Assured Guaranty Ltd. Reports Results for First Quarter 2021

GAAP Highlights

Net income attributable to Assured Guaranty Ltd. was $11 million, or $0.14 per share,(1) for first quarter 2021. This includes a $13 million after-tax write-off of an intangible asset attributable to the insurance licenses of Municipal Assurance Corp. (MAC) as a result of an internal organizational restructuring.

Shareholders’ equity attributable to Assured Guaranty Ltd. per share was $84.67 as of March 31, 2021, the second highest ever reported.

Non-GAAP Highlights

Adjusted operating income(2) was $43 million, or $0.55 per share, for first quarter 2021. This also includes a $13 million after-tax write-off of the MAC insurance licenses.

Adjusted operating shareholders’ equity(2) per share and adjusted book value (ABV)(2) per share reached record highs of $79.44 and $116.56, respectively, as of March 31, 2021.

Return of Capital to Shareholders

First quarter 2021 capital returned to shareholders was $95 million, including share repurchases of $77 million, or 2.0 million shares, and dividends of $18 million.

Insurance Segment

Adjusted operating income was $79 million for first quarter 2021.

Gross written premiums (GWP) were $87 million for first quarter 2021, the highest first-quarter result in four years.

Present value of new business production (PVP)(2) was $86 million for first quarter 2021.

Asset Management Segment

Adjusted operating loss was $7 million for first quarter 2021.

Gross inflows were $1.0 billion for first quarter 2021.

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 March 31, 2021 (first quarter 2021).

Commenting on first quarter activity, Dominic Frederico, President and CEO said: “Assured Guaranty has now reached important new consensual settlement agreements relating to Puerto Rico that, combined with a previous agreement, will resolve over 93% of our net par outstanding of Puerto Rico exposures, once court-approved and implemented. Of our additional $241 million of net par, almost all relates to credits that have not missed any principal or interest payments.

“Additionally,” he continued, “in a quarter when our important shareholder value measures of adjusted operating shareholders’ equity per share and adjusted book value per share again achieved new highs, our new business production generated $86 million of PVP, more than in all but one first quarter since 2009, driven by very strong U.S. public finance production. The $5.5 billion of municipal new issue par sold with our insurance was the most we insured in any first quarter since 2010, and our 65% share of insured municipal par sold was better than our market share in any quarter since 2014.

“The first quarter also saw a resurgence in the global CLO market that benefited our asset management business, which issued two new CLOs during the quarter and continued to sell legacy CLO equity to third parties. CLO management fees for the quarter were more than double those of last year’s first quarter.”

(1)

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

(2)

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

Summary Financial Results

(in millions, except per share amounts)

 

 

Quarter Ended

 

March 31,

 

2021

 

2020

 

 

 

 

GAAP

 

 

 

Net income (loss) attributable to AGL

$

11

 

 

$

(55

)

Net income (loss) attributable to AGL per diluted share

$

0.14

 

 

$

(0.59

)

Weighted average diluted shares

77.5

 

 

92.6

 

Non-GAAP

 

 

 

Adjusted operating income (loss) (1) (2)

$

43

 

 

$

33

 

Adjusted operating income per diluted share(2)

$

0.55

 

 

$

0.36

 

Weighted average diluted shares

77.5

 

 

93.4

 

 

 

 

 

Segment (1)

 

 

 

Insurance

$

79

 

 

$

85

 

Asset Management

(7

)

 

(9

)

Corporate

(29

)

 

(39

)

Other

—

 

 

(4

)

Adjusted operating income (loss)

$

43

 

 

$

33

 

 

As of

 

March 31, 2021

 

December 31, 2020

 

Amount

 

Per Share

 

Amount

 

Per Share

 

 

 

 

 

 

 

 

Shareholders’ equity attributable to AGL

$

6,430

 

 

$

84.67

 

 

$

6,643

 

 

$

85.66

 

Adjusted operating shareholders’ equity (2)

6,032

 

 

79.44

 

 

6,087

 

 

78.49

 

ABV (2)

8,851

 

 

116.56

 

 

8,908

 

 

114.87

 

 

 

 

 

 

 

 

 

Common Shares Outstanding

75.9

 

 

 

 

77.5

 

 

 

(1)

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

(2)

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

As of March 31, 2021, on a per share basis, shareholders’ equity attributable to AGL was the second highest ever reported, and adjusted operating shareholders’ equity and ABV both reached record highs.

