Assured Guaranty Ltd. Reports Results for Fourth Quarter 2022 and Full Year 2022

Assured Guaranty Ltd. (NYSE: AGO) (AGL and, together with its consolidated entities, Assured Guaranty or the Company) announced today its financial results for the three-month period ended December 31, 2022 (fourth quarter 2022) and the year ended December 31, 2022 (FY 2022).

“Assured Guaranty performed well in 2022,” said Dominic Frederico, President and CEO. “Our insurance business saw a solid performance from our U.S public, international infrastructure and global structured finance sectors, producing $360 million in gross written premiums, or $375 million of total PVP, making 2022 the fifth consecutive year in which we generated more than $350 million of GWP and PVP.

“We reached settlement agreements for all but one of the defaulting Puerto Rico entities in our insured portfolio, and our Puerto Rico insured exposure in total decreased by $2.2 billion. Additionally, we continued to demonstrate thoughtful capital management, while returning $567 million to shareholders through share repurchases and dividends. The share repurchases reduced our shares outstanding by almost 13% from shares outstanding at year-end 2021.”

On a per share basis, shareholders’ equity attributable to AGL was $85.80 as of December 31, 2022, which was lower than shareholders’ equity attributable to AGL of $93.19 as of December 31, 2021, primarily due to unrealized losses on the investment portfolio that resulted from rising interest rates.

On a per share basis, adjusted operating shareholders’ equity increased to $93.92 as of December 31, 2022, from $88.73 as of December 31, 2021, and ABV increased to $141.98 as of December 31, 2022 from $130.67 as of December 31, 2021, primarily due to the accretive effect of the share repurchase program, and in the case of ABV, net premiums written and favorable loss development. See “Common Share Repurchases” on page 15.

Fourth Quarter 2022

Insurance Segment

The Insurance segment primarily consists of the Company’s insurance subsidiaries that provide credit protection products to the United States (U.S.) and non-U.S. public finance (including infrastructure) and structured finance markets.

Insurance segment adjusted operating income was $66 million in fourth quarter 2022, compared with $277 million in the three-month period ended December 31, 2021 (fourth quarter 2021). The variance was primarily attributable to loss expense and changes in net asset values of alternative investments reported in “equity in earnings (losses) of investees”, as shown in the table above. The components of premiums, losses and income from the investment portfolio are presented below.

Insurance Segment Net Earned Premiums and Credit Derivative Revenues

Net earned premiums attributable to accelerations increased in fourth quarter 2022 compared with fourth quarter 2021 primarily due to the resolution of Puerto Rico Highways and Transportation Authority exposures, offset by declines in scheduled net earned premiums due to the effect of terminations and refundings since the fourth quarter of 2021 on recurring net earned premiums.

Insurance Segment Loss Expense (Benefit) and the Rollforward of Expected Losses

The table below presents the loss expense (benefit) recognized in the Insurance segment’s adjusted operating income.

The table below presents the rollforward of expected losses for fourth quarter 2022.

Loss expense (benefit) is a function of economic loss development (benefit), as well as the amortization of deferred premium revenue. In fourth quarter 2022 loss expense in the public finance sector was $58 million and the economic development was a loss of $39 million. Public finance economic development was primarily due to certain Puerto Rico exposures. The difference between public finance loss expense and public finance economic development was primarily attributable to the release of deferred premium revenue associated with extinguished Puerto Rico policies.

The economic benefit in fourth quarter 2022 for U.S. RMBS was $16 million, primarily attributable to higher recoveries on previously charged-off loans and improved performance in certain transactions.

In fourth quarter 2021 the Company sold a portion of its salvage and subrogation recoverables associated with certain matured Puerto Rico exposures, and increased its assumptions for the value of recoveries to be received in 2022 in connection with the resolution of general obligation bonds of the Commonwealth of Puerto Rico and obligations of its related authorities and public corporations, the Public Buildings Authority, the Convention Center District Authority, the Infrastructure Financing Authority and the Highways and Transportation Authority under the Puerto Rico Oversight, Management, and Economic Stability Act (2022 Puerto Rico Resolutions) resulting in a benefit in loss expenses.

Insurance Segment Income from Investment Portfolio

Net investment income, which represents interest income on fixed-maturity debt securities and short-term investments, increased to $80 million in fourth quarter 2022 from $67 million in fourth quarter 2021, primarily due to rising interest rates on short-term investments.

