Executive Summary / Key Takeaways

• Assured Guaranty, the dominant leader in financial guaranty insurance, is strategically leveraging its robust financial strength, advanced technology, and diversified business model to capitalize on current market volatility and drive significant shareholder value.
• First Quarter 2025 results demonstrated strong performance, with net income attributable to AGL increasing significantly year-over-year, boosted by a $103 million pre-tax gain from the resolution of the LBIE litigation and higher investment income from alternative investments.
• The company continues to achieve record highs in key per-share valuation metrics, including Adjusted Operating Shareholders' Equity and Adjusted Book Value, fueled by consistent adjusted operating income, new business production, and an aggressive, accretive share repurchase program targeting $500 million annually.
• Strategic initiatives in the core Insurance segment, including expanding into new geographic markets like Australia and Continental Europe and modernizing technology for the secondary market, are enhancing new business production and diversifying risk beyond traditional U.S. public finance.
• While managing legacy and current credit exposures like PREPA and certain U.K. regulated utilities, Assured Guaranty's senior creditor position, proactive surveillance, loss mitigation expertise, and willingness to pursue legal action underpin confidence in ultimate recoveries and protect capital.

Assured Guaranty: Capitalizing on Market Volatility and Unlocking Value Through Dominance and Diversification

Assured Guaranty Ltd. (NYSE: AGO) stands as a formidable force in the financial services landscape, primarily operating as the leading provider of financial guaranty insurance. For four decades, the Bermuda-based holding company has specialized in offering credit protection products to the U.S. and international public finance and structured finance markets. Its core value proposition lies in applying sophisticated credit underwriting, risk management, and capital markets expertise to guarantee scheduled payments on debt instruments, providing essential credit enhancement that benefits both issuers through lower borrowing costs and investors through enhanced security and liquidity.

In an industry where trust and financial strength are paramount, Assured Guaranty has built a dominant market position, particularly in the U.S. municipal bond insurance market, where it commands an estimated 71.3% share. This leadership is not merely a function of size but is underpinned by a strategic approach that combines operational efficiency, technological advancement, and a commitment to disciplined risk-taking. The company's competitive landscape includes direct rivals like MBIA Inc. (MBI) and Ambac Financial Group (AMBC), primarily focused on the U.S. market, and larger, more diversified insurers like American International Group (AIG) with overlapping guaranty operations. While competitors like MBIA and Ambac have faced significant challenges from legacy exposures and exhibit weaker financial performance metrics (e.g., lower margins, volatile cash flow), Assured Guaranty has consistently demonstrated superior profitability (TTM Net Margin 46.34% vs. MBI -10.57%, AMBC -2.36%, AIG -0.05%) and robust cash flow generation (TTM Operating Cash Flow $47M, Q1 2025 $87M). AIG, benefiting from scale and diversification, shows strong revenue growth, but AGO's specialized focus allows for higher margins in its core guaranty business. Indirect competition from alternative credit solutions like private credit funds poses a challenge through potentially lower costs, but these alternatives typically lack the comprehensive, unconditional guarantees that define AGO's product.

A key differentiator for Assured Guaranty lies in its operational technology. The company has invested in modernizing its processes and systems, particularly for acquiring and executing secondary market business. These digital tools and advanced underwriting technology provide tangible benefits, enabling faster policy issuance and potentially lower operating costs per unit compared to rivals. Management highlights that these systems provide counterparties with real-time pricing information, facilitating quicker transactions and supporting the company's push to build a more consistent pipeline in the secondary market. This technological edge contributes directly to operational efficiency and strengthens the company's competitive moat.

