Assured Guaranty Ltd. Q1 2023 Earnings Call
U S public finance business with Azure was adversely affected by comparatively low new issuance volume during the first quarter of 2023 aggregate U S municipal market volume was 23% below that of the first quarter of 2022.
However, bond insurance market penetration of seven 7% of par issued remained close to the 8% total for all of 2022 and significantly higher than the 10 year annual average of six 4%.
We continue to lead the U S municipal bond insurance market with 60% of insured new issue par sold in the first quarter, we guaranteed 124 transactions with $3 4 billion of aggregate insured par.
We also continued to benefit from institutional investor demand for assured guaranty's insurance on larger transactions in the first quarter, we insured <unk> transactions with insured par of.
$100 million or more which totaled approximately $1 6 billion.
Among double a credits defined as those credits S&P and moodys rate in the double a category on an uninsured basis assured guaranty insured <unk> primary market transactions for a total of almost $800 million.
Of insured par during the quarter.
We think the fact that investors are willing to accept a lower yield to gain the protection of our guarantee is a testament to the breadth of benefits in our value proposition beyond simply default protection.
Related to asset management, and our agreement with at some point, we believe the transaction, which we expect to close in the third quarter will be immediately accretive to earnings per share return on equity and book value per share.
The combination of assured I am with sandpoint is subject to certain consents and regulatory approval.
We will create an asset management firm that is expected to have approximately $47 billion in total assets under management for the <unk>.
Yellow portion that we're ranked fifth in AUM among global CLO managers.
Based on year end numbers under the agreement, we will own 30% of the combined entity at closing.
We will contribute to Southwind are assured investment management business with certain exceptions, such as assured health care partners.
After closing we will also engage standpoint as a sole alternative investment manager for AGM and AGC, which are committed to invest over time, the total of $1 billion to alternative investment strategies managed by standpoint.
That's about $1 billion includes alternative investments and commitments currently being managed by assured I am that will be transferred to south point as part of the transaction.
At year end 'twenty, two 2020 to nearly $400 million of AGM and AGC alternative investments were managed by assured I am.
To give you a sort of idea of the scale of this new platform using year end 2022 amounts for shortly and would add approximately $15 2 billion of AUM.
To some points $32 billion.
Total of $47 2 billion.
The CLO the CLO components are $14 5 billion from assure I am and $21 4 billion from standpoint as of year end.
This arrangement should further advanced our strategic diversification into the asset management business.
We have said that we are looking for alternative accretive growth strategies to maximize the value to shareholders of our asset management business and to generate a growing earning stream independent of our insurance premiums.
We believe our arrangement with standpoint, we will accelerate the growth in our earnings from asset management.
We intend to jointly create a framework competitive advantages, including the large scale essential for leadership in the asset management business proven success in managing credit focused alternative investment strategies, well established distribution channels and a stable source of capital for growth opportunities in the asset management business.
Our desire to enter into this transaction with sound point was based on our confidence in <unk> proven ability to raise LP funds and to produce attractive alternative investment returns. We believe the addition of assured I am AUM, an AGM and AGC capital.
Can further strengthen some point and enhance the combined entities profitability as well as its ability to increase the investment returns of our insurance subsidiaries.
This would further support their capacity to upstream dividends to the holding company and ultimately to shareholders.
Turning to Puerto Rico, our last remaining unsettled defaulted, Puerto Rico exposure is the electric power authority PREPA.
The premise of core has always wanted as again directed the parties to engage in good faith mediation in an effort to reach an agreement before the comprehension hearing scheduled for late July .
We remain committed to negotiate a fair and reasonable settlement with PREPA, but if necessary, we'll protect to enforce our rights of bondholders through litigation and the title III planned confirmation process.
Looking forward I'm optimistic about our prospects for the year and beyond with our international infrastructure and structured finance businesses at good pipelines of opportunities.
U S public finance business should continue to benefit from the more steady transaction flow that is typically in that market inflation in the last year of hawkish fed action and continue to have a significant impact on the municipal bond market.
Compared with last year's first quarter, when the AAA 30 year municipal benchmark index averaged 2%. The average for this year's first quarter was three 4%. Additionally, credit spreads, which can be equally if not more important to our business widened significantly during 2022 and remained steady during the first quarter.
We believe these factors should be positive for our business going forward.
Market volatility economic and geopolitical uncertainty and recession fears tend to be conduct conducive to a greater investor demand for our product.
Importantly for over 35 years, our business model has proven its resiliency and unpredictable and stressful economic times.
Protecting our company's financial strength and shareholder value, while we feel good about our policyholders and save money for issuers.
I believe theres a good chance to market is entering the kind of sustained interest rate and credit spread conditions that I have often said would allow for significant growth in our financial guaranty business.
