- Assured Guaranty sold off by 12% after earnings, likely due to mark to market noise from higher rates and FX.
- The most troublesome credit should be resolved this month and then there will only be PREPA, which should happen this year, ending the Puerto Rico saga.
- AGO trades at 38.5% of its adjusted operating book value, when historically that number has been around 50%, even when Puerto Rico issues were a massive concern.
- The below investment grade exposure in the insured portfolio has never been lower than now and it will drop again by a lot after HTA is settled this quarter.
Assured Guaranty ( AGO ) is a stock I’ve written about many times, starting in 2012, and I’ve been an investor since either early 2009, or late 2008, as my memory is getting older. In that time, there have only been two times I’ve been really shocked by a short-term stock move, as I’ve understood the rationale on most. One was in March of 2020, when it plummeted by an insane amount in peak Covid-19/lockdown times, and today as the stock has dropped by 12% after reporting 2 nd quarter earnings. In this article I’ll discuss the investment outlook for the stock and review earnings. This feels like a pretty amazing buying opportunity, and I’ve done so this morning.
AGO 2nd quarter investor presentation AGO 2nd quarter investor presentation
Source: AGO Q2 Equity Investor Presentation
On August 3 rd , AGO reported that in the 2 nd quarter the company earned $30MM of adjusted operating income, $ or $.46 per share. The GAAP loss was $47MM or $(.74) per share. These figures are a bit misleading as they include $63MM of after-tax losses related to foreign exchange remeasurement. In addition, there was a $27MM after-tax hit on alternative assets, $25MM on available-for-sale investments (which are likely the contingent value investments received on a Puerto Rico settlement), and $15MM on trading securities. So, the loss was completely based on mark to market noise that has nothing to do with the underlying business of bond insurance. Over the last two years, AGO has shifted a portion of its investment portfolio into investment securities managed by their asset manager (AssuredIM), such as CLOs and a Healthcare fund. These funds are marked to market on a quarterly basis, leading to both gains and losses. This quarter those funds were down like almost all fixed income-type securities. In addition, the strong dollar, caused FX mark to market losses on revenues derived abroad from the European operations. Many if not most of these losses will likely reverse, especially since interest rates have headed quite a bit lower thus far this quarter, so we might not have to wait long. CLO prices have rallied quite a bit over the last month as well.
Earned premiums were $82MM, net investment income was $62MM, asset management fees were $21MM, and loss and loss adjustment expense were a net benefit of $11MM. Once again, clearly the issue wasn’t anything with the insured portfolio, and AGO has very stable and predictable revenues streams moving many years into the future. The underlying business results were actually quite good if not for the investment portfolio losses, which should bode well moving forward.
The company generated $76MM of new business production (PVP), insuring approximately $6.7B of new business par, which was the largest amount of second quarter par insured in a decade. Even better, management mentioned that PVP in Q3 thus far has already exceeded this strong 2 nd quarter. Capital markets were basically frozen in Q2, but demand is increasing for bond insurance and momentum is building. As spreads widen and rates increase, bond insurance demand typically picks up by quite a bit and we are seeing the signs. You just need more open capital markets and clearly, this Q3 production one month into the quarter bodes well for the company.
Book value per share declined to $84.89 at the end of Q2, as unrealized AOCI losses from higher interest rates impacted the metric, like with just about every other insurance company reporting this quarter. Both Operating Shareholders’ equity and Adjusted Operating Shareholders’ Equity hit records this quarter of $90.18 and $134.91, respectively, bolstered by accretive stock buybacks. I’d expect all book value per share metrics to continue their upwards ascent as the company continues to take advantage of buybacks at these outrageous prices, materially discounted from all book value metrics. To put it in perspective, at the end of 2012, Adjusted Operating Shareholders’ equity per share was only $45.06, so the company has added nearly $90 per share of value in just under ten years. The formula is sustained profitability and smart capital allocation, taking advantage of the disconnect between stock price and intrinsic value.
