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ASSURED GUARANTY LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 therapeutics, and the global consequences of the pandemic and such actions, including their impact on the factors listed below; •consequences of the conflict inUkraine , including economic sanctions, volatility in energy prices, and the potential for increased cyberattacks; •changes in the world's credit markets, segments thereof, interest rates, inflation, 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 exposures 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 financial guaranty contracts written in credit default swap (CDS) form, and certain consolidated variable interest entities (VIEs); •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 possibility that acquisitions made byAssured Guaranty , including its acquisition ofBlueMountain Capital Management LLC (BlueMountain, now known asAssured Investment Management LLC ) and its associated entities (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; 72
•natural or man-made catastrophes or pandemics; •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 2021 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).
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 and other activities (including financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs)) 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 73
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payment due on an obligation, including a 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 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, which are referred to as the specialty insurance and reinsurance business. 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 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 ofMarch 31, 2022 , AssuredIM had$17.0 billion of assets under management (AUM), including$1.4 billion that is managed on behalf ofAssured Guaranty Municipal Corp. (AGM) andAssured Guaranty Corp. (AGC). 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, collateralized loan obligations (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. Other activities include the effect of consolidating FG VIEs and CIVs (FG VIE and CIV consolidation). See Item 1, Financial Statements, Note 2, Segment Information.
Economic Environment
Economic activity in theU.S. and throughout the world expanded in 2021 and in the three month period endedMarch 31, 2022 (First Quarter 2022). According to the advance estimate released by theU.S. Bureau of Economic Analysis (BEA), real gross domestic product (GDP) increased at an annual rate of 6.9% in the fourth quarter of 2021. Although an advance estimate released by the BEA showed that GDP decreased 1.4% in First Quarter 2022, the primary reason was reported to be as a result of trade, since net imports increased as supply chains improved and businesses continued to restock. More granular measures were positive, with a 4.7% increase in consumer spending and a 5.7% increase in business investment. At the end ofMarch 2022 , theU.S. unemployment rate, seasonally adjusted, stood at 3.6%, lower than where it started the quarter at 3.9%, and down from a pandemic high of 14.7% inApril 2020 . More globally, theOrganization for Economic Co-operation and Development (OECD) estimates that GDP in theOECD area increased by 5.1% during 2021, withU.K. GDP estimated to have grown by 6.9% for the year, in each case after experiencing material contraction in 2020. The Company believes a more robust economy makes it less likely that obligors whose obligations it guarantees will default. According to theU.S. Bureau of Labor Statistics , the inflation rate in theU.S. over the 12-month period endingMarch 2022 (the latest data available), as measured by the consumer price index for all urban consumers, rose to 8.5% before seasonal adjustment, the highest since December of 1981. The energy index rose 32% and the food index 8.8% over the same 12-month period, the most since the period endingMay 1981 . According to theU.K.'s Office for National Statistics (ONS), the Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 6.2% in the 12 months endingMarch 2022 , up from 5.5% in the 12 months endingFebruary 2022 and 1.0% in the 12 months endingMarch 2021 . Consumer price inflation does not impact the Company's primary businesses directly, but may impact the Company indirectly to the extent it makes it more difficult for obligors to make their debt payments or causes interest rates to rise more generally. 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 First Quarter 2022 at 1.49% but rose more than 100 basis points (bps) to end the quarter at 2.53%. The average rate for the quarter was 2.00%, above the 1.54% average for 2021. With the onset of the COVID-19 pandemic, theFederal Open Market Committee (FOMC) lowered the target range 74
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for the federal funds rate to 0% to 0.25% inMarch 2020 . However, at theFOMC's meeting inMarch 2022 , theFOMC decided to raise the target range for the federal funds rate to 0.25% to 0.50%, stating that it anticipated that ongoing increases in the target range will be appropriate. In addition, theFOMC said that it expected to begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities at a coming meeting. At the conclusion of itsMay 3-4, 2022 meeting, theFOMC again raised the federal funds target range, this time to 0.75% to 1%, reiterating that it anticipated that ongoing increases in the target range would be appropriate. In addition, theFOMC announced that it would begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities onJune 1, 2022 . The level and direction of interest rates impact the Company in numerous ways. For example, higher interest rates may make the Company's credit enhancement products more attractive in the market and increase the level of premiums it can charge for that product, and, over time, also increase 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 higher interest rates generally increasing the premium rates the Company may charge. On the other hand, high interest rates decrease the amount of excess spread available to support the distressed residential mortgage-backed securities (RMBS) the Company insures and reduce the market value of its largely fixed rate fixed-maturity securities in the investment portfolio. The Company believes further increases in interest rates and spreads in 2022, should it occur, could increase demand for insurance and permit it to increase its premium rates on new business. The difference, or credit spread, between the 30-year A-rated general obligation relative to the 30-yearAAA MMD averaged 39 bps in First Quarter 2022 up from 33 bps in 2021 but still below the 42 bps in 2020. BBB credit spreads measured on the same basis averaged 72 bps in First Quarter 2022, up modestly from the 70 bps in full year 2021. The level of credit spreads also influences how high a premium the Company can charge for its financial guaranty insurance product, with tighter credit spreads generally lowering the premium rates the Company may charge. Home prices continued their recent surge in the First Quarter of 2022. According to theNational Association of Realtors , the median existing-home price for all housing types inMarch 2022 was$375,300 , a 15% year-over-year increase and up from$358,000 inDecember 2021 . Existing home sales were 5.8 million inMarch 2022 , up 4.5% year over year. The S&P CoreLogic Case-ShillerU.S. National Home Price NSA Index, covering all nineU.S. census divisions, reported an 19.8% annualized gain inFebruary 2022 (the latest data available), compared to 19.1% in the previous month. The 10-City Composite annual increase came in at 18.6%, compared to 17.3% in the previous month. The 20-City Composite posted an 20.2% year-over-year gain, compared to 18.9% in the previous month. Home prices in theU.S. impact the performance of the Company's insured RMBS portfolio. Improved home prices generally result in fewer losses or more reimbursements with respect to the Company's distressed insured RMBS risks, and may impact the amount of losses or reimbursements it projects for its distressed legacy RMBS insured portfolio.
Impact of COVID-19
Variants of COVID-19 continue to spread throughout the world, while the production, acceptance, and distribution of vaccines and therapeutics 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 and therapeutics 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. 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 intermittent 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 has paid only relatively small insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19, and has already received reimbursement for most of those claims. The Company began operating remotely in accordance with its business continuity plan inMarch 2020 in response to the COVID-19 pandemic, instituting mandatory remote work policies in its offices inBermuda ,U.S. ,U.K. andFrance . By the end ofFebruary 2022 , the Company had reopened all of its offices, choosing a hybrid remote and office work model in response to employee feedback and as part of its commitment to providing a safe and healthy workplace. Whether its 75
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employees are working remotely or in a hybrid remote and office work model, the
Company continues to provide the services and communications it normally would.
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 financial crisis that began in 2008. The Company believes that if interest rates further increase in 2022, demand for bond insurance may improve. 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. 76
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U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
Year Ended
First Quarter 2022 First Quarter 2021 December 31, 2021
(dollars
in billions, except number of issues and percentages)
Par:
New municipal bonds issued
$ 96.8 $ 104.5$ 456.7 Total insured $ 8.2 $ 8.5$ 37.5 Insured by Assured Guaranty $ 4.8 $ 5.5$ 22.6 Number of issues: New municipal bonds issued 2,288 2,698 11,819 Total insured 408 514 2,198 Insured by Assured Guaranty 168 252 1,076 Bond insurance market penetration based on: Par 8.5 % 8.1 % 8.2 % Number of issues 17.8 % 19.1 % 18.6 % Single A par sold 36.5 % 27.0 % 26.6 % Single A transactions sold 57.7 % 56.7 % 56.6 %$25 million and under par sold 20.8 % 21.3 % 21.3 %$25 million and under transactions sold 20.7 % 21.9 % 21.7 %
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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, generally through reinsurance. 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 andStockton, California 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 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 theCommonwealth of Puerto Rico and various obligations of its related authorities and public corporations. After over five years of negotiations, onMarch 15, 2022 , a substantial portion of the Company'sPuerto Rico exposure was resolved in accordance with three orders entered by theUnited States District Court of the District of Puerto Rico (Federal District Court of Puerto Rico ): •OnJanuary 18, 2022 , theFederal District Court of Puerto Rico , acting under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), entered an order and judgment confirming the Modified Eighth Amended Title III Joint Plan of Adjustment of theCommonwealth of Puerto Rico , the Employees Retirement System of the Government of theCommonwealth of Puerto Rico , and thePuerto Rico Public Buildings Authority (GO/PBA Plan). The GO/PBA Plan restructured approximately$35 billion of debt (including thePuerto Rico General Obligation (GO) and Public Buildings Authority (PBA) bonds insured by the Company) and other claims against the government ofPuerto Rico and certain entities as well as$50 billion in pension obligations (none of which pension obligations are insured by the Company), all consistent with the terms of the settlement embodied in a revised GO and PBA plan support agreement (PSA) entered into by AGM and AGC onFebruary 22, 2021 , with certain other stakeholders, the Commonwealth, and the financial oversight and management board (the FOMB) (GO/PBA PSA). 77
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•OnJanuary 20, 2022 , theFederal District Court of Puerto Rico , acting under Title VI of PROMESA, entered an order under Title VI of PROMESA (PRCCDA Modification) modifying the debt of thePuerto Rico Convention Center District Authority (PRCCDA). •OnJanuary 20, 2022 , theFederal District Court of Puerto Rico , acting under Title VI of PROMESA, entered another order under Title VI of PROMESA (PRIFA Modification) modifying certain debt of thePuerto Rico Infrastructure Financing Authority (PRIFA). As a result of the consummation onMarch 15, 2022 , of each of the GO/PBA Plan, PRCCDA Modification and PRIFA Modification (together, the March Puerto Rico Resolutions), including claim payments made by the Company under the March Puerto Rico Resolutions, the Company's obligations under its insurance policies covering debt of PRCCDA and PRIFA were extinguished, and its insurance exposure to Puerto Rico GO and PBA was greatly reduced. The Company believes the consummation of the March Puerto Rico Resolutions onMarch 15, 2022 , 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. In connection with the consummation of the March Puerto Rico Resolutions the Company received substantial amounts of new recovery bonds and contingent value instruments (CVIs). The Company has sold some of the new recovery bonds and CVIs it received and may continue to sell amounts it still retains, subject to market conditions. The fair value of such securities held by the Company as ofMarch 31, 2022 , is included in the lines "fixed-maturity securities -Puerto Rico , available-for-sale" and "fixed-maturity securities -Puerto Rico , trading" in the table "Investment Portfolio Carrying Value" of Item 1, Financial Statements, Note 7, Investments. The Company is and has for several years been 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 ofMarch 31, 2022 , AssuredIM was 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, 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 the AGM, AGC and, until its merger with AGM onApril 1, 2021 , MAC, (collectively, theU.S. Insurance Subsidiaries) invested 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. 78
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As ofMarch 31, 2022 ,AG Asset Strategies LLC (AGAS) had committed$702 million to funds managed by AssuredIM (AssuredIM Funds), including$229 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.
