Assured Guaranty Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 8 speakers on the call.

Operator

morning, everyone, and welcome to the Assured Guaranteed Limited First Quarter 2023 Earnings Conference Call. My name is Bruno, and I'll be the operator of today. All participants will be in a listen only mode. Please note that this event is being recorded. I would now like to turn the conference call over to your host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining Assured Guaranty for our Q1 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 our 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. The 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 assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Rob Balenson, our Chief Financial Officer.

Speaker 1

After their remarks, we will open the call to your questions. I will now turn the call over to Dominic.

Speaker 2

Thank you, Robert, and welcome to everyone joining today's call. Assured Guaranty's new business production was outstanding in the Q1 of 2023. In terms of PVP, it was our most successful Q1 in over a decade. We closed $112,000,000 of PVP in the quarter, up 62% from Q1 of 2022 and double the Q1 average for the previous 10 years. We benefited from a strong start to the year for both Global Structure Finance, which were its largest amount of Q1 PVP in over a decade and International Public Finance, the Q1 PVP was the best in 5 years.

Speaker 2

Adjusted operating income per share came in at $1.12 for the Q1. As of March 31, our key non GAAP valuation measures again reached record levels on a per share basis, with adjusted operating shareholders' equity at $94.58 and adjusted book value of $143.04 Shareholders' equity per share at quarter end was $88.07 compared to $85.80 for the previous quarter. Significantly, on April 5, we announced that we reached an agreement with SoundPoint Capital Management, which when implemented will combine the asset management portfolios of Assured Investment Management and SoundPoint to create what we expect to be the CLO's market's 5th largest asset manager by AUM. Our Q1 production results showed the strategic execution of our uniquely diversified 3 pronged business approach, which includes the U. S.

Speaker 2

Public finance, international infrastructure and global structured finance markets. In the Q1, the largest contribution to PPP came from global structured finance, which contributed $60,000,000 of PPP, primarily from an insurance securitization and an excess of loss guarantee of a minimum amount of built rent on a diversified portfolio of real estate properties. We're also active in whole business securitizations and subscription finance, which is a promising new market for us. In International Public Finance, we generated $30,000,000 of PPP by guaranteeing several regulated utility transactions as well as a long term sale and leaseback financing for the Glasgow City Council. Our U.

Speaker 2

S. Public finance business was adversely affected by comparatively low new issuance volumes during the Q1 of 2023. Aggregate U. S. Municipal market volume was 23% below that of Q1 of 2022.

Speaker 2

However, bond insurance market penetration of 7.7% of car issued remained close to the 8% total for all of 2022 and significantly higher than the 10 year annual average of 6.4%. We continue to lead the U. S. Municipal bond insurance market with 60% of insured new issues par sold in the Q1. We guaranteed 124 transactions with $3,400,000,000 of aggregate insured par.

Speaker 2

We also continue to benefit from institutional investor demand for Assured Guaranteed's insurance on larger transactions. In the Q1, we insured 8 transactions with insured par of $100,000,000 or more, which totaled approximately $1,600,000,000 Among AA credits, defined as those credits S and P and or Moody's rate in the AA category on an uninsured basis, Assured Guaranty insured 15 primary market transactions for a total of almost $800,000,000 of insured part during the quarter. We think the fact that investors are willing to accept a lower yield to gain the protection of our guarantee is a testament to the breadth of benefits in our value proposition beyond simply default protection. Related to asset management and our agreement with SoundPoint, we believe the transaction with respect to closing the Q3 will be immediately accretive to earnings per share, return on equity and book value per share. The combination of Assured I'm with SoundPoint is subject to certain consents and regulatory approval and will create an asset management firm that is expected to have approximately $47,000,000,000 in total assets under management with the CLO portion that would rank 5th in AUM among global CLO managers based on year end numbers.

Speaker 2

Under the agreement, we will own 30% of the combined entity at closing. We will contribute to SoundPoint, our Assured Investment Management business with certain exceptions such as Assured Healthcare Partners. After closing, we will also engage SoundPoint as a sole alternative investment manager for AGM and AGC, which are committed to invest over time a total of $1,000,000,000 to alternative investment strategies managed by SoundPoint. That total of $1,000,000,000 includes alternative investments and commitments currently being managed by Assured I'm will be transferred to SoundPoint as part of the transaction. At year end 2022, nearly $400,000,000 of AGM and AGC alternative investments were managed by Assured I'm To give you a further idea of the scale of this new platform using year end 2022 amounts, Assured I'm would add approximately $15,200,000,000 of AUM to SoundPoint's $32,000,000,000 for a total of $47,200,000,000 The CLO components are $14,500,000,000 from Assure I'm and $21,400,000,000 from SoundPoint as of year end.