Year-to-date AGO has earned $120MM of adjusted operating income, or $1.81 per share. New business production has been solid, generating $145MM of new business production, by insuring approximately $11.2B of new business par, which is the second largest amount of first half par insured in a decade. Insured par market penetration has been 8.8%, which is up from 8.2% last year, and 7.6% the year in 2020. This has been an encouraging trend as more issuers are seeing the value of using bond insurance, and it is likely to become even more important as bond insurance is one of the few ways to weaken the impact that higher rates are having on new bond issuances. AGO’s market share has been 56% YTD, down from 61% last year. AGM and AGUK also received a ratings upgrade to A1 (from A2) with stable outlook from Moody’s.
AGO 2nd quarter investor presentation
The Asset Management division AssuredIM, increased AUM to $17.9B, which was up approximately $947 in the quarter. The division has improved its operating income to break even in both Q1 and Q2, which is a big improvement from losing money the past few years. Ultimately this division needs to become profitable on an operating basis, so hopefully we see that as the year progresses. They completed the final closing for Assured Healthcare Partners’ Fund II, which brought final aggregate commitments of $760MM. In addition, the unit priced two U.S. CLOs, selling nearly 50% of the equity to third parties. It was a brutal first half of the year for just about all classes of investments and CLOs were very volatile, while municipal bonds had their worst first half performance since the 1980s. This has opened the door for more attractive and higher yielding investment opportunities, which bodes well for the future. Treasury yields have come down quite a bit over the past month, which also would reverse a decent portion of AOCI losses, which have been a short-term hindrance for most of the financial sector, including AGO the last two quarters. AssuredIM has brought its investment acumen to the company, as AGO’s subsidiaries have invested up to $750MM in funds managed by AssuredIM. $516MM has been invested thus far, which as of the end of Q2 is worth $549MM. CLOs and municipal bonds have had a nice little rally, so I’d bet the mark to market figure is higher than that.
AGO 2nd quarter investor presentation
AGO repurchased nearly $3MM shares of AGO at a total cost of nearly $141MM. YTD, the company has repurchased over 5MM shares for a total cost of approximately $306MM. The company was also active from quarter end to August 3 rd , spending another $35MM on buybacks, all at massive discount to tangible book value per share. The Board just issued another $250MM repurchase authorization, so the accretive buybacks should continue. Assured Guaranty also pays a $.25 per share quarterly dividend.
AGO 2nd quarter investor presentation
AGO has consummated the settlement of its Puerto Rico GO, PBA, CCDA and PRIFA exposure, reducing its exposure to BIG credit by roughly $1.3B. Under the settlement, the company received cash, new recovery bonds and other securities with a par value of $1.2B, in addition to contingent value instruments that are linked to certain sales tax revenues. AGO’s insured portfolio has never been healthier in its history as a public company, with below investment grade ('BIG') credits now representing only 2.3%, which is down 26% from the 3.1% year-end figure. In my opinion, the most worrisome Puerto Rico credit has been the Highway Transit Authority, HTA, but in May the Oversight Board submitted that plan of adjustment to the Title III Court, and there is a confirmation hearing on August 17/18. In July, AGO received its share of certain HTA recoveries under the Commonwealth plan related to clawbacks, which consisted of cash totaling $147MM and $668MM notional of contingent value instruments. Once the HTA Plan of Adjustment is confirmed and implemented, the company will receive further recoveries. In other Puerto Rico news, disappointingly the Commonwealth, supported by the Oversight Board, terminated the previously agreed Restructuring Support Agreement for PREPA. There have been numerous RSAs at this point and all have had the monoline insurers losing very little and I certainly don’t expect that to change given the quality of the credit, as the monopoly utility on the island. The Title III court is applying pressure to complete mediation to achieve a consensual resolution, so once that is done, the Puerto Rico saga will thankfully be at an end.
At a recent price of $51.99, AGO trades at just 61%, 57%, and 38.5% of its book value, operating book value, and adjusted operating book value. These are some of the cheapest metrics I can remember, and it is a result of very strong book value growth these last few years, which will continue as the mark to market AOCI noise reverses, accretive stock buybacks keep going, and retained earnings increase. The insured portