Assured Guaranty Ltd. Reports Results for Fourth Quarter 2018 and Full Year 2018

  • Gross written premiums were $96 million in fourth quarter 2018,
    bringing FY 2018 gross written premiums to $612 million. PVP
    1
    was $96 million in fourth quarter 2018, bringing FY 2018 PVP to $663
    million. For FY 2018, gross written premiums and PVP were the highest
    reported in the last 10 years.
  • Shareholders’ equity per share, non-GAAP operating shareholders’
    equity
    1 per share and non-GAAP adjusted book
    value
    1 per share reached new records at
    $63.23, $61.17 and $86.06, respectively.
  • Net income was $88 million, or $0.83 per share, for fourth quarter
    2018 and $521 million, or $4.68 per share, for FY 2018.
  • Non-GAAP operating income1 was $92
    million, or $0.87 per share, for fourth quarter 2018, and $482
    million, or $4.34 per share, for FY 2018.
  • Share repurchases totaled $120 million, or 3.0 million shares, in
    fourth quarter 2018, for a total of $500 million, or 13.2 million
    shares, in FY 2018. On February 27, 2019, the Board of Directors
    authorized an additional $300 million in share repurchases.

HAMILTON, Bermuda–(BUSINESS WIRE)–Assured Guaranty Ltd. (NYSE:AGO) (AGL and, together with its
consolidated entities, Assured Guaranty or the Company) announced today
its financial results for the three-month period ended December 31, 2018
(fourth quarter 2018) and the year ended December 31, 2018 (FY 2018).

“Assured Guaranty continued to be the leading financial guarantor in
2018, successfully executing on its strategic priorities while
maintaining its strong financial position and creating more shareholder
value,” said Dominic Frederico, President and CEO. “By writing new
business in all of our financial guaranty markets – U.S. public finance,
international infrastructure finance and structured finance – and
additionally reinsuring the preponderance of a legacy guarantor’s
insured portfolio, we drove a 129% year-over-year increase in PVP to
bring our new business production to a level not seen since 2008.”

1 Please see “Explanation of Non-GAAP Financial Measures.”
When a financial measure is described as “operating,” it is a non-GAAP
financial measure.

Summary Financial Results

(in millions, except per share amounts)

 
  Quarter Ended   Year Ended
December 31, December 31,
2018   2017 2018   2017
Net income $ 88 $ 52 $ 521 $ 730
Non-GAAP operating income (1) 92 91 482 661

Gain (loss) related to the effect of consolidating

financial guaranty variable interest entities (FG

VIE consolidation) included in non-GAAP

operating income

(3 ) 2 (4 ) 11
 
Net income per diluted share $ 0.83 $ 0.44 $ 4.68 $ 5.96
Non-GAAP operating income (1) per diluted share 0.87 0.77 4.34 5.41

Gain (loss) related to FG VIE consolidation

included in non-GAAP operating income per

diluted share

(0.02 ) 0.02 (0.03 ) 0.10
 

Weighted average diluted shares

106.4 118.9 111.3 122.3
 
Gross written premiums (GWP) $ 96 $ 72 $ 612 $ 307

Present value of new business production

(PVP) (1)

96 77 663 289
Gross par written 4,850 4,776 24,624 18,024
 
  As of
December 31, 2018   December 31, 2017
Amount   Per Share Amount   Per Share
Shareholders’ equity $ 6,555 $ 63.23 $ 6,839 $ 58.95
Non-GAAP operating shareholders’ equity (1) 6,342 61.17 6,521 56.20
Non-GAAP adjusted book value (1) 8,922 86.06 9,020 77.74

Gain (loss) related to FG VIE consolidation

included in non-GAAP operating shareholders’

equity

3 0.03 5 0.03

Gain (loss) related to FG VIE consolidation

included in non-GAAP adjusted book value

(15 ) (0.15 ) (14 ) (0.12 )
 
Common shares outstanding 103.7 116.0
 

________________________________________________

(1) Please see “Explanation of Non-GAAP Financial Measures” at the end
of this press release.

