Earnings Labs

Assured Guaranty Ltd. (AGO)

Q2 2020 Earnings Call· Fri, Aug 7, 2020

$83.38

+0.47%

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Transcript

Operator

Operator

Good day and welcome to the Assured Guaranty Limited Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations. Please go ahead.

Robert Tucker

Analyst

Thank you all for joining Assured Guaranty for our second quarter 2020 financial results conference call. Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change to the new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you are listening to a replay of this call, or if you are reading a transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. The presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures, most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures and our current financial supplement and equity investor presentation which is on our website at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you would like to ask a question. I will now turn the call over to Dominic.

Dominic Frederico

Analyst

Thank you, Robert, and welcome to everyone joining today's call. For the first time in our history, Assured Guaranty's adjusted book value has surpassed $100 per share and both shareholders' equity per share and adjusted operating shareholders' equity per share were also new records. We achieved this milestone while producing our best direct new business insurance production for second quarter since the acquisition of AGM in July of 2009. Our financial guaranty, guaranty PVP of $96 million was 71% higher than in last year's second quarter. Our success reflects the tremendous work we did over several years to prepare for the unexpected. Our people were extremely effective, operating 100% remotely in unprecedented economic and market conditions. We had the technology, processes, and training in place to help us excel during this pandemic and we did excel, proving again not only the competence and dedication of our employees, but also the resilience of our business model and the benefits of our value proposition. With the virus creating market and economic uncertainty, bond yields had increased by the beginning of the quarter and credit spreads widened. Investors turned more of their attention to credit quality for which our financial guaranty insurance is a solution and also to ratings durability, trading value stability and market liquidity, to all of which our product tends to add value. The result has manifested in heightened demand for bond insurance. As a result, we saw the best second quarter and first half direct U.S. public finance production in more than a decade, driving direct PVP of $60 million and $89 million, respectively. And I can tell you that with our July municipal insured par volume exceeding $2 billion, the surge in demand for our guaranty has not let up. At the industry level, more than $9.1 billion…

Rob Bailenson

Analyst

Thank you, Dominic, and good morning to everyone on the call. I'm very pleased with our results and progress on our strategic initiative this quarter. Despite the continued market turmoil, our business model proved resilient, we made significant progress in all three areas of our strategic focus. In our Insurance segment, we had strong new business development, which is replenishing our unearned premium reserve and offsetting the scheduled amortization of the existing book of business. In the Asset Management segment, we launched a new liquid asset strategy and restarted CLO issuance towards the end of the second quarter. In terms of capital management, we are ahead of our plan, relative to the number of shares repurchased, which helped us to propel our adjusted book value per share to over $100, a record high. Turning to second quarter 2020, adjusted operating income was strong coming in at $190 million or $1.36 per share. This consists of $154 million of income from our Insurance segment, a $9 million loss from our Asset Management segment and a $26 million loss from our Corporate division, which is where we reflect our holding company interest and other corporate expenses. Starting with the Insurance segment, adjusted operating income was $154 million compared to $161 million in the second quarter of 2019. Net earned premiums and credit derivative revenues in the second quarter 2020 were $125 million compared with $127 million in the second quarter of 2019. Structured finance net earned premiums and credit-driven revenues decreased to total of $13 million, due to the decline in this portfolio. On the other hand, public finance net earned premiums increased in the second quarter 2020 compared to the second quarter of 2019, due to higher accelerations as well as a modest increase in scheduled net earned premiums, which is…

Operator

Operator

[Operator Instructions] The first question is from Andrew Harte with BTIG. Please go ahead.

Andrew Harte

Analyst

Hi, team. Thanks for the question. You mentioned in your prepared remarks that the company is taking some steps to proactively address situation in which municipalities are under financial duress. Can you give us some color on some of the actions we've been taking there?

Dominic Frederico

Analyst

Okay. Generally, it relates to us as we talked about, we went to our most vulnerable credits reach out to the issuers and talk to them about the financial plans for the remainder of the year to ensure that timely debt service payments were going to be made. If not, what was going to be the issue until we help. So typically the only real change that has been made to any deal is just a thought of a future debt service payment that might be restructured. So extend out the term, reduce the current payment to back-end some further payments something of this nature is the typical, but that's been very rare.

Andrew Harte

Analyst

Thanks.

Dominic Frederico

Analyst

Next question, operator?

Operator

Operator

Next question is from Tommy McJoynt with KBW. Please go ahead.

Tommy McJoynt

Analyst

Hey. Good morning, guys. Thanks for taking my question. I wanted to ask about with Andrew leaving BlueMountain, do you guys think that will have any impact on fund raising or flows or just a broader timeline of profitability in that segment?

