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ASSURED GUARANTY LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Form 10-Q contains information that includes or is based upon forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future events ofAssured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL,Assured Guaranty or the Company). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all ofAssured Guaranty's forward looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect.Assured Guaranty's actual results may vary materially. Among factors that could cause actual results to differ adversely are: •the development, course and duration of the COVID-19 pandemic and the governmental and private actions taken in response, the effectiveness, acceptance and distribution of COVID-19 vaccines, and the global consequences of the pandemic and such actions, including their impact on the factors listed below; •changes in the world's credit markets, segments thereof, interest rates, credit spreads or general economic conditions; •developments in the world's financial and capital markets that adversely affect insured obligors' repayment rates,Assured Guaranty's insurance loss or recovery experience, investments ofAssured Guaranty or assets it manages; •reduction in the amount of available insurance opportunities and/or in the demand forAssured Guaranty's insurance; •the loss of investors inAssured Guaranty's asset management strategies or the failure to attract new investors toAssured Guaranty's asset management business; •the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on obligations of state, territorial and local governments and their related authorities and public corporations thatAssured Guaranty insures or reinsures; •insured losses in excess of those expected byAssured Guaranty or the failure ofAssured Guaranty to realize loss recoveries that are assumed in its expected loss estimates for insurance exposures, including as a result of the failure to resolveAssured Guaranty's Puerto Rico exposure in a manner substantially consistent with the support agreements signed to date; •increased competition, including from new entrants into the financial guaranty industry; •poor performance ofAssured Guaranty's asset management strategies compared to the performance of the asset management strategies ofAssured Guaranty's competitors; •the possibility that investments made byAssured Guaranty for its investment portfolio, including alternative investments and investments it manages, do not result in the benefits anticipated or subjectAssured Guaranty to reduced liquidity at a time it requires liquidity or to unanticipated consequences; •the impact of market volatility on the mark-to-market ofAssured Guaranty's assets and liabilities subject to mark-to-market, including certain of its investments, most of its contracts written in credit default swap (CDS) form, and variable interest entities (VIEs) as well as on the mark-to-market of assetsAssured Guaranty manages; •rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of AGL or any of its insurance subsidiaries, and/or of any securities AGL or any of its subsidiaries have issued, and/or of transactions that AGL's insurance subsidiaries have insured; •the inability ofAssured Guaranty to access external sources of capital on acceptable terms; •changes in applicable accounting policies or practices; •changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental actions; •the failure ofAssured Guaranty to successfully integrate the business ofBlueMountain Capital Management, LLC (BlueMountain, now known asAssured Investment Management LLC ) and its associated entities; •the possibility that acquisitions made byAssured Guaranty , including its acquisition of BlueMountain (BlueMountain Acquisition), do not result in the benefits anticipated or subjectAssured Guaranty to unanticipated consequences; •difficulties with the execution ofAssured Guaranty's business strategy; •loss of key personnel; •the effects of mergers, acquisitions and divestitures; •natural or man-made catastrophes or pandemics; 87
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•other risk factors identified in AGL's filings with theUnited States (U.S.) Securities and Exchange Commission (theSEC ); •other risks and uncertainties that have not been identified at this time; and •management's response to these factors. The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, as well as the risk factors included in the Company's 2020 Annual Report on Form 10-K. The Company undertakes no obligation to update publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company's reports filed with theSEC . If one or more of these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this Form 10-Q reflect the Company's current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity. For these statements, the Company claims the protection of the safe harbor for forward looking statements contained in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Available Information
