Q3 2021 Assured Guaranty Ltd Earnings Call
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Good morning, and welcome to the assured Guaranty limited third quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing to Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note that this event is being recorded 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 third quarter.
2021 financial results Conference call. Today's presentation is made pursuant to the safe Harbor provisions of the private Securities litigation was.
1995.
Does it take to 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.
Payments are subject to change due to new information or future events. Therefore, you should not place undue reliance on them.
We do not undertake any obligation to publicly update or revise them, except as required by law. If you were 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 presentation.
But now see SEC filings, most 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 GAAP and non-GAAP financial measures and our current financial supplement and equity investor presentation, which.
On our website at assured guaranty dotcom.
Going to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer of assured Guaranty Ltd, and Rob Bailenson, Our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled to keep that he's dialed 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 and a successful third quarter of 2021 assured guaranty's, new business production generated $96 million of Pvp.
This is our second highest result for a third quarter in the last decade.
At the nine month, Mark our year to date, Pvp totaled $263 million, which puts us on pace with last year's outstanding production.
The business was well distributed across our U S public finance international infrastructure and global structured finance markets for both the third quarter and nine months.
In terms of shareholder value as of September 32021 on a per share basis shareholders' equity adjusted operating shareholders' equity and adjusted book value All reached record highs of $88 40 to $82 89 and $122.
50 cents respectively.
Year to date assured guaranty has earned $197 million of adjusted operating income about the same as in last year's first three quarters, notwithstanding a $138 million after tax loss on debt extinguishment.
This accelerated recognition of an expense, resulting from the voluntary early redemption of certain senior notes.
These redemptions and the issuance of lower coupon debt will reduce net your school reduce neck use next years debt service by.
$5 2 million.
Bob will provide more detail on the debt issuance later.
During the third quarter total municipal bond issuance was strong with $121 billion of new par issue.
The second highest third quarter volume in a dozen years.
For the first three quarters Newport issue of $343 billion exceeded that of the comparable period in 2020, which was a record year insurance penetration continued its upward trend, reaching eight 5% for both the third quarter and nine months.
This level for a third quarter and any nine month period and more than a decade.
This was achieved even though the interest rate environment remains challenging.
Benchmark yields moved a bit higher during the quarter. They remain low by historical standards and credit spreads compressed at the tightest levels in a decade.
In this environment assured guaranty continued to lead the municipal bond insurance industry with the third quarter market share approaching two thirds of the insured par sold in the primary market as we guaranteed 270 transactions for a total of $6 $7 billion in insured par at.
At the nine month, Mark we had guaranteed more than 60% of insured new issue par sold this year the.
The $17 $9 billion reinsured in the primary market was 19% higher than in the first nine months of 2020 and 88% more than in the first nine months at the most recent pre pandemic year 2019.
It was in fact, our highest primary market insured par for the first nine months in a decade.
We can and we have continued to benefit from institutional investors preference for assured guaranty's insurance on larger transactions during the third quarter. We ensured 17 transactions with $100 million are more insured par, which brings our total year to date transaction count in this category to 38.
Just one deal short of the number we ensuring all of 2020.
Also in the third quarter, we continue to add value on double a credits ensuring $836 million of par on 27 deals that each have at least one rating in the double a category from either S&P or Moody's.
The 83 municipal issues reinsured in this category through September this year aggregate to more than $3 billion of insured par compared with 2 billion in the first nine months of last year.
It was public finance, usually generates a large percentage of our P. P P. Each quarter and it's $55 million of third quarter. Pvp is no exception, but we have a uniquely diversified approach to producing new business.
Our international infrastructure business has been a reliable contributor to our production and every quarter for more than five years. It produced $17 million of PDP in the third quarter of 2021.
One significant transaction was a 113 billion pounds student accommodation issue by the University of Essex, We have a substantial pipeline of high and medium probability transactions for the rest of this year and the first half of next.
And the transaction and the transaction inquiries, we're receiving our increasingly diverse over the longer term. We believe infrastructure will continue to be a significant international market for us in the U K alone. The government has put out a paper anticipating as much as 650 billion pounds of public and private infrastructure spending over the next 10.
Years.
In global structured finance third quarter, Pvp was very strong $24 million, bringing the year to date totaled $35 million, we closed on a large insurance securitization in the third quarter and our CLO activity has been accelerating we guaranteed two euro denominated she lives in the quarter our guarantees of C. L.
