Assured Guaranty Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Assured Currency Limited Third Quarter 2023 Earnings Conference Call. My name is Elliot, and I'll be your operator for today's call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

Operator

And I would now like to turn the conference over to our host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining Assured Guaranty for our Q3 2023 financial results conference call. Today's presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them except as required by law.

Speaker 1

If you are listening to a replay of this call or if you are reading the transcript of the call, please note that the statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. This presentation also includes references to non GAAP financial measures. We present the GAAP financial measures most directly comparable to the non GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non GAAP financial measures in our current financial supplement and equity investor presentation, which are on our website at assuredguaranteed.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Rob Bailenson, our Chief Financial Officer.

Speaker 1

After their remarks, we will open the call to your questions. As the webcast is not enabled for Q and A, please dial into the call if you'd like to ask a question. I will now turn the call over to Dominic.

Speaker 2

Thank you, Robert, and welcome to everyone joining today's call. We continue to build value for Assured Guaranty shareholders and policyholders during the Q3 and 1st 9 months of 2023. Adjusted book value per share of $148.03 and adjusted operating shareholders' equity per share of $99.18 both reached record highs

Speaker 3

at the end of the Q3.

Speaker 2

New business production has been strong this year with significant contributions from U. S. Public Finance, International Infrastructure Finance and Global Structured Finance. For the 4th consecutive year, our PVP for the 1st 3 quarters reached or exceeded $240,000,000 coming in at $249,000,000 for 2023. In July, we completed our transaction with SoundPoint Capital Management and Assured Healthcare Partners, which resulted in a $241,000,000 pre tax gain net of expenses.

Speaker 2

We now continue our asset management diversification strategy to our 30 percent ownership interest in SoundPoint. The earnings from that stake will be reflected for the first time in our Q4 reporting, furthering our strategy of generating fee based earnings to complement our risk based financial guaranty earnings. We also expect enhanced returns on our investment portfolio based on a broader range of alternative investment options with SoundPoint. More generally, these changes will also result in a streamlining some of our financial disclosures. Rob will expand on this in a few minutes.

Speaker 2

In Capital Management, during the Q3, we completed our current debt restructuring efforts by refinancing $330,000,000 of our senior obligations due next year. We also picked up the pace of our share repurchases, buying $64,000,000 worth of shares in the quarter. And last week, our Board of Directors increased our repurchase authorization by $300,000,000 Before I go into greater detail about the quarter and year to date results, I want to tell you about 2 important management promotions. I'm pleased to announce that CFO, Rob Bailenson, will become Assured Guaranty's Chief Operating Officer as of January 1, 2024. Rob will assume responsibility over our financial guaranty underwriting and origination strategies worldwide as well as other initiatives to grow our financial guaranty business and increase returns.

Speaker 2

We will also be working with May on setting the company's strategic direction and in assisting and executing other corporate priorities. Additionally, we are fortunate to have an outstanding person to fill Rob's role as CFO, Ben Rosenbloom. Ben is currently our Chief Actuary. Ben has managed under Rob many critical financial functions, including accounting and financial reporting. As CFO, he will add treasury, tech and investment management to his portfolio of responsibilities.

Speaker 2

Ben's quantitative and management skills have helped us accomplish many business objectives since he joined us in 2004. Most recently, he was instrumental in completing the SoundPoint transaction. Rob and Ben have earned these promotions by making numerous significant contributions over their many years at Assured Guaranty. With their extensive understanding of our strategies, markets, business practices and unique characteristics of the Financial Care Act business, I'm confident they will provide great leadership in the years to come. Turning to U.