Financial Performance and Operational Strength

Assured Guaranty's financial performance in the first quarter of 2025 underscored the resilience and earnings power of its business model, even amidst a volatile economic backdrop. Net income attributable to AGL reached $176 million, a significant increase from $109 million in the prior year period. This growth was notably driven by a $103 million pre-tax gain on credit derivatives related to the successful resolution of the long-standing LBIE litigation, a testament to the company's determination in enforcing its legal rights. Further boosting results were foreign exchange gains on remeasurement ($37 million in Q1 2025 vs. a $12 million loss in Q1 2024) and higher equity in earnings from the company's alternative investments, primarily managed by Sound Point.

These positive factors were partially offset by a loss and loss adjustment expense (LAE) of $40 million in Q1 2025, compared to a $1 million benefit in Q1 2024. This increase in loss expense reflects economic loss development, particularly from exposures in U.S. public finance (attributable to PREPA) and certain non-U.S. public finance (U.K. regulated utilities). However, the company's rigorous loss estimation process, which involves scenario analysis and probability weighting based on extensive surveillance, informs its reserving and proactive loss mitigation efforts. The economic benefit from U.S. RMBS exposures ($3 million in Q1 2025) due to improved recoveries also contributed positively.

The core Insurance segment remains the primary earnings engine, contributing $168 million to adjusted operating income in Q1 2025, up from $149 million in Q1 2024. Net earned premiums and credit derivative revenues saw a healthy increase, partly due to the LBIE resolution, although lower financial guaranty refundings and terminations provided a partial offset. The company's deferred premium revenue, representing future earnings from its in-force book, remains substantial at $3.9 billion as of March 31, 2025.

The Asset Management segment, primarily reflecting the company's ownership interest in Sound Point, saw a significant increase in adjusted operating income to $12 million in Q1 2025 from $1 million in Q1 2024. This segment's earnings, reported on a quarter lag, tend to be back-end loaded due to performance fees, suggesting Sound Point's strong performance in Q4 2024 contributed to this result. This segment is a key part of AGO's strategy to diversify its earnings streams beyond risk-based premiums.

Insured Portfolio and Credit Exposures

Assured Guaranty's insured portfolio is highly diversified across U.S. and non-U.S. public finance and structured finance sectors. As of March 31, 2025, total net par outstanding stood at $263.6 billion. The portfolio's credit quality is a critical focus, with the majority rated investment grade. However, a portion is rated below investment grade (BIG), totaling $9.5 billion in net par outstanding, which receives heightened surveillance.

Key credit exposures currently impacting loss development include the Puerto Rico Electric Power Authority (PREPA), certain U.K. regulated utilities, and specific healthcare facilities. PREPA remains the company's only unresolved defaulting Puerto Rico exposure, with $532 million in net par outstanding as of March 31, 2025. Litigation is ongoing, but a favorable appeals court ruling affirming bondholders' secured lien on PREPA's revenues provides a strong basis for recovery. While certain U.K. regulated utilities and European renewable energy transactions were downgraded to BIG in 2024 due to operational and capital strains, management emphasizes its senior position and long tenor on these exposures as protective factors. Similarly, some BIG healthcare exposures face pressure from rising costs, but the company's operational expertise and strong deal covenants are employed for loss mitigation.

The subjective nature of loss estimation over the long life of financial guaranty contracts means that actual losses could differ from current projections. However, Assured Guaranty's extensive experience, proactive surveillance, and willingness to engage in complex restructurings and litigation (as demonstrated by the LBIE outcome and PREPA legal actions) are core operational strengths aimed at minimizing ultimate losses and maximizing recoveries.

Strategic Growth and Diversification

Assured Guaranty's strategic initiatives are designed to drive growth, diversify earnings, and enhance shareholder value. In the core Insurance segment, the company is focused on increasing new business production. While Q1 2025 saw a decrease in PVP ($39 million vs. $63 million in Q1 2024) primarily due to large transactions in the prior year, the company's market share in the U.S. municipal primary market increased significantly (64% vs. 53%). The push into the secondary market, supported by technology investments for faster execution and real-time pricing, is expected to contribute more meaningfully going forward.

