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AG

ASSURED GUARANTY LTD (AGO)·Q1 2016 Earnings Summary

Executive Summary

  • Q1 2016 operating income was $113M, down from $140M in Q1 2015, driven by higher loss expense; financial guaranty and credit derivative revenues rose to $198M vs $171M in Q1 2015 as refundings/terminations accelerated premium recognition .
  • Production momentum: PVP was $38M; AGO led US public finance, insuring ~$3.0B par (54% industry share), with pricing “approximately double” the nearest competitor and premium-per-par more than twice last year’s ratio .
  • Puerto Rico remained the primary headwind: economic loss development was a $59M loss (public finance +$99M loss offset by +$40M benefit in structured finance); discount-rate changes added a $63M loss .
  • Capital actions and M&A: $75M in buybacks (3.0M shares) and a new $250M repurchase authorization; AGC agreed to acquire CIFG for $450M, adding $5.6B net par and expected +$300–$325M to statutory capital, accretive to EPS, operating equity, and adjusted book value .

What Went Well and What Went Wrong

What Went Well

  • Strong market leadership and improved pricing: “Assured Guaranty continued to lead the market in par insured, capturing 54% of all insured new issue par,” with premium rates “approximately double that of our nearest competitor” .
  • Secondary and international momentum: Secondary market par insured was $359M and contributed over one-third of US public finance PVP; management sees reemerging European infrastructure and Basel III/Solvency II-driven structured finance opportunities .
  • Capital deployment and accretive M&A: $75M buybacks; new $250M authorization (with $210M remaining as of May 4). CIFG acquisition expected accretive, boosting statutory capital by ~$300–$325M in 2016 .

What Went Wrong

  • Loss development concentrated in Puerto Rico: Q1 economic loss development was a $59M loss, with $99M loss in public finance due to increased PR reserves; discount-rate changes also weighed ($63M loss) .
  • Operating income declined YoY: $113M vs $140M in Q1 2015, primarily from higher loss expense despite stronger net earned premiums and loss mitigation recoveries .
  • Ongoing policy uncertainty: Management cautioned that proposed federal legislation for Puerto Rico could retroactively impair creditor rights, raising systemic municipal financing costs; they emphasized litigation and recovery strategies to protect rights .

Financial Results

Quarterly comparison (oldest → newest):

MetricQ3 2015Q4 2015Q1 2016
Operating Income ($M)$164 $117 $113
Financial Guaranty & Credit Derivative Revenues ($M)$252 $312 $198
Accelerations of Net Earned Premiums ($M)$105 $180 $89
Operating Shareholders’ Equity per Share ($)$41.87 $43.11 $44.08
Adjusted Book Value per Share ($)$59.97 $61.18 $61.40

Segment loss development detail:

Segment Loss DevelopmentQ3 2015Q4 2015Q1 2016
Public Finance Economic Loss Development ($M)$91 loss — (elevated due to PR, no explicit figure) $99 loss
Structured Finance Economic Benefit ($M)$94 benefit (RMBS $76; Other SF $18) — (HELOC/CMBS effects discussed) $40 benefit
Total Economic Loss Development ($M)~flat (PF loss offset by SF benefit) $133 loss $59 loss
Discount Rate Impact within Loss Development ($M)$11 loss $6 loss $63 loss

Selected KPIs:

KPIQ3 2015Q4 2015Q1 2016
US Public Finance Par Insured ($B)$3.1 —~$3.0
Present Value of Production (PVP) ($M)——$38
Share Repurchases ($M; Shares; Avg Price)$135; 5.4M; $25.17 —$75; 3.0M; $24.69

Notes:

  • AGO did not provide formal EPS or margin guidance in the call; consensus estimates were unavailable via S&P Global during this analysis window, so estimate comparisons are omitted .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Share Repurchase AuthorizationQ1 2016$400M program exhausted in Feb 2016 New $250M program; $210M remaining as of May 4 Maintained capital return capacity
CIFG Acquisition (Accretion/Capital)Mid-2016 expected closingN/AAccretive to EPS, operating equity, adjusted book value; +$300–$325M to statutory capital; adds $5.6B net par New transaction; positive capital impact
Dividend PolicyQ1 2016Last increase to $0.13 in Q4 2015 No change discussed in Q1 callMaintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2015, Q4 2015)Current Period (Q1 2016)Trend
Puerto Rico policy, legal and reservesWarned of “Super Chapter 9” risks; PR clawbacks; reserve additions; PREPA RSA progress Increased PR reserves; detailed July 1 payment schedule (GO $196.467M); commitment to legal recovery; critique of proposed legislation Continued headwind; heightened legal focus
Market leadership & pricingLed insured par; pricing improved; double‑A issuance mix up 54% share of insured par; premium rates ~2x competitor; premium-per-par >2x YoY Strengthening pricing power
Secondary market strategyGrowing secondary par, indicative pricing via Bloomberg $359M secondary par; expanded indicative pricing to traders Expansion
Structured finance (Basel III/Solvency II)Identified capital efficiency opportunities Ongoing pipeline across consumer loans, CLOs, aviation; expected closings in 2016 Building pipeline
International infrastructureReemerging European market; best year since 2008 Restructuring of existing exposure; optimistic pipeline Improving trajectory
M&A / portfolio acquisitionsRadian Asset accretive; buyback capacity CIFG acquisition announced (AGC); accretive metrics and capital boost Continued consolidation
Loss mitigation (RMBS, CLO, HELOC)RMBS R&W recoveries; HELOC reset noise; CLO remediation $31M RMBS benefit via accelerated plan payments; student loan commutation benefit; discount-rate losses Active mitigation

Management Commentary

  • Strategy and market position: “Assured Guaranty continued to lead the market in par insured, capturing 54% of all insured new issue par… our first-quarter premium rate was approximately double that of our nearest competitor” .
  • Capital and accretion: “CIFG…had approximately $637 million of consolidated statutory capital. We are currently estimating that the transaction will increase AGC’s statutory capital… by approximately $300 million to $325 million” and be accretive to EPS, operating equity, and adjusted book value .
  • Puerto Rico stance: “We will follow our legal rights to the recovery of those payments… our reserves have to consider all possible scenarios” . “It is imperative that the legislation include an empowered and uncompromised federal oversight board” .

Q&A Highlights

  • Puerto Rico payment schedule and recovery: Management cited ~$196.467M GO debt service due July 1; PREPA and HTA expected to use reserves; AGO will pursue legal recovery for any payments made .
  • CIFG portfolio placement: CIFG will be merged into AGC (structured finance hub), improving invested assets and dividend capacity drivers; transportation bonds comprised ~$48M of CIFG’s PR exposure .
  • Acquisition pipeline and regulatory view: Further legacy portfolio acquisitions are “absolutely” likely; regulators view consolidations favorably as bondholders get stronger AA wrap .
  • Capital management: New $250M buyback program with $210M remaining as of May 4; operating equity/share and adjusted book value/share reached new records .
  • Distressed CLO/Zohar actions: AGO holds second‑to‑pay exposure and has implemented loss mitigation including swaps and bond purchases .

Estimates Context

  • Wall Street consensus (EPS, revenue) via S&P Global was unavailable during this analysis window; therefore estimate benchmarks and beat/miss assessments cannot be provided. AGO did not issue formal quantitative guidance for Q1 2016 in the documents reviewed .

Key Takeaways for Investors

  • Near‑term: Watch July 1 Puerto Rico payments and PREPA RSA implementation; AGO plans to exercise contractual rights, but PR reserve builds remain a swing factor for earnings .
  • Medium‑term: CIFG closing (mid‑2016 target) should be accretive to capital and per‑share metrics, supporting ongoing buybacks and potentially dividend flexibility over time .
  • Pricing power: AGO’s superior pricing and market share suggest durable margin support in US public finance, even with low rates; secondary market initiatives may further monetize pipeline .
  • Loss mitigation: Continued RMBS recoveries, student loan commutations, and structured finance terminations provide non‑rate tailwinds; discount‑rate impacts are non‑credit in nature .
  • Policy risk remains the key narrative driver: Any federal PR legislation enabling non‑consensual restructurings would be negative for muni market valuations; consensual deals (e.g., PREPA) are constructive .

Additional Relevant Press Releases (Q1 2016)

  • CIFG acquisition announcement (April 13, 2016): AGC to acquire CIFG Holding for $450M cash; adds $5.6B net par; expected accretive metrics and +$300–$325M statutory capital .

Prior Two Quarters’ Context

  • Q4 2015: Operating income $117M; net earned premiums & credit derivative revenues $312M; accelerations $180M; elevated PR‑related reserves; dividend raised to $0.13; robust buybacks .
  • Q3 2015: Operating income $164M; net earned premiums & credit derivative revenues $252M; accelerations $105M; PF loss development $91M offset by $94M benefit in structured finance; growing leadership and improved pricing .