Speaker 2

S. Public finance, where total year to date municipal bond par insurance was down 9% year over year, we nonetheless achieved a nearly 10% increase in the par amount of bonds sold with our insurance, guaranteeing $14,100,000,000 or 62% insured market share. This includes $7,200,000,000 of par from 27 large transactions that each involved at least $100,000,000 of insured par, up from $4,800,000,000 of par from 21 such transactions in the 1st 3 quarters of 2022. Importantly, the industry has maintained relatively steady high insured penetration rates this year with a rate of 8.5 percent of new issue parcels for the 1st 9 months of 2023 compared with 7.8% for the 1st 9 months of 2022. 9 month 2023 penetration rate is the highest in the decade.

Speaker 2

And in the Q3 of 2023, with overall par volume issued up only 3% year over year, we insured almost 50% more primary and market parts sold than we did in the Q3 last year. Our insured parts sold in the primary and guaranteed in the secondary markets totaled $4,400,000,000 up from $3,400,000,000 in the Q3 of 2022. We are also pleased with the increased activity we are seeing on bonds with underlying AA ratings from S and P or Moody's. In that category, we insured approximately $2,800,000,000 of par during the 1st 9 months of 2023, up from $2,300,000,000 of par for the 1st 9 months of last year. We wrote 64 policies on such AA transactions during the 9 month period, 55 of which were for new issues.

Speaker 2

We believe investors see our guarantee on high quality credits as a mitigant to downgrade and market value risks. And looking forward to the Q4 activity, we're off to a strong start. In the month of October, 3 U. S. Public finance transactions between $350,000,000 $750,000,000 sold or closed with our insurance, 2 airport transactions and a green bond transaction in the power sector.

Speaker 2

Outside of U. S. Public finance, our international public finance business produced $38,000,000 of PDP year to date. We also have a promising pipeline of additional infrastructure business, closing 5 transactions in the airport, water utility, higher education and student accommodation sectors with parts early on with $600,000,000 In Global Structured Finance, we produced $82,000,000 of PVP year to date, assuring that 2023 will be our best year for direct structured finance production since 2,009. We have another number of future mandates expected to close this year.

Speaker 2

The growth of our structured finance business further validates the 3 pronged approach we take to writing financial guaranty business. By diversifying across U. S. Public finance, global structured finance and international infrastructure markets, we can reduce production volatility over time as we have conditions in one market can be offset by a more favorable environment in another. Our last remaining nonpaying Puerto Rico exposure is the Power Authority PREPA, for which we continue our loss mitigation efforts.

Speaker 2

After mediation reach an impasse, proposed PREPA plan of adjustment appears headed towards a contested plan confirmation hearing. We remain committed to resolving PREPA consensually if possible, but will protect our bond claims and enforce our creditor legal rights through litigation and the Title III plan confirmation and appeals process as necessary. Meanwhile, our outstanding prep and short exposure continues to reduce. Overall, the strength of our insured portfolio has improved significantly in the last several years, largely because of our loss mitigation efforts. We now classify only 2.1 percent of our $242,000,000,000 insured portfolio as below investment grade compared with 4.6% of the portfolio in 2017.

Speaker 2

As I mentioned on our last call, during the Q3, S and P reaffirmed its AA Financial Trust rating with stable outlooks of our insurance companies, citing both our very strong financial risk profile and very strong business risk profile in its annual review of us. This report describes many strengths supporting our AA rating, including S and P's view that we have excellent capital and earnings with a meaningful capital adequacy buffer. Additionally, in October, KBRA reaffirmed its AA plus insured financial strength rating with stable outlook of our financial guarantee operating subsidiaries in its annual surveillance reports on AGM and AGC. It also commented that investor demand for our product may be further enhanced by economic conditions such as tightening credit cycle, and economic environment of higher interest rates, volatile or widening credit spreads and economic uncertainty. Our product is designed to provide value in a matter of the market environment, including when credit or market conditions are particularly uncertain.