Shareholders’ equity attributable to AGL declined, on both a nominal and per-share basis, due mainly to unrealized losses on the fixed-maturity investment portfolio. Share repurchases and dividends also reduced shareholders’ equity attributable to AGL. See “Common Share Repurchases” on page 10.

Adjusted operating shareholders’ equity and ABV decreased on a nominal basis primarily due to share repurchases and dividends, partially offset, in the case of ABV, by net premiums written on new business production. On a per share basis, adjusted operating shareholders’ equity and ABV benefited from the repurchase of an additional 2.0 million shares in first quarter 2021.

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 international public finance (including infrastructure) and structured finance markets. The Insurance segment is presented without giving effect to the consolidation of financial guaranty variable interest entities (FG VIEs) and therefore includes premiums and losses of all financial guaranty contracts, whether or not the associated FG VIEs are consolidated, and also includes its share of earnings from funds managed by Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) (AssuredIM Funds).

Insurance Results

(in millions)

 

 

Quarter Ended

 

March 31,

 

2021

 

2020

Revenues

 

 

 

Net earned premiums and credit derivative revenues

$

107

 

 

$

107

 

Net investment income

73

 

 

83

 

Other income (loss)

(1

)

 

6

 

Total revenues

179

 

 

196

 

 

 

 

 

Expenses

 

 

 

Loss expense

30

 

 

18

 

Amortization of deferred acquisition costs (DAC)

3

 

 

3

 

Employee compensation and benefit expenses

36

 

 

41

 

Write-off of MAC insurance licenses

16

 

 

—

 

Other operating expenses

21

 

 

22

 

Total expenses

106

 

 

84

 

Equity in earnings of investees

19

 

 

(9

)

Adjusted operating income (loss) before income taxes

92

 

 

103

 

Provision (benefit) for income taxes

13

 

 

18

 

Adjusted operating income (loss)

$

79

 

 

$

85

 

Insurance adjusted operating income for first quarter 2021 was $79 million, compared with $85 million for the three-month period ended March 31, 2020 (first quarter 2020). The decrease was mainly due to the following:

In first quarter 2021, the Company received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into Assured Guaranty Municipal Corp. (AGM), with AGM as the surviving company. As a result, the Company wrote-off the $16 million carrying value ($13 million after-tax) of MAC’s insurance licenses in first quarter 2021. MAC was merged with and into AGM on April 1, 2021. This restructuring of the Company’s U.S. insurance subsidiaries will simplify the organizational and capital structure, reduce costs, and increases the future dividend capacity of the U.S. insurance subsidiaries.

Loss expense was $12 million higher. Loss expense in first quarter 2021 was primarily attributable to certain Puerto Rico and U.S. residential mortgage-backed securities (RMBS) exposures, partially offset by a benefit in certain European exposures. Loss expense in first quarter 2020 was primarily attributable to Puerto Rico exposures, partially offset by a benefit on first lien U.S. RMBS exposures.

These decreases were partially offset by higher income from the investment portfolio, which was $92 million in first quarter 2021, compared with $74 million in first quarter 2020, consisting of the following components:

Income from Investment Portfolio

(in millions)

 

 

Quarter Ended

 

March 31,

 

2021

 

2020

Net investment income

$

73

 

 

$

83

 

Equity in earnings of investees:

 

 

 

AssuredIM Funds

10

 

 

(10

)

Other

9

 

 

1

 

Total

$

92

 

 

$

74

 

The decrease in net investment income was primarily due to lower average balances in the fixed-maturity investment portfolio, which declined due to dividends paid by the insurance subsidiaries that were used for AGL share repurchases, lower reinvestment yields on short-term investments, and lower income on securities purchased for loss mitigation purposes.