The Company maintains an Internet web site at www.assuredguaranty.com. The Company makes available, free of charge, on its web site (under www.assuredguaranty.com/sec-filings) the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, theSEC . The Company also makes available, free of charge, through its web site (under www.assuredguaranty.com/governance) links to the Company's Corporate Governance Guidelines, the Company's Global Code of Ethics, AGL's Bye-Laws and the charters for the committees of its Board of Directors. In addition, theSEC maintains an Internet site (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC . The Company routinely posts important information for investors on its web site (under www.assuredguaranty.com/company-statements and, more generally, under the Investor Information tab at www.assuredguaranty.com/investor-information and Businesses tab at www.assuredguaranty.com/businesses). The Company also maintains a social media account on LinkedIn (www.linkedin.com/company/assured-guaranty/). The Company uses its web site and may use its social media account as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses portions of the Company's web site as well as the Company's social media account on LinkedIn, in addition to following the Company's press releases,SEC filings, public conference calls, presentations and webcasts. The information contained on, or that may be accessed through, the Company's web site or social media account is not incorporated by reference into, and is not a part of, this report. Overview Business The Company reports its results of operations in two distinct segments, Insurance and Asset Management, consistent with the manner in which the Company's chief operating decision maker (CODM) reviews the business to assess performance and allocate resources. The Company's Corporate division activities are presented separately. In the Insurance segment, the Company provides credit protection products to theU.S. and international public finance (including infrastructure) and structured finance markets. The Company applies its credit underwriting judgment, risk management skills and capital markets experience primarily to offer credit protection products to holders of debt instruments and other monetary obligations that protect them from defaults in scheduled payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal and interest (debt service) payment, the Company is required under its unconditional and irrevocable financial guaranty to pay the amount of the shortfall to the holder of the obligation. The 88
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Company markets its credit protection products directly to issuers and underwriters of public finance and structured finance securities as well as to investors in such obligations. The Company guarantees obligations issued principally in theU.S. and theUnited Kingdom (U.K. ), and also guarantees obligations issued in other countries and regions, includingWestern Europe ,Canada andAustralia . The Company also provides other forms of insurance that are consistent with its risk profile and benefit from its underwriting experience. Premiums are earned over the contractual lives, or in the case of homogeneous pools of insured obligations, the remaining expected lives, of financial guaranty insurance contracts. In the Asset Management segment, the Company provides investment advisory services, which include the management of collateralized loan obligations (CLOs), opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down.Assured Investment Management LLC (AssuredIM LLC ) and its investment management affiliates (together withAssuredIM LLC , AssuredIM) have managed structured, public finance and credit investments since 2003. AssuredIM provides investment advisory services while leveraging a technology-enabled risk platform, which aims to maximize returns for its clients. The establishment, in the fourth quarter of 2019, of the Asset Management segment diversifies the risk profile and revenue opportunities of the Company. As ofSeptember 30, 2021 , AssuredIM had$17.6 billion of assets under management (AUM), including$1.3 billion that is managed on behalf of the Company'sU.S. insurance subsidiaries. Fees in respect of investment advisory services are the largest component of revenues for the Asset Management segment. AssuredIM is compensated for its investment advisory services generally through management fees which are based on AUM, and may also earn performance fees calculated as a percentage of net profits or based on an internal rate of return referencing distributions made to investors, in each case, in respect of funds, CLOs and/or accounts which it advises. The Corporate division consists primarily of interest expense on the debt ofAssured Guaranty US Holdings Inc. (AGUS) andAssured Guaranty Municipal Holdings Inc. (AGMH) (theU.S. Holding Companies), as well as other operating expenses attributed to holding company activities, including administrative services performed by certain subsidiaries for the holding companies. In Third Quarter 2021, it also included a loss on extinguishment of debt.
See Item 1. Financial Statements, Note 2, Segment Information.
Economic Environment and Impact of COVID-19
The COVID-19 pandemic continues throughout the world, while the production, acceptance, and distribution of vaccines for it are proceeding unevenly across the globe. The emergence of COVID-19 and reactions to it, including various intermittent closures and capacity and travel restrictions, have had a profound effect on the global economy and financial markets. The ultimate size, depth, course and duration of the pandemic, and the effectiveness, acceptance, and distribution of vaccines for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve. Consequently, and due to the nature of the Company's business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time. As a consequence of the onset of the COVID-19 pandemic, economic activity in theU.S. and throughout the world slowed significantly in early to mid-2020, but began to recover later in the year and, at least in theU.S. , continued to expand in the nine-month period endedSeptember 30, 2021 (Nine Months 2021). InOctober 2021 , theU.S. Bureau of Economic Analysis (BEA) reported that real Gross Domestic Product (GDP) was estimated to have increased at an annual rate of 2% in the three-month period endedSeptember 30, 2021 (Third Quarter 2021), compared to 6.7% for the three-month period endedJune 30, 2021 . At the end ofSeptember 2021 , theU.S. unemployment rate, seasonally adjusted, stood at 4.8%, lower than where it started the period at 5.9%, and down from a pandemic high of 14.7% inApril 2020 . The level and direction of interest rates impact the Company in numerous ways. For example, low interest rates may make the Company's credit enhancement products less attractive in the market and reduce the level of premiums it can charge for that product, and, over time, also reduce the amount the Company can earn on its largely fixed-income investment portfolio. Specifically, the level of interest rates on theU.S. municipal bonds the Company enhances influences how high a premium the Company can charge for its public finance financial guaranty insurance product, with lower interest rates generally lowering the premium rates the Company may charge. On the other hand, low interest rates increase the amount of excess spread available to support the distressed residential-mortgage-backed securities the Company insures. The 30-yearAAA Municipal Market Data (MMD) rate is a measure of interest rates in the Company's largest financial guaranty insurance market,U.S. public finance. The 30-yearAAA MMD rate started Third Quarter 2021 at 1.50% and decreased through the first few weeks ofJuly 2021 . It generally increased in the weeks that followed and reached 1.67% by the end of Third Quarter 2021. Despite the increase, the average for Third Quarter 2021 was 1.47%, slightly lower than the 1.49% average for the same quarter last year. The Company believes that the policies being pursued by theFederal Reserve are designed to keep interest rates low. In itsSeptember 2021 meeting, theFederal Open Market Committee (FOMC) decided to 89
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keep the target range for the federal funds rate at 0% to 0.25%, noting it "expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." At itsNovember 2-3, 2021 meeting, theFOMC kept the federal funds rates unchanged. The difference, or spread, between the 30-year A-rated General Obligation (GO) relative to the 30-yearAAA MMD was virtually flat throughout Third Quarter 2021 as it finished the quarter at 29 basis points (bps) after starting the quarter one basis point higher. This is down from an average of 44.2 bps across the same quarter in 2020. In addition, BBB credit spreads measured on the same basis also remained steady throughout the quarter, averaging 60.1 bps for Third Quarter 2021. This is significantly lower than the 148.4 bps average for the same quarter in 2020. Both the A and BBB spreads are at their narrowest levels in over a decade. Generally, wider credit spreads are one factor that may allow the Company to charge higher premiums for its public finance financial guaranty insurance product. TheNational Association of Realtors (NAR) reported that "existing-home sales on a seasonally adjusted annual rate rose 7% in September from August, with all regions showing an increase." According to the NAR, the median existing-homes sales price climbed 13.3% year-over-year to$352,800 . Properties typically sold in 17 days in September, remaining at a record low. The S&P CoreLogic Case-ShillerU.S. National Home Price NSA Index, covering all nineU.S. census divisions, reported a 19.8% annual gain inAugust 2021 (the latest data available), remaining the same as the previous month. The 20-City Composite posted a 19.7% year-over-year gain, down from 20.0% in the previous month. Home prices in theU.S. impact the performance of the Company's insured residential mortgage-backed securities (RMBS) portfolio. Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks. From shortly after the pandemic reached theU.S. through early 2021, the Company's surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. Given significant federal funding to state and local governments in 2021 and the performance it observed, the Company's surveillance department has reduced the supplemental procedures. However, it is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments. The Company's internal ratings and loss projections, including those for RMBS,Puerto Rico and certain other distressed public finance exposures, reflect its supplemental COVID-19 surveillance activity. For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered). ThroughNovember 4, 2021 , the Company has paid less than$10 million in first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19. The Company currently projects nearly full reimbursement of these claims. The Company believes its financial guaranty business model is particularly well-suited to withstand global economic disruptions. If an insured obligor defaults, the Company is required to pay only any shortfall in interest and principal on scheduled payment dates; the Company's policies forbid acceleration of its obligations without its consent. In addition, many of the obligations the Company insures benefit from debt service reserve funds or other funding sources from which interest and principal may be paid during limited periods of stress, providing the obligor with an opportunity to recover. While the Company believes its guaranty may support the market value of an insured obligation in comparison to a similar uninsured obligation, the Company's ultimate loss on a defaulted insured obligation is not a function of that underlying obligation's market price. Rather, the Company's ultimate loss is the sum of all principal and interest payments it makes under its policy less the sum of all reimbursements, subrogation payments and other recoveries it receives from the obligor or any other sources in connection with the obligation. For contracts accounted for as insurance, its expected losses equal the discounted value of all claim payments it projects making less the discounted value of all recoveries it expects to receive, on a probability-weighted basis. See Item 1, Financial Statements, Note 4, Expected Loss to be Paid (Recovered). The nature of the financial guaranty business model, which requires the Company to pay only any shortfall in interest and principal on scheduled payment dates, along with the Company's liquidity practices, reduce the need for the Company to sell investment assets in periods of market distress. As ofSeptember 30, 2021 , the Company had$694 million of short-term investments and$101 million of cash, including proceeds from the issuance of debt in 2021. See Item 1, Financial Statements, Note 14, Long-Term Debt. In addition, the Company's investment portfolio generates cash over time through interest and principal receipts. The Company began operating remotely in accordance with its business continuity plan inMarch 2020 , instituting mandatory work-from-home policies in itsBermuda ,U.S. ,U.K. and French offices. While such policies are not currently mandatory in some of the jurisdictions where it has offices, the majority of its workforce is still working remotely. Some of its 90
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workforce has returned to the office, and the Company is planning for the reopening of all its offices inNovember 2021 . In response to employee feedback and as part of its commitment to providing a safe and healthy workplace for employees and visitors, the Company intends to implement a hybrid remote and office work model, among other safety measures based on regional governmental guidance and recommended practices for reopening its offices. The Company is providing the services and communications it normally would, and continues to close new insurance transactions and make insurance claim payments and, in its asset management business, make trades and raise funds.
Key Business Strategies
The Company continually evaluates its business strategies. For example, with the establishment of AssuredIM the Company has increased its focus on asset management and alternative investments. Currently, the Company is pursuing the following key business strategies in three areas: (1) Insurance, (2) Asset Management and Alternative Investments, and (3) Capital Management.
Insurance
The Company seeks to grow the insurance business through new business
production, acquisitions of remaining legacy monoline insurers or reinsurance of
their insured portfolios, and to continue to mitigate losses in its current
insured portfolio.
Growth of the Insured Portfolio
The Company seeks to grow its insurance portfolio through new business production in each of its three markets:U.S. public finance, international infrastructure and global structured finance. The Company believes high-profile defaults by municipal obligors, such asPuerto Rico ,Detroit, Michigan andStockton, California as well as events such as the COVID-19 pandemic have led to increased awareness of the value of bond insurance and stimulated demand for the product. The Company believes there will be continued demand for its insurance in this market because, for those exposures that the Company guarantees, it undertakes the tasks of credit selection, analysis, negotiation of terms, surveillance and, if necessary, loss mitigation. The Company believes that its insurance:
•encourages retail investors, who typically have fewer resources than the
Company for analyzing municipal bonds, to purchase such bonds;
•enables institutional investors to operate more efficiently; and
•allows smaller, less well-known issuers to gain market access on a more
cost-effective basis.