Speaker 2

We believe the market disruptions during the pandemic and more recently volatility in the markets and global economies, geopolitical unpredictability and climate related natural disasters have resulted in a broader recognition of the protection and value our guarantee provides against unforeseen circumstances and a greater appreciation for the capital and liquidity supporting our insurance policies. We believe that concerns in the market can increase the demand for financial guarantee insurance because it can help support price stability and provide greater certainty of execution for new issues in the volatile pricing environments. Our outlook is positive as we continue to focus on our core principles of prudent capital management that is optimized for the benefit of our policyholders and shareholders, disciplined risk management and clear and well executed strategies for new business production. I will now turn the call over to Rob.

Speaker 4

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report Q3 2023 adjusted operating income increased to $206,000,000 or $3.42 per share. This represents an increase of 55% 62% respectively compared with the Q3 of last year. The increase was primarily driven by the gain on the SoundPoint and AHP transactions of $190,000,000 which is net of transaction expenses and deferred taxes. The SoundPoint and AHP transactions were strategic milestones towards our goal of increasing fee based and alternative investment earnings in order to grow the returns of the company, while diversifying sources of income.

Speaker 4

With the SoundPoint transaction, we will own a 30% interest in an asset manager with historically strong AUM growth that provides an array of alternative investment options. In keeping with our commitment to invest a total of $1,000,000,000 in SoundPoint managed alternative investments within 2 years, we committed $150,000,000 to 2 SoundPoint funds in the 3rd quarter and another $100,000,000 since the end of the 3rd quarter. Including funds managed by SoundPoint, AHP and others, as of September 30, 2023, we had $630,000,000 in alternative investments. Our inception to date annualized returns across all alternative investments is 12%. Before I get into a discussion of the Q3, I wanted to highlight a few financial reporting changes resulting from the SoundPoint and AHB transactions.

Speaker 4

First, while we are still reporting in Asset Management segment, it now primarily consists of our 30% share of SoundPoint's earnings, net of any amortization of intangible assets associated with the SoundPoint investment. Because all SoundPoint reporting is on a 1 quarter lag, our share of SoundPoint results will be first reported in the Q4. And second, the SoundPoint and AHP transactions triggered the deconsolidation of all Assured IAM CLOs and CLO Warehouses, as well as the AHP funds. However, due to the significant ownership interest and other control rights that we maintain in certain funds, we continue to consolidate 3 Assured I'm funds that are now being managed by SoundPoint, a CLO fund and 2 asset based funds with a total net asset value of $272,000,000 The net impact of CIBs to adjusted operating income was a loss of $10,000,000 which primarily consists of a loss on deconsolidation of the CLOs and AHP funds. In the insurance segment, adjusted operating income was $59,000,000 in the Q3 of 2023, compared with $159,000,000 in the Q3 of 2022.

Speaker 4

The decline was primarily attributable to increased reserves on PREPA exposures and a lower benefit on RMBS transactions compared with the Q3 of 2022. Economic loss development in the Q3 of 2023 for RMBS transactions was a benefit of $48,000,000 primarily due to higher recoveries for charged off loans. Higher earnings generated by the investment portfolio partially offset increases in loss expense. Net investment income on available for sale fixed maturity securities increased by $32,000,000 due to the acceleration of accretion on loss mitigation securities and higher short term interest rates and average investment balances. Equity and earnings on alternative investments was a gain of $25,000,000 in the Q3 of 2023, compared with losses of $11,000,000 in the Q3 of 2022.

Speaker 4

In addition, fair value gains on Puerto Rico contingent value instruments were $4,000,000 in the Q3 of 2023 compared with losses of $8,000,000 in the prior year period. Net earned premiums and credit derivative revenues increased to $99,000,000 in the Q3 of 2023 from $92,000,000 in the Q3 of last year. Accelerations were $15,000,000 in the Q3 of 2023 compared with $12,000,000 in the Q3 of last year. Deferred premium revenue remained steady at approximately $3,600,000,000 as new business production replenished the amortization of deferred premium revenue. Total operating and compensation expenses across all segments were $91,000,000 in the Q3 of 2023, down from $94,000,000 in the Q3 of last year.

