Q2 2022 Assured Guaranty Ltd Earnings Call
Good morning, and welcome to the assured Guaranty limited second quarter 2022 earnings Conference call. My name is Daniel and I'll be the operator for today's call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question Press Star then two please note that this event is being recorded.
I'd now like to turn the conference over to our host Robert Tucker Senior managing director of Investor Relations and corporate Communications. Please go ahead.
Thank you operator, and thank you all for joining assured guaranty for our second quarter 2022 financial results Conference call. Today's presentation is made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
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.
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 census 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 and our current financial supplement and equity investor presentation, which are on our web.
Site at assured Guaranty Dot com.
Turning 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 for Q&A. Please dial into the call. If you would like to ask a question I will now turn the call over to Dominic.
Thank you Robert and welcome to earn during today's call.
Hey, Mark of 2020 to assured guaranty's adjusted operating shareholders' equity per share and adjusted book value per share were at the highest levels in our history $90 18.
$134.91 respectfully.
Second quarter and first half of 2022 were marked by extremely market the extreme market volatility rapidly increasing inflation and fed action to raise interest rates.
I will cover how the shifting extreme environment affected our financial results, but I am pleased to say that our core insurance business continue to perform well in this year's volatile markets.
New business production has been strong and consistent with recent years excellent results first.
First half 2022, Pvp totaled $145 million and its sources were diversified across U S public finance international infrastructure and global structured finance.
In terms of direct Pvp, we again produced more than $100 million of first half direct pvp, making it five times over the last six years that we've exceeded that milestone.
And U S public finance during the same period. This year is $106 million of first half direct Pvp was second only to last year's first half production.
And would have easily been the best first half of any year with the inclusion of one of our large transactions that sold in the second quarter, but closed in the third quarter.
During the first half of 2022 municipal bond yields trended higher and credit spreads also widened though to a lesser extent.
The June 30th benchmark yield of three 8% for 30 year AAA Geo bonds reflected a 65 basis point increase in the second quarter alone that was more than double the yield at the start of the year, However, yields and spreads where eventually were unusually volatile new money issues rose modestly in par volume.
Dominated the market with rising interest rates also pushed some potential refunding, including taxable advanced refundings other money closing overall volume market market volumes to decline.
We're going to continue to see high demand for our bond insurance compared with pre pandemic levels.
First half 2022 insured penetration of eight 8% was higher than the eight 4% in the first half of 2021 and significantly higher than the five 9% in 2019 first half.
We believe that two important factors have helped to amplify the use of bond insurance wider investor awareness that insurance offer safety with many potential consequences of a volatile economic conditions.
Larger number of issuers, recognizing the cost effectiveness of bond insurance.
For the first half of 2020 to assure its share of the insured primary municipal bond market exceeded 56%.
Guaranteed 380, new issues with a total of $10 billion in insured par sold.
We said 12 year records for first half secondary market par written at almost $1 8 billion.
When combined primary and secondary market insured pars sold at 11 8 billion.
Our direct gross par written on U S municipal transactions closed during the first half was also the highest in 12 years.
<unk> to this where 17 primary market transactions, where we guaranteed $100 million are more apart. Each we believe deals of this size reflects significant institutional demand for our insurance due to the financial strength of our guarantee and the relative price stability and an increased market liquidity or insurance can provide.
Looking at the second quarter, our insured pars sold totaled $6 5 billion.
Of which $1 $4 billion with secondary market par.
Total insurance penetration for the quarter was eight 9% our bond insurance market share was over 54%.
Also a guaranteed 10 large transactions sold in the quarter that utilized over $100 million of our insurance each these.
These included a $608 million in New York Power authority issue entirely wrapped by assured guaranty and a $468 million portion of the Alameda corridor Trans Transportation authority issue, which closed after the quarter end and has contributed to the strong start we've seen for our third quarter Pvp results.
In fact across our company and the week since the third quarter began we have already written more than $75 million of Pvp.
Remember our first half total Pvp was $145 million.
And assigned an investors recognize the strength of our guarantee we continued to add value on double a credits for.
For the first half of 2022 reinsured, one $6 billion of parcel through 79 primary and secondary market policies.
Bonds rated in the double a category by S&P or Moody's or both.
This included $1 1 billion of par on 52 deals sold in the second quarter of which approximately $300 million was insured in the secondary market.
International Public finance produced $30 million of <unk> during the first half of 2022, including $8 million $18 million in the second quarter.
In May we wrote a large secondary market guarantee for an institutional investor.
Our pipeline of potential international public finance transactions looks very good and includes a number of significant transactions that we consider are likely to close in 2022.
And as I said previously we have already seen a strong start in the third quarter.
In global structured finance, we continue to see potential opportunities with such clients as life insurers.
Other direct lenders pension funds and asset backed investors.