Those attract new investors, which might otherwise be discouraged by the higher capital requirements on uninsured Clo's and we are seeing more opportunities to help investors reduce the capital consumed by both existing structured finance exposures and new investments.
Overall, the quality of our insured portfolio has continued to improve as the below investment grade portion of our insured portfolio declined by $300 million in the quarter is within sight of falling below 3% of net par exposure.
Puerto Rico issues account for almost half of our below investment grade net par outstanding and there had been important positive developments in the efforts to complete that restructuring Senator from Asia.
She had agreements for these restructurings applied at 95% of our par exposure to Puerto Rico entities with the balance of our exposures remaining current on debt service payments.
The log jam was broken on October 28, when the oversight Board agreed that the recently passed Commonwealth legislation intended to authorized issuance of new exchange securities as part of the Commonwealth restructuring met the board's condition and a revised plan of adjustment could move forward to the confirmation hearing which is scheduled for November the eighth.
Three days from now.
Meanwhile, the Commonwealth revenues have exceeded expectations and billions and.
Billions more had been received or are expected from federal Corona virus relief and disaster relief allocations and the island may benefit further from pending federal physical infrastructure, Bill and build back better reconciliation Bill.
On our last call I mentioned Sps affirmation in July we're double a stable outlook financial strength rating. It decides to our insurance subsidiaries. This has been followed in October by KBR as affirmation of a double a plus rating of Ags assured guaranty U K and Paris based assured guaranty.
Europe importantly, it also upgraded AGC to double a plus based on AG Street, Agc's strengthened capital position relative to KBR as conservative stress loss modeling along with separate analysis of Agc's, Puerto Rico, RBS and certain other exposures KBR a also.
A G sees decreased insurance leverage the substantial derisking of its insured portfolio and the positive movement toward resolution of Puerto Rico's title III process.
All the ratings have stable outlooks by the way the Puerto Rico settlement agreements were also deemed credit positive by Moody's in its credit opinion about AGM published in July.
On the asset management side of our business, we have been participating in a very active CLO market.
Kris free earnings CLO assets during the third quarter largely by launching one new CLO, which brought the number of sellers we issued during the first nine months to four.
These new CLO is responsible for $1 $7 billion of the one of the $3 $8 billion increase in fee, earning CLO assets since the year began.
The remaining $2 $1 billion of the increase resulted primarily from selling CLO equity previously held an assured I am funds and converting AUM from non fee, earning to fee earnings during the year.
We have shed virtually all of the CLO equity held by assure I am legacy funds and 96% of the R. C. L O N E, earning now we.
We expect the CLO market to remain strong through year end.
We reset our refinanced three CLO is in the United States this quarter, adding up to a total of four C. O lives in the U S and three CLO in Europe, they were reset or refinance for the year through third quarter for these transactions are mounted on the sub advisory basis yeah.
After the third quarter and in October we closed a new CLO in the United States. In addition, we currently have two open CLO warehouses, one in the U S and one in Europe. We are planning to open one additional CLO warehouse in the U S. Before the end of the year, those yellows and ongoing assured I am funds overall have performed well.
I look forward to a successful finish for assured guaranty. This year, our track record proves that our company is built to withstand severe disruption in the financial markets and our recent results strongly suggest that a growing number of investors. Appreciate the resilience of our business model understand our value proposition and recognize our financial strength.
Those investments will be a source of our success for years to come.
As we continue to protect our policyholders and create value for our clients and shareholders now I'll call to turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call. This quarter, we continued to make great progress on our capital management strategies after issuing $500 million of 10 year senior notes at a rate of 315% in May I'm pleased to report that a G. U S holdings issued another $400 million of 30.
Our senior notes in August at an attractive rate of three 6%.
Most of the proceeds of these debt offerings were used to redeem $600 million of long dated debt obligations and the remaining proceeds were designated for general corporate purposes, including share repurchases. The redemptions included $430 million of debt we assumed in 2000.
As part of the FSA H acquisition.
With coupons ranging from five 6% to six 9%.
And remaining terms of approximately 80 years as well as a $170 million of AG U S. 5% senior notes due in 2024.
These debt refinancings at several benefits to the company.
First we reduced the average coupon on redeemed debt from $5 eight 9% to $3 three 5%.
Which will result in a $5 $2 million of annual savings until the next debt maturity date, we expect continual annual interest savings after that so the amount of such savings will depend on the interest rate environment and the refinancing decisions we make at the time.
Second we reduced our 2020 for that.
Debt refinancing need from $500 million to $330 million.
And lastly, the debt proceeds we borrowed in excess of those used for redemptions will provide flexibility to execute other strategic priorities, including share repurchases without significantly affecting our leverage or interest coverage ratios.
These debt redemptions resulted in a pre tax loss on debt extinguishment of $175 million or $138 million on an after tax basis, consisting of two components.
First.
$156 million acceleration of unamortized fair value adjustments that were originally recorded in 2009 as part of the FSA acquisition.
And second a $19 million make whole payments to debt holders of the redeemed a G U S 5% senior notes.
It is important to note.
At $156 million of the $175 million loss was a non cash expense.
Yeah amortization of these purchase adjustments had been slowly amortizing into interest expense since 2009.
And we are scheduled to continue to amortize into interest expense for another 80 years.
Champion of this debt merely accelerated the timing of that expense.
Despite this charge our third quarter 2021, adjusted operating income was $34 million or <unk> 45 per share.
The loss on debt extinguishment reduced adjusted operating income by $1 87 per share.
In the insurance segment. However, adjusted operating income was significantly higher at $214 million for the third quarter 2021.
From $81 million in the third quarter of 2020.
The increase is primarily due to favorable loss development, which was a benefit of $94 million in the third quarter of 2021.
The largest component of the economic benefit was attributable to a $65 million benefit and U S. RMB as exposures that was mainly related to a benefit from higher recoveries on second lien charged off loans and deferred first lien principal balances.
In addition, there was a $31 million benefit on public finance transactions due to mainly the refinement of the mechanics of certain terms of the Puerto Rico support agreements.
The economic development attributable to changes in discount rates across all transactions was not significant in the third quarter of 2021.
Other components of the insurance segment also performed well in third quarter 2021.
The investment portfolio generated total income of $102 million, an increase from $95 million in third quarter 2020.
The increase was increase was mainly due to the performance of the alternative investment portfolio, including assured I am funds, which collectively generated $33 million in the third quarter of 2021.
Paired with $20 million in the third quarter of 2020.
Since the establishment of assured I am the insurance subsidiaries have invested $380 million in assured I am funds.
We now have a net asset value of $465 million.
And that produced an inception to date return of almost 20%.
As a reminder.
What are you an earnings of Investees is a function of mark to market movements attributable to the short I am fun and other alternative investments.
It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period to period.
Our fixed maturity and short term investments accounted for the largest portion of the portfolio generating net investment income of $69 million in third quarter of 2021.
Paired with $75 million in third quarter of 2020. The decrease in net investment income was primarily due to lower average balances in our loss mitigation investment portfolio.
As we ship fixed maturity assets into alternative investments net investment income from fixed maturity Securities may decline.
However over the long term, we are targeting enhanced returns on the alternative investment portfolio of over 10%.
Which exceeds to protect returns on our fixed maturity portfolio.
In terms of premiums schedule net earned premiums were consistent relative to third quarter of 2020.
And accelerations due to refundings and terminations were $15 million in third quarter of 2021.
Paired with $18 million in the third quarter of 2020.
And the asset management segment, we have continued to make great progress in advancing advancing our strategic goals. This.
This quarter, we increased fee earnings CLO AUM with the issuance of $598 million in new CLS.
We continue to liquidate assets in mind downtime and now have less than a $1 billion of legacy AUM and.
Those funds.
And using a short am's investment management expertise, we have expanded investment strategies in the insurance market and insurance segment to date, we've recorded strong mark to market results on a fund established by a short I am.
Yes, It management segment.
Adjusted operating loss was $7 million in third quarter 2021.
Compared to just the operating loss of $12 million in the third quarter of 2020.
However, asset management revenues increased 38% in third quarter 2021.
Compared with third quarter 2020, due mainly to the increase in CLO fee, earning AUM and the recovery of previously deferred CLO fees in 2021.
The COVID-19, pandemic and downgrades loan in loan markets had shrink had triggered overcollateralization provisions and CLO in the second and third quarters of 2020, resulting in the deferral of CLO management fees. However, as of September 30th 2021, none of them are assured.
M yellows with triggering overcollateralization provisions and therefore, none of assured I am CLO piece, we're being deferred.
Fees from opportunity funds were also up as AUM increased to $1 $6 billion as of September 32021 for $1 billion as of September 32020.