Speaker 4

The Q3 of this year includes $14,000,000 in SoundPoint and AHP transaction expenses and no longer includes asset management segment expenses, which were $24,000,000 in the Q3 of last year. As you know, our effective tax rate fluctuates from period to period based on the proportion of income in different tax jurisdictions. On a year to date basis, the effective tax rate was 18.4% for 2023 compared with 8.1% for 2022. In addition to advancing our key objectives in asset management, alternative investments and new business production, we continue to focus on capital management. In the Q3, we increased the pace of share repurchases to $64,000,000 or 1,100,000 shares.

Speaker 4

Last week, the Board of Directors increased the share repurchase authorization by $300,000,000 We also achieved a great execution on the refinancing of $330,000,000 of debt that was scheduled to mature in mid-twenty 24. Our next debt maturity is now in September of 2028. The refinancing provides us the flexibility to pursue other capital management strategies, including share repurchases. At the holding company level, we currently have cash and investments of approximately $146,000,000 of which $67,000,000 resides in AGL. These funds are available for debt service and corporate operating expenses, as well as share repurchases and other strategic initiatives.

Speaker 4

The transformation of our asset management segment, the efficiency of our capital management activities and focus on new business origination and earnings growth continue to drive adjusted operating shareholders' equity and adjusted book value per share to new records of over $99 $148 respectively. I'll now turn the call over to our operator to give you the instructions for the Q and A period. Thank you.

Operator

Thank you. We will now begin the question and answer session. First question comes from Tommy McJoynt with KBW. Your line is open.

Speaker 5

Hey, good morning guys. Thanks for taking my questions.

Speaker 4

Good morning.

Speaker 5

Looking at the gross written premium and the PVP in the quarter, there was a sizable decline. And while I understand that the structured finance side can be lumpy, should

Speaker 6

we

Speaker 5

read anything into this that such as a pullback or a tightening of credit from your underwriting standpoint? Or is this simply a function of what the market gave you and you're really trying to write as much new business as you can?

Speaker 3

It's really a function of mix of business in the quarter. There was a rapid or a stark decline in the BBB issuance in the quarter, which obviously is where we eat most of our pudding. So that affected what we were able to write. So we wrote a lot of what I'll call down the middle of the road, flow business, highly rated, now at the rates that are available to us in the marketplace.

Speaker 5

Okay, got it.

Speaker 4

And Tommy, as we said Dominic said in the Q4, we're seeing a strong flow in public finance.

Speaker 5

Got it, okay. And then switching gears, on the capital standpoint, is your leverage position, your debt to capital a constraining factor that could inhibit you from doing more buybacks at some point? And when you and perhaps your regulators look at the opportunity for buybacks and what that could mean for your debt to capital ratios, do you look at a capital number that includes or excludes the other comprehensive income given the swings that we've seen there?

Speaker 4

Well, the regulator would look at excluding other comprehensive income, if they look on a statutory basis. And we look we generally look at our debt to capital ratios with respect to rating agency constraints. And yes, it's true that as you if in fact you somehow shrink your capital and you also have to delever. But with our refinancing that we did this year and that we're able to push our maturity out 5 years, we have flexibility going forward of what we can do in capital management.

Speaker 2

Yes. At this point in time, it's not a constraint.

Speaker 4

But it's always something that we look at.

Speaker 5

Okay, got it. And then just last question, what's your initial understanding of the potential tax regime changes in Bermuda and how that could impact your business? And to the extent that the effective tax rates do increase there, do you think that your business could pass through those rate increases in order to maintain returns?

Speaker 4

Yes. And at the end of the day, as you know, the global minimum tax is going to be effective in 2024. So because Bermuda had a no tax jurisdiction, we would have had to pay whatever income that Bermuda makes 15% would go to the UK, because we're UK tax resident. So if Bermuda initiates the tax, then we just would not have to pay that tax to the UK, we would just pay that tax to Bermuda. And yes, we believe that OXY would be profitable.