Dominic Frederico

Analyst

I think the market has the more significant impact on fund raising and other market timing. I think, we actually are entering into a new phase in BlueMountain. So if you think about it, they have been winding down there are legacy funds. There really hasn't been any fundraising other than the CLO issuance, which is a direct execution, some equity investing. So as we look to the company now, what do we are looking to do, we're looking to significantly increase our distribution capabilities, specifically in fund raising area and two, to focus on the core competencies between the two organizations, but we've got credit commonality as well as market commonality and there is the real opportunity for us and we still feel strongly about that as a real growth for the company. And as I said, it kind of shifts the makeup of our P&L statement from less risk to some fee bearing and as the market opens up, we think we're in perfect position to capitalize on those opportunities.

Tommy McJoynt

Analyst

Got it. Thanks. And I want to switch gears, you've done about $300 million in buybacks year-to-date, obviously its $500 kind of a target number on an annual basis. Can you get an update on whether or not you think you can go to the $500 this year? And just kind of the math for what you have available at the hold co in the remaining operating dividend capacity from the subsidiaries?

Dominic Frederico

Analyst

Rob, you want to take that?

Rob Bailenson

Analyst

Well, as we always said, we could only get to about $250 million to $300 million without special dividends or other sources of financing. We have -- let me just say that given the activity that we have seen to-date, we have already bought back more than we would have planned for in this year's plan. So we're up to over 10 million shares that we bought back. So I think you should focus on the percentage of shares that we actually bought back. But to your question, without a special dividend or other sources of financing, we could only buyback limited amount more shares over the next quarter. You want to add anything…

Tommy McJoynt

Analyst

And any sense of why you didn't want to look into sources of special financing? Or not going to comment on that right now?

Rob Bailenson

Analyst

Sorry, I couldn't hear the question.

Tommy McJoynt

Analyst

Was there a sense -- if you did, would you consider, other sources of financing or is that something that you're not really considering?

Rob Bailenson

Analyst

We're always evaluating our financing options. So, yes, we will consider it and we will evaluate in our current plan.

Tommy McJoynt

Analyst

Okay, thanks. And then just last one, there was a recent court victory that allowed the guarantors proceed claims against some of the banks for underwriting in Puerto Rico. Was there any impact on that in your report this quarter? And just how should we think about potential recoveries from that?

Dominic Frederico

Analyst

We're not a part of that litigation. Obviously, we didn't have any impact on our financial statements for that Judgement, obviously we would expect this thing to go through an appeal process and we'll continue to evaluate it as it moves along the course.

Tommy McJoynt

Analyst

Okay, thank you.

Operator

Operator

The next question is from Geoffrey Dunn with Dowling. Please go ahead.

Geoffrey Dunn

Analyst

Thanks. Good morning.

Dominic Frederico

Analyst

Hey, Geoff.

Geoffrey Dunn

Analyst

I'm not sure I'm completely following the commitment to the asset management business in terms of funds from the insurance, can you review that again, you mentioned the $354 million out of $500 million and then the $250 million to $100 million and additional $200 million authorization. Can you split out a little bit more, so I understand what you're doing?

Dominic Frederico

Analyst

Yeah, I'll let Rob go over the numbers. But the big takeaway, you got to think about, Geoff, is as we look at our portfolio, we look at the changing capital charges to the portfolio from the S&P revisions last year, obviously, we wanted to start investing more up and down the spectrum of credit and probably wider in terms of asset class. At the same time, we said, if we're going to do that we can obviously pay a third party, or we can do it internally. If we do it internally when it would be great. That would also lead to us driving the opportunity to develop a new business, a new revenue stream and lower the beta, the risk in the overall organization by looking at fee income. So the two are married together as kind of a cohesive look at the opportunity that we see to increase yield across our investment portfolio, principally based on the S&P kept our changes and at the same time driving new business opportunity a new enterprise within the organization. Rob can give you the numbers as to how many billion dollar commitment breaks down.

Rob Bailenson

Analyst

Hold one second…

Dominic Frederico

Analyst

As you can imagine there has been power outages in New York and Connecticut, kind of made his piecemeal, some of the stuff together we got people in different people's houses, et cetera, people on phones as opposed to Zoom. So it's been a little difficult putting stuff together and making sure we can present this earnings call kind of cohesively and I think we're doing as good a job as we can. So, Mr. Bailenson, have you found your information?

Rob Bailenson

Analyst

We have. So I said we funded $354 million from AGAS. We have $250 million funded in the muni fund. We have CLO, funded about $100 million get to about $704 million. We've got authorized $500 million at AGAS, which is the investment subsidiaries and we've been authorized $250 million for the muni fund as well as $300 million for additional CLO -- for CLO activity in IMA, it's coming to $1 million -- over $1.50 billion.

Dominic Frederico

Analyst

So remember, Geoff, we're going to jump in two components. One is a $500 million commitment to AGAS, it's your dedicated subsidiary owned by AGM and AGC that then gets invested in various funds, and new funds that are being developed and authorized to BlueMountain. $365 million of that's committed already so there is still some dry powder there. The rest we're doing is on the balance sheets of AGC and AGM in terms of IMA Investment Management Agreement, where they're going to have a municipal portfolio, a CLO equity portfolio and kind of opportunities municipal portfolio. So that's kind of how it breaks down.

