Assured Guaranty Q1 2025 Earnings Call Transcript

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May 9, 2025

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Assured Guaranty Limited First Quarter twenty twenty five Earnings Conference Call. My name is Ezra, and I will be the 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

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 first quarter twenty twenty five 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're listening to a replay of this call or if you're 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. 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 assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited Rob Balenson, our Chief Operating Officer and Ben Rosenblum, 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. Assured Guaranty had a solid first quarter of twenty twenty five. Adjusted operating income per share came in at $3.18 for the first quarter of twenty twenty five compared with $1.96 in the first quarter of last year. Our key valuation measures again reached new highs at quarter end on a per share basis with adjusted operating shareholders' equity at $117.4 adjusted book value at $172.79 and shareholders' equity per share at $112.8 Our new business production in the quarter was $39,000,000 of PVP, of which roughly 65% came from The U. S.

Speaker 2

Public Finance, where we enjoyed a good flow of high quality business. The balance is produced in global structured finance and non U. S. Public Finance. In both of those areas, premiums tend to be higher, but the timing of transactions tend to vary because development times are often longer in those areas.

Speaker 2

I'll let Rob give you more details in a moment. In an important achievement that we mentioned last quarter, we concluded litigation with Lehman Brothers International in early February twenty twenty five, and we recognized a pretax gain of $103,000,000 in the first quarter of twenty twenty five. This positive outcome is a result of years of negotiation and litigation and is a testament to our determination to defend our legal rights to the fullest extent possible. We have the same determination to enforce our rights as a secured creditor of the Puerto Rico Electric Power Authority. It is again worth noting that over the FOMB's objections, the First Circuit has confirmed that bondholders are secured by an unavoidable security interest in PREPA's past, current and future net revenues.

Speaker 2

PEPRA remains our final unresolved defaulting Puerto Rico exposure. Our strategic approach to asset management continues to focus on increasing the fee based earnings generated through our 30% ownership interest in SoundPoint, which contributed $13,000,000 to our income in the first quarter. In addition, our investment portfolio benefited from attractive returns on our alternative investments through SoundPoint. Total first quarter investment income from all of our alternative investments was $59,000,000 the highest quarterly level to date for our alternative investment portfolio. Our inception to date annualized rate of return for all alternative investments was 13%.

Speaker 2

Globally, we are currently experiencing a highly volatile market environment and an unpredictable economic environment. In other words, the kind of conditions Assured Guaranty is built for. We have proven for four decades the reliability and value of our guarantee and the resilience of our business model through exceptionally difficult economic and geopolitical environments. We believe the current environment as volatile as it been over the past two months has the potential to drive increased demand for our guarantee as investors seek out proven instruments for reliable cash flow and capital preservation and issuers seek out increased certainty of market access along with more efficient executions. We have the financial strength, market position, credit skills, surveillance operations, remediation abilities and comprehensive enterprise risk management to protect our capital as we help issuers and counterparties reduce borrowing costs, improve capital efficiency and provide investment choices designed specifically to give investors confidence in times like these.

Speaker 2

I will now turn the call over to Rob to provide more details about our production results.

Speaker 3

Thank you, Dominic, and good morning to everyone on the call. Assured Guaranty closed $39,000,000 of PVP in the first quarter of twenty twenty five. U. S. Public finance led the way with $25,000,000 of PVP and non U.

Speaker 3

S. Public Finance and global structured finance each contributed $7,000,000 of PVP. For the first quarter of twenty twenty five, Assured Guaranty continued as the leader in U. S. Municipal bond insurance, capturing 64% of the primary market insured par sold and 58% of the insured transaction count.

Speaker 3

Compared with the first quarter of the previous year, Assured Guaranty's insured par sold was up 23% to $4,700,000,000 and up 46% to two twenty two new issues in transaction count. In addition, while quarterly par insured was the second highest in a decade, the average underlying credit quality of first quarter municipal transactions was single A, indicating higher credit quality, less risk, lower rating agency capital charges and less PVP than a similar par amount of more typically rated municipal business would produce. In fact, during the quarter, 30% of the municipal transactions that we closed had underlying ratings in the AA category by S and P or Moody's. We are excited about developments in our secondary market bond insurance business, where activity increased substantially during the first quarter of twenty twenty five,

Speaker 1

producing $376,000,000 of insured par, more than

Speaker 3

in all of 2024. We believe that many secondary market investors in part sought our guarantee to manage the potential portfolio impact of the current environment's economic stress and market volatility. We are confident our secondary market business has the potential to make a greater contribution going forward, and we have focused the past year on modernizing our processes and technology for acquiring and executing secondary market business. We have already deployed some of the new technology and aim to build a more consistent transaction pipeline with thousands of outstanding issues preapproved to secondary market insurance. In the primary market, we continue to use our guarantee to help support some of the largest transactions and we see our positive results in this area as a gauge of the further growth of institutional demand for our guarantee.