Speaker 4

And also, we just remember, it's still significantly lower, whatever tax is, it was significantly lower than the U. S. And there's a significant amount of capital here in Bermuda that earns at a lower tax rate and we constantly evaluate and do tax planning based on that.

Speaker 5

Got it. Thank you.

Operator

We now turn to Giuliano Bologna with Compass Point. Your line is open.

Speaker 6

Good morning and congratulations on another successful quarter. Sprint finished continued performance. Thank you, Giuliano.

Operator

Well, one thing

Speaker 6

I was curious about asking and I may have missed this during the prepared remarks. I'm curious if there's any commentary about special dividends or how you think about your ability to request special dividends at this point And then also how you think about topping off capital to the holding company on kind of a go forward basis that way?

Speaker 3

Well, Giuliano, I'm pleased to report that we filed applications with both regulators for special dividend approval. So we're now just in waiting mode, which we're optimistic of those to be approved. So that's part of the capital management strategy, part of the capital buyback strategy. So we're doing exactly what we said we would do.

Speaker 6

That's great. And then one thing I'd be curious on the new business front. The high register for that environment obviously drives a lot of demand, but it's not linear the way it flows through. I'm curious when you think about market penetration rates on the muni side and where that could go over the next couple of years, obviously, assuming we stay in a higher for longer environment.

Speaker 2

Well, as I said in my comments, penetration rates are

Speaker 3

at all time high relative to the last, say, 10 years. And they gave you some really startling statistics. So as we said in the quarter, there was not a lot of BBB issuance because I think there's a wait and see in terms of the interest rate marketplace and they want to finance high and then have the opportunity to look later on in life that the rates are a lot lower. But to give you some statistics, in the Q3, on a transaction basis, 84.7% of all BBB issuance took insurance, 84.7%. That means only 15% of the BBB issuance did not take insurance.

Speaker 3

That's a tremendous statistic for the insurance industry. I think it's reflective of the higher rate marketplace. Our promise we just need more volume in the market to really drive more premium growth, which we can see in the future. As Rob mentioned, we're having a great Q4 start. We expect the Q4 to be spectacular on the public finance side as well as our other marketplaces as well.

Speaker 6

That's very helpful. I realize it's very early in the process with the SoundPoint transaction. I'm curious just even from a high level, do you expect contribution to be positive starting next quarter because you referenced that you get the 1st full quarter of Absolutely.

Speaker 3

We own 30% of a $50,000,000,000 asset manager, Tom, you said or I'm sorry, Giuliano. So we expect it to be positive all the way through. We wouldn't have done it otherwise.

Speaker 6

That's very helpful. I appreciate it.

Speaker 7

And I will jump back in the queue.

Speaker 6

Thank you. Thank you.

Operator

We now turn to Geoffrey Dunn with Dowling and Partners. Your line is open.

Speaker 6

Thanks. Good morning.

Speaker 7

Good morning, Jeff. Dominic, I was wondering if you could just talk about how the market for new business has evolved in the last 2 years. Obviously, we've had a lot of movement on rates and spreads, but can you give either qualitatively or quantitatively how the market has changed over the past 2 years with respect to penetration rates, pricing terms, conditions? I mean, net net, it seems like it all should be positive, but obviously, it gets distorted from what we see with mix change and all that stuff. So wondering if you could just dig a little bit more into that.

Speaker 3

Well, Jeff, I would say it's all positive except for one thing, which is issuance. So let's talk about it. So number 1, interest rates are higher. That's a real benefit to our business across the board, both what we can charge for premium, both in addition to how many people would seek insurance now, try to save some financing costs. Issuance has been is, A, the municipalities have been awash with cash and they've released that they got through the pandemic.