On the other hand, the persistently low interest rate environment and relatively tightU.S. municipal credit spreads have dampened demand for bond insurance compared to the levels before the 2008 financial crisis. The Company believes that some of theU.S. federal tax increases recently proposed could, if enacted, make municipal obligations more attractive to both institutional and retail investors. In certain segments of the global infrastructure and structured finance markets the Company believes its financial guaranty product is competitive with other financing options. For example, certain investors may receive advantageous capital requirement treatment with the addition of the Company's guaranty. The Company considers its involvement in both international infrastructure and structured finance transactions to be beneficial because such transactions diversify both the Company's business opportunities and its risk profile beyondU.S. public finance. The timing of new business production in the international infrastructure and structured finance sectors is influenced by typically long lead times and therefore may vary from period to period. While volatility and dislocation in the municipal finance market in theU.S. resulted in the Company issuing a reduced number of new insurance policies in late March and intoApril 2020 compared to the prior year, the Company began writing a higher volume of new insurance business as 2020 progressed. The$17.4 billion of municipal new issue par sold with the Company's insurance in Nine Months 2021 was the most the Company insured in the first nine months of a year since 2010. See "- Results of Operations by Segment - Insurance Segment" below. 91
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U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
Year Ended
Nine Months 2021 Nine Months 2020 December 31, 2020
(dollars in billions, except number of issues and percent)
Par:
New municipal bonds issued $ 343.4 $ 330.4 $ 451.8
Total insured $ 29.1 $ 25.4 $ 34.2
Insured by Assured Guaranty $ 17.4 $ 15.1 $ 19.7
Number of issues:
New municipal bonds issued 9,125 8,536 11,857
Total insured 1,714 1,605 2,140
Insured by Assured Guaranty 826 734 982
Bond insurance market penetration based on:
Par 8.5 % 7.7 % 7.6 %
Number of issues 18.8 % 18.8 % 18.0 %
Single A par sold 27.2 % 27.3 % 28.3 %
Single A transactions sold 56.4 % 54.3 % 54.3 %
$25 million and under par sold 21.6 % 22.0 % 20.9 %
$25 million and under transactions sold 21.9 % 21.9 % 21.0 %
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(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured byAssured Guaranty , which the Company also considers to be public finance business. The Company also considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no longer actively writing new business or their insured portfolios. These transactions enable the Company to improve its future earnings and deploy excess capital.
Loss Mitigation
In an effort to avoid, reduce or recover losses and potential losses in its
insurance portfolio, the Company employs a number of strategies.
In the public finance area, the Company believes its experience and the resources it is prepared to deploy, as well as its ability to provide bond insurance or other contributions as part of a solution, result in more favorable outcomes in distressed public finance situations than would be the case without its participation. This has been illustrated by the Company's role in theDetroit, Michigan ;Stockton, California ; andJefferson County, Alabama financial crises, and more recently by the Company's role in negotiating various agreements in connection with the restructuring of obligations of theCommonwealth of Puerto Rico (Commonwealth) and various obligations of its related authorities and public corporations. The Company will also, where appropriate, pursue litigation to enforce its rights. For example, it initiated a number of legal actions to enforce its rights with respect to obligations of the Commonwealth and various obligations of its related authorities and public corporations. OnFebruary 22, 2021 ,Assured Guaranty Municipal Corp. (AGM) andAssured Guaranty Corp. (AGC) entered into a revisedPuerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) with certain other stakeholders, the Commonwealth, and the Financial Oversight andManagement Board for Puerto Rico (FOMB). Then, onMay 5, 2021 , AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to thePuerto Rico Highways and Transportation Authority (PRHTA) and thePuerto Rico Convention Center District Authority (PRCCDA). More recently, onJuly 28, 2021 , AGC joined the PSA (PRIFA PSA) signed onJuly 27, 2021 by certain other stakeholders, the Commonwealth, and the FOMB with respect to thePuerto Rico Infrastructure Financing Authority (PRIFA). Previously, onMay 3, 2019 , AGM and AGC entered into a restructuring support agreement (PREPA RSA; together with the GO/PBA PSA, HTA/CCDA PSA, and PRIFA PSA, the Support Agreements) with thePuerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company's insured PREPA revenue bonds. 92