Capital Management
The Company has developed strategies to efficiently manage capital within the
From 2013 throughMay 5, 2022 , the Company has repurchased 135.8 million common shares for approximately$4,374 million , representing approximately 70.0% of the total shares outstanding at the beginning of the repurchase program in 2013. OnFebruary 23, 2022 , the AGL Board of Directors (the Board) authorized the repurchase of an additional$350 million of common shares. Under this and previous authorizations, as ofMay 5, 2022 , the Company was authorized to purchase$240 million of its common shares. Shares may be repurchased from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program are at the discretion of management and will depend on a variety of factors, including funds available at the parent company, other potential uses for such funds, market conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board at any time and it does not have an expiration date. See Item 1, Financial Statements, Note 14, Shareholders' Equity, for additional information about the Company's repurchases of its common shares. Summary of Share Repurchases Average price Amount Number of Shares per share (in millions, except per share data) 2013 - 2021$ 4,158 132.0$ 31.50 2022 (First Quarter) 155 2.7 56.62 2022 (through May 5) 61 1.0 59.86 Cumulative repurchases since the beginning of 2013$ 4,374 135.8 32.21 Accretive Effect of Cumulative Repurchases (1) First Quarter 2022 As of March 31, 2022 (per share) Net income (loss) attributable to AGL $ 0.51 Adjusted operating income 0.75 Shareholders' equity attributable to AGL $
38.45
Adjusted operating shareholders' equity 39.16 Adjusted book value 68.20 _________________
(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. 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. See "- Liquidity and Capital Resources - AGL and itsU.S. Holding Companies" for theU.S. Holding Companies' long-term debt. 79
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In 2021, as a result of these redemptions, the Company recognized a loss on extinguishment of debt of approximately$175 million on a pre-tax basis ($138 million after-tax) which represents the difference between the amount paid 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 were used for
general corporate purposes, including share repurchases.
The Company may choose to redeem or make additional purchases of this or other Company debt in the future. Since the second quarter of 2017, AGUS has purchased$154 million in principal of AGMH's outstanding Junior Subordinated Debentures.
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 simplified the organizational and capital structure, reduced costs, and increased 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 2021 Annual Report on Form 10-K.
The primary drivers of volatility in the Company's net income include: changes
in fair value of credit derivatives, FG VIEs, CIVs, and committed capital
securities (CCS), loss and loss adjustment expense (LAE), foreign exchange gains
(losses), the level of refundings of insured obligations, and changes in the
value of the Company's alternative investments, as well as the effects of any
large settlements, commutations and loss mitigation strategies, among other
factors. 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.
80
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Table of Contents
Financial Performance of
Financial Results
First Quarter
2022 2021
(in millions, except per share
amounts)
GAAP
Net income (loss) attributable to AGL $ 66$ 11 Net income (loss) attributable to AGL per diluted share$ 0.98 $ 0.14 Weighted average diluted shares 67.4 77.5
Non-GAAP
Adjusted operating income (loss) (2) $ 90$ 43 Adjusted operating income per diluted share$ 1.34 $ 0.55 Weighted average diluted shares 67.4 77.5
Gain (loss) related to FG VIE and CIV consolidation included in
adjusted operating income
$
(10) $ -
Gain (loss) related to FG VIE and CIV consolidation included in
adjusted operating income per share
$
(0.14) $ -
Components of total adjusted operating income (loss) Insurance segment$ 133 $ 79 Asset Management segment - (7) Corporate division (33) (29) Other (1) (10) - Adjusted operating income (loss) $
90
Insurance Segment Gross written premiums (GWP) $ 70$ 87 Present value of new business production (PVP) (2) 69 86 Gross par written 4,471 5,472 Asset Management Segment AUM Inflows - third party $ 91$ 873 Inflows - intercompany - 145 81
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Table of Contents
WHITE MOUNTAINS INSURANCE GROUP LTD – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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