Fourth Quarter Results

GAAP Financial Information

Net income for fourth quarter 2018 was $88 million, compared with net
income of $52 million for the three-month period ended December 31, 2017
(fourth quarter 2017). Net income increased, mainly due to a lower
effective tax rate, lower loss and loss adjustment expenses (LAE) and
higher fair value gains on committed capital securities (CCS), offset in
part by lower premium accelerations and foreign exchange losses in
fourth quarter 2018.

The effective tax rate was 12.8% for fourth quarter 2018, compared with
66.6% for fourth quarter 2017. The lower effective tax rate in fourth
quarter 2018 was primarily due to a lower statutory corporate tax rate
in United States (U.S.) jurisdictions compared with fourth quarter 2017,
and a provisional expense of $61 million attributable to the estimated
effect of tax reform under the 2017 Tax Cuts and Jobs Act (the Tax Act)
recorded in fourth quarter 2017. The effective tax rate fluctuates from
period to period based on the proportion of income in different tax
jurisdictions.

Loss and LAE was $21 million in fourth quarter 2018, compared with $34
million in fourth quarter 2017. The loss and LAE in both periods was
primarily related to Puerto Rico exposures. The loss and LAE in fourth
quarter 2017 was partially offset by a gain on the settlement of a
breach of representations and warranties (R&W) claim.

Fair value gains on CCS were $17 million in fourth quarter 2018,
compared with $2 million in fourth quarter 2017. Fair value of CCS is
heavily affected by, and in part fluctuates with, changes in market
interest rates, credit spreads and other market factors and are not
expected to result in an economic gain or loss.

Net earned premiums in fourth quarter 2018 were $125 million, compared
with $178 million in fourth quarter 2017. The decline was due to reduced
refunding activity.

Foreign exchange gains and losses primarily relate to premiums
receivable, driven by changes in the exchange rate of the British pound
sterling relative to the U.S. dollar. Fourth quarter 2018 foreign
exchange losses were $15 million, compared with gains of $8 million in
fourth quarter 2017.

Consolidated Statements of Operations (unaudited)

(in millions)

 
Quarter Ended
December 31,
2018   2017
Revenues:
Net earned premiums $ 125 $ 178
Net investment income 100 96
Net realized investment gains (losses) (18 ) (14 )
Net change in fair value of credit derivatives 9 5
Fair value gains (losses) on FG VIEs 3 5
Other income (loss) (5 ) 11  
Total revenues 214 281
 
Expenses:
Loss and LAE 21 34
Amortization of deferred acquisition costs 4 6
Interest expense 23 24
Other operating expenses 65   61  
Total expenses 113 125
   
Income (loss) before income taxes 101 156
Provision (benefit) for income taxes 13   104  
Net income (loss) $ 88   $ 52  
 

Economic Loss Development

Net economic loss development in fourth quarter 2018 included a benefit
of $17 million related to U.S. residential mortgage-backed securities
(RMBS) as a result of improved performance of the underlying collateral.
This was offset by increased loss and LAE for certain Puerto Rico and
other structured finance exposures. The economic development
attributable to changes in discount rates was a benefit of $2 million
for fourth quarter 2018.

Roll Forward of Net Expected Loss to be Paid (1)

(in millions)

         

Net Expected

Loss to be Paid

(Recovered) as

of September 30,

2018

Economic Loss

Development/

(Benefit)

Losses

(Paid)/

Recovered

Net Expected

Loss to be Paid

(Recovered) as

of December 31,

2018

 
Public finance $ 870 $ 6 $ (12 ) $ 864
U.S. RMBS 303 (17 ) 7 293
Other structured finance 18   11   (3 ) 26
Total $ 1,191   $   $ (8 ) $ 1,183

________________________________________________

(1) Economic loss development represents the change in net expected loss
to be paid attributable to the effects of changes in assumptions based
on observed market trends, changes in discount rates, accretion of
discount and the economic effects of loss mitigation efforts. Economic
loss development is the principal measure that the Company uses to
evaluate the loss experience in its insured portfolio. Expected loss to
be paid includes all transactions insured by the Company, whether
written in insurance or credit derivative form, regardless of the
accounting model prescribed under accounting principles generally
accepted in the United States of America (GAAP).