Speaker 3

So they had to run out of their checkbooks, which has taken quite a long time. So we didn't have any need to finance. And then 2, because of the volatility in the marketplace and the interest rate environment, people are a little concerned that there is always a prediction that rates are going to come back down. So whether I should wait to finance in 6 months or 9 months because I get a better rate. So I think we've got conditions that support the growth of the business and support the insurance industry through the interest rate process.

Speaker 3

Like I said, they haven't had a need to borrow, but we know in the municipality world, it's not a matter of if, it's only a matter of when and the when is coming. And because of the higher rates, we think we're in great shape to make significant production gains across the board. Spreads, of course, in a well to market tend to be a little bit volatile. They're a little tight now, but we expect them to widen out as well, which will further benefit production. So I think it's a mid tail of 2 stories.

Speaker 3

The interest rate environment helps, but the issuance market is lower because of the awash cash that came out of the pandemic relief as well as the fact that people are looking for better rates to finance.

Speaker 7

And if I remember, we were like 6% change penetration rate 2 years ago and now you I think you said 8.5% year to date?

Speaker 2

Right. So that growth and like

Speaker 3

I said, if you break it down between the where we're actually strong in the marketplace in the A and the BBB. So to give you another statistics, I told you 84.7% of BBB transactions grabbed insurance, 59.5 percent of A transactions grabbed insurance. So think of it both in the BBB and the A space well over 50% penetration rates, which is what I had predicted a 1000 years ago based on penetration rates that I expect based on us being AA rated and what's available in the market. And also, the fact that we're in the other two markets, the structured finance and international infrastructure really provides us further support and a little stability in the earnings that we can see and the production that we can make. Of course, as you know, the returns on those businesses are even higher, significantly higher than the domestic public finance business.

Speaker 7

And then one last follow-up given what you just said about the BB and simulated penetration. You also indicated that you're gaining traction in AA. So is your view that it's an 8% to 10% type of penetration rate? Or is it still, I think years ago, we were talking about maybe recovery of 15%. What's your view on the ultimate penetration?

Speaker 3

I still think we can get to 50% of the 50%, which is 25%. That's my view and I still stick to it. And as I said, if I look at the BBB and the single A penetration, we're there. We just need to get more participation in AA. And I think we'll get to the numbers.

Speaker 3

So I think easily over 10% in a normalized marketplace, if you continue to see high interest rates and spreads lying down, that penetration rate will grow as well.

Speaker 7

Okay. Thank you.

Speaker 3

Thanks, Jeff.

Operator

This concludes the question and answer session. I would now like to turn the conference back over to our host, Robert Tucker for closing remarks.

Speaker 1

Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.

Operator

This concludes the conference call. Thank you all for attending. You may now disconnect your lines and have a great day.

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Key Takeaways

  • Assured Guaranty reported record adjusted book value per share of $148.03 and adjusted operating shareholders’ equity per share of $99.18 at the end of Q3 2023, driven by strong new business and alternative investment earnings.
  • In July, the company completed a transaction with SoundPoint Capital Management and Assured Healthcare Partners, realizing a $241 million pre-tax gain and securing a 30% ownership in SoundPoint to diversify into fee-based alternative asset management.
  • New business production reached a four-year high with Q1–Q3 PVP of $249 million, anchored by a 10% increase in U.S. public finance volume (62% insured market share) and robust contributions from international infrastructure and global structured finance.
  • Capital management actions in Q3 included refinancing $330 million of senior debt maturing in 2024, repurchasing $64 million of shares, and obtaining board approval for an additional $300 million repurchase authorization while filing for special dividend approvals.
  • The company’s financial strength was validated by S&P and KBRA reaffirming AA/AA+ ratings with stable outlooks, and its insured portfolio’s below-investment-grade exposure fell to 2.1% from 4.6% in 2017, reflecting successful loss mitigation efforts.
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Earnings Conference Call
Assured Guaranty Q3 2023
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