Q1 2021 Assured Guaranty Ltd Earnings Call
Yeah.
Good morning, and welcome to the assured Guaranty Ltd first quarter 2021 earnings conference call.
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I would now like to turn the conference over to Robert Tucker Senior Managing director Investor Relations and corporate Communications. Please go ahead.
Thank you operator, and thank you all for joining assured guaranty for our first quarter 2021 financial results Conference call.
Today's presentation.
It was made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
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 we went for it.
Future events, and 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, 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 card 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 and our current financial supplement and equity investor presentation.
Which are on our website at assured guaranty dot com.
Turning to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer for Guaranty Ltd, and Rob Bailenson, Our Chief Financial Officer. After their remarks, we'll open the call to your questions as the webcast is not enabled for Q&A. Please dial into the call if you'd like to ask a question I will now turn.
The call over to Dominic.
Thank you Robert and welcome to everyone. Joining today's call I'm pleased to say that in the first quarter of 2021, we continue to benefit from the value proposition that our financial Guaranty provides in challenging times, which was further recognized last year as well.
Driven by our highest first quarter new business production in U S. Public finance since we acquired AGM in 2009 assured guaranty generated $86 million of PV P. 69% above last year's first quarter P V P and more than in all but one first quarter since 2009.
Key shareholder value measures also reached new highs at quarter end of $79.44 for adjusted operating shareholders' equity per share and $116.56 for adjusted book value per share.
As we continued our successful capital management program. Additionally.
Additionally, adjusted operating income per share of 55 deaths was 53% higher than in the first quarter of 2020.
The first quarter of this year is the fourth consecutive quarter in which we saw our total net par outstanding increase.
Administrative fundamental organic growth in our core business. This is a positive sign for our efforts to restore the size of our insured portfolio and the related predictable base for future earnings embedded in our insured transactions with.
We generally expect to see an upward trend in our portfolio size as quarterly run off diminishes and we continue to originate new business.
The U S municipal bond market was very strong in the first three months of 2021.
Volume sold in the primary U S municipal bond market reached its highest first quarter level since the great recession $104 $5 billion.
Which industry insured par near $8 5 billion setting a 12 year record for first quarter insured volume straw.
Strong demand for bond insurance led to 76% more insured pars sold than in the last year's first quarter significantly outperforming the 19% increase in total municipal issuance.
The insurance penetration rate of eight 1% during the first quarter for 2021 was higher than the 2020 full year rate of seven 6% and higher than every first quarter and annual penetration rate since 2009.
Assured guaranty widen its lead in new issue market share during the first quarter or <unk> 65 per cent share of insured market municipal insured municipal par sold was better than our market share in any quarter since 2014 the.
$5 $5 billion of new issue par sold with our insurance in the quarter was the highest amount we assured in any first quarter since 2010.
It was almost two and a half times, our insured par in last year's first quarter and our primary market transaction count of 252 was up 57%. These.
These year over year quarterly comparisons were influenced by the pandemic related market disruption and first quarter of 2020.
But in what they would what yet but at what may be a more meaningful comparison, our first quarter insured par sold was almost 20% higher than in the fourth quarter of 2020.
During this year's first quarter, we assured $100 million or more on eight different transactions with aggregate insured par totaling 2.25 billion large transaction tend to attract institutional investors and our leadership in this category reflects a growing appetite for assured guaranty insurance in the institutional market.
Even as there have been signs of recovery of and a recovering economy and better than expected municipal revenues to persistence of the global pandemic and what is it and what it has taught the market about economic unpredictability have shown that investors have good reason to remain concerned about downgrade risk trading value stability.
And liquidity, which are guaranty has the potential to address we believe those concerns combined within a appreciation of our overall value proposition for behind our ability in the first quarter to ensure a $1.5 billion of par on 27 transactions aside double a underlying ratings by at least one of the two leading rating agencies.
The stable outlooks on assured guaranty's own double your ratings provide an extra level of comfort for investors in these high quality bonds.
In international infrastructure finance during the first quarter, we executed two international transactions, neither which created any new risk exposure.
One transaction was an extension of the debt service reserve Guaranty that we provided to Welsh water in 2019 as a substitute for their bank liquidity facilities.
Other involved converting a convention center project financing that we ensured years ago went to a direct obligation other sub sovereign.
Additionally, we made progress on important new transactions to which have already closed since quarter end generating over $23 million of international Pvp in the second quarter.
The pandemic delayed a number of projects. It also had the effect of widening credit spreads and therefore, creating opportunities for us we believe the U K and other governments efforts to provide stimulus through infrastructure investment will require a significant amount of private financing to be fully successful and that we will have a part to play in that.