Speaker 2

This arrangement should further advance our strategic diversification into the asset management business. We have said that we're looking for alternative accretive growth strategies to maximize the value to shareholders of our Asset Management business and to generate a growing earnings stream independent of our insurance premiums. We believe our arrangement with Sandpoint will accelerate the growth in our earnings from Asset Management. We intend to jointly create a firm with competitive advantages including the large scale essential for leadership in the asset management business, proven success in managing credit focused alternative investment strategies, well established distribution channels and a stable source of capital for growth opportunities in the asset management business. Our desire to enter into this transaction with SoundPoint was based on our confidence in SoundPoint's proven ability to raise LP funds and to produce attractive alternative investment returns.

Speaker 2

We believe the addition of Assured I'm AUM and AGM and AGC's capital commitments can further strengthen SoundPoint and enhance the combined entity's profitability as well as its ability to increase the investment returns of our insurance subsidiaries. This would further support their capacity to upstream dividends to the holding company and ultimately to shareholders. Turning to Puerto Rico, our last remaining unsettled defaulted Puerto Rico exposure is the Electric Power Authority, PREPA. The PROMESA court has again directed the parties to engage in good faith mediation and an effort to reach an agreement before the COPPA mission hearing scheduled for late July. We remain committed to negotiate a fair and reasonable settlement with PREPA, but if necessary, we'll protect and enforce our rights as bondholders through litigation in the Title III plan confirmation process.

Speaker 2

Looking forward, I'm optimistic about our prospects for the year and beyond. Both our international infrastructure and structured finance businesses have good pipelines of opportunities and the U. S. Public finance business should continue to benefit from the more steady transaction flow that is typical in that market. Inflation in the last year of hawkish Fed action continue to have a significant impact on the municipal bond market, Compared with last year's Q1 when the AAA 30 year municipal benchmark index averaged 2%, the average for this year's Q1 was 3.4%.

Speaker 2

Additionally, credit spreads, which can be equally, if not more, important to our business, widened significantly during 2022 and remained steady during the Q1. We believe these factors should be positive for our business going forward. Market volatility, economic and geopolitical uncertainty and recession fears tend to be conducive to a greater investor demand for our product. Importantly, for over 35 years, our business model has proven its resiliency in unpredictable and stressful economic times, are protecting our company's financial strength and shareholder value while we safeguard our policyholders and save money for issuers. I believe there is a good chance the market is entering the kind of sustained interest rate and credit spread conditions that I've often said would allow for significant growth in our financial guaranty business, conditions that would likely give us more opportunities to add value as well as increased pricing flexibility.

Speaker 2

Our insured portfolio and financial condition are as strong as or stronger than ever, and we expect our new asset management approach to be highly beneficial. I will now turn the call over to Rob.

Speaker 3

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report Q1 2023 adjusted operating income of $68,000,000 or $1.12 per share. This compares to adjusted operating income of $90,000,000 or $1.34 per share in the Q1 of last year, which included a $63,000,000 net benefit associated with the Puerto Rico settlements that occurred last March. The largest component of adjusted operating income was the insurance segment, which contributed $117,000,000 of adjusted operating income in the Q1 of 2023 compared with $133,000,000 in the same period of last year. Excluding the benefit for Puerto Rico settlements from last year's results, Insurance segment adjusted operating income increased due to higher net asset values for alternative investments, higher investment income and the release of a litigation accrual.

Speaker 3

Investment results from both the fixed maturity and the alternative investment portfolios performed very well in the Q1 of 2023, with total income from investments of $110,000,000 compared with $58,000,000 in the Q1 of last year. The available for sale portfolio generated net investment income of $82,000,000 in the Q1 of 2023, up from $63,000,000 in the Q1 of 2022. Higher income from floating rate assets as well as higher interest rates and average balances in the short term portfolio were the primary drivers of the increase. Equity and earnings from alternative investments predominantly generated by the Assured I'm CLO and healthcare funds was a gain of $30,000,000 in the Q1 of 2023 compared with a net loss of $1,000,000 in the Q1 of last year. Annualized returns for the Assured I'm funds were 10.7%, which is in line with our long term expectation for these investments.