We closed our second guarantee of a subscription finance facility for our bank during the second quarter.
Many opportunities to work with new Counterparties and the fund finance sector. The CLO market remains an important area of focus and we are speaking with current and potential CLO investors that opportunities created by the recent spread widening.
More importantly, our insured portfolio quality continues to improve during.
During the first six months of this year, our exposure to below investment grade credits decreased by almost $2 billion of par, including the $1 3 billion of Puerto Rico exposure, we extinguished as a result of the Commonwealth Geo PBA plan of adjustment.
Our big's par exposure now represents only two 3% of our insured portfolio.
On our last call I mentioned as part of the Commonwealth Geo PBA plan of adjustment, we received cash and new Geo bonds totaling approximately $1 2 billion.
Plus additional contingent value instruments and.
In addition concerning the highway and transportation authority revenue bonds in July we received from the Commonwealth pursuant to the Commonwealth Geo PBA plan of adjustment and the terms of the HCA planned support agreement of $147 million of cash and $668 million notional of contingent value instruments.
<unk> plan of adjustment confirmation hearing has been set for August 17 and 18.
Assuming the current HCA plan is confirmed and implemented we expect to receive additional recoveries in the fourth quarter.
Virtually all responsible parties understand that completing the island's debt restructuring as a key factor for its further economic progress in Puerto Rico Federal.
Federal three quarters applying pressure to complete mediation to achieve a consensual resolution of the treatment of the Puerto Rico Electric power authority revenue bonds, our last unresolved, Puerto Rico exposure.
On July 29, the judge extended determined the mediation through August 15.
The improved quality of already high quality insured portfolio adds to the reasons for our insurance subsidiaries <unk> financial strength rating.
S&P has recently affirmed its <unk> financial strength rating for all of our financial guarantee companies.
So I think both are very strong financial risk profile, and very strong business risk profile and its annual review of assured guaranty.
This report describes many strengths supporting our double a rating, including S&P's view that we have excellent capital and earnings with a meaningful capital adequacy buffer you can read the entire report on our website assured guaranty dot com.
On the asset management side of our business during the second quarter, we increased assets under management by approximately 950 $950 million to $17 9 billion.
Which 96% is now fee earnings.
Third party inflows totaled $1 $3 billion we.
We closed a new CLO and held an oversubscribed final closing for our latest healthcare fund and we continue to execute on our other strategic objectives.
Given the uncertainty in this economic environment. It is good to reflect on the proven resiliency of our company.
The pandemic, we saw investor appetite for bond insurance increase and that heightened interest has been maintained.
This year's developments continue to remind investors that the future is often volatile we.
We have succeeded through decades of economic cycles.
Living on our commitment to protect investors principal and interest against all risks, while improving our resilience through disciplined risk management and responsible stewardship of capital.
Our insurance subsidiaries aggregate $11 billion of claim paying resources today are approximately the same as they were.
At the end of 2007, even though since then we have paid gross claims exceeding $13 billion to keep investors hold and returned more than $5 billion to shareholders through share buyback or dividend.
We maintain those.
Numbers by mitigating losses on gross claim payments only $6 billion of net claims through recoveries reinsurance and reimbursement and.
Thereby earning more than $6 billion in adjusted operating income over the same period.
Our $11 billion of claim paying resources now supports a much smaller and higher quality portfolio of insured risks by every measurement that compares our capital resources to insured exposure, our insured leverages less than half of what it was at the end of 2009.
This resilience has positioned us to thrive as business and market positions are creating more incentives for the use of financial guarantees.
Never been better prepared to serve our clients protect our policyholders and create value for our shareholders I will now turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call and the.
The second quarter of 2022, adjusted operating income was $30 million or <unk> 46 per share.
With $120 million, well $1 59 per share in the second quarter of 2021.
The largest drivers of the quarter over quarter variance are mark to market movements on alternative investments, which had a $27 million after tax loss in the.
Second quarter of 2022 30.
$38 million after tax gain in the second quarter of last year.
And the trading portfolio, which consists of Puerto Rico contingent value instruments.
And that experienced a $15 million loss in the second quarter of 2022.
Our core underwriting results, excluding these fair value adjustments remained strong.
As I mentioned in the past quarter to quarter comparisons of adjusted operating income are volatile due to the nature of these investments and the corresponding accounting requires recognition of these mark to market movements and income.
However, it's important to note that today's short I am funds, which account for most of this variance inception to date Mark is a pre tax gain of $98 million. This represents a 10, 8% total return which.
As in line with our targeted return.
<unk> the value of our investment diversification strategy.
Alternative investments.
As for the Puerto Rico.
<unk> or contingent value instruments. The company received these instruments as part of the March 2022 resolution of the Geo PBA exposures.
This resulted in a $1 3 billion reduction of our insured exposure to Puerto Rico.
