectively. Please see “Explanation of Non-GAAP Financial Measures.”

(3)

Beginning in the fourth quarter of 2019, with the acquisition of BlueMountain Capital Management, LLC and expansion into the asset management business, the Company now operates in two distinct operating segments: Insurance and Asset Management. The Company also has a Corporate division; please see “Summary Financial Results” table below. Adjusted operating income is the Company’s segment measure.

(4)

Please see “Explanation of Non-GAAP Financial Measures.”

Summary Financial Results

(in millions, except per share amounts)

 

 

Quarter Ended

 

June 30,

 

2020

 

2019

 

 

 

 

GAAP Highlights

 

 

 

Net income (loss) attributable to AGL

$

183

 

 

$

142

 

Net income (loss) attributable to AGL per diluted share

2.10

 

 

1.39

 

Weighted average shares

87.0

 

 

101.9

 

 

 

 

 

Non-GAAP Highlights

 

 

 

Adjusted operating income (loss)

 

 

 

Insurance(1)

$

154

 

 

$

161

 

Asset Management(1)

(9

)

 

 

Corporate

(26

)

 

(26

)

Other

 

 

6

 

Adjusted operating income (loss)(2)

$

119

 

 

$

141

 

Adjusted operating income per diluted share(2)

$

1.36

 

 

$

1.38

 

Weighted average diluted shares

87.0

 

 

101.9

 

 

As of

 

June 30, 2020

 

December 31, 2019

 

Amount

 

Per Share

 

Amount

 

Per Share

 

 

 

 

 

 

 

 

Shareholders’ equity attributable to AGL

$

6,444

 

 

$

76.66

 

 

$

6,639

 

 

$

71.18

 

Adjusted operating shareholders’ equity (2)

5,997

 

 

71.34

 

 

6,246

 

 

66.96

 

ABV (2)

8,796

 

 

104.63

 

 

9,047

 

 

96.99

 

 

 

 

 

 

 

 

 

Common Shares Outstanding

84.1

 

 

 

 

93.3

 

 

 

________________________________________________

(1)

Adjusted operating income (loss) represents the Company’s segment measure.

(2)

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

Shareholders’ equity attributable to AGL decreased in the six-month period ended June 30, 2020 primarily due to share repurchases and dividends, partially offset by net income. Adjusted operating shareholders’ equity decreased in the six-month period ended June 30, 2020 as adjusted operating income was offset mainly by share repurchases and dividends. ABV also decreased primarily due to share repurchases and dividends, partially offset by net premiums written.

As of June 30, 2020, on a per share basis, shareholders’ equity attributable to AGL, adjusted operating shareholders’ equity and ABV all reached new records.

Insurance Segment

The Insurance segment primarily consists of the Company’s domestic and foreign insurance subsidiaries and their wholly owned subsidiaries that provide credit protection products to the United States (U.S.) and international public finance (including infrastructure) and structured finance markets. The Insurance segment also includes the income (loss) from its proportionate equity interest in Assured Investment Management funds. The Insurance segment is presented without giving effect to the consolidation of variable interest entities (VIEs).

Insurance Results

(in millions)

 

 

Quarter Ended

 

June 30,

 

2020

 

2019

Revenues

 

 

 

Net earned premiums and credit derivative revenues

$

125

 

 

$

127

 

Net investment income

82

 

 

110

 

Commutation gains (losses)

38

 

 

1

 

Other income (loss)

1

 

 

3

 

Total revenues

246

 

 

241

 

 

 

 

 

Expenses

 

 

 

Loss expense (benefit)

39

 

 

(15

)

Amortization of deferred acquisition costs (DAC)

4

 

 

4

 

Employee compensation and benefit expenses

29

 

 

34

 

Other operating expenses

18

 

 

17

 

Total expenses

90

 

 

40

 

Equity in net earnings of investees

26

 

 

1

 

Adjusted operating income (loss) before income taxes

182

 

 

202

 

Provision (benefit) for income taxes

28

 

 

41

 

Adjusted operating income (loss)

$

154

 

 

$

161

 

Insurance adjusted operating income for second quarter 2020 was $154 million, compared with adjusted operating income of $161 million for the three-month period ended June 30, 2019 (second quarter 2019). The decrease was mainly due to the following:

  • Loss expense of $39 million in second quarter 2020, compared with a benefit of $15 million in second quarter 2019. Loss expense in second quarter 2020 was primarily attributable to certain Puerto Rico exposures. Loss expense in second quarter 2019 was a net benefit mainly driven by second-lien U.S. residential mortgage-backed securities (RMBS) exposures, partially offset by loss expense on certain Puerto Rico exposures.
  • Net investment income decreased in second quarter 2020, compared with second quarter 2019, primarily due to a decrease in the average balance of the portfolio of securities purchased for loss mitigation purposes which typically earn a higher yield than the externally managed portfolio of fixed maturity securities. In second quarter 2019, a large transaction in the loss mitigation portfolio was settled resulting in additional income that did not recur in second quarter 2020. Net investment income also decreased due to a lower average balance in the externally managed fixed-maturity and short-term investment portfolio, which declined due to dividends paid out of the insurance subsidiaries that were used for AGL share repurchases, and a shift of assets to funds managed by Assured Investment Management, and other alternative investments. Assured Investment Management funds are recorded at fair value through the Insurance segment income statement in the line item equity in net earnings of investees (see below). To the extent additional assets are shifted to funds managed by Assured Investment Management and other alternative investments, the presentation of the corresponding income in the statement of operations may also shift from net investment income to equity in net earnings of investees.
  • Net earned premiums and credit derivative revenues declined slightly compared with second quarter 2019. Structured finance net earned premiums and credit derivative revenues declined $13 million due to lower accelerations from terminations and the scheduled decline in the structured finance portfolio. However, public finance net earned premiums increased in second quarter 2020 compared with second quarter 2019 due to higher accelerations from refundings and terminations as well as a modest increase in scheduled earned premiums due to higher levels of premiums written in recent periods. Total accelerations were $32 million in second quarter 2020 compared with $29 million in second quarter 2019.

These decreases were partially offset by the following:

  • A commutation gain of $38 million in second quarter 2020 compared with $1 million in second quarter 2019. In second quarter 2020, the Company reassumed $336 million in par from its largest remaining legacy financial guaranty reinsurer.
  • Equity in net earnings of investees primarily consists of investments in Assured Investment Management funds, which are recorded at fair value. Assured Investment Management funds recorded a gain of $26 million in second quarter 2020, mostly generated by the collateralized loan obligation (CLO) and healthcare fund investments.
  • The effective tax rate was 15.6% in second quarter 2020 compared with 20.2% in second quarter 2019. The effective tax rate fluctuates from period to period based on the proportion of income in different tax jurisdictions.

Economic Loss Development

The economic loss development in second quarter 2020 of $34 million was primarily attributable to Puerto Rico exposures. Net economic loss development in U.S. RMBS of $1 million was mainly attributable to increased delinquencies, offset by higher excess spread. The economic development attributable to changes in discount rates was a loss of $1 million in second quarter 2020.

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

(in millions)

 

 

Net Expected

Loss to be

Paid/(Recovered)

as of

March 31, 2020

 

Economic Loss/

(Benefit)

Development

 

Losses (Paid)/

Recovered

 

Net Expected

Loss to be

Paid/(Recovered)

as of

June 30, 2020

 

 

 

 

 

 

 

 

Public finance

$

519

 

 

$

32

 

 

$

21

 

 

$

572

 

U.S. RMBS

104

 

 

1

 

 

23

 

 

128

 

Other structured finance

37

 

 

1

 

 

(3

)

 

35

 

Total

$

660

 

 

$

34

 

 

$

41

 

 

$

735

 

________________________________________________

(1)

Economic loss/(benefit) 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 specialty insurance and reinsurance contracts. Financial guaranty GWP includes (1) amounts collected upfront on new business written, (2) the present value of future contractual or expected premiums on new business written (discounted at risk free rates), and (3) the effects of changes in the estimated lives of transactions in the inforce book of business. Specialty insurance and reinsurance GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP.

The non-GAAP measure, PVP, on the other hand, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed maturity securities purchased during the prior calendar year, for all contracts whether in insurance or credit derivative form. See “Explanation of Non-GAAP Financial Measures” at the end of this press release.

New Business Production

(in millions)

 

 

Quarter Ended June 30,

 

2020

 

2019

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

GWP

 

PVP (1)

 

Gross Par

Written (1)

 

 

 

 

 

 

 

 

 

 

 

 

Public finance – U.S.

$

60

 

 

$

60

 

 

$

5,282

 

 

$

43

 

 

$

44

 

 

$

3,657

 

Public finance – non-U.S.

81

 

 

28

 

 

557

 

 

12

 

 

8

 

 

299

 

Structured finance – U.S.

8

 

 

8

 

 

173

 

 

(4

)

 

3

 

 

227

 

Structured finance – non-U.S.

 

 

 

 

 

 

 

 

1

 

 

 

Total (2)

$

149

 

 

$

96

 

 

$

6,012

 

 

$

51

 

 

$

56

 

 

$

4,183

 

________________________________________________

(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. The discount rate used for PVP as of June 30, 2020 is 3%. The prior period has been recast to present PVP discounted at 3% instead of 6%.

(2)

While PVP includes the present value of only the premiums the Company estimates it will receive over the expected term of the transaction, under GAAP the Company is required, for certain transactions, to include contractual premiums through the date of legal maturity in GWP.