Speaker 3

With respect to premiums and losses, the variance in both line items was primarily driven by the impact of the Puerto Rico settlements in March of last year, which resulted in net earned premium accelerations of $104,000,000 and loss expense of $29,000,000 Net earned premiums and credit derivative revenues were $84,000,000 in the Q1 of 2023, compared with $219,000,000 in the Q1 of last year. Excluding the Q1 of 2022 effects of the Puerto Rico settlements, scheduled net earned premium and credit derivative revenues were relatively consistent quarter over quarter as new business has kept pace with the scheduled amortization and refundings in the insured portfolio. Deferred premium revenue remains steady at approximately $3,700,000,000 where it has been for the past year. Non Puerto Rico accelerations were $4,000,000 in the Q1 of 2023 compared with $26,000,000 in the Q1 of last year, as refunding activity has slowed down in recent years. Loss expense in the Q1 of 2023 was $9,000,000 and economic development was $11,000,000 The primary driver of both measures was the change in risk free rates used to discount losses.

Speaker 3

With respect to operating expenses, Q1 of 2023 ran higher than our normal run rate due in part to severance and legal expenses related to the SoundPoint transaction and an additional UK value added tax, which together totaled approximately $15,000,000 These unusual items affected each of the segments in the corporate division and were the primary driver of the increase in Corporate division adjusted operating loss from $33,000,000 to $44,000,000 Turning to the Asset Management segment. We are committed to the SoundPoint transaction, which we expect to close in the Q3 of this year. As a result, we have designated the transferring Assured I'm business as well as the remaining healthcare business as held for sale on our balance sheet, we have stopped amortizing the related intangibles. From a reporting perspective, the transformation of our asset management business from a wholly owned business to a minority stake in a larger SoundPoint combined entity continues to give a short guarantee ongoing earnings based on asset management fees and increases our ability to expand into alternative investments while simplifying our reporting structure and financial statements. Upon closing, we expect that we will deconsolidate most, if not all, of the CLOs and Assured I'm funds.

Speaker 3

The result will be more straightforward one line investment in SoundPoint and each of the funds using the equity method of accounting. As Dominic mentioned, we've agreed after closing to invest $1,000,000,000 in SoundPoint managed alternative investments subject to regulatory approval. This commitment includes almost $400,000,000 of existing investments and commitments in the short I'm CLO and asset based funds that will transfer to SoundPoint. Adding inception to date distributed gains, our current authorization for alternative investments through our investment subsidiary, AGEAS, is $853,000,000 and is available for investment in both SoundPoint investment vehicles and the Assured Healthcare Partners strategy. As we continue to shift more of the investment portfolio to alternative investments, net investment income from fixed maturity securities may decline.

Speaker 3

However, over the long term, we expect returns on the alternative investment portfolio of over 10%, which exceeds the projected returns on the fixed maturity portfolio. In addition to meeting 2 of our key objectives in asset management and alternative investments with the 7 point transaction, we continue to focus on our other long term strategic initiatives to grow the company and enhance shareholder value. In the Insurance segment, strong production in the international, public finance and structured finance markets provide diversified sources of new business and are accretive to key book value metrics. On the loss mitigation front, we continue to strategically divest the remaining recovery bonds and contingent value instruments that we received last year as part of the resolution of the majority of our Puerto Rico insured exposures in order to maximize our economic benefit. We also continue to work towards resolution of our PREPA insured exposure.

Speaker 3

As of May 5, we have sold approximately 91% of the recovery bonds in the investment portfolio and 35% of the contingent value instruments. Based on fair value, we have approximately $81,000,000 in recovery bonds and $324,000,000 in contingent value instruments remaining in our investment portfolio. In terms of holding company liquidity, we currently have cash and investments of approximately $165,000,000 of which $48,000,000 resides in AGL. These funds are available for debt service and corporate operating expenses or for use in the pursuit of our strategic initiatives, including potentially refinancing or redeeming debt and repurchasing shares to manage our capital. As we said in our last call last quarter, we currently have $201,000,000 of remaining authorization and expect to resume share repurchases in the second half of the year.

Speaker 3

However, even without share repurchases in the Q1 of 2023, operating shareholders' equity and adjusted book value per share reached new records of over $94,000,000 $143,000,000 respectively, due to positive adjusted operating income and strong new business production results for the quarter, demonstrating the value of all our initiatives. I'll now turn the call over to the operator to give you 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 Thomas McJoynt from KBW. Thomas, your line is now open. Please go ahead.

Speaker 4

Hey, good morning, guys. Thanks for taking my questions. You did call out a number of thanks. Yes, you did call out kind of a number of seemingly kind of one off pieces like the litigation accrual release, the UK tax assessment and some of the SoundPoint transaction costs. So a lot of moving pieces there, but some of them weren't quantified.