Conditions that would likely give us more opportunities to add value as well as increased pricing flexibility.
Our short portfolio and financial condition are strong as or stronger than ever and we expect our new asset management approach to be highly beneficial I will now turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call.
I am pleased to report first quarter 2023, adjusted operating income of $68 million $1 12 per share.
This compares to adjusted operating income of $90 million or $1 34 per share in the first quarter of last year, which included a $63 million net benefit associated with the Puerto Rico settlements that current last March.
The largest component of adjusted operating income was the insurance segment, which contributed $117 million of <unk>.
<unk> operating income in the first quarter of 2023.
Compared with $133 million in the same period of last year.
Excluding the benefit of Puerto Rico settlements from last year's results insurance segment adjusted operating income increased due to higher net asset values for alternative investments higher investment income and the release of a litigation accrual.
Investment results from both the fixed maturity and the alternative investment portfolios performed very well in the first quarter of 2023 with.
With total income from investments was $110 million compared with $58 million in the first quarter of last year.
The available for sale portfolio generated net investment income of $82 million in the first quarter of 2023 up from $63 million in the first quarter of 2022.
Higher income from floating rate assets as well as higher interest rates and average balances in the short term portfolio were the primary drivers of the increase.
Equity in earnings from alternative investments predominantly generated by the assured I am CLO and healthcare funds with a gain of $30 million in the first quarter of 2023, compared with a net loss of $1 million in the first quarter of last year.
Annualized returns for the short I am tons, or 10, 7%, which is in line with our long term expectation for these investments.
With respect to premiums and losses, a variance in both line items as primary primarily was.
Primarily driven by the impact of the Puerto Rico settlements in March of last year, which resulted in net earned premium accelerations of $104 million and loss expense of $29 million.
Net earned premiums and credit derivative revenues were.
Were $84 million in the first quarter of 2023, compared with $219 million in the first quarter of last year.
Excluding the first quarter of 2022 effects of the Puerto Rico settlements scheduled net earned premiums and credit derivative revenues were relatively consistent quarter over quarter as new business have kept pace.
With the scheduled amortization and refundings in the insured portfolio.
Deferred premium revenue remained steady at approximately $3 7 billion.
But where it has been for the past year.
Non Puerto Rico accelerations were $4 million in the first quarter of 2023 compared with $26 million in.
In the first quarter of last year.
As refunding activity has slowed down in recent years.
Loss expense in the first quarter of 2023 was $9 million in economic development was $11 million.
Primary driver of both measures was the change in risk free rates used to discount losses.
With respect to operating expenses first quarter of 2023 ran higher than our normal run rate due in part to severance and legal expenses related to the sound point transaction.
And then additional UK value added tax.
Which together totaled approximately $15 million.
These unusual items affected each of the segments and the corporate division from a prime over the primary driver of the increase in corporate Division adjusted operating loss of 33 million to $44 million.
Turning to the asset management segment, we are committed to the standpoint, transact transaction, which we expect to close in the third quarter of this year.
As a result, we have designated the transferring assured I am business as well as the remaining healthcare business as held for sale on our balance sheet.
We've stopped amortizing the related intangibles.
From a reporting perspective, the transformation of our asset management business from our wholly owned business to a minority stake in our largest sound point combine entity continues to give assured guaranty ongoing earnings based on asset management fees and increases our ability to expand into alternative investments.
While simplifying our reporting structure and financial statements.
In closing, we expect that we will deconsolidation, most not all of the CLO and assured I am funds.
<unk> will be more straightforward one line investment in standpoint, and in each of the funds using the equity method of accounting.
As Dominic mentioned, we've agreed after closing to invest $1 billion at some point managed alternative investments subject to regulatory approval.
This commitment includes almost $400 million of existing investments and commitments and assure short I am CLO and asset based funds that will transfer to standpoint.
Adding the inception to date distributed gains our current authorization for alternative investments.
Through our investment subsidiary a gas.
Is $853 million and is available for investment in both sound point investment vehicles, and the assured health care partner strategy.
As we continue to shift more of the investment portfolio to alternative investments net investment income from fixed maturity Securities May decline. However over the long term, we expect returns on the alternative investment portfolio.
Of over 10%, which exceeds the projected returns on our fixed maturity portfolio.
In addition to meeting two of our key objectives in asset management and alternative investments.
With the seven point transaction, we continue to focus on our other long term strategic initiatives to grow the company and enhance shareholder value.
In the insurance segment strong production in the international public finance and structured finance markets provide diversified sources of new business and are accretive to key book value metrics.
On the loss mitigation front, we continued to strategically divest the remaining recovery bonds.
And contingent value instruments that we received last year as part of the resolution of the majority of our Puerto Rico insured exposures.