Investments in AssuredIM Funds are recorded at net asset value (NAV), with the change in NAV recorded in the line item “equity in earnings of investees” in the Insurance segment. These include investments in healthcare funds, collateralized loan obligations (CLOs), a municipal bond fund and an asset-based fund. Equity in earnings of investees also includes the Company’s proportionate interests in other alternative investments managed by third parties. To the extent additional fixed-maturity securities are shifted to AssuredIM Funds and other alternative investments, the corresponding income in the condensed consolidated statements of operations will also shift from net investment income to equity in earnings of investees.

Equity in earnings of AssuredIM Funds in first quarter 2021 was a gain of $10 million, primarily attributable to changes in the NAV of CLO funds. In first quarter 2020, equity in earnings of AssuredIM Funds was a loss primarily attributable to CLO and asset-based funds. In addition, other alternative investments also generated gains of $9 million.

The Insurance segment is authorized to invest up to $750 million into AssuredIM Funds. As of March 31, 2021, the Insurance segment has total commitments to AssuredIM Funds of $587 million of which $335 million represents net invested capital and $252 million is undrawn. The Insurance segment’s interest in AssuredIM Funds was valued at $368 million as of March 31, 2021.

Net earned premiums and credit derivative revenues were consistent between first quarter 2021 and first quarter 2020, and consisted of the components presented in the table below.

Net Earned Premiums and Credit Derivative Revenues

(in millions)

 

 

Quarter Ended

 

March 31,

 

2021

 

2020

Scheduled net earned premiums and credit derivative revenues

$

91

 

 

$

92

 

Accelerations

16

 

 

15

 

Total

$

107

 

 

$

107

 

Economic Loss Development

Net economic loss development of $13 million in first quarter 2021 primarily consists of $11 million in loss development on U.S. RMBS, which was mainly attributable to lower excess spread of $58 million, offset by a benefit of $33 million related to changes in discount rates, and a benefit of $14 million related to improved performance and recoveries on previously charged-off loans in certain second lien transactions. Certain U.S. RMBS transactions with insured floating-rate debt linked to the London Interbank Offered Rate (LIBOR) are supported by large portions of fixed-rate assets. When LIBOR increases, as it did in first quarter 2021, excess spread decreases. The economic development attributable to changes in discount rates for all transactions was a benefit of $48 million for first quarter 2021. Net economic loss development in first quarter 2021 includes the impact of the Puerto Rico plan support agreements announced through [yesterday].

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

(in millions)

 

 

Net Expected
Loss to be Paid
(Recovered) as of
December 31, 2020

 

Economic Loss
(Benefit)
Development

 

Losses (Paid)
Recovered

 

Net Expected
Loss to be Paid
(Recovered) as of
March 31, 2021

 

 

 

 

 

 

 

 

Public finance

$

341

 

 

$

3

 

 

$

(92

)

 

$

252

 

U.S. RMBS

148

 

 

11

 

 

22

 

 

181

 

Other structured finance

40

 

 

(1

)

 

—

 

 

39

 

Total

$

529

 

 

$

13

 

 

$

(70

)

 

$

472

 

(1)

Economic loss development (benefit) represents the change in net expected loss to be paid (recovered) 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, each net of reinsurance. 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, 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, 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 March 31,

 

2021

 

2020

 

GWP

 

PVP (1)

 

Gross Par
Written (1)

 

GWP

 

PVP (1)

 

Gross Par
Written (1)

 

 

 

 

 

 

 

 

 

 

 

 

Public finance – U.S.

$

79

 

 

$

81

 

 

$

5,427

 

 

$

29

 

 

$

29

 

 

$

2,641

 

Public finance – non-U.S.

5

 

 

3

 

 

—

 

 

34

 

 

21

 

 

377

 

Structured finance – U.S.

3

 

 

2

 

 

45

 

 

1

 

 

1

 

 

15

 

Structured finance – non-U.S.