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With AGM and AGC agreeing to the HTA/CCDA PSA, GO/PBA PSA, and (in the case of AGC) PRIFA PSA, 95% ofAssured Guaranty's net par outstanding toPuerto Rico credits as ofSeptember 30, 2021 , is now covered by a Support Agreement. Each Support Agreement includes a number of conditions and the related debtor's plan of adjustment must be approved by the Title III court, so there can be no assurance that the consensual resolutions embodied in the Support Agreements will be achieved in their current form, or at all. Even if the consensual resolutions embodied in the Support Agreements are approved and documented as contemplated, they may be subject to further legal challenge or the parties to the legal documents may not live up to their obligations. Both economic and political developments, including those related to the COVID-19 pandemic, may impact implementation of the consensual resolutions contemplated by the Support Agreements and the amount the Company realizes under the Support Agreements and related debtors' plans of adjustment, as well as the performance or resolution of thePuerto Rico exposures not subject to a Support Agreement. Nevertheless, the Company believes these developments mark a milestone in itsPuerto Rico loss mitigation efforts. For more information about developments inPuerto Rico and related recovery litigation being pursued by the Company, see Item 1, Financial Statements, Note 3, Outstanding Exposure and the Insured Portfolio section below. The Company is currently working with the servicers of some of the RMBS it insures to encourage the servicers to provide alternatives to distressed borrowers that will encourage them to continue making payments on their loans to help improve the performance of the related RMBS. In some instances, the terms of the Company's policy give it the option to pay principal on an accelerated basis on an obligation on which it has paid a claim, thereby reducing the amount of guaranteed interest due in the future. The Company has at times exercised this option, which uses cash but reduces projected future losses. The Company may also facilitate the issuance of refunding bonds, by either providing insurance on the refunding bonds or purchasing refunding bonds, or both. Refunding bonds may provide the issuer with payment relief.
Asset Management and Alternative Investments
AssuredIM is a diversified asset manager that serves as investment adviser to CLOs, opportunity and liquid strategy funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. As ofSeptember 30, 2021 , AssuredIM is a top-25 CLO manager by AUM, as published byCreditflux Ltd. AssuredIM is actively pursuing opportunity strategies focused on healthcare and asset-based lending and liquid strategies relating to municipal obligations. Over time, the Company seeks to broaden and further diversify its Asset Management segment leading to increased AUM and a fee-generating platform. The Company intends to leverage the AssuredIM infrastructure and platform to grow its Asset Management segment both organically and through strategic combinations. The Company monitors certain operating metrics that are common to the asset management industry. These operating metrics include, but are not limited to, funded AUM and unfunded capital commitments (together, AUM) and investment advisory management and performance fees. The Company considers the categorization of its AUM by product type to be a useful lens in monitoring the Asset Management segment. AUM by product type assists in measuring the duration of AUM for which the Asset Management segment has the potential to earn management fees and performance fees. For a discussion of the metric AUM, please see "- Results of Operations by Segment - Asset Management Segment." Additionally, the Company believes that AssuredIM provides the Company an opportunity to deploy excess capital at attractive returns improving the risk-adjusted return on a portion of the investment portfolio and potentially increasing the amount of dividends certain of its insurance subsidiaries are permitted to pay under applicable regulations. The Company allocated$750 million of capital to invest in funds managed by AssuredIM plus$550 