We now manage this component of our Puerto Rico exposure as tradable instruments.
Any gains and losses, we recognized an adjusted operating income on this portfolio a reflection of current market pricing.
Both of these mark to market adjustments, which account for $80 million of the variance are reflected in the insurance segment, which had adjusted operating income of $55 million in the second quarter of 2022, compared with $152 million in the prior year.
Insurance segment net earned premiums and credit derivative revenues were $86 million in the second quarter of 2022, compared with $106 million in the same period of last year.
Refunding component of earned premiums as well as changes in debt service assumptions accounted for the majority of the change.
Economic development on our <unk>.
In short portfolio was a benefit of $32 million.
Primarily consisting of a $39 million benefit and U S RMB, yes.
Including included in total economic development and the effect of increasing discount rates, which was a benefit of $42 million in a second.
Quarter of 2022 across all sectors.
This resulted in a benefit and loss expense of $17 million, which is a function of both economic development and amortization of deferred premium revenue.
For the insurance segment income from the investment portfolio consists of several components.
Net investment income on the available for sale portfolio and changes in fair value of trading securities and alternative investments.
Net investment income was $66 million in the second quarter of 2022, compared with $71 million in the second quarter of 2021, primarily due to lower average balances.
Equity and earnings on alternative investments with a net loss of $34 million in the second quarter of 2022 losses were a result of lower net asset values.
CLO funds and dilution from rebalancing following a final fund raising close for the health care Fund.
In the second quarter of last year. These funds had gains of $48 million.
This volatility was the single largest driver of the quarter over quarter period variance in adjusted operating income.
Fair value losses on the trading portfolio were $18 million, which represent mark to market movements on the.
Puerto Rico contingent value instruments.
The asset management segment.
Adjusted operating income increased to breakeven in the second quarter of 2022.
With respect to our capital management objectives, we repurchased two 6 million shares for $151 million in a second.
<unk> quarter of 2022.
We went to the quarter close.
We repurchased over 600000 shares for $35 million.
On August three 2022, the board of directors authorized the repurchase of an additional $250 million.
Our common shares which brings our current remaining authorization to $365 million.
Continued share repurchases along with our positive adjusted operating income and new business production have propelled operating shareholders equity and adjusted book value per share to new records of over $90 and $134 respectively.
Since the beginning of our repurchase program in 2013, we have returned $4 5 billion to shareholders, resulting in a 71% reduction in total shares outstanding.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately 180 $189 million of which $135 million resides in AGL.
These funds are available for liquidity needs for the use in the pursuit of our strategic initiatives to either expand our business or repurchase shares to manage our capital.
As we look forward to the rest of the year, we remain optimistic that the interest rate environment will be more conducive to new insurance business production.
The asset management segment and alternative asset strategies will continue to contribute to the company's progress towards its long term strategic goals in Puerto Rico, our largest single below investment grade exposure will be substantially resolved by the end of the year and a sign of continued progress we received $147 million in cash.
Cash and $668 million in original notional contingent value instrument in July as a part of the pending HDA settlement.
I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.
We will now begin the question and answer questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Youre using a speakerphone please pick up your headset before pressing the keys at this time, we will pause momentarily to assemble our roster.
We will take our first question caller your line is open.
Hey, good morning, guys. Thanks for taking my questions here.
Could you go into a bit more detail on earned premium decline I think you attributed to somewhat to a change in debt service assumptions and what does that mean for the go forward recognition of premiums kind of what you expect there.
So half of it was due to a decline in refundings and the other part was the extension of life of a transaction because <unk>.
They are related to CPI index in the U K and when you have significant amount of.
Premium associated with that you have to reallocate that and it's more exposure you have.
More exposure and if you have more exposure.
And over a longer period of time, which makes it slow.
Then slows down your expected earned premium so it doesn't make it smaller it just makes it over a longer period of time.
Okay got it.
And then it sounds like your demand for your wrap remains strong can you talk about pricing on new business relative to the enforce book both from a perhaps pricing power perspective as well.
<unk>, perhaps a more uncertain economic outlook.
So as you know we get paid on debt service, which means as interest rates go up that service increases therefore, the premium calculation of rate times debt service becomes higher.
Number two typically as interest rates go up spreads widen we get paid based on the percent.
Therefore becomes even more.
Favorable market for us relative to the return.
Calculate return on a transaction by transaction basis, a business by business basis, and then compare it across quarters and years.
So our goal is always to get to double digit return, obviously, there is volatility in that as well.
Times Theres, a larger transaction that may come in higher or lower on a basis that is because we do given amount of per quarter. It could fluctuate the results with you.
Yesterday, we are hitting our target in terms of return we think the market will continue to get better for us as the year progresses, the first half of the year.
Been so volatile theres been a little bit of a sticker shock relative to the.
The issuance in the marketplace. So as we said new money is up a bit but virtually little activity on the refunding side. However, this environment for us and creates an even better environment for secondary market transactions. So of course, we thought about secondary market.
Narrative, where to give you a statistic we remove as much business as of the six months in the secondary markets that I think is twice when we wrote all of last year.
To give you a point of comparison.
Sorry in the secondary market, obviously is higher priced higher return business. So the more of that as a compliment direct primary business really drives ROE is up to a very.
Reasonable or not reasonable profitable level for the company.
And to give you some of those numbers on secondary market as Tom just talked about in the second quarter, we brought $27 million of Pvp for the six months it was $50 million of Pvp.
And and that's over $1 $4 billion of par for the quarter and $1 $7 billion of par for six months.
Okay. That's helpful.
The numbers.
And then just lastly.
Could you kind of remind us what your latest calculation is for how much excess capital that you currently have and whether that be the method. We're looking at perhaps rating agency levels or above an acceptable leverage of CPR gross par or anything else that you think is relevant.
So when you look at it from two basis, one radiation because it's important that we maintain our double a rating from S&P and then through from our own internal capital models to make sure that we continue to provide.
Necessary protection and buffer relative to the marketplace to ensure the company remains.
<unk> strong.
Obviously, it's getting a little bit easier for us as the portfolio continues to amortize down there for the leverage ratio decreases yes. Its capital position has been relatively significant now the only number we've given you 2019, we're trying to get to 2020 number which was over $2 billion and we still kind of maintain a significant level of excess capital and as you will note that our capital.
Is the strategy majority of that has been obviously.
Position relative to share buyback, which we will continue part of our capital management strategy, but we will continue to evaluate circumstances and situations.
We continue to evolve.
Palio amortizing higher.
Higher risks in the portfolio basically.
Decline.
That excess capital position, we still think it's significant.
Remember that's after returning well over $4 billion of capital to shareholders. So we still got a long way to go relative to working capital down to a reasonable level.
We think it will provide us the opportunity for higher Roe.
Therefore move up relative to the cost of capital that the valuation of the company going forward and we look forward with a very strong optimism that the financial guarantee business is growing profitability is widening that should contribute to higher earned premiums for the next two years are still managing the capital down.
Talked a little bit about on the asset management side. We've finally gotten the platform stabilized breakeven that we started to build the verticals.
Profitability.
If you look at all three combined I think it puts us in a very good situation relative to continued improvement of ROE Eagle for lower capital base.
The business is functioning very very well in this marketplace.
Great. Thank you.
Thanks Tommy.
We will take our next question from the line of Geoffrey Dunn with Dowling and partners. Please go ahead. Your line is now open.
Thanks, Good morning, guys.
Hi, Jeff.
Rob I wanted to.
I wanted to understand.
How the new Mark on trading Securities I believe that applies to the Cvs you received.
But.
That is a mark that or if I understand correctly has occurred since you received the CVI is on July 8th or does that extend back to some of the instruments you received on the Geos as well.
Yes, it extends back to when we receive it.
CVI.
Okay.
So, but it includes some of the HCA stuff too.
<unk> came in very late.
The mark to market movement.
Primarily related to that.
Okay.
General obligation is not not piece here.
Okay. So what I wanted to understand is with the mark to market noise. No I was just going to bounce around each quarter does that effect.
Your recovery assumptions on CVI has to be received in the future here with respect to your reserving at all or is it truly just mark noise. It doesn't have any implications on the core reserve position.
So if you remember Jeff.
Book, a recovery estimate once you physically received the instruments as the recovery they get price on the day of receipt.
The recovery period relative to the insurance policy and now becoming investment in the investment portfolio now subject to any other volatility in terms of pricing in the investment portfolio until either hold them to maturity yourself. Yeah. So we've already locked in what's going to be in our journey and now it's actually kind of flow through that investment portfolio.
That I understand I'm, just wondering if the trading securities you now have in any way influence your recovery expectation on the CVI is still to be received in the future.
Now through the insurance policy now for the investment returns right. So you got to make sure you understand that the date of the settlement that locked in the recovery ultimately on the insurance policy period end quote.
Longer having anything to do with the recovery on insurance or the ultimate claim was now becomes an investment and obviously if you look at those investments and you evaluate market conditions expectation.
Yes.
With the market returns are therefore manage that balance accordingly, as we go through the period and Jeff. We've already received maybe it will help we've already received all of the CVI.
We're going to get from the <unk>.
And for transportation.
We don't we're not getting anymore. So it will not affect any reserve assumptions.
Okay. So and then on the HCA than all of its remaining is new bonds or is there a cash a new bond components still to come.
Yes, it is a cash in new bonds.
Coming when the plan is approved.
Got it okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to our host Robert Tucker for closing remarks.
Thank you operator, and thank you all 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 for attending you may now disconnect your lines have a great day.
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