We have a robust pipeline of potential infrastructure opportunities and have been receiving an increased variety of new business inquiries. We also believe investor appetite for our product remains strong in our international markets. We've continued our efforts to maintain and expand our relationships.
Our structured finance and international underwriting groups are collaborating on various portfolio Guaranty transactions. We believe this is an area. We can help institutions optimize the capital associated with infrastructure portfolios.
Using principles that can be applied to other asset types as well. Additionally, the structured finance group is currently processing or in discussions for potential transactions and diverse categories, including rail assets trade receivables life insurance cielo as equipment leases and subscription finance facilities for private equity funds.
Importantly, and relates to our financial strength and stability, our disciplined and diversified approach to writing new business along with our loss mitigation activities has helped to reduce to below investment grade percentage of our insured portfolio to just three 2% of net par outstanding.
About half of our big exposures to Puerto Rico, Puerto Rico Obligor is and there have been considerable positive news out of Puerto Rico as I mentioned on our last call. We conditionally agreed in February to support a revised G O and public buildings authority planned support agreement with the oversight board and other creditors of the Commonwealth and P. B E.
We did so with the express understanding that the government parties would work with us to make that agreement part of a more comprehensive solution that also address the related Puerto Rico credits, including what are known as the Clawback credits such as revenue bonds of the highway and Transportation Authority and the Convention Center District Authority.
The big a big step towards such a resolution took place on April 12, when we the oversight board and others agreed in principle to a framework for settling our insured exposures to the H T. A N C. C D. A credit subject to definitive documentation of an H T. A C C D. A planned support agreement.
We have now finalized that documentation as announced on May 5th and have reaffirmed our support for the G. O P. B E. P. S. A it.
It will still be months until the plan of adjustment incorporating these P. S A's and the PREPA RSA are approved and implemented but with the shift with the settlements. We have agreed to terms on over 93% of our Puerto Rico net par exposure.
Outside of these agreements the company it was only $241 million of additional Puerto Rico net par exposure almost all of which relates to credit would have not missed any principle or interest payments.
Lastly, once again, we reassess the potential impact of COVID-19, or orange on our insured portfolio.
Especially in light of the one nine trillion federal stimulus package.
Enacted during the first quarter and that review further indicated that the pandemic has not given US a reason to establish significant into loss reserves and we do not expect any ultimate losses from first time municipal bond insurance claims that arise specifically from COVID-19.
In addition to having a great quarter in the financial Guaranty business, we made good progress in the asset management business.
The CLO market blossomed during the first quarter with total supply, including new issues Refis resets and re issues setting quarterly records of $106 $3 billion in the United States and 26 billion euros in Europe.
Assured I <unk> issued one CLO in each of those markets during the period.
It's a reset of CLO, which extended its life and therefore, its fees and we sold $71 million of CLO equity from our legacy funds, we reduced our total non fee earning.
AUM to $2 4 billion from the $3 6 billion three months earlier, while increasing total CLO AUM by almost half a billion dollars to $14 3 billion.
Cielo imagine fees for the quarter were more than double those of last year's first quarter.
The outlook for this business is positive.
We recently opened three CLO warehouses and remain focused on raising more third party capital.
I would like to do I would like to take this opportunity to welcome three new directors to our board of directors, Michel Mccloskey, Laurent Radke and coordination.
Bring variety reread backgrounds as leaders in public finance structured finance and investment management and their insights and wealth of experience will be of great value to our board strategic decision, making.
Looking towards the rest of the year, we expect strong investor demand for municipal bonds exemplified by the approximately $30 billion of inflows that municipal bond mutual funds and Etfs took in during the first quarter, we believe high demand for municipal bonds like believing that.
Issuers needs to raise more capital for infrastructure development in order to amplify the benefit of infrastructure funding likely to come from Washington, as well as by their desire to refinance them borrow while interest rates remain low.
Cause long term yields rise long term municipals, maybe come into attractive and save for alternative to corporate bonds, especially for high net worth investors wary of potential tax increases. We believe this mix of market conditions will provide us with many public finance opportunities large and small.
As finance activities revive around the world, we have already seen a pick up since quarter end and our international financial Guaranty business and we expect to complete some large.
Structured finance transactions as the year progresses. We've also believe you will see significant growth in our asset management business.
<unk> been through a lot in the last past 14 months, we believe the challenges of this period had made the market even more aware of the resilience of our business model, the dedication and professionalism of our employees and the benefits of our financial guarantees.
As always we are committed to creating value won't be out for our shareholders as well as for our clients and the investors who place their trust in our credit discipline and financial strength.