Speaker 4

So could you put any numbers around those just as we try to think of kind of the magnitude of the impact on the quarter?

Speaker 3

I would just say, Tommy, looking at expenses, the one time items are approximately $15,000,000 and the release of the litigation accrual was about $20,000,000

Speaker 4

Got it. Thanks. And then just as a reminder, in the Asset Management segment, can you remind us, are most of the performance fees that you guys recognize loaded into the Q1? So just like a higher seasonally, that's normally what has been the case or anything kind of unique there?

Speaker 2

No, not bloated at all, Tommy. Whenever they realize it and we recognize them, unless there's a tax distribution, then you have to recognize it, something for the tax distributions. But typically, they don't recognize to realize, and that's any time we sell the assets.

Speaker 4

Okay. You also called out an excess of loss guarantee on a minimum amount to build rent on a diversified portfolio of real estate properties. You of course have a lot of different mechanisms through which you guys lend your guarantee as long as it's the right price. Is this type of transaction new? I'm not sure I've heard of it before.

Speaker 4

And basically do you plan to branch off into these types of transactions as you look for new growth sectors?

Speaker 2

In our structured finance economy, it's becoming more bespoke than it used to be standardized. Remember, in the old days, it was basically mortgage business, credit cards, auto loans and those businesses now go out without insurance. So you got to be a little bit more creative. This is an internally rated AA transaction, highly subordinated protection in the deal. It's a mixture of all sorts of properties, including residential, multifamily residential, office space, retail space and industrial space.

Speaker 2

And it's a really great portfolio. And if we see other opportunities like this, we'd be more than happy to take them.

Speaker 3

And a lot of these transactions, Tommy, benefit the client for capital relief. So capital relief transactions are significant in the structured finance.

Speaker 2

Yes, this is done for a finance institution.

Speaker 4

Okay, got it. Makes sense. And then just actually last one, if I could sneak it in here. Does your thinking still believe that in the second half of the year, you should have that 5 year audit completed? You think the opportunity to pursue special dividends becomes more likely?

Speaker 4

Is that still the right timing that we should be thinking about?

Speaker 2

Yes. Separate two issues there, Tommy. 1 special dividend, 1 share repurchase. We anticipate starting new share repurchasing now. After the call after we clear blackout because we've now got uncertainty or uncertainty obligations that we were preparing for relative to the TownPoint transaction and some other things that we were holding money for.

Speaker 2

So that will start. And then special dividend will be requested sometime this year. The amount of capital that we could retire this year will be predicated based on availability and special dividend.

Speaker 3

And we do expect the audit to be done in July.

Speaker 4

Great. Thank you, Beth.

Speaker 3

Thank you.

Operator

Our next question comes from Giuliano Bologna from Compass Point. Giuliano, your line is now open. Please go ahead.

Speaker 5

Good morning and congratulations on another great quarter. One thing I'd be curious about related to the asset management transaction is you had some good loan intangibles related to the Blue Mountain deal. And it sounds like the commentary implies that this will be always flat, if not positive, from a book value impact perspective. Is it fair to assume that the fair value of the equity stake should exceed at least meet or exceed the goodwill intangibles related to the Blue Mountain deal?

Speaker 3

Yes. That's a good assumption.

Speaker 5

Thank you. And then thinking about the earnings, obviously, if you recognize it as an equity method investment, would it just flow through as kind of a below the line item or just another income line on a net basis? And related to that, would you get distributions from the partnership quarterly or annually? Is there any kind of sense of the timing there?

Speaker 3

It will be equity income and our investment in SoundPoint on one item. And there'll be an equity income, as I said, for our investment in the funds. And we will get distributions from SoundPoint up into the holding company.

Speaker 5

That's great. Very helpful. And I will jump back in the queue.

Speaker 3

Thanks, Julien.

Operator

Our next question comes from Jordan from Philadelphia Financials. Jordan, your line is now open. Please go ahead.

Speaker 6

Thanks guys for taking my question and go 76ers. You said Dominic a minute ago that you expect to start buybacks as soon as the quiet period ends. Can I push that a little more? On the last call, you said you would be able to do without a special dividend, you may not be able to do quite $300,000,000 but near $300,000,000 in special dividends without a special buyback. Is that still the plan for this year?