New Business Production

GWP relates to both financial guaranty insurance and non-financial
guaranty insurance contracts. Credit derivatives are accounted for at
fair value and therefore not included in GWP. Financial guaranty GWP
includes amounts collected upfront on new business written, the present
value of future premiums on new business written (discounted at risk
free rates), as well as the effects of changes in the estimated lives of
transactions in the inforce book of business. Non-financial guaranty GWP
is recorded as premiums are received. Non-GAAP PVP includes upfront
premiums and future installments on new business that are estimated at
the time of issuance, discounted at 6% for all contracts, whether in
insurance or credit derivative form.

New Business Production

(in millions)

 
Quarter Ended December 31,
2018   2017
GWP   PVP (1)  

Gross Par

Written

GWP   PVP (1)  

Gross Par

Written

 
Public finance – U.S. $ 93 $ 89 $ 4,555 $ 58 $ 59 $ 4,367
Public finance – non-U.S. 4 3 96 13 8 116
Structured finance – U.S. (1 ) 1 25 (4 ) 7 246
Structured finance – non-U.S.   3   174   5   3   47

Total

$ 96   $ 96   $ 4,850   $ 72   $ 77   $ 4,776
 

________________________________________________

(1) PVP and Gross Par Written in the table above are based on “close
date,” when the transaction settles. Please see “Explanation of Non-GAAP
Financial Measures” at the end of this press release.

The increase in GWP was attributable to U.S. public finance new business
production in fourth quarter 2018, which included two large transactions
and higher levels of secondary market guarantees. Assured Guaranty once
again guaranteed the majority of insured par issued.

Outside the U.S., the Company generated $6 million in public finance and
structured finance PVP in fourth quarter 2018, including a United
Kingdom social housing financing. This is the thirteenth consecutive
quarter that the Company generated non-U.S. PVP.

Quarterly business activity in the international infrastructure and
structured finance sectors is influenced by typically long lead times
and therefore may vary from quarter to quarter.

Other Non-GAAP Financial Measures

Non-GAAP operating income was $92 million in fourth quarter 2018,
compared with $91 million in fourth quarter 2017. Non-GAAP operating
income increased mainly due to the effects of the Tax Act, offset in
part by lower net earned premiums and higher loss expense.

Year-to-Date Results

GAAP Financial Information

Net income was $521 million for FY 2018, compared with $730 million for
the year ended December 31, 2017 (FY 2017). Net income for 2017 was
higher, primarily due to $402 million in after-tax gains attributable to
commutations, the acquisition of MBIA UK Insurance Limited (MBIA UK)
(MBIA UK Acquisition), and R&W settlements. Excluding these items, net
income increased in FY 2018 compared with FY 2017 mainly due to a lower
effective tax rate and lower loss and LAE, offset in part by lower net
earned premiums, foreign exchange remeasurement losses, net
realized investment losses and losses on the repurchase of debt.

The lower effective tax rate in FY 2018 was primarily due to a lower
statutory corporate tax rate in U.S. jurisdictions compared with FY
2017, and a provisional expense of $61 million attributable to the
estimated effect of tax reform under the Tax Act recorded in fourth
quarter 2017.

Loss and LAE expense was $64 million in FY 2018, compared with $388
million in FY 2017. The expense in FY 2018 mainly related to an increase
in loss and LAE on Puerto Rico exposures, offset in part by the
reduction of loss reserves on exposure to the City of Hartford,
Connecticut, and a benefit on U.S. RMBS exposures. FY 2017 loss and LAE
mainly related to an increase in loss reserves on Puerto Rico exposures,
offset in part by benefits attributable to litigation and R&W
settlements.

Net earned premiums in FY 2018 were $548 million, compared with $690
million in FY 2017. The decline in net earned premiums was primarily due
to reduced refunding activity.

