2023-08-22 05:54:34 ET
Summary
- Assured Guaranty has been focusing on deleveraging its operations and reducing its exposure to Puerto Rico.
- The company offers credit protection products in the United States and internationally, with two segments: Insurance and Asset Management.
- AGO's financial strength is supported by its substantial investment portfolio and short duration of fixed-maturity securities.
- The valuation of the company is currently too high for a buy recommendation.
Introduction
Assured Guaranty Ltd. ( AGO ) has been an interesting company to watch as it has been making strong steps towards deleveraging its operations and producing a better return to shareholders without too much-added risk. Some of these measures as been moving away from and removing almost all its Puerto Rico exposure. Dividends continue to be a big point as to why AGO is such a strong income opportunity. But the valuation right now seems rather rich even if the company boasts a solid insured portfolio.
For me, the view on AGO should be quite neutral right now. Overpaying and not getting any significant growth in return seems hardly worth it. For AGO that is what I am seeing with the p/e at 13 and p/b 17% above historical measurements for the company. The company is in the property and casualty insurance industry and I think there is a decent chance that AGO continues growing its earnings and portfolio, just not at the rate that I think it's valued at right now. This leads me to rate the company as a hold rather than a buy.
Company Structure
What AGO does is provide credit protection products for various purposes like public finance, infrastructure, and structured finance markets. The operations are in the United States but also internationally.
Two different segments make up the company structure, those being Insurance and Asset Management. Offering financial guaranty insurance that protects holders of debt instruments and other various debt obligations. AGO needs to manage a significant amount of risk and only take on what it can handle, seems obvious but it's a thin line to tread that if leaned too heavily on one side can result in quite disappointing results.
Looking at how the company can return capital and earnings to shareholders it seems to come primarily from buying back shares. The shares outstanding as seen above here were reduced by over 10% YoY.
Where AGO has done very well is in reducing the expenses in the business as it decreased by 18% YoY and this has ultimately helped grow the margins of the business which for the net margin sits at 20%, this is however far below what has been the average for the company the last 5 years on average, around 46% below.
AGO's financial strength is underscored by its substantial investment portfolio, which stands at $8.7 billion. Notably, this portfolio maintains an average A+ rating, reflecting AGO's commitment to holding assets with solid credit quality. Additionally, the company holds $396 million in AssuredIM funds, valuing at $296 million, further bolstering its diversified asset base.
Dividend Summary (Seeking Alpha)
A key aspect that highlights AGO's prudence and positioning is the overall duration of its fixed-maturity securities, which stands at a mere 3.5 years. This relatively short duration serves as a strategic advantage, as it implies the company is less exposed to interest rate fluctuations over the long term. In this regard, AGO demonstrates a proactive approach to managing interest rate risk and maintaining stability in its investment portfolio.
Valuation & Comparison
GGM Model (Author)
Looking at the chart above it further highlights what my conclusion about the company has been, it's too richly valued to properly justify a buy right now. I want a 10% return at least and even though the dividend increase is quite high at 8% the target prices come out lower than where it's currently at. This is suppressing a buy and as I want some sort of margin of safety too, AGO looks rather risky now to be investing into. The risk for further downside seems stronger than the upside from here on out.
Risk Associated
AGO's potential susceptibility to the fiscal challenges faced by municipalities in Chicago, San Francisco, and Illinois could be quite limited. It's worth noting that the direct exposure of AGO to these specific regions might not be substantial. While this is an important point, there are other critical factors to consider in evaluating AGO's risk profile.
For instance, the pricing strategy AGO employs for its "AA" indemnity, currently ranging between 150 to 175 basis points, plays a pivotal role in the stock's vulnerability. The fact that AGO isn't commanding higher premiums in the range of 300 to 400 basis points, especially in the face of concerning fiscal trends, is noteworthy. This positioning potentially exposes the company's stock to certain risks that stem from an existential downgrade of general municipal credits.
The crux of the issue lies in the broader context of municipal credits. The undeniable fiscal challenges faced by numerous municipalities have been garnering increasing attention. As fiscal trends take a negative turn across many localities, there's an emerging pressure on credit ratings. This, in turn, creates an environment where credit rating agencies like S&P might find it difficult to ignore these fiscal challenges.
Investor Takeaway
Operating as a credit protection company that offers products to public financing and infrastructure AGO has been able to grow rather decent over the last several years. Engaging in insurance and reinsurance too the broad nature of the business has lent to able generate quite a strong NI over the years. This has resulted in a solid dividend with a yield of around 1.8%. Despite the outlook seeming good for further dividend raises, the price you have to pay right now seems rich in comparison to what you are getting. I want a better entry point before making a buy case for AGO, as a result, I am concluding AGO as a hold.
For further details see:
Assured Guaranty: Waiting For A Better Valuation