Assured Guaranty Ltd. (NYSE:AGO) has proven its resilience and ability to deliver consistent value to shareholders over the past two decades. Since its IPO 20 years ago, the company has generated nearly $9 billion in cumulative net adjusted operating income, increased its adjusted book value by 542%, returned $1 billion in dividends to shareholders, and grown its share price by 385% - outperforming key market indices.
Assured Guaranty's success is a testament to its prudent earnings strategy and the resilience of its business model. The company has navigated challenging environments, including the 2008 global financial crisis, increased natural disasters, and the COVID-19 pandemic, while maintaining strong ratings, claim-paying resources, and the ability to write new business. During these periods, Assured Guaranty reduced its insured leverage and single-risk exposures, all while returning over $6 billion to shareholders through share buybacks and dividends.
In the first quarter of 2024, Assured Guaranty continued to deliver impressive results. The company reported adjusted operating income of $113 million, or $1.96 per share, compared to $68 million, or $1.12 per share, in the same period last year - a 75% increase on a per-share basis. This strong performance was driven by several factors, including:
- Higher net earned premiums, primarily due to the refunding of a large transaction - Mark-to-market gains on Puerto Rico contingent value instruments - Robust equity earnings from the company's alternative investments
Assured Guaranty's key non-GAAP valuation metrics also reached new highs, with adjusted operating shareholders' equity per share at $107.69 and adjusted book value per share at $157.31 - both up $14 from the first quarter of 2023. Shareholders' equity per share stood at a record $102.19.
Business Overview
Assured Guaranty operates in two main segments: Insurance and Asset Management. The Insurance segment is the core of the business, providing credit protection products to the U.S. and non-U.S. public finance (including infrastructure) and structured finance markets. Until July 2023, the Asset Management segment consisted of the company's investment advisory business, Assured Investment Management (AssuredIM). Following the Sound Point Transaction, Assured Guaranty now participates in the asset management business through its 30% ownership interest in Sound Point Capital Management.
In the Insurance segment, Assured Guaranty seeks to grow its financial guaranty insurance portfolio through new business production in public finance, infrastructure, and structured finance markets. The company believes its insurance product is valuable to investors and issuers, as it encourages retail participation, enables institutional investors to operate more efficiently, and allows smaller issuers to access the market more cost-effectively.
Assured Guaranty's public finance business benefited from strong demand in the first quarter of 2024, with $43 million in present value of new business production (PVP) - nearly double the $22 million reported in the same period last year. The company insured 7 transactions with $100 million or more in insured par, including a $340 million revenue bond issue for the North Carolina Turnpike Authority and a $380 million revenue bond issue for the Lower Colorado River Authority.
The company's structured finance business also contributed significantly, generating $19 million in PVP from 11 transactions, primarily in the insurance securitization and subscription finance sectors. Assured Guaranty continues to expand the application of its guarantee into new sectors to support business growth.
In the non-U.S. public finance market, Assured Guaranty produced $2 million in PVP from the renewal of two liquidity facilities. The company has a large pipeline of international infrastructure transactions and expects certain deals to generate significant PVP, especially in the second half of 2024.
Financials
For the full year 2023, Assured Guaranty reported net income of $739 million on revenue of $1.015 billion. The company generated annual operating cash flow of $461 million and free cash flow of $461 million.
In the first quarter of 2024, the company reported adjusted operating income of $113 million, or $1.96 per share, compared to $68 million, or $1.12 per share, in the same period last year. This strong performance was driven by higher net earned premiums, mark-to-market gains on Puerto Rico contingent value instruments, and robust equity earnings from alternative investments.
Assured Guaranty's Insurance segment contributed $149 million to adjusted operating income in the first quarter of 2024, up from $117 million in the same period last year. The Asset Management segment reported adjusted operating income of $1 million, compared to a loss of $1 million in the first quarter of 2023.
The company's investment portfolio, which is primarily composed of investment-grade, liquid instruments, generated net investment income of $84 million in the first quarter of 2024, compared to $82 million in the same period last year. Equity in earnings of investees, which includes the company's alternative investments, increased to $40 million from $30 million in the first quarter of 2023.
Liquidity
Assured Guaranty maintains a strong liquidity position, with cash and investments of approximately $239 million at the holding company level as of March 31, 2024, of which $67 million resides at the AGL parent company. The company's insurance subsidiaries also have ample liquidity to meet their obligations.
Assured Guaranty has been proactive in managing its capital, returning significant capital to shareholders through share repurchases. In the first quarter of 2024, the company bought back 1.5 million shares for $129 million at an average price of $84.07 per share. This represents 2.7% of the shares outstanding at the beginning of the year. The company's Board of Directors has now authorized an additional $300 million in share repurchases, bringing the total remaining authorization to $414 million.
The consistent quarterly increases in Assured Guaranty's adjusted operating shareholders' equity per share and adjusted book value per share reflect the successful execution of the company's strategic initiatives and its ability to create long-term shareholder value.
Risks and Challenges
Assured Guaranty's business model has proven resilient through various market cycles and economic conditions. However, the company faces risks, including:
- Significant changes in inflation, interest rates, credit spreads, or general economic conditions - Geopolitical risks, such as the conflict in Ukraine or tensions between the U.S. and China - The potential for a U.S. government shutdown or default - Public health crises, like the COVID-19 pandemic - Increased competition from new entrants in the financial guaranty industry
Outlook
Despite these risks, Assured Guaranty remains optimistic about its future prospects. The company's insured portfolio and financial condition are stronger than ever, with below-investment-grade exposures comprising just 2.1% of its net par outstanding as of March 31, 2024. Assured Guaranty is also well-positioned to capitalize on the growing demand for its insurance products, particularly in the public finance and infrastructure sectors.
Moreover, the company's strategic partnership with Sound Point Capital Management is expected to generate a stable stream of fee-based earnings and enhance its alternative investment opportunities. Assured Guaranty's management team is confident in the company's ability to continue delivering consistent value to shareholders in the years to come.
Conclusion
Assured Guaranty's impressive performance over the past two decades, including its strong first-quarter 2024 results, demonstrates the resilience and effectiveness of its business model. The company's prudent approach to risk management, capital allocation, and shareholder returns has positioned it as a leading provider of financial guaranty insurance and a reliable investment for shareholders. With a robust pipeline of new business opportunities, a strengthened asset management platform, and a steadfast commitment to creating long-term value, Assured Guaranty appears poised for continued success in the years ahead.