In the Insurance segment, investments in AssuredIM Funds are recorded at net asset value (NAV), with the change in NAV reported in “equity in earnings (losses) of investees.” Equity in earnings of AssuredIM Funds is mainly generated by healthcare, collateralized loan obligations (CLOs) and asset-based funds. As of December 31, 2022, the Insurance segment had invested $569 million (at fair value) in AssuredIM Funds, and inception-to-date realized and unrealized gains on AssuredIM Funds totaled $110 million. Equity in earnings of other alternative investments was a loss in fourth quarter 2022, primarily attributable to a private equity fund.

Equity in earnings of AssuredIM Funds was a gain of $10 million in fourth quarter 2021, primarily attributable to higher valuations of assets held in the asset-based fund that was launched in 2021. Equity in earnings of other alternative investments was a gain of $34 million in fourth quarter 2021, mainly attributable to a large fair value gain on a specific investment in a private equity fund.

Equity in earnings of investees is more volatile than net investment income on fixed-maturity securities and short-term investments. To the extent that the amounts invested in AssuredIM Funds and other alternative investments increase and available-for-sale fixed-maturity securities decrease, net investment income may decline and mark-to-market volatility may increase.

Insurance Segment New Business Production

PVP, a non-GAAP financial measure, measures the value of the Insurance segment’s new business production for all contracts regardless of form or GAAP accounting model. See “Explanation of Non-GAAP Financial Measures” at the end of this press release.

U.S. public finance GWP and PVP in fourth quarter 2022, was higher than the comparable GWP and PVP in fourth quarter 2021, primarily due to several large transactions in the healthcare and infrastructure sector in fourth quarter 2022. The Company’s direct par written represented 70% of the total U.S. municipal market insured issuance in fourth quarter 2022, compared with 61% in fourth quarter 2021, and the Company’s penetration of all municipal issuance increased to 6.1% in fourth quarter 2022 from 4.6% in fourth quarter 2021.

Fourth quarter 2022 structured finance GWP and PVP were primarily attributable to insurance securitization transactions, and commercial real estate and pooled corporate obligations.

Asset Management Segment

In the Asset Management segment, the Company provides investment advisory services, which include the management of CLOs and opportunity funds, as well as certain legacy hedge and opportunity funds now subject to an orderly wind-down. The Asset Management segment was affected by the challenging global economy and financial markets and the widening of CLO spreads, as well as the runoff of our legacy funds and certain strategic limitations during the year.

The Company is exploring alternative accretive growth strategies for its asset management business, with the goal of maximizing the value of this business for its stakeholders. The Company remains committed to growing asset management-related earnings and is pursuing strategies that would provide it with an avenue for such growth. Discussions regarding alternative accretive growth strategies are ongoing and there can be no assurance that such discussions will result in any transaction.

Corporate Division

The Corporate division primarily consists of interest expense on the debt of Assured Guaranty US Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH), as well as other operating expenses attributed to holding company activities. Adjusted operating loss for the Corporate division was $36 million in fourth quarter 2022 compared with $31 million in fourth quarter 2021.

Other (Effect of FG VIE and CIV consolidation)

The effect of consolidating FG VIEs and CIVs in fourth quarter 2022 was a $5 million loss related to FG VIE consolidation and a $8 million loss related to CIV consolidation. In fourth quarter 2021 the effect of consolidating FG VIEs and CIVs was a gain of $30 million primarily related to a pre-tax gain on consolidation of an AssuredIM healthcare fund.

Reconciliation to GAAP

The following table presents a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).

Non-credit impairment-related unrealized fair value gains on credit derivatives in fourth quarter 2022 were primarily due to a general decrease in credit spreads of the underlying reference obligations, offset in part by a decrease in the Company’s own credit spreads and the effects of foreign exchange movements. Non-credit impairment-related unrealized fair value losses on credit derivatives in fourth quarter 2021 related primarily to a decrease in the Company’s own credit spread. Except for credit impairment, the fair value adjustments on credit derivatives in the insured portfolio are non-economic adjustments that reverse to zero over the remaining term of that portfolio.

Fair value gains on CCS in fourth quarter 2022 related primarily to increase in London Interbank Offered Rate (LIBOR). Fair value of CCS is heavily affected by, and in part fluctuates with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

Foreign exchange gains in fourth quarter 2022 primarily relate to remeasurement of premiums receivable and are mainly due to changes in the exchange rates relative to the U.S. dollar of the pound sterling and, to a lesser extent, the euro.

Full Year 2022

Insurance Segment

Insurance segment adjusted operating income for FY 2022 was $413 million, compared with $722 million for the year ended December 31, 2021 (FY 2021). The decrease was mainly attributable to loss expense and changes in net asset values for alternative investments reported in “equity in earnings (losses) of investees”, offset in part by higher net earned premiums and credit derivative revenues, as shown in the table above. The components of premiums, losses and income from the investment portfolio are presented below.

Insurance Segment Net Earned Premiums and Credit Derivative Revenues

Net earned premiums attributable to accelerations increased in FY 2022 compared with FY 2021 primarily due to the 2022 Puerto Rico Resolutions, offset by declines in scheduled net earned premiums due to the effect of Puerto Rico and certain other terminations and refundings on recurring scheduled net earned premiums, the scheduled decline of the legacy structured finance book of business, and updates to debt service assumptions in 2022.

Insurance Segment Loss Expense (Benefit) and the Rollforward of Expected Losses

In FY 2022 loss expense in the public finance sector was $128 million and the economic development was a loss of $17 million, both primarily attributable to Puerto Rico exposures offset in part by the effects of changes in discount rates. The difference between public finance loss expense and public finance economic development was primarily attributable to the release of unearned premium reserves associated with extinguished Puerto Rico policies. The U.S. RMBS economic benefit of $143 million was primarily attributable to changes in discount rates, improved performance of certain transactions, higher recoveries on charged-off second lien loans, the purchase of a loss mitigation security, and updates in projected default curves, partially offset by lower excess spread. The economic development attributable to changes in discount rates across all sectors was a benefit of $115 million in FY 2022.

In FY 2021 loss expense for public finance transactions was a benefit of $155 million, and the economic benefit for public finance transactions was $204 million, primarily due to Puerto Rico exposures. In fourth quarter 2021 the Company sold a portion of its salvage and subrogation recoverable assets associated with Puerto Rico exposures. It also increased its assumptions for the value of recoveries to be received in 2022 under the 2022 Puerto Rico Resolutions, and incorporated refinements in certain terms of the Puerto Rico support agreements, resulting in a net benefit in loss expense. The FY 2021 U.S. RMBS economic benefit of $100 million was primarily attributable to higher projected recoveries on charged-off second lien loans, improved performance of certain transactions, the implementation of a recovery assumption on certain deferred principal balances in first lien loans and changes in discount rates, partially offset by lower excess spread. The economic development attributable to changes in discount rates across all sectors was a benefit of $33 million in FY 2021.

Insurance Segment Income from Investment Portfolio

Net investment income was consistent in FY 2022 compared with FY 2021. FY 2022 losses on CVIs received as part of the 2022 Puerto Rico Resolutions, and classified as trading securities, were $34 million. Equity in earnings of AssuredIM Funds in FY 2022 was a loss primarily attributable to the dilutive impact of a subsequent close of a healthcare fund, which increased revenues in the Asset Management segment. Equity in earnings of other alternative investments generated losses of $41 million in FY 2022 primarily due to mark-to-market losses in a private equity fund.

Equity in earnings of AssuredIM Funds in FY 2021 was primarily attributable to higher valuations of assets held in: (i) the healthcare fund that opened at the end of 2020; (ii) CLO funds; and (iii) the asset-based fund that was launched in the third quarter of 2021. Equity in earnings of other alternative investments generated gains of $64 million in FY 2021 primarily due to a large fair value gain on a specific investment in a private equity fund.

Insurance Segment New Business Production

U.S. public finance GWP increased in FY 2022 to $248 million from $231 million in FY 2021, and the corresponding PVP increased in FY 2022 to $257 million from $235 million in FY 2021. The increase was primarily due to a higher proportion of secondary market transactions. The Company’s direct par written represented 59% of the total U.S. municipal market insured issuance in FY 2022, compared with 60% in FY 2021, and the Company’s penetration of all municipal issuance was 4.7% in FY 2022, compared with 5.0% in FY 2021.

In FY 2022, non-U.S. public finance GWP and PVP included the restructuring of several existing transactions that resulted in additional GWP and PVP, without an increase in gross par, and several large transactions involving secondary market guarantees for institutional investors and banks, and a United Kingdom water utility liquidity guarantee.

FY 2022 structured finance GWP and PVP were primarily attributable to large insurance securitization transactions and pooled corporate obligations. PVP also includes a guarantee of rental income cash flows.