million of general account assets now managed by AssuredIM under an Investment Management Agreement (IMA). The Company is using these allocations to (a) launch new products (CLOs, opportunity funds and liquid strategy funds) on the AssuredIM platform and (b) enhance the returns of its own investment portfolio. As ofSeptember 30, 2021 ,AG Asset Strategies LLC (AGAS) had committed$659 million to funds managed by AssuredIM (AssuredIM Funds), including$279 million that has yet to be funded. This capital was committed to several funds, each dedicated to a single strategy including CLOs, asset-based finance, healthcare structured capital and municipal bonds. Under the IMA with AssuredIM, AGM and AGC have together invested$250 million to municipal obligation strategies and$300 million to CLO strategies. All of these strategies are consistent with the investment strengths of AssuredIM and the Company's plans to continue to grow its investment strategies. 93
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Capital Management
The Company has developed strategies to efficiently manage capital within the
From 2013 throughNovember 4, 2021 , the Company has repurchased 129.8 million common shares for approximately$4,044 million , representing approximately 67% of the total shares outstanding at the beginning of the repurchase program in 2013. OnAugust 4, 2021 , the Board of Directors (the Board) authorized the repurchase of an additional$350 million of common shares. Under this and previous authorizations, as ofNovember 4, 2021 , the Company was authorized to purchase$220 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors, some of which factors may be impacted by the direct and indirect consequences of the course and duration of the COVID-19 pandemic and evolving governmental and private responses to the pandemic. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 15, Shareholders' Equity, for additional information about the Company's repurchases of its common shares. Summary of Share Repurchases Average price Amount Number of Shares per share (in millions, except per share data) 2013 - 2020$ 3,662 121.5$ 30.14 2021 (First Quarter) 77 2.0 38.83 2021 (Second Quarter) 88 1.9 46.63 2021 (Third Quarter) 140 2.9 47.76 2021 (through November 4) 77 1.5 51.90 Cumulative repurchases since the beginning of 2013$ 4,044 129.8 31.16 Accretive Effect of Cumulative Repurchases (1) Third Quarter As of September 2021 Nine Months 2021 30, 2021 (per share) Net income (loss) attributable to AGL$ 0.01 $ 0.66 Adjusted operating income 0.16 1.25 Shareholders' equity attributable to AGL$ 36.81 Adjusted operating shareholders' equity 33.26 Adjusted book value 58.68 _________________
(1) Represents the estimated accretive effect of cumulative repurchases since
the beginning of 2013.
The Company considers the appropriate mix of debt and equity in its capital structure. OnMay 26, 2021 , the Company issued$500 million of 3.15% Senior Notes, due in 2031 for net proceeds of$494 million . OnJuly 9, 2021 , a portion of the proceeds from the issuance of the 3.15% Senior Notes were used to redeem$200 million of AGMH debt as follows: all$100 million of AGMH's 6 7/8% Quarterly Interest Bonds due in 2101, and$100 million of the$230 million of AGMH's 6.25% Notes due in 2102. See "- Liquidity and Capital Resources - AGL and itsU.S. Holding Companies" for theU.S. Holding Companies' expected debt service for its long-term debt. OnAugust 20, 2021 , the Company issued$400 million of 3.6% Senior Notes, due in 2051 for net proceeds of$395 million . OnSeptember 27, 2021 , all of the proceeds from the issuance of the 3.6% Senior Notes were used to redeem$400 million of AGMH and AGUS debt as follows: all$100 million of AGMH's 5.60% Notes due in 2103, the remaining$130 million of AGMH 6.25% Notes due in 2102, and$170 million of the$500 million of AGUS 5% Senior Notes due in 2024.
In Third Quarter 2021, as a result of these redemptions, the Company recognized
a loss on extinguishment of debt of approximately
basis (
amount paid
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to redeem the debt and the carrying value of the debt. The carrying value of the debt included the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.
Proceeds from the debt issuances that were not used to redeem debt are being
used for general corporate purposes, including share repurchases.
Since the second quarter of 2017, AGUS has purchased$154 million in principal of AGMH's outstanding Junior Subordinated Debentures. The Company may choose to redeem or make additional purchases of this or other Company debt in the future. See Item 1. Financial Statements, Note 14, Long-Term Debt.