U.S. public finance GWP increased 40%, and PVP increased 36%, compared with second quarter 2019, including transactions guaranteed in both the primary and secondary market. The average rating of all U.S. public finance par written in second quarter 2020 was A-. The Company guaranteed 62% of insured U.S. public finance new issuance par in second quarter 2020.

Outside the U.S., GWP and PVP also increased in second quarter 2020, compared with second quarter 2019. In second quarter 2020, the Company’s new French subsidiary, Assured Guaranty (Europe) SA wrote a guaranty of a solar bond transaction in Spain, and a secondary market guaranty to a European financial institution for a public sector credit. Non-U.S. GWP and PVP also includes the restructuring of an existing insured transaction that resulted in no additional exposure. The Company has consistently written new non-U.S. public finance business every quarter since the end of 2015.

In total, the structured finance sector’s GWP and PVP both increased in second quarter 2020 compared with second quarter 2019. New business in second quarter 2020 included an insurance securitization and two whole business securitizations.

Business activity in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period.

Asset Management Segment

The Asset Management segment, which consists of BlueMountain Capital Management, LLC (BlueMountain) and its associated entities operating within the Assured Investment Management platform, provides asset management services to outside investors as well as to the Insurance segment.

Asset Management Results

(in millions)

 

 

Quarter Ended

 

June 30,

 

2020

Revenues

 

Management fees:

 

CLOs

$

2

 

Opportunity funds

3

 

Wind-down funds

7

 

Total management fees (1)

12

 

Other income

1

 

Total revenues

13

 

 

 

Expenses

 

Amortization of intangible assets

3

 

Employee compensation and benefit expenses

14

 

Other operating expenses

7

 

Total expenses

24

 

Adjusted operating income (loss) before income taxes

(11

)

Provision (benefit) for income taxes

(2

)

Adjusted operating income (loss)

$

(9

)

________________________________________________

(1)

The Asset Management segment presents reimbursable fund expenses netted in other operating expenses, whereas on the condensed consolidated statement of operations such reimbursable expenses are shown gross, as components of asset management fees and other operating expenses.

Asset Management adjusted operating loss was $9 million for second quarter 2020, including $3 million in pretax amortization related to intangible assets, which primarily consist of the fair value of investment management and CLO contracts.

Management fees from CLOs shown in the table above are the net management fees that BlueMountain retains after rebating the portion of these fees that pertains to the CLO equity that is held directly by Assured Investment Management funds. Gross management fees from CLOs, before rebates to Assured Investment Management funds, were $7 million for second quarter 2020. Management fees from opportunity funds are mainly attributable to previously established funds and also includes two opportunity funds in which the Insurance segment’s U.S. insurance subsidiaries invest. Total opportunity fund AUM includes $256 million in assets under management (AUM) for the Insurance segment’s U.S. insurance subsidiaries.

Assets Under Management

(in millions)

 

 

CLOs

 

Opportunity

Funds

 

Liquid

Strategies

 

Wind-Down

Funds

 

Total

Rollforward:

 

 

 

 

 

 

 

 

 

AUM, March 31, 2020

$

12,645

 

 

$

969

 

 

$

 

 

$

2,865

 

 

$

16,479

 

 

 

 

 

 

 

 

 

 

 

Inflows

741

 

 

30

 

 

370

 

 

 

 

1,141

 

Outflows:

 

 

 

 

 

 

 

 

 

Redemptions

 

 

 

 

 

 

 

 

 

Distributions

(213

)

 

(83

)

 

 

 

(541

)

 

(837

)

Total outflows

(213

)

 

(83

)

 

 

 

(541

)

 

(837

)

Net flows

528

 

 

(53

)

 

370

 

 

(541

)

 

304

 

Change in fund value

39

 

 

57

 

 

1

 

 

136

 

 

233

 

AUM, June 30, 2020 (1)

$

13,212

 

 

$

973

 

 

$

371

 

 

$

2,460

 

 

$

17,016

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2020:

 

 

 

 

 

 

 

 

 

Funded AUM (2)

$

13,142

 

 

$

868

 

 

$

371

 

 

$

2,438

 

 

$

16,819

 

Unfunded AUM (2)

70

 

 

105

 

 

 

 

22

 

 

197

 

 

 

 

 

 

 

 

 

 

 

Fee Earning AUM (2)

$

6,513

 

 

$

804

 

 

$

371

 

 

$

2,258

 

 

$

9,946

 

Non-Fee Earning AUM (2)

6,699

 

 

169

 

 

 

 

202

 

 

7,070

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

 

Funded AUM (2)

$

12,634

 

 

$

849

 

 

$

 

 

$

2,843

 

 

$

16,326

 

Unfunded AUM (2)

11

 

 

120

 

 

 

 

22

 

 

153

 

 

 

 

 

 

 

 

 

 

 

Fee Earning AUM (2)

$

6,038

 

 

$

814

 

 

$

 

 

$

2,601

 

 

$

9,453

 

Non-Fee Earning AUM (2)

6,607

 

 

155

 

 

 

 

264

 

 

7,026

 

________________________________________________

(1)

Includes AUM of the insurance company subsidiaries (intercompany AUM) of $256 million in opportunity funds, $221 million in the CLOs and $351 million in liquid strategies.