Now I'll turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call.
I would like to start by highlighting our two key metrics for new business production Pvp and third party inflows of assets under management.
As Dominic mentioned first quarter U S public finance Pvp was our strongest first quarter since 2009 and was the largest component of our $86 million first quarter Pvp.
Strong Pvp results over the last several quarters has helped us maintain our deferred premium revenues, our storehouse or future premium earnings at approximately $3 8 billion since the end of 2019.
And the asset management segment total third party inflows of $873 million was primarily driven by CLO issuance, which helped to increase our fee, earning AUM by 11%.
In the first quarter of 2021 for $12 nine.
Two to $14 $4 billion.
In terms of adjusted operating income, we earned $43 million or <unk> 55 per share in the first quarter of 2021, compared with $33 million 36 per share in the first quarter of 2020.
While this represents a 30% increase year over year.
But to highlight that our first quarter 2021 results for quite a onetime $13 million after tax write off of an intangible asset.
Repeatable for the insurance licenses of Mac.
Or municipal Assurance Corporation Mac was our U S. Muni only insurance subsidiary until we merged it into our larger New York Insurance subsidiary assured Guaranty Municipal Corp, or a G. M. On April one 2021.
Excluding this write off first quarter 2021, adjusted operating income would have been $56 million, representing an increase of 70% of our first quarter 2020.
The restructuring simplifies our capital and organizational structure eliminates the cost of maintaining and additional legal entity.
And is expected to increase future statutory net investment income and the regulatory dividend paying capacity of the remaining U S insurance subsidiaries over the next few years.
The insurance segment's first quarter contribution to adjusted operating income was $79 million compared with $85 million in the first quarter of 2020.
Excluding the Mac license write off adjusted operating income would have been $92 million or an increase of $7 million.
Within the insurance segment total income from the investment portfolio increased by $18 million or 24%.
The investment portfolio generates net investment income from its fixed maturity portfolio and equity and earnings for Investees for alternative investments carried under the equity method.
Our fixed maturity and short term investments account for the largest portion of the portfolio generating net investment income of $73 million.
In first quarter 2021, compared with $83 million for first quarter of 2020 the.
The decrease in net investment income was primarily due to lower average balances and the externally managed fixed maturity investment portfolio.
Which declined due to dividends paid by the insurance subsidiaries that we then used for AGL share repurchases low.
For short term interest rates.
And lower income for my last mitigation securities.
Equity in earnings of Investees, primarily include assured I am funds.
Several several other alternative investments managed by third parties.
Be assured I am funds, primarily the CLO and asset based funds generated a gain of $10 million in first quarter 2021, compared with a loss of $10 million in the first quarter of 2020.
Alternative investments managed by the third.
Managed by third parties generated gains of 9 million in the first quarter of 2021.
As a reminder, equity earnings and Investees as a function of mark to market movements attributable to the short I am funds and therefore more volatile than the net investment income on our fixed maturity portfolio and will fluctuate from period to period.
As we shift our current fixed maturity long term assets into these alternative investments the related net investment income may decline.
However over the long term, we expect to enhance returns.
On the alternative investment portfolio to be over 10%, which exceeds the returns on the fixed maturity portfolio.
Scheduled net earned premiums for and consistent were consistent at $107 million year over year as recent new business production substantially offset the decline in earnings on structured finance transactions for.
First quarter 2021, refunding resulted in acceleration of $16 million.
Paired with $15 million in first quarter 2020.
Loss expense was $30 million in first quarter 2021, compared with $18 million in first quarter of 2020.
First quarter 2021 includes loss expense on both public finance.
Particularly Puerto Rico, as well as U S RMB as exposures.
The first quarter of 2020 expenses consistent consisted mainly of Puerto Rico loss expenses offset by a benefit on U S. RMB is due in large part to increased excess spread.
Net economic loss development of $13 million in the first quarter of 2021, primarily consists of $11 million in loss development on U S. RBS, which was mainly attributable to lower excess spread offset by benefits due to changes in discount rates.
And improved performance in recoveries on previously charged off loans.
Certain second lien transactions.
The economic losses, the economic development attributable to change in discount rates for.
For all transactions was a benefit of $48 million for first quarter 2021.
Our expected losses as of first quarter of 2021 reflect.
In our scenarios the terms of the Puerto Rico settlement agreement reached this week.
Which should also significantly reduce the future volatility.
These reserves.
These agreements in addition to our previous PREPA agreement represent over 93% of our net Puerto Rico par outstanding were 46% of total below investment grade net par outstanding.
Turning to the asset management segment.