Rob Bailenson

Analyst

And then the CLO…

Dominic Frederico

Analyst

Okay…

Rob Bailenson

Analyst

So it's in the CLO debt that I referenced in the IMA is investment grade debt.

Geoffrey Dunn

Analyst

Okay. So $354 million funded of really what was the original $500 million commitment that I think you got to shared with us.

Rob Bailenson

Analyst

Yes.

Geoffrey Dunn

Analyst

And $250 million out of another $500 million authorized is funded into muni funds and $100 million funded into CLOs out of a $300 million authorization...

Rob Bailenson

Analyst

Yeah, you missed them...

Geoffrey Dunn

Analyst

The latter two or out of the directly out of...

Rob Bailenson

Analyst

With $550 million of authorized. So $250 million for muni, $300 million for CLO debt and what was -- that was authorized what we have funded is $250 million for muni and $100 million for investment grade CLOs.

Geoffrey Dunn

Analyst

Okay. And the difference is the 354 is coming out of AGAS and the 250 - or the 250 authorized 300 authorized is coming directly from the subsidiary balance sheets.

Rob Bailenson

Analyst

For the separate IMA.

Geoffrey Dunn

Analyst

Got you. Okay. Thank you.

Operator

Operator

[Operator Instructions] The next question is from John Helmers with Long Focus. Please go ahead.

John Helmers

Analyst

Hey, guys. Thanks for taking my question. Listen, Dominic, I've been an investor in Assured since the financial crisis and it seems that you face one night flight after another. And I would just appreciate, if you could frame why and the market seems to believe that the existential threat of state bankruptcies is going to wipe out the value that is clearly here? And it would make -- otherwise the disconnect from equity in adjusted book value don't make any sense. Is there a way you can frame, why you're so confident that the state, I guess, stress is not going to lead to that outcome?

Dominic Frederico

Analyst

Well, I'll give you my best and I share your frustration as a large individual shareholder myself in terms of the current valuation of the stock, which I agree, makes no sense. So if you think about it, as our portfolio shrinks, it gets more granular, the exposure to the large states become smaller and smaller. And as we talked about in New Jersey's case, there are substantial amortization over the next five years that will significantly decrease the amount of money we have in various New Jersey facilities or authorization. So we think about it, if there is a thing -- there is no ability today for state bankruptcy. If you really tried to authorize the state bankruptcy, you'd have to go against the U.S. Constitution, which means the constitutional amendment. We can all talk about the political, kind of, upheaval or something like that, but more importantly, it's the creditability and efficiency of the capital markets of the United States. States have to borrow money all the time. Their whole budget concept looks at potential future revenues against current support needs and therefore the whole concept of municipal borrowing they share a very special focus in terms of tax exemption, et cetera. So, we believe that there will never be the authorization of state bankruptcies. And also well they carved Puerto Rico, but understand Puerto Rico is not done yet. There's going to be a lot of constitutional challenges to that, both the U.S. Constitution, as well as the Puerto Rico Constitution. There is a clause in U.S. Constitution, while the takings clause that say you basically can't take away legal right that was agreed and granted and now obviously a state bankruptcy retroactively would be taking away legal right. So, we firmly believe in that. It would…

Rob Bailenson

Analyst

Let me also add, muni credit spreads are very, very tight. So the market is perceiving much less risk, which would mean that AGO is completely undervalued. People are buying muni bonds at historically tight credit spreads.

John Helmers

Analyst

No, listen, I see the disconnect and the inconsistency in the markets and obviously the -- and that's very helpful. I appreciate you addressing that, both of you. But because it makes no sense, and, obviously, it goes back to the comment around the ability to repurchase shares because assuming the Armageddon scenario doesn't play out, which obviously is a very good bet, then the accretion is, at least, in the 10 years that I've been invested has never been more compelling than it is today. And so...

Dominic Frederico

Analyst

We appreciate that and recognize it. And the one thing you got to understand is, states rely on the market to fund capital improvement, to meet certain short-term obligations. Our revenue claim on them is mostly perpetual. So at the end of the day, we have a lean forever in a day relative to our recovery. So without some constitutional amendment, which once again would be challenged in the courts because is the clause in the constitution, you just really can't get there and as I said the destruction of the financial markets would be overwhelming in the United -- that's like saying, let the U.S. default on one of the treasury notes to see what happens to the U.S.'s ability to borrow trillions of dollars, it just can't happen. And as Rob points out, which is a very good point, look where yields are in the municipal space. Look where spreads are. If ever really -- everybody really thought there was such a credit concern, Illinois just got off some additional debt and not very high prices. So at the end of the day, whatever is being applied to Assured Guaranty is obviously not being applied to the overall market and with the dislocation between value and price, you can't engineer a loss that large that would never really significantly impact that delta.

John Helmers

Analyst

Thanks. I appreciate you addressing.

Dominic Frederico

Analyst

No problem.

Operator

Operator

This concludes our question-and-answer session. I would like to the conference back over to Robert Tucker for any closing remarks.

Robert Tucker

Analyst

Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.

Operator

Operator

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.