Fees from the wind down funds decreased as distributions to investors continued and as of September 32021, the AUR of the wind down funds was $809 million compared with $2 3 billion as of September 32020.
The corporate division.
Typically consists mainly of interest expense on U S holding companies debt and corporate operating expenses.
This quarter. It also includes the debt extinguishment charge, which brought third quarter corporate results to a net loss of $169 million.
In third quarter of 2021.
The effective tax rate was a benefit of 57%.
Compared with a benefit of 33% in third quarter of 2020.
The overall effective tax rate on adjusted operating income fluctuates from period to period based on the proportion of income in different tax jurisdictions.
The loss on extinguishment of debt in the third quarter of 2021 reduced income in the U S compared to other jurisdictions, resulting in a low rate for the quarter, while third quarter 2020 benefited from the release of a reserve for uncertain tax positions.
Turning back to our ongoing capital management strategies, we repurchased two 9 million shares for $140 million in third quarter of 2021.
At an average price of $47 76 per share.
This brings year to date repurchases to $305 million as of September 32021.
The continued success of this program helped to drive our per share book value metrics to record highs.
Subsequent to the quarter close we repurchased an additional one 5 million shares for $77 million.
Since the beginning of our repurchase program in January 2013, we have returned $4 billion to shareholders under this program, resulting in a 67% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of over $33 in adjusted operating shareholders' equity per share and $58 in adjusted book value per share, which helped drive these metrics should you to new record highs of more than 82 down in adjusted operating shareholders' equity per share and a hunter.
'twenty two.
Dollars in adjusted book value per share.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $272 million.
Of which $86 million resides in AGL.
As funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to expand our business well repurchase shares to manage our capital.
As of today, we have $220 million in remaining share repurchase authorization.
I'll now turn the call over to the operator to give you the instructions for our 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 were using a speaker phone 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 Geoffrey Dunn with Dowling and partners. Please go ahead.
Thanks, Good morning.
Good morning.
Let's see.
First question with respect to the Puerto Rico development.
What were the key.
Factors that prompted the favorable development is it largely more what happened after the end of the quarter with the building passing the oversight board agreeing to the amended burdens.
And then maybe getting some more clarity on timing or was there more to the quarter that prompted you refine them.
Joe I guess Youre talking about the reserve change in the quarter for Puerto Rico.
Yes.
<unk> finance.
So at the end of the day, the majority of public finances, Puerto Rico, but it was all mechanical jobs. So if you think about how we set reserves one scenario analysis of probability weighting. That's the same just as more facts became apparent about the exact structure of the deal for instance, like the G. D bees now the judge agreed that they were.
Subordinated there for they're not in the calculation of a secured creditor. It was more changes of those mechanical natures than anything else. So we saw a bear scenario modeling we still are probability weighting. So this is just a mechanical change to reflect what we think is going to be the final version of that potential Psa.
Okay.
And.
As you're getting more well I guess.
Or is it getting more clarity on Puerto Rico, what are your thoughts to exploring a special dividend out of the operating subs.
To support that that $500 million annual target not necessarily need it for this year, but that's sort of coming here.
We've always said, Jeff when we think it's the proper time, we will seek special dividend approval. We think you are correct. It is.
Assuming that we get the first Puerto Rico deal done as of year end and then funded through January.
So we didn't deal with the new bonds, we get within that a settlement period I think that puts us in very good shape to be able to go to the states and ask for a special dividend. So I think we're just following our course of our strategy that we I think X thousand long ago that said as you clear up these conditions of what our uncertainties to make them.
Certainly I think it allows us that opportunity.
Were you know obviously, if we want to keep our current pace of share repurchases, we would need a special dividend as you well know so our thinking is let's get the PSA Doug for the general obligations and then let's move forward from there.
In addition, Jeff remember with these debt offerings, we increased our flexibility with the with the cash that we have available in addition to which as we stated last quarter.
The reorganization of Mac and the unwind of Mac.
It is a benefit which will increase our dividend capacity next year, so that will give us more flexibility there as well and reducing the need to ask for significant special dividend.
Okay, and then last one.
If and when we get to the full Puerto Rico resolution.
What are your thoughts about targeting more than 500 million annually as a steady go.
Oh, Jeff obviously, I think in our strategic vision, and we want to be efficient managers of capital. So to the extent that we can use the capital we don't see opportunities to put it to work in other areas and then obviously the most accretive.