Foreign exchange gains and losses primarily relate to premiums
receivable, driven by changes in the exchange rate of the British pound
sterling relative to the U.S. dollar. FY 2018 foreign exchange losses
were $37 million, compared with gains of $60 million in FY 2017.

Net realized investment losses were $32 million in FY 2018 compared with
gains of $40 million in FY 2017. Realized investments gains in FY 2017
included the gain on sale of the Zohar II 2005-1 notes exchanged in the
MBIA UK Acquisition in January 2017 and other loss mitigation securities.

The loss on the repurchase of debt is related to the purchase by Assured
Guaranty US Holdings Inc. of a portion of the principal amount of
Assured Guaranty Municipal Holdings Inc.’s (AGMH) outstanding Junior
Subordinated Debentures, and represents the difference between the
amount paid to purchase AGMH’s debt and the carrying value of the debt,
which includes the unamortized fair value adjustments recorded upon the
acquisition of AGMH in 2009. The loss was $34 million on the repurchase
of $100 million of principal in FY 2018, compared with $9 million loss
on the repurchase of $28 million of principal in FY 2017.

Consolidated Statements of Operations (unaudited)

(in millions)

 
Year Ended
December 31,
2018   2017
Revenues:
Net earned premiums $ 548 $ 690
Net investment income 398 418
Net realized investment gains (losses) (32 ) 40
Net change in fair value of credit derivatives 112 111
Fair value gains (losses) on FG VIEs 14 30
Bargain purchase gain and settlement of pre-existing relationships,
net
58
Commutation gains (losses) (16 ) 328
Other income (loss) (22 ) 64
Total revenues 1,002 1,739
 
Expenses:
Loss and LAE 64 388
Amortization of deferred acquisition costs 16 19
Interest expense 94 97
Other operating expenses 248   244
Total expenses 422 748
   
Income (loss) before income taxes 580 991
Provision (benefit) for income taxes 59   261
Net income (loss) $ 521   $ 730
 

Economic Loss Development

The economic benefit for FY 2018 was $5 million. The economic benefit in
U.S. RMBS of $69 million was due to improved performance of the
underlying collateral and was partially offset by economic loss
development in the U.S. public finance sector. Economic loss development
in U.S. public finance was primarily attributable to Puerto Rico
exposures, partially offset by a benefit recorded following the State of
Connecticut’s agreement to pay the debt service costs of certain bonds
of the City of Hartford, including the bonds insured by the Company. The
economic development attributable to changes in discount rates was a
benefit of $17 million in FY 2018.

Roll Forward of Net Expected Loss to be Paid

(in millions)

         

Net Expected

Loss to be Paid

(Recovered) as

of December 31,

2017

Net Expected

Loss to be Paid

on SGI

Transaction

as of June 1,

2018

Economic Loss

Development/

(Benefit)

Losses

(Paid)/

Recovered

Net Expected

Loss to be Paid

(Recovered) as

of December 31,

2018

 
Public finance $ 1,203 $ 1 $ 56 $ (396 ) $ 864
U.S. RMBS 73 130 (69 ) 159 293
Other structured finance 27     8   (9 ) 26
Total $ 1,303   $ 131   $ (5 ) $ (246 ) $ 1,183
 

New Business Production

New Business Production

(in millions)

 
Year Ended December 31,
2018   2017
GWP   PVP (1)  

Gross Par

Written

GWP   PVP (1)  

Gross Par

Written

 
Public finance – U.S. $ 320 $ 391 $ 19,572 $ 190 $ 196 $ 15,957
Public finance – non – U.S. 115 94 3,817 105 66 1,376
Structured finance – U.S. 167 166 902 (1 ) 12 489
Structured finance – non-U.S. 10   12   333   13   15   202
Total $ 612   $ 663   $ 24,624   $ 307   $ 289   $ 18,024

________________________________________________

(1) Please see “Explanation of Non-GAAP Financial Measures” at the end
of this press release.