Speaker 3

In our view, such growth reflects institutions' heightened appreciation of the relative price stability and increased market liquidity our insurance can provide, along with the reduced borrowing costs issuers receive. The first quarter of twenty twenty five included eight large transactions with insured par over $100,000,000 including $261,000,000 for Indiana Municipal Power, two fifty six million for Sumter Landing Community Development District and 186,000,000 for the Oklahoma Turnpike Authority. Among AA credits, which we define as credits rated in the AA category by S and P and or Moody's, Assured Guaranty insured 53 primary and secondary transactions for a total of $1,700,000,000 of insured par during the quarter, further reflecting what we believe is the market's recognition of the value our guarantee can add to even highly rated credits. For non U. S.

Speaker 3

Public finance, new business in the first quarter of twenty twenty five primarily included UK regulated utility transactions as well as a secondary market transaction for a UK public sector entity. Structured finances production in the first quarter twenty twenty five was primarily attributable to subscription finance and pooled corporate transactions. Both non U. S. Public and structured finance have expanded the application of our products into various new sectors and locations, and we look to continue to develop additional product applications and expand into new territories to further support our business growth.

Speaker 3

For instance, post quarter, we guaranteed a transaction issued by XB Fiber, the largest independent fiber to home operator in France. This is our first primary financial guarantee in the French infrastructure space since we opened our Paris office and represents a key milestone in our strategy to expand our product offerings and strengthen our presence in Continental Europe. We expect demand to continue for our core products and see that demand likely increasing. At times when challenges or uncertainty arises in the economy and financial markets or when the cost of borrowing goes up, our products can help further optimize a variety of transactions so our clients can accomplish more with lower financing costs and or better capital efficiencies. I'll now turn the call over to Ben.

Speaker 4

Thank you, Dominic and Rob, and good morning. I am pleased to report first quarter twenty twenty five adjusted operating income of $162,000,000 or $3.18 per share. This represents a 62% increase from the first quarter twenty twenty four adjusted operating income of $1.96 per share or $113,000,000 The largest driver of the increase in adjusted operating income in the first quarter of twenty twenty five compared with the first quarter of twenty twenty four is the 103,000,000 pretax gain, which represents the judgment awarded and claims for attorney's fees, expenses and interest in connection with the LBIE litigation. This equates to an $82,000,000 after tax gain or $1.62 per share. The LBIE gain was reported as a $63,000,000 recovery that is reflected as a benefit and loss expense and economic development and $40,000,000 in credit derivative revenues.

Speaker 4

Excluding the $40,000,000 associated with litigation, net earned premiums and credit derivative revenues decreased by $28,000,000 due to lower financial guaranty refundings and terminations. However, scheduled net earned premiums and credit derivative revenues increased by 7% and deferred premium revenue remained strong at $3,900,000,000 First quarter 20 20 5 economic loss development excluding the litigation benefit was $48,000,000 mainly due to losses on the Puerto Rico Electric Power Authority or PREPA and certain UK regulated utilities. The PREPA loss in the first quarter was due to a potential delay in the expected timing of the resolution of PREPA. Loss expense included in adjusted operating income excluding the benefit associated with the litigation was $40,000,000 and was primarily related to PREPA and certain healthcare exposures. Our investment portfolio continues to perform well and demonstrates the value of having both a stable stream of interest income from the fixed maturity portfolio as well as income from a diverse portfolio of alternative investments.

Speaker 4

In the first quarter of twenty twenty five, net investment income on the available for sale fixed maturity and short term investment portfolio for the segments and corporate division was $90,000,000 compared with $86,000,000 in the first quarter of twenty twenty four. In the first quarter of twenty twenty five, net investment income included $11,000,000 related to CLO equity tranches. Certain CLO equity tranche investments were reclassified to the available for sale fixed maturity portfolio in the fourth quarter of twenty twenty four with interest income now reported in net investment income and changes in fair value reported in other comprehensive income. The company previously held these CLO equity tranches in a SoundPoint managed fund with changes in net asset value reported in equity and earnings or losses of investees in the insurance segment. Net investment income on the short term investment portfolio decreased by $9,000,000 as a result of lower short term interest rates and lower average short term asset balances.