Asset Management Segment

Asset Management segment adjusted operating loss was $6 million for FY 2022, compared with adjusted operating loss of $19 million for FY 2021. The improvement in Asset Management segment results is primarily attributable to an increase in opportunity fund management and performance fees.

Corporate Division

Adjusted operating loss for the Corporate division was $134 million in FY 2022 compared with an adjusted operating loss of $263 million in FY 2021. The Corporate division loss in FY 2021 was primarily due to the loss on extinguishment of debt of $175 million on a pre-tax basis ($138 million after-tax) associated with the redemption of AGMH and AGUS debt, which represented the difference between the amount paid to redeem the debt and the carrying value of the debt.

Other (Effect of FG VIE and CIV consolidation)

The effect of consolidating FG VIEs and CIVs in FY 2022 consisted of a $4 million gain related to FG VIE consolidation and a $10 million loss related to CIV consolidation. In FY 2021 the effect of consolidating FG VIEs and CIVs was a gain of $30 million primarily related to a pre-tax gain on consolidation of an AssuredIM healthcare fund.

Reconciliation to GAAP

The following table presents a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).

Realized losses on investments in FY 2022 primarily relate to losses on sales of Puerto Rico recovery bonds and credit impairment in 2022 on obligations that the Company has insured and for which it had expected losses to be paid, that the Company purchases in order to mitigate the economic effect of insured losses (Loss Mitigation Securities).

Non-credit impairment-related unrealized fair value losses on credit derivatives in FY 2022 were generated primarily as a result of wider asset spreads, partially offset by the increased cost to buy protection on AGC, and changes in discount rates. Non-credit impairment-related unrealized fair value losses on credit derivatives in FY 2021 primarily related to the lower cost to buy protection on the Company’s name.

Fair value gains on CCS in FY 2022 were primarily driven by an increase in LIBOR during 2022. Fair value losses on CCS in FY 2021 were primarily driven by tightened market spreads during 2021.

Foreign exchange losses in both periods primarily relate to remeasurement of premiums receivable and are mainly due to changes in exchange rates relative to the U.S. dollar of the pound sterling and, to a lesser extent, the euro.

Common Share Repurchases

From 2013 through February 28, 2023, the Company has repurchased 141 million common shares at an average price of $33.09, representing approximately 73% of the total shares outstanding at the beginning of the repurchase program in 2013. On February 23, 2022 and August 3, 2022, the Board authorized the repurchase of an additional $350 million and $250 million, respectively, of its common shares. As of February 28, 2023, the Company was authorized to purchase $201 million of its common shares. These repurchases can be made 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 of Directors at any time. It does not have an expiration date.

Financial Statements

Explanation of Non-GAAP Financial Measures

The Company discloses both: (a) financial measures determined in accordance with GAAP; and (b) financial measures not determined in accordance with GAAP (non-GAAP financial measures). Financial measures identified as non-GAAP should not be considered substitutes for GAAP financial measures. The primary limitation of non-GAAP financial measures is the potential lack of comparability to financial measures of other companies, whose definitions of non-GAAP financial measures may differ from those of the Company.

The Company believes its presentation of non-GAAP financial measures provides information that is necessary for analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.

GAAP requires the Company to consolidate entities where it is deemed to be the primary beneficiary which include:

• FG VIEs, which the Company does not own and where its exposure is limited to its obligation under the financial guaranty insurance contract, and
• CIVs in which certain subsidiaries invest and which are managed by AssuredIM.

The Company discloses the effect of FG VIE and CIV consolidation that is embedded in each non-GAAP financial measure, as applicable. The Company believes this information may also be useful to analysts and investors evaluating Assured Guaranty’s financial results. In the case of both the consolidated FG VIEs and the CIVs, the economic effect on the Company of each of the consolidated FG VIEs and CIVs is reflected primarily in the results of the Insurance segment.

Management of the Company and AGL’s Board of Directors use non-GAAP financial measures further adjusted to remove the effect of FG VIE and CIV consolidation (which the Company refers to as its core financial measures), as well as GAAP financial measures and other factors, to evaluate the Company’s results of operations, financial condition and progress towards long-term goals. The Company uses core financial measures in its decision-making process for and in its calculation of certain components of management compensation. The financial measures that the Company uses to help determine compensation are: (1) adjusted operating income, further adjusted to remove the effect of FG VIE and CIV consolidation; (2) adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation; (3) adjusted book value per share, further adjusted to remove the effect of FG VIE and CIV consolidation; (4) PVP, and (5) gross third-party assets raised.