GWP and PVP for FY 2018 reached 10-year records due to the assumption of
substantially all of the insured portfolio of Syncora Guarantee Inc.
(SGI) (SGI Transaction). The average rating on all new business
production was A- in both FY 2018 and FY 2017.

On a GAAP basis, the SGI Transaction generated GWP of $330 million, plus
$86 million in undiscounted expected future credit derivative revenue,
including transactions with $131 million in expected losses (discounted
at a risk-free rate on a GAAP basis). On a non-GAAP basis, PVP was $391
million, including transactions with expected losses of $83 million
(discounted at 6% consistent with the PVP discount rate). The components
of GWP, PVP and gross par written generated by the SGI Transaction are
presented below.

Assumed SGI Insured Portfolio

(in millions)

     
GWP PVP (1)

Financial

Guaranty

Financial

Guaranty

  Credit

Derivatives

  Total Gross Par

Written (1)

Public Finance—U.S. $ 123 $ 118 $ 67 $ 185 $ 7,559
Public Finance—non-U.S. 50 38 12 50 3,345
Structured Finance—U.S. 157 156 156 349
Structured Finance—non-U.S.         19
Total $ 330   $ 312   $ 79   $ 391   $ 11,272
 

________________________________________________

(1) Please see “Explanation of Non-GAAP Financial Measures” at the end
of this press release.

Excluding the assumed business from SGI, U.S. public finance PVP was 5%
higher compared with that of FY 2017, despite a 22% decline in new U.S.
municipal bonds issued. In FY 2018, Assured Guaranty once again
guaranteed the majority of U.S. public finance insured par issued.
Outside the U.S., the Company generated $44 million of public finance
PVP in FY 2018, compared with $66 million in FY 2017. In 2018 this
included several infrastructure finance and regulated utilities
transactions, including the Company’s first post-financial crisis
transaction in Australia.

In addition, the Company closed insurance and reinsurance aircraft
residual value insurance policies in non-U.S. structured finance new
business in FY 2018 and FY 2017, which represented all of the new
business in FY 2017 and the majority of new business in FY 2018. In
2018, the Company also closed transactions in the commercial real estate
markets, and guaranteed a collateralized loan obligation for the first
time since 2008. Structured finance transactions tend to have long lead
times, causing production levels to vary significantly from period to
period.

Other Non-GAAP Financial Measures

Non-GAAP operating income for FY 2018 was $482 million, compared with
non-GAAP operating income for FY 2017 of $661 million. Similar to net
income results, non-GAAP operating income in FY 2017 included gains
related to commutation, the MBIA UK Acquisition and litigation and R&W
settlements totaling $402 million, after-tax. Excluding these gains,
non-GAAP operating income increased in FY 2018 compared with FY 2017,
mainly due to the effects of the Tax Act and lower loss expense, offset
in part by lower net earned premiums.

On a per-share basis, shareholders’ equity increased due to positive
income, as well as the accretive effect of the share repurchase program
that has been in effect since January 2013. Non-GAAP operating
shareholders’ equity per share and non-GAAP adjusted book value per
share also benefited from new business production and the SGI
Transaction.

Common Share Repurchases

Summary of Share Repurchases

(in millions, except per share amounts)

     
Amount

Number of

Shares

Average Price

Per Share

 
2018 (January 1 – March 31) $ 98 2.79 $ 35.20
2018 (April 1 – June 30) 152 4.16 36.48
2018 (July 1 – September 30) 130 3.30 39.41
2018 (October 1 – December 31) 120   2.99   40.09
Total 2018 500 13.24 37.76
 
2019 (January 1 – February 28) $

48

1.20

$

40.03

 

From January 2013 through February 28, 2019, the Company repurchased a
total of 95.7 million common shares at an average price of $28.87,
representing approximately 49% of the total shares outstanding at the
beginning of the repurchase program in 2013. On February 27, 2019, the
Board of Directors authorized the repurchase of another $300 million of
common shares. As of February 28, 2019, the Company was authorized to
purchase $350 million of its common shares. These repurchases can be
made from time to time in the open market or in privately negotiated
transactions.