Speaker 4

Alternative investments have generated an annualized internal rate of return of approximately 13% on an inception to date basis through 03/31/2025. Equity in earnings from our alternative investments reported in our segments and corporate division results were $46,000,000 compared with $37,000,000 in the first quarter of twenty twenty four. The change in fair value of trading securities, which mainly consists of Puerto Rico contingent value instruments was a $1,000,000 gain compared with a $26,000,000 gain in the first quarter of twenty twenty four. Breaking down the main contributors of our first quarter results, the Insurance segment contributed $168,000,000 up from $149,000,000 in the first quarter of twenty twenty four. The Asset Management segment contributed $12,000,000 up from $1,000,000 in the first quarter of twenty twenty four and mainly consists of earnings related to our 30% ownership interest in SoundPoint.

Speaker 4

These segment earnings were offset in part by the Corporate Division's adjusted operating loss of $20,000,000 in the first quarter of twenty twenty five, which is down from a $37,000,000 loss in the prior year. On the capital management front, in the first quarter of twenty twenty five, we repurchased 1,300,000.0 shares for $120,000,000 at an average price of $89.72 per share. Our remaining authorization is approximately $181,000,000 We also returned $18,000,000 in dividends to our shareholders. In terms of our current holding company liquidity position, we have cash and investments of approximately $257,000,000 of which $53,000,000 resides in AGL. Share repurchases along with adjusted operating income and new business production collectively contributed to new records for adjusted operating shareholders equity per share of over $117 and adjusted book value per share of over $172 While adjusted operating income varies from period to period, the consistent quarterly increases in these book value metrics reflect the value of our key strategic initiatives, which build shareholder value over the long term.

Speaker 4

I'll now turn the call over to our operator to give you the instructions for the Q and A period.

Speaker 1

Operator?

Operator

We will now begin the question and answer session. Our first question comes from Mirza Lobo with UBS. Mirza, your line is now open. Please go ahead.

Speaker 5

Good morning. Thanks for taking my question. On the topic of U. K. Water exposures, specifically Thames Water, what likelihood are you now placing on a haircut to the debt given there there is the clear bidder for for Thames?

Speaker 2

Marissa, that's not the way our reserves work. I'll let Ben give you the tutorial on reserving. We there are many ways to look at it, and Ben wants you to work it through it.

Speaker 4

Yeah. So, I mean, I think I think there's a couple ways to come up

Speaker 5

There are a range of right. I understand there's a range scenarios.

Speaker 2

You gotta outline all possible scenarios of probability weight them. Mhmm.

Speaker 4

Right. Think you have to look at two at two really a couple of factors. One, what scenarios you're looking at in each probability weight? So and a scenario may have a haircut or may not have a haircut. And in the event there is a haircut, then what kind of recovery would you get if there was, you know, potentially equity on the other side of it?

Speaker 4

And we obviously have spent a lot of time looking at each of the scenarios assessing what we think the likelihood of a haircut is based on information that we are involved in in getting. We don't reserve through the marketplace. We don't reserve through newspapers and articles you see. And we we do look at each you know, we are talking to people all over the place and looking at it, and we do have quite a few scenarios now that we're playing with both in terms of a haircut they receive and any recovery we may get on the back end.

Speaker 5

Appreciate that. Well, I was also hoping you could share your view on how you see the the process timeline from here.

Speaker 2

The process timeline is gonna go through the regulatory environment. So and that's still in question as well as that's getting studied. But let's go back for a second to the reserve. So the majority of cases show no loss to assured guarantee on the bonds. Remember, we're the senior creditor position in those situations.

Speaker 2

We worked out a liquidity plan that we believe really provides the space necessary for them to raise the necessary equity to be back in the market. As Ben said, the recovery will take many forms. It will also have to be valued as well. But the majority of our cases, the strong majority of our cases will have no reserve, no, ultimate loss to assure. And we think the regulatory work itself out over the next six to twelve months.

Speaker 5

Much appreciated. And then another topic, was hoping you could speak to, you know, the impact of tariffs. Do they mean do they have any potential impacts to any of the credits that you wrap?