To maximize our economic benefit.
We also continue to work towards resolution of our preference short exposure.
As of May five we have sold approximately 91% of the recovery bonds in the investment portfolio, 35% of the contingent value instruments.
Based on fair value, we have we have approximately $81 million in recovery bonds and $324 million in contingent value instruments remaining in our investment portfolio.
In terms of holding company liquidity, we currently have cash and investments of approximately $165 million of.
Of which $48 million resides in AGL.
These funds are available for debt service and corporate operating expenses or for use in pursuit of our strategic initiatives, including potentially refinancing are redeeming debt and repurchasing shares to manage our capital.
As we said in our last call our last call last quarter.
We currently have $201 million of remaining authorization and expect to resume share repurchases in the second half of the year.
However, even without share repurchases in the first quarter of 2023 operating shareholders equity and adjusted book value per share reached new records of over $94 million and $143 million respectively.
Positive adjusted operating income and strong new business production results for the quarter demonstrating the value of all our initiatives.
I'll now turn the call over to the operator to give you the instructions for the Q&A period. Thank you.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two and 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.
Okay.
Our first question comes from Thomas Mclain from <unk>. Thomas Your line is now open. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
You did call out a number.
Thanks, Yes, you did call out the kind of a number of seemingly kind of one off pieces like the litigation accrual relief.
K tax assessment and some of the sound point transaction costs. So.
A lot of moving pieces, there, but some of them more quantified. So could you put any numbers around those just as we try to think of kind of the magnitude of the impact on the quarter.
I would just say Tommy looking at expenses, the onetime items of approximately $15 million.
And the release of a litigation accrual was about $20 million.
Got it thanks, and then just as a reminder, in the asset management segment can you remind us or most of the performance fees that you guys recognized loaded into the first quarter. So just like a higher seasonally that's normally what has been the case.
Anything kind of unique there.
No not at all.
Andre whenever they realize and when we recognize them unless there's a tax distribution and you have to recognize or something for the tax distributions, but typically they don't recognize to realize and thats anytime with Dolby assets.
Okay.
Okay, you also called out.
In excess of loss guarantee on minimum that to build rent on a diversified portfolio of real estate properties.
And of course that a lot of different mechanisms through which you guys lend your year guarantee as long as it's the right price is.
Is this type of transaction, new I'm not sure I've heard of it before and basically do you plan to branch off into doing these types of transactions as we look for new growth sectors.
And our structured finance economy is becoming more bespoke than it used to be standardized remember in the old days was basically mortgage business.
Clouds auto loans. So those businesses now go out without insurance, but you're going to be a little bit more creative.
This is a an internally rated double a transaction highly subordinated protection and the deal. It's a mixture of all sorts of properties, including residential multifamily residential office space retail space and industrial space.
And it's a really great portfolio, we see other opportunities like this we'd be more than happy to take them.
A lot of these transactions Tommy's benefit the <unk>.
For a capital relief.
Capital REIT transactions, there are significant and restructure financial this is done for a financial institution.
Okay got it makes sense and then just as a last one if I if I could sneak it in here.
Does your.
Thinking still believe that in the second half of the year you should have that five year audit completed when you think the opportunity to.
Pursuant special dividend becomes more likely is that still the right time, when we should be thinking about.
Yes, yes separate two issues <unk> special dividend and share repurchases, we anticipate starting new share repurchasing now after the call you have to be clear blackout.
Because we now got uncertainty here with certainly the obligations that we were preparing for relative with Sailpoint transaction unless some other things that we were holding money for so that'll start.
And then a special dividend will be requested in sometime this year. So the amount of capital that we could retire this year will be predicated based on availability and special dividend.
And we do expect the audit to be done.
Again in July .
Great. Thank you Beth.
Thank you.
Yeah.
Our next question comes from <unk> from Compass point Tucano. Your line is now open. Please go ahead.
Good morning Carlos.
Another great quarter lumpy I'd be curious about related to the asset management transaction.
You have some.
Goodwill and intangibles related to the.
Deal and it sounds like the <unk>.
Jerry and progress.
Okay.
Slots are positive from a portfolio impact perspective is it fair to assume.
The fair value of the equity stakes should exceed at least meet or exceed.
The goodwill and intangibles.
We're not in jail.
Yes, that's a good assumption.
Thank you and then and then thinking about the earnings obviously, if you recognize it as an equity method investment.
It just went through is kind of a.
Below the line item or just in the other income line.
On a net basis, Andrew related to that or would you get distributions from the partnership quarterly or annually with any therapy at the time.
Anything there.
It will be an equity income and our investment in standpoint on one item.
And there'll be an equity income as I said for our.
Investment in the funds and we will get distributions from some point up in development capital.
That's great.