Adjusted operating income was a loss of $7 million in first quarter 2021, compared with a loss of $9 million in first quarter 2020.
Our long term view of the asset management segment is optimistic since.
Since the acquisition of assured I am we have made great progress in advancing our strategic goals, we have liquidated assets and wind down funds.
Increased fee earnings.
L O M for the issuance of new Clo's and the sale of CLO equity from legacy funds.
Raised capital for new opportunity funds and.
And achieved attractive returns on the funds we have established since the acquisition.
In first quarter 2021, the increase in management fees from Clo's and opportunity in liquid strategies more than offset the decline in fees for my wind down funds as our core strategies pick up momentum after a difficult 2020.
Our corporate division mainly consists of interest expense.
On the U S holding a U S holding company debt as well as board of directors and other corporate expenses.
Adjusted operating loss.
For the corporate Division was $29 million in first quarter of 2021, compared with $39 million in the first quarter of 2020.
First quarter 2020 included losses related to an investment impairment charge and a loss on the extinguishment of debt.
On a consolidated adjusted operating income basis, the effective tax rate may fluctuate from period to period based on the proportion of income in different tax jurisdictions.
First quarter 2021, the effective tax rate was $15 million.
I'm sorry, 15%.
Compared with 24, 7% in first quarter of 2020.
Turning to our capital management strategy.
In the first quarter of 2021, we repurchased 2 million shares for $77 million at an average price of $38 83 per share.
Since then we have continued the program and repurchased an additional 600000 shares for $28 million.
Since the beginning of our repurchase program in January of 2013, we've returned $3 $8 billion to shareholders, resulting in 64 per cent reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of approximately $30 in adjusted operating shareholders' equity and $53 in adjusted book value per share, which helped drive these metrics to new record highs of over $79 and adjusted operating shareholders' equity.
And over $116 and adjusted book value per share.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $218 million of which $60 million resides in AGL.
These funds are available for liquidity needs.
For the use in pursuit of our strategic initiatives to either expand or our business or repurchase shares to manage our capital.
I'll now turn the call over to the operator to give you the instructions instructions for the Q&A period. Thank you.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
If you are using a speakerphone please pick up your handset before pressing the keys.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Tommy Mike joined with K B W. Please go ahead.
Hey, good morning, guys.
So congrats on the signing of the HCA yesterday.
Thank you.
Yeah. So I wanted to ask about the the terms about hte so.
So for the upfront cash and bond for more malls.
Clawback C. B items for me can you guys share your expectations on what you think low C b items.
For your recovery beyond mall, 40% upfront cash and bonds.
Sure. The CVI is kind of like a moving target. So there's two assumptions that you've got to make the in principle right. What is it going to be the continued growth in the sales tax amount and that really is predicated on the economy. So we're trying to factor them in economic growth sector and you can pick whatever number you like and then the second thing you have to look at it.
The discount rate.
As we get closer to the Finalization of the agreement. There is also going to be the question of whether this instrument will trade.
And if it trades that gives you a little bit better valuation principles. So it's really in our scenarios picking discount rates and growth of the economy. As we tried to evaluate in our scenario analysis remember our reserves are still based on GAAP GAAP requirements, which says you've got mapped out scenarios and probability weight them. So in our scenario model for H T.
Yes.
One of the scenarios includes the settlement pleasant assumption relative to economic growth and discount rate on the cash flows, but there's also a scenario good.
It's really changed the settlement makes it worse, we can't really make it better and of course, we changed the discount rates and the growth assumptions to make the reserve model work that you've got more than one scenario and the reserve model. So there's a lot of moving parts there as we get further along in the year there'll be more clarity relative to the weather the instruments trade and of course at the time, we're ready income.
We will start to disclose more of our assumptions, but at this point in time, we're not doing that.
And was there a follow up Mr. Mike Joint.
Yeah, Yeah. Thank you.
Yeah. So now that we have made some good news good progress on quarter Veeco.
What are your latest loveland thoughts on interest in consolidating the rest of the remaining runoff books of business available.
And when we think about those opportunities could you discuss whether you think he'd be able to structure any transactions using capital at the opco level rather than at the Holdco level. Obviously, there was a lot of capital trap there at the operating company level. So it could be an efficient use of capital there and your thoughts on that.
Sure. So let me answer them in the order that you gave us a number one does this open up the door for some more consolidation and the answer is probably yes. It clear as one of the hurdles, but there are still remaining hurdles weighted valuation is one acceptance of other terms and conditions. What are we like in the portfolio, whether we'll see competition from third parties that will make.