Speaker 2

I think that's such a fluid situation. It's really hard to make an estimate at this point in time. So I go there and look to the market. If you saw it in the first quarter, you know, municipal issuance is way, way up, which is reflective of the stronger credits going to the marketplace and then the confidence that the market will still respond to it. So we're taking a wait and see approach.

Speaker 2

Obviously, continue to look at our international opportunities. We think there's volatility and an economic upheaval or vault or questioning position will help our demand for our product over the long run. We're thinking that short term, we've got opportunities if reports might be affected. We looked at our book in that area. So I think we're looking at volatility and confusion as a good thing for Assured because that's when the market is the most, you know, receptive to our guarantee.

Speaker 2

I think if you look, it's

Speaker 4

very similar to COVID where we opportunistically saw the market dislocated in COVID, particularly in areas like airports, and we did very well writing business during that time.

Speaker 5

Got it. Thanks for your answers and congrats on the strong quarter. That's it from me.

Speaker 4

Thank you. Thank you.

Operator

Thank you very much. Our next question comes from Tommy MacJean with KBW. Your line is now open. Please go ahead.

Speaker 6

Hey, good morning guys. Question on some of the commentary you put out there around the type of primary issuance that came through in the quarter seeming to be overall a higher rated credit. Does this change your outlook on what the normalized PVP to par looks like going forward? Or should we not read too much into one quarter, one data point?

Speaker 3

No, that was this quarter as with the market volatility, a lot of the issuance was in the senior rated positions, AAA, AA in the public finance market. And everyone was waiting and seeing what's going to happen with interest rates and the volatility with respect to the tariffs and all the noise. So AAA and AA issuers came to market. We actually, as I said, significantly, we wrapped a significant portion of the AA market. But so it's business based.

Speaker 3

It doesn't change when we think it's going to happen going forward for the year. In fact, we see a strong pipeline in public finance, both the primary and the flow primary business in our target markets in the AA and BBB as well as in our secondary market execution as I talked about. We're seeing, we have a lot of names that are open. We've made our process. We've increased our our, we've significantly invested in our systems to help execute that market with our counterparties, giving them real time information of what the price is going to be quickly and how our premium fits into that transaction, how people can save money.

Speaker 3

So we see the opportunity in secondary growing throughout the year and also in our flow business as markets have become less volatile.

Speaker 2

Yes, Tommy, I'd say we actually take a lot of comfort in the first quarter and get a lot of confidence in what the year is going to look like. Strong credits came to the market in a volatile period, which you would expect that the stronger credits would still go out to issue. It shows the demand for financing that the municipality still need. The market in general was up 20% or 19% par over par, and yet we were up 33% par over par. So it shows the demand for the papers there.

Speaker 2

There's issuance activity there. We expect the stronger credits in a volatile market to go to the market because they're not really affected. We expect the rest of the credits will come to the market as the year pulls out and things get more stable in the tariff situation and the global economic situation. So we are very encouraged by the first quarter.

Speaker 6

Okay. Got it. Appreciate the color there. And on some of those technology investments that you're making to potentially increase penetration in in in the secondary market. Can you remind me, is there a competition in that space?

Speaker 6

I know on the primary municipal side, there's there's really only one other competitor. What's the environment like competitively in in the secondary side?

Speaker 2

The same as the primary. We have one other competitor looking at secondary market executions. But remember, they look at a lot smaller end of the market than we do.

Speaker 6

Okay. Got it. And then the last question you asked, man

Speaker 2

I'm sorry. I said the first quarter reflects that if you look at the demand for the two companies and the amount of par that was insured by the two companies, there was a significant difference in the first quarter versus other quarters. Why? Because the stronger credits came to the market. We're only sure it can provide assistance there.

Speaker 6

Okay. Got it. And then just last question, the asset management segment, the bottom line there was a bit stronger than we were expected. Can you talk me through what happened there in the asset management side?

Speaker 4

Yeah. I think when you look at the asset management business, a lot of our earnings in the asset management business are back end loaded. So we we book on a quarter lag. So we are looking really booking what SoundPoint did in the fourth quarter. And I think we are seeing a lot of that at SoundPoint typically has a very strong end of the year as they syndicate some of the loans they have out there.

Speaker 4

They pick up some incentive fees. And what we've observed is that they typically it's a little bit back end loaded. So I think, you know, as you as you model through the rest of the year, I would always assume that, you know, our first quarter, which is really their fourth quarter, is probably gonna be our best quarter in that space.

Speaker 6

Thanks.

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 today's conference call. Thank you all for attending. You may now disconnect your lines. Have a great day.

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