(2)

Please see “Definitions” at the end of this press release.

Total inflows of $1.1 billion in second quarter 2020 include CLO inflows of $741 million, which mainly consist of a new CLO and an Investment Management Agreement (IMA) with the U.S. insurance company subsidiaries to manage up to $300 million in CLO obligations, of which $100 million had been allocated as of June 30, 2020.

The launch of a new liquid asset strategy contributed inflows of $370 million at the end of second quarter 2020. Funds raised in the new liquid strategies include $100 million of capital from the Insurance segment’s U.S. insurance subsidiaries that were invested in a new municipal bond fund, as well as a $250 million IMA with the U.S. insurance subsidiaries to manage a portfolio of municipal obligations. Liquid strategy investment vehicles typically offer investors redemption rights within one year and are largely invested in liquid securities.

Total outflows for second quarter 2020 were mainly driven by the return of capital from wind-down funds, which include certain funds that are in their harvest period.

Asset Management Leadership Transition

Andrew Feldstein, Assured Guaranty’s Chief Investment Officer and Head of Asset Management, has decided to leave the Company and its subsidiary BlueMountain Capital Management, LLC. BlueMountain’s Deputy Chief Investment Officer David A. Buzen will assume Mr. Feldstein’s responsibilities as Chief Executive Officer and Chief Investment Officer of BlueMountain, and Head of Asset Management and Chief Investment Officer at Assured Guaranty, effective immediately. Mr. Feldstein will remain with the Company as Senior Advisor to the CEO and CIO of BlueMountain through the end of October 2020 to support a smooth transition of responsibilities.

Dominic Frederico, President and CEO of Assured Guaranty said, “I want to thank Andrew for his contributions in helping to establish our Assured Investment Management platform and for integrating BlueMountain into it over the past year. Our commitment to BlueMountain and the Assured Investment Management platform is unchanged. We are pleased with the business diversification we have achieved through this acquisition, continue to support the growth of the business, and have already allocated over $1 billion of our investment portfolio so far to investments BlueMountain manages. David Buzen and the talented senior team at BlueMountain bring exceptional knowledge of our asset management strategy and are well-positioned to oversee the launch of new strategies that are aligned with the firm’s focus on credit-based strategies such as collateralized loan obligations, asset-based investing, municipal bonds, and private investments in areas such as healthcare and infrastructure, as well as the wind down of legacy BlueMountain funds.”

Corporate Division

The Corporate division consists primarily of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH), as well as other operating expenses attributed to holding company activities such as Board of Directors’ expenses, and administrative services performed by operating subsidiaries for the holding companies.

Corporate Results

(in millions)

 

 

Quarter Ended

 

June 30,

 

2020

 

2019

 

 

 

 

Revenues

 

 

 

Net investment income

$

 

 

$

1

 

Total revenues

 

 

1

 

 

 

 

 

Expenses

 

 

 

Interest expense

23

 

 

22

 

Employee compensation and benefit expenses

3

 

 

5

 

Other operating expenses

6

 

 

4

 

Total expenses

32

 

 

31

 

Equity in net earnings of investees

 

 

 

Adjusted operating income (loss) before income taxes

(32

)

 

(30

)

Provision (benefit) for income taxes

(6

)

 

(4

)

Adjusted operating income (loss)

$

(26

)

 

$

(26

)

Adjusted operating loss for the Corporate division for both periods consisted primarily of interest expense and operating expenses of the holding companies. Interest expense includes interest on intersegment debt to the Insurance segment of $2 million in second quarter 2020.

Other Items

Other items consist of intersegment eliminations, reclassifications of reimbursable fund expenses, and consolidation adjustments, including the effect of consolidating financial guaranty (FG) VIEs and certain Assured Investment Management platform investment vehicles.

The types of VIEs the Company consolidates when it is deemed to be the primary beneficiary include (1) entities whose debt obligations the U.S insurance subsidiaries insure, and (2) investment vehicles such as collateralized financing entities and investment funds managed by the Asset Management subsidiaries, in which the U.

Contacts

Robert Tucker

Senior Managing Director, Investor Relations and Corporate Communications

212-339-0861

[email protected]

Ashweeta Durani

Vice President, Corporate Communications

212-408-6042

[email protected]

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