Basically kind of changed our return assumption so theres a lot of factors, but this does clear one of the remaining hurdles. There should go a long way to clearing the remaining hurdle of Puerto Rico exposure.
Number two a remind me again what that was.
Just whether you could structure anything using capital at the op.
The level of other than at the whole day, yeah. So our goal is to use.
In every case, we can trap capital in the operating companies because that obviously makes the most sense as you're well aware free capital at the holding company that gives us a lot of flexibility for a multitude of purposes, including our dedication to capital management, So where possible we will definitely use existing operating income our existing operating cash.
That's trapped in the operating companies.
Yes.
Okay.
To sum it up if you could kind of rank order your interest in terms of capital allocation between buybacks and consolidating our run off businesses and perhaps growing asset management business, how would you rank those.
Well I think it's like which of your children do you like the most but at the end of the day I'd still say the most attractive of the three is capital management because he's got the biggest return I mean, where are we still traded at discounts. We're at is just you know a spectacular opportunity for us to continue to retire that stock.
That makes sense. Thank you guys.
Youre welcome.
The next question comes from Brian Meredith with UBS. Please go ahead.
Good morning.
Good morning, and congrats on everything.
I guess, Mike My Big question here is one Dominic Rob there's the Mac consolidation it all free up any dividend capacity and then two is it add on to that.
Do we need to see the court finalization.
Court agreement in order to kind of go and it gets get a special dividend.
Oh <unk>.
Go ahead, Rob I'll take the first part with Mac.
Yes, so by taking out that trapped capital that was underneath our insurance companies and consolidating that emerging that within AGM.
You are now going to increase investment income at our two main operating subsidiaries.
Do you expect it to increase our dividend capacity.
This year modestly and next share more significantly.
Because there are different rules regarding how much you could dividend out between Maryland, and New York, but it will increase our dividend capacity Bryan.
Great.
And then the second question Brian.
Yeah, just with respect to getting asking for a special dividend are you going to would you would you would you want to wait until you get a final agreement from the courts on Puerto Rico before you do that do you think Brexit point now that you can.
Go ask the regulators for one.
Well, let's go through the facts are in fact, well number one is we still believe capital management is the most accretive transaction, we could do number two to get to our typical target of capital management, we need a special dividend.
Number three we've had some impediments to request or to get a special dividend granted even considered and the two being COVID-19 and of course, Puerto Rico as we resolve those through this year I think it does create an environment where that conversation game begun to be held with the regulators that we're responsible to.
Helpful. Thanks for all I appreciate it.
Thanks for thanks, Brian.
The next question comes from Geoffrey Dunn with Dowling and partners. Please go ahead.
Thanks, Good morning, guys.
Yeah.
With respect to both the G O P b, a as well as the <unk>.
Transport agreements.
Am I right that unlike past deals here recovery is solely in the new bonds and the C. V is there is no other.
Bond insurer considerations that we should be factoring in to be the.
Ultimate estimate recovers.
But are you, leaving that one little piece, which is called cash.
And remembered cash is king so at the end of day, there is a cash component to be settlement.
No I think what you're referring to as opportunities do we have to basically make the settlement better by wrapping the bonds you get a higher value from them and at this point in time, we've not.
Considering that fully at all so we're just allowing the settlement and the estimates of recoveries to take place based on what's actually appearing in the documents available to everyone for REIT.
Okay, and then within the G. O is are you able to help us narrow down.
I know this is publically about what's the ratio of narrow down where in that recovery range to of the deal your bonds fall.
Well, that's not that easy to figure out right. Obviously, we have a good idea we have the ability to see that it has not been publicly disclosed I remember the problem you have with some of the statistics youre seeing as they include all creditors not just bondholders are secured creditors. They obviously don't.
<unk> in a lot of the published reported so they're only looking at cash and bonds and in some cases, they're just looking at new bonds, because if you're looking for them to put it in government point of view. It is that I had so much debt for so much bonds, what do I Wanna convinced you tell people I've got a I know new debt with new debt requirements, when I'm, comparing the old bonds to the new bonds and kind of ignoring.
Our cash and CVI falls out so the numbers do substantially moving about.
As we've said, we're very comfortable with the settlements and I think that should give the market.
A pretty good indication of what we believe is our recovery rates.
Okay, great. Thank you.
Youre welcome.
This concludes the question and answer session.
I'd now like to turn the conference back over to Robert Tucker for closing remarks.
Thank you operator, and I'd like to thank everyone for joining us on today's call.
You have additional questions. Please feel free to give us a call. Thank you very much.
This concludes today's conference call. Thank you all for attending you may now disconnect your lines have a great day.
Yeah.
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