Management believes that many investors, analysts and financial news reporters use adjusted operating shareholders’ equity and/or adjusted book value, each further adjusted to remove the effect of FG VIE and CIV consolidation, as the principal financial measures for valuing AGL’s current share price or projected share price and also as the basis of their decision to recommend, buy or sell AGL’s common shares. Management also believes that many of the Company’s fixed income investors also use adjusted operating shareholders’ equity, further adjusted to remove the effect of FG VIE and CIV consolidation, to evaluate the Company’s capital adequacy.

Adjusted operating income, further adjusted for the effect of FG VIE and CIV consolidation enables investors and analysts to evaluate the Company’s financial results in comparison with the consensus analyst estimates distributed publicly by financial databases.

The following paragraphs define each non-GAAP financial measure disclosed by the Company and describe why it is useful. To the extent there is a directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is presented below.

Adjusted Operating Income

Management believes that adjusted operating income is a useful measure because it clarifies the understanding of the operating results of the Company. Adjusted operating income is defined as net income (loss) attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of realized gains (losses) on the Company’s investments, except for gains and losses on securities classified as trading. The timing of realized gains and losses, which depends largely on market credit cycles, can vary considerably across periods. The timing of sales is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax and capital profile.

2) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives that are recognized in net income, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, the Company’s credit spreads and other market factors and are not expected to result in an economic gain or loss.

3) Elimination of fair value gains (losses) on the Company’s CCS that are recognized in net income. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss.

4) Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and LAE reserves that are recognized in net income. Long-dated receivables and loss and LAE reserves represent the present value of future contractual or expected cash flows. Therefore, the current period’s foreign exchange remeasurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that the Company will ultimately recognize.

5) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

See “Reconciliation to GAAP” above for a reconciliation of net income (loss) attributable to AGL to adjusted operating income (loss).

Adjusted Operating Shareholders’ Equity and Adjusted Book Value

Management believes that adjusted operating shareholders’ equity is a useful measure because it excludes the fair value adjustments on investments, credit derivatives and CCS that are not expected to result in economic gain or loss.

Adjusted operating shareholders’ equity is defined as shareholders’ equity attributable to AGL, as reported under GAAP, adjusted for the following:

1) Elimination of non-credit impairment-related unrealized fair value gains (losses) on credit derivatives, which is the amount of unrealized fair value gains (losses) in excess of the present value of the expected estimated economic credit losses, and non-economic payments. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market interest rates, credit spreads and other market factors and are not expected to result in an economic gain or loss.

2) Elimination of fair value gains (losses) on the Company’s CCS. Such amounts are affected by changes in market interest rates, the Company’s credit spreads, price indications on the Company’s publicly traded debt and other market factors and are not expected to result in an economic gain or loss.

3) Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of accumulated other comprehensive income (AOCI). The AOCI component of the fair value adjustment on the investment portfolio is not deemed economic because the Company generally holds these investments to maturity and therefore would not recognize an economic gain or loss.

4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

Management uses adjusted book value, further adjusted for FG VIE and CIV consolidation, to measure the intrinsic value of the Company, excluding franchise value. Adjusted book value per share, further adjusted for FG VIE and CIV consolidation (core adjusted book value), is one of the key financial measures used in determining the amount of certain long-term compensation elements to management and employees and used by rating agencies and investors. Management believes that adjusted book value is a useful measure because it enables an evaluation of the Company’s in-force premiums and revenues net of expected losses. Adjusted book value is adjusted operating shareholders’ equity, as defined above, further adjusted for the following:

1) Elimination of deferred acquisition costs, net. These amounts represent net deferred expenses that have already been paid or accrued and will be expensed in future accounting periods.

2) Addition of the net present value of estimated net future revenue. See below.

3) Addition of the deferred premium revenue on financial guaranty contracts in excess of expected loss to be expensed, net of reinsurance. This amount represents the present value of the expected future net earned premiums, net of the present value of expected losses to be expensed, which are not reflected in GAAP equity.

4) Elimination of the tax effects related to the above adjustments, which are determined by applying the statutory tax rate in each of the jurisdictions that generate these adjustments.

The unearned premiums and revenues included in adjusted book value will be earned in future periods, but actual earnings may differ materially from the estimated amounts used in determining current adjusted book value due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.