Transaction, we could do today and remains that way as share repurchase. So we would continue to look at share repurchase as a primary strategic objective, but we make those decisions basically at the time when we look at availability.
Ratings market opportunities excess cash and obviously the accretive nature of the share buyback.
Okay. Thank you.
The next question comes from Jordan Hymowitz of Philadelphia Financial. Please go ahead.
Oh, Hey, guys Great quarter question is now that you no longer are melting ice cube, but now that no longer Puerto Rico's blowing you up it seems like a lot of the marginal business is not only gaining more share and not only is the market growing but youre growing and more profitable business specifically the structure of the European can you.
Discuss the marginal profitability of some of those businesses and could they want to expand your overall profitability as a company as a result.
Well I think youre right as we look at our business opportunities and the fact that we're the only company that stay diversified across all three aspects of the financial Guy T and <unk>.
You're correct in making your assumption in today's marketplace, where spreads and rates are the structured finance and international infrastructure business is a lot higher capital return in the U S. Public finance, although we said minimum targets for all of them right and at the end of the day.
Can't give you exact numbers, but I will tell you that the structured finance and international make about a 60% higher return in U S. Public finance, we calculate return on a deal by deal basis, our biggest challenge to true profitability. However is really the excess capital and you know the drags that creates in a row.
As significant and obviously, we got to continue to manage that to really make profitability of key.
And a result of our organization, even though the deals per se or probable on their own and as I said, we said minimums and we track that religiously you've got to deal with excess capital and I think we're finally, turning the curve here in terms of where the business now starts to grow we think we've hit the bottom in terms of production.
Growth in unearned premium reserve and we're now starting to see the benefits of the hard work that all of our business people have done relative to go out and generating investor acceptance recognizing the value of the product and its getting more acceptance worldwide.
We also have goals of expanding internationally right now we're still too much of a U K dominant international player and there's gotta be market opportunity significantly throughout the rest of the continent of Europe as well as in certain markets in Asia.
Asia and the far east.
And you said I'd just repeat that the other business up 60% higher profit margins and your core business I believe is targeting at least a double digit return on equity correct.
Right.
Perfect now if we could just get the Eagles, when everything would be great in the world.
Exactly right. Thank you.
Yeah.
The next question comes from Tommy Mckeith with K B W. Please go ahead.
Hey, guys. Good morning, Thanks for taking my question I just wanted to go back real quick to the ball put them out for the sort of buybacks and I'm, especially thinking of next year. So if you could just elaborate a bit on the on the puts and takes between.
Between the you know the reorganization of Mac.
Anything new that you've taken out.
And capacity.
Just weird buybacks could shake out next year without a special dividend.
If you could just kind of walk through that now.
Rob you want to do that.
Well you know, we generally I always say that we have without telling me, we have about $250 million to $300 million without a special dividend.
Mac benefit if I recall correctly is.
Roughly.
Kind of give us another $100 million.
So.
We'll be at about 400 million without even a special dividend.
Depending on and that would be depending if we don't have any other cash enhancing transactions. So so that's where we're at for next year.
Okay. That's helpful.
And then switching over real quick the RMB us benefit in the quarter was that largely just driven by home price appreciation.
Yes, the RMB it yes, it was driven by <unk>.
Home price appreciation, so better performance on.
Transactions that had previously charged off loans. So if you have previously charged off loans youre in your home prices, increasing you have equity in your home.
Are you able to actually generate a benefit when either the home is sold with a borrower realizes I've got equity and we're going out actively to be able to reach out to these.
Borrowers with us.
Special servicing contract, we have with our surveillance group and telling these borrowers to remind them that they have equity in his home and that we still have a lien on this and so as they sell as home prices increase and as you know.
Also people start prepaying, if they start prepaying on this they would they would they would pay off their loans and they and then we would get the benefit of those previously charged off loans. So yes, that's primarily increased and continued increase in home price appreciation.
Continue to see benefits going forward.
So you answered the second part of my question there as well and then just lastly, when do you expect the asset management segment to report its first full year of operating profitability.
Well as we said we continue to make substantial progress and obviously the Crosby.
Terry is going to be when we finally get rid of the legacy funds in the administrative expenses regarding how we have to administer those funds and we hope that that'll be done by the end of this year.
Alright, thank you.
I'm sorry, the end of 2022.
Right Yep. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Robert Tucker for closing remarks.
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.
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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Yeah.
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