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

Total (2)

$

87

 

 

$

86

 

 

$

5,472

 

 

$

64

 

 

$

51

 

 

$

3,033

 

(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.

(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 and PVP in first quarter 2021 both increased over 170%, compared with first quarter 2020, primarily driven by several large transactions as well as an increase in market volume and insured penetration. The average rating of U.S. public finance par written was A-. The Company’s gross par written represented 65% of the total U.S. municipal market insured issuance in first quarter 2021.

The Company has consistently written new non-U.S. public finance business every quarter since the end of 2015. Business activity in the international infrastructure and structured finance sectors typically has long lead times and therefore may vary from period to period.

Asset Management Segment

The Asset Management segment consists of AssuredIM, which provides asset management services to outside investors as well as to the Insurance segment.

Asset Management Results

(in millions)

 

 

Quarter Ended

 

March 31,

 

2021

 

2020

Revenues

 

 

 

Management fees:

 

 

 

CLOs(1)

$

12

 

 

$

5

 

Opportunity funds and liquid strategies

4

 

 

2

 

Wind-down funds

3

 

 

9

 

Total management fees

19

 

 

16

 

Performance fees

1

 

 

—

 

Other income

—

 

 

1

 

Total revenues

20

 

 

17

 

 

 

 

 

Expenses

 

 

 

Employee compensation and benefit expenses

19

 

 

18

 

Amortization of intangible assets

3

 

 

3

 

Other operating expenses

7

 

 

7

 

Total expenses

29

 

 

28

 

Adjusted operating income (loss) before income taxes

(9

)

 

(11

)

Provision (benefit) for income taxes

(2

)

 

(2

)

Adjusted operating income (loss)

$

(7

)

 

$

(9

)

(1)

CLO fees are the net management fees that AssuredIM retains after rebating the portion of these fees that pertains to the CLO equity that is held directly by AssuredIM Funds.

Net CLO fees increased in first quarter 2021 compared with first quarter 2020, largely driven by the sale of CLO equity to third parties from legacy funds, the recovery of previously deferred CLO fees, and the issuance of new CLOs. The COVID-19 pandemic and downgrades in loan markets had triggered over-collateralization provisions in CLOs in 2020, resulting in the deferral of CLO management fees, the majority of which reversed by first quarter 2021. Management fees from opportunity funds and liquid strategies increased mainly due to fees from funds created since the Company acquired BlueMountain Capital Management, LLC. Management fees from wind-down funds decreased as distributions to investors continued.

Third party inflows of $873 million in first quarter 2021 was primarily attributable to the issuance of two new CLOs. While total assets under management (AUM) increased slightly in first quarter 2021 from $17.3 billion as of December 31, 2020 to $17.5 billion as of March 31, 2021, fee earning AUM rose by 11.4% over the same period, from $12.9 billion to $14.4 billion primarily due to the issuance of two new CLOs and the sale of CLO equity from legacy funds to third parties.

Roll Forward of

Assets Under Management

(in millions)

 

 

CLOs

 

Opportunity
Funds

 

Liquid
Strategies

 

Wind-Down
Funds

 

Total

AUM, December 31, 2020

$

13,856

 

 

$

1,486

 

 

$

383

 

 

$

1,623

 

 

$

17,348

 

 

 

 

 

 

 

 

 

 

 

Inflows-third party

813

 

 

60

 

 

—

 

 

—

 

 

873

 

Inflows-intercompany

109

 

 

36

 

 

—

 

 

—

 

 

145

 

Outflows:

 

 

 

 

 

 

 

 

 

Redemptions

—

 

 

—

 

 

—

 

 

—

 

 

—

 

Distributions

(356

)

 

(217

)

 

—

 

 

(329

)

 

(902

)

Total outflows

(356

)

 

(217

)

 

—

 

 

(329

)

 

(902

)

Net flows

566

 

 

(121

)

 

—

 

 

(329

)

 

116

 

Change in value

(91

)

 

148

 

 

1

 

 

3

 

 

61

 

AUM, March 31, 2021

$

14,331

 

 

$

1,513

 

 

$

384

 

 

$