OnApril 1, 2021 ,Municipal Assurance Corp. (MAC) merged with and into AGM, with AGM as the surviving company. Upon the merger all direct insurance policies issued by MAC became direct insurance obligations of AGM. As a result, the Company wrote off the$16 million carrying value of MAC's insurance licenses in the first quarter of 2021. This restructuring of the Company'sU.S. insurance subsidiaries will simplify the organizational and capital structure, reduce costs, and is expected to increase the future dividend capacity of theU.S. insurance subsidiaries.
Executive Summary
This executive summary of management's discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Quarterly Report. For a more detailed description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks and the critical accounting policies and estimates affecting the Company, this Quarterly Report should be read in its entirety and in addition to the Company's 2020 Annual Report on Form 10-K. Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or improvement, or ultimate economic gains or losses such as: changes in credit spreads of insured credit derivative obligations, changes in fair value of assets and liabilities of VIEs and committed capital securities (CCS), changes in fair value of credit derivatives related to the Company's own credit spreads, and changes in risk-free rates used to discount expected losses (recoveries). Other factors that drive volatility in net income include: changes in expected losses and recoveries, the amount and timing of the refunding and/or termination of insured obligations, realized gains and losses on investments (including credit impairment), changes in foreign exchange rates, the effects of large settlements, commutations, acquisitions, the effects of the Company's various loss mitigation strategies, and changes in the fair value of investments in AssuredIM Funds. Changes in the fair value of AssuredIM Funds affect the amount of management and performance fees earned. Changes in laws and regulations, among other factors, may also have a significant effect on reported net income or loss in a given reporting period. 95
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Financial Performance of
Financial Results
Third Quarter Nine Months
2021 2020 2021 2020
(in millions, except per share amounts)
GAAP
Net income (loss) attributable to AGL $ 17 $ 86 $ 126 $ 214
Net income (loss) attributable to AGL per diluted
share $ 0.22 $ 1.02 $ 1.66 $ 2.43
Weighted average diluted shares 73.6 83.8 75.7 88.0
Non-GAAP
Adjusted operating income (loss) (1) (2)
48$ 197 $ 200 Adjusted operating income per diluted share (2)$ 0.45 $ 0.58 $ 2.60 $ 2.28 Weighted average diluted shares 73.6 83.8 75.7 88.0 Components of total adjusted operating income (loss) Insurance segment$ 214 $ 81 $ 445 $ 320 Asset Management segment (7) (12) (16) (30) Corporate division (169) (18) (232) (83) Other (4) (3) - (7) Adjusted operating income (loss)$ 34 $
48
Insurance Segment Gross written premiums (GWP)$ 106 $ 121 $ 277 $ 334 Present value of new business production (PVP) (1) 96 117 263 264 Gross par written 8,561 7,432 20,170 16,477 Asset Management Segment Inflows - third party$ 843 $ 1 $ 2,082 $ 466 Inflows - intercompany 73 167 182 931 As of September 30, 2021 As of December 31, 2020 Amount Per Share Amount Per Share (in millions, except per share amounts) Shareholders' equity attributable to AGL$ 6,300 $ 88.42 $ 6,643 $ 85.66 Adjusted operating shareholders' equity (1) 5,906 82.89 6,087 78.49 Adjusted book value (1) 8,727 122.50 8,908 114.87 Gain (loss) related to the effect of consolidating VIEs (VIE consolidation) included in adjusted operating shareholders' equity - - 2 0.03 Gain (loss) related to VIE consolidation included in adjusted book value (9) (0.12) (8) (0.10) Common shares outstanding (3) 71.2 77.5
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(1) See "-Non-GAAP Financial Measures" for a definition of the financial measures that were not determined in accordance with accounting principles generally accepted inthe United States of America (GAAP), a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure, if available, and for additional details. (2) "Adjusted operating income" is the Company's segment measure. (3) See "- Overview- Key Business Strategies - Capital Management" above for information on common share repurchases. 96
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