Geographic expansion is another key pillar. The company is actively pursuing opportunities in Australia, New Zealand, Continental Europe, and Asia, opening offices and executing transactions in new sectors like French fiber and Spanish infrastructure. This expansion diversifies risk and taps into markets with potentially higher returns.

The Asset Management segment, centered around the Sound Point partnership, provides a valuable fee-based earnings stream. The agreement to invest $1 billion in Sound Point managed alternative investments over two years underscores the commitment to this strategy, which has historically generated attractive returns (approximately 13% annualized inception-to-date).

Complementing these growth strategies is a robust capital management program. The company has consistently returned capital to shareholders through significant share repurchases, buying back 1.34 million shares for $120 million in Q1 2025 alone. Since 2013, AGO has repurchased 152 million shares for approximately $5.5 billion, significantly enhancing per-share metrics. The company targets repurchasing $500 million annually for both 2024 and 2025, supported by strong liquidity and capital distributions from its subsidiaries, including $400 million from the U.S. insurance subsidiaries in connection with the AGM/AG merger in August 2024. This merger itself was a strategic move to create a more efficient capital structure and enhance claims-paying resources.

Liquidity and Capital Management

Assured Guaranty maintains a strong liquidity position to meet its obligations and fund strategic initiatives. The holding company's liquidity is primarily sourced from subsidiary distributions and access to external financing. Management targets holding liquid assets equivalent to 1.5 times its stressed operating company net cash flows over the next four quarters. Operating cash flows saw a significant increase in Q1 2025 ($87 million inflow vs. $74 million outflow in Q1 2024), boosted by the LBIE litigation recovery and lower claim payments.

The ability of insurance subsidiaries to pay dividends is subject to regulatory restrictions and rating agency requirements, but management is confident in their capacity to fund holding company needs and the targeted share repurchases. The $400 million distribution related to the AGM/AG merger further bolstered holding company liquidity, providing capital for corporate initiatives, including buybacks.

The share repurchase program remains a central component of the capital management strategy, consistently contributing to the increase in per-share valuation metrics. As of May 8, 2025, the company had approximately $181 million remaining under its current authorization, with a clear target to continue repurchasing shares at a significant pace.

Competitive Positioning

Assured Guaranty's competitive positioning is defined by its market dominance, financial strength, operational efficiency, and strategic diversification. Compared to direct competitors like MBIA and Ambac, AGO benefits from a much stronger balance sheet, higher credit ratings, and a more diversified and higher-quality insured portfolio. While MBIA and Ambac are still grappling with legacy issues from the financial crisis, AGO has largely moved past these, allowing it to focus on new business and value creation. AGO's advanced underwriting technology and digital tools provide an operational edge, enabling faster processing and potentially lower costs per unit in certain areas, which supports its market share leadership.

The company's strategic expansion into international markets and asset management further differentiates it, reducing reliance on the U.S. municipal market and tapping into higher-return opportunities. While indirect competitors may offer lower costs, they lack the comprehensive credit protection and regulatory standing of a financial guaranty insurer. Assured Guaranty's ability to provide capital relief solutions and enhance market access positions it favorably against a broader set of financial intermediaries.

Conclusion

Assured Guaranty is a fundamentally strong company with a clear investment thesis centered on its market leadership, disciplined risk management, and commitment to shareholder value creation. The company's ability to generate consistent adjusted operating income, coupled with its accretive share repurchase program, continues to drive growth in per-share book value metrics. Strategic initiatives aimed at diversifying the business through international expansion and asset management, alongside investments in operational technology, position Assured Guaranty to capitalize on opportunities in a volatile global market. While challenges remain, particularly with legacy credit exposures like PREPA and navigating the complexities of regulated utilities, the company's proven expertise in surveillance, loss mitigation, and legal enforcement provides a solid foundation for managing these risks. For investors, Assured Guaranty represents an opportunity to invest in a market leader leveraging its unique strengths to deliver value through both earnings growth and capital return.