As in the past, the Company’s execution of its capital management
strategy is contingent upon its available free cash and the capital
position of the parent company, market conditions, the maintenance of
its strong financial strength ratings and other factors. The repurchase
program may be modified, extended or terminated by the Board of
Directors at any time. It does not have an expiration date.

Consolidated Balance Sheets (unaudited)

(in millions)

 
As of
December 31, 2018   December 31, 2017
Assets
Investment portfolio:
Fixed maturity securities, available-for-sale, at fair value $ 10,089 $ 10,674
Short-term investments, at fair value 729 627
Other invested assets 55   94
Total investment portfolio 10,873 11,395
 
Cash 104 144
Premiums receivable, net of commissions payable 904 915
Ceded unearned premium reserve 59 119
Deferred acquisition costs 105 101
Salvage and subrogation recoverable 490 572
FG VIEs’ assets, at fair value 569 700
Other assets 499   487
Total assets $ 13,603   $ 14,433
 
Liabilities and shareholders’ equity
Liabilities
Unearned premium reserve $ 3,512 $ 3,475
Loss and LAE reserve 1,177 1,444
Long-term debt 1,233 1,292
Credit derivative liabilities 209 271
FG VIEs’ liabilities with recourse, at fair value 517 627
FG VIEs’ liabilities without recourse, at fair value 102 130
Other liabilities 298   355
Total liabilities 7,048 7,594
 
Shareholders’ equity
Common stock 1 1
Additional paid-in capital 86 573
Retained earnings 6,374 5,892
Accumulated other comprehensive income 93 372
Deferred equity compensation 1   1
Total shareholders’ equity 6,555   6,839
Total liabilities and shareholders’ equity $ 13,603   $ 14,433
 

Explanation of Non-GAAP Financial Measures

To reflect the key financial measures that management analyzes in
evaluating the Company’s operations and progress towards long-term
goals, the Company discloses both financial measures determined in
accordance with GAAP and financial measures not determined in accordance
with GAAP (non-GAAP financial measures).

Financial measures identified as non-GAAP should not be considered
substitutes for GAAP financial measures. The primary limitation of
non-GAAP financial measures is the potential lack of comparability to
financial measures of other companies, whose definitions of non-GAAP
financial measures may differ from those of the Company.

By disclosing non-GAAP financial measures, the Company gives investors,
analysts and financial news reporters access to information that
management and the Board of Directors review internally. The Company
believes its presentation of non-GAAP financial measures, along with the
effect of FG VIE consolidation, provides information that is necessary
for analysts to calculate their estimates of Assured Guaranty’s
financial results in their research reports on Assured Guaranty and for
investors, analysts and the financial news media to evaluate Assured
Guaranty’s financial results.

GAAP requires the Company to consolidate certain VIEs that have issued
debt obligations insured by the Company. However, the Company does not
own such VIEs and its exposure is limited to its obligation under its
financial guaranty insurance contract. Management and the Board of
Directors use non-GAAP financial measures adjusted to remove FG VIE
consolidation (which the Company refers to as its core financial
measures), as well as GAAP financial measures and other factors, to
evaluate the Company’s results of operations, financial condition and
progress towards long-term goals. The Company uses these core financial
measures in its decision making process and in its calculation of
certain components of management compensation. Wherever possible, the
Company has separately disclosed the effect of FG VIE consolidation.

Many investors, analysts and financial news reporters use non-GAAP
operating shareholders’ equity, adjusted to remove the effect of FG VIE
consolidation, as the principal financial measure for valuing AGL’s
current share price or projected share price and also as the basis of
their decision to recommend, buy or sell AGL’s common shares.

Contacts

Assured Guaranty Ltd.
Robert Tucker
Senior Managing Director,
Investor Relations and Corporate Communications
212-339-0861
[email protected]
or
Ashweeta
Durani
Vice President, Corporate Communications
212-408-6042
[email protected]

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