Speaker 2

I don't think we've ever given a number to be honest with you, Jordan. Obviously, we will do as much as we can based on availability and based on other

Speaker 6

We had $300,000,000 in dividend paying capability or near that in the past. And you said we should have close to that this year. We have to

Speaker 2

think about what we do with the money, Jordan. We've got the debt refinancing that we've got to think about whether we're going to pay the debt off or refinance it. We've got some other things we've got to do in terms of truing up the balance sheet with the ultimate merger with the SoundPoint. So there's some other calls on cash that we've got to look at as well. So as we figure out the availability, the amount, X and with the special dividend, we will then start and continue to do our execution of our strategy of retiring capital.

Speaker 2

As we've always said, it's still a very high priority in the company. And as we know, we've got some clarity where we're at today. We can start to buy back some shares. And like I said, the amount that we'll buy back this year will be predicated on the special dividend and these other factors that we're considering.

Speaker 3

We do expect as I said, Mike, I do we do expect to buy back shares as part of our capital management strategy.

Speaker 6

Okay. And any prediction on

Speaker 2

I'd say I was shocked last night and we're in Bermuda, so we're an hour ahead. So it was a little late out as fast as the game, but I was shocked that they won last night, that's for sure. But it's a continuation of a great Philadelphia sports story. Eagles, Phillies, now Sixers, can't get any better than that.

Operator

Our next question comes from Brian Meredith from BBS. Brian, your line is now open. Please go ahead.

Speaker 7

Thanks. So a couple of them here for you. First one, I'm just curious, the kind of one timers we had in the quarter, did any of this affect the insurance operations? I'm just looking

Speaker 2

at the

Speaker 7

$67,000,000 of insurance operating expenses, trying to figure out is there a run rate or is there anything one time in that number?

Speaker 2

The only thing it would be there is the acceleration based on shares that were given to him and retire eligible employees would be the acceleration in the expense line.

Speaker 3

And also the one time items also included the VAT value added tax expense that I talked about.

Speaker 2

So you're going to

Speaker 7

get the insurance costs. Okay.

Speaker 3

Yes. But like I said, in total for the entire company was $15,000,000 of onetime items.

Speaker 7

Got you. Got you. Makes sense. I was just trying to figure out kind of a run rate underwriting profitability kind of thinking about the insurance operations. Second question, I'm just curious more from, I guess, regulatory accounting perspective.

Speaker 7

Does alternative investment income count with respect to the test on dividends out of the insurance operations with respect to investment income?

Speaker 2

Yes. So you think of it this way. The assets that are on the insurance companies' books or balance sheets that are invested in alternative investments, the higher returns to increase investment income in those companies and therefore increase their dividend capacity if that's a limiting factor. The GP management fees are outside the insurance company structure, so that's free cash flow that's created for the company.

Speaker 3

And as distributions as we did distribute, the returns from the alternate investments from Aegis up to insurance companies, as Dominic said, will increase the dividend capacity of the insurance companies.

Speaker 7

Great. That's helpful. And then, Dominic, last question just quickly here on PREPA. I mean, you do talk about it, the court decision with respect to, I guess, revenues versus net revenues. Maybe you could just try to put that in plain English for some of us, what does it mean as far as potentially getting a settlement here and rights and stuff?

Speaker 2

Remember, any utility has to pay their expenses, right? So you're basically led to the net revenue opportunity to pay back debt. If you remember in the Jefferson County, they tried to stuff the kitchen sink into the expenses of the water authority. We were able to get that kind of resolved without any impairment. Obviously, the judge seems to be making social decisions, not legal decisions.

Speaker 2

That's fine. That's why there's a Court of Appeals and there's other avenues for us to pursue. They seem to want to press for mediation, which obviously makes some sense that we don't have the fight when it comes to confirmation time. But at the end of the day, I'm not seeing a whole lot of daylight here. So I think litigation is the course of action that we're going to take and we're more than happy to basically protect our legal rights in this matter as a revenue bond for special legal entity outside the Commonwealth's balances.

Speaker 7

And do you think and so I guess the other thing just on PREPA, I guess, I think you talked about this before. It does you don't have to settle PREPA in order for you to get more comfortable with taking special dividends, just simply just getting this audit done, correct?

Speaker 2

Yes. If you remember, Brian, as we talked about, when we were first getting special dividends, that was just when Puerto Rico filed for bankruptcy. So we were able to get special dividends when the entire amount was up for grabs, just down to one exposure, which we believe that we've economically defeased to our reserving process on the books, really makes it a no brainer relative to the state, I believe.

Speaker 7

Great. Makes sense. Thank you.

Speaker 2

Thanks, Brian. Thanks, Brian.

Operator

We currently have no further questions. So I would like to hand the call over back to Robert Tucker. Please go ahead.

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

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.

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Assured Guaranty Q1 2023
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