Helpful I'll jump back in the queue.
Thanks Julia.
Our next question comes from Jordan from Philadelphia Financial.
Your line is now open. Please go ahead.
Thanks, guys for taking my question and go 70 sectors.
You'd said Dominic a minute ago.
That you expect to stock buybacks as soon as the quiet period ends can I push that a little more on the last call. You said you would be able to do without a special dividend you may not be able to acquire 300 by near 300 and specials evidenced without us special buyback is that still the plan for this year.
I don't think we've ever given a number to be honest with the jewelry and obviously, we will do as much as we can based on availability and based on others, where you had $300 million in dividend paying capability or near that in the past things that we should have close to that this year, we're about to do with the money Jordan that we've got the debt refinancing we got to figure out what are you going to pay the debt off of refi.
The answer we've got some other things we are going to do in terms of turning up the balance sheet with the ultimate merger with California's. So there are some other calls on cash that we've got to look at as well so as we figure out the availability.
Now exiting with the special dividend, we will then start and continue the.
The execution of our strategy of retiring capital as we've always said, it's still a very high priority in the company and as we know <unk> got some clarity where we're at today, we can start the buyback some shares and like I said the amount that we'll buyback this year will be predicated on the special dividend and these other factors that we're considering.
We deal with as I said, Mike.
We do expect to buy back shares as part of our capital management strategy.
Okay and any further.
Yeah.
Patients with serious eye to eye with shock last night and we are in Bermuda. So we're now we're ahead. So we'll leave that for the game, but I was shocked that they won last night that's for sure.
But as a continuation of a great Philadelphia Sports story Eagles, Billy's mouth, Sixers can't get any better than that.
Our next question comes from Brian Meredith from PBS.
Brian Your line is now open. Please go ahead.
Thanks.
So a couple of them here for you first one I'm just curious kind.
Kind of one timers, we had in the quarter did any of those affect the insurance operations I'm just looking at the $67 million of insurance operating expenses trying to figure that as a run rate or was there anything onetime in that number.
Let me review there is the acceleration based on shares that were given to them.
Retiree eligible employees would be the acceleration in the expense line.
And also the onetime items also included the VAT.
<unk>.
Value added tax.
Expense that I talked about.
But in total the charge offs, okay, yes.
But like I said in total for the entire company was $15 million of.
Of one time items.
Got you got you. It makes sense I was just trying to figure out kind of a run rate underwriting profitability kind of thinking about the insurance operations.
Second question I'm just curious.
I guess, a regulatory accounting perspective.
This alternative investment income count with respect to the <unk>.
First on dividends out of the insurance operations with respect to investment income.
So think of it this way the assets that are on the insurance companies books for balance sheet and an investment alternative investments for higher returns to increase investment income in those companies and therefore increased our dividend capacity, that's a limiting factor to GP mandate or outside insurance governance structures that free cash flow.
Created for the company.
As distributions as we did distribute.
The investment the returns from the alternative investments from a gas as insurance companies as Dominic said that will increase the dividend capacity of the insurance companies.
Great.
That's helpful. And then Dominic last question just quickly here on PREPA I mean, you did talk about it the court decision with respect to.
I guess revenues versus net revenues, maybe you could just.
Try to put that in plain English for some of US what does it mean.
As far as potentially getting a settlement here and Reits and stuff.
But remember any utility has to pay their expenses right. So you're basically led to the net revenue opportunity to pay but if you remember in the Jefferson County, They tried to stop the kitchen sink into the expenses of the water authority and we were able to get that resolved without any impairment.
Obviously, the judge seems to be taking social decisions about legal decision. That's fine. That's why this quarter Appeals there is other avenues for us to pursue they seem to want to press release mediation, which obviously makes some sense that we don't know, but when it comes to the confirmation time, but at the end of the day.
<unk> seen a whole lot of due diligence. So I think litigation as a course of action that we are going to take and we're more than happy to basically protect our legal rights in this matter as a revenue bonds for special legal entity outside the Commonwealth.
Sure.
Balances.
Do you think.
And so I guess I guess the other thing just on PREPA I guess I think you've talked about this before it doesn't you don't have to sell a proper in order for you to get more comfortable with taking special dividend just simply just getting this audit done correct. Doug If you remember Brian as we talked about when we were first getting special dividend.
That was just when Puerto Rico filed for bankruptcy. So we were able to get price with dividends.
And that was up for grabs just down to one.
This exposure, which we believe economically degrees to our reserving process on the books really makes it a no brainer relative to the state I believe.
Great makes sense. Thank you.
Thanks, Brian Thanks, Brian .
We currently have no further questions. So I would like to hand, the call over back to Robert Tucker. Please go ahead.
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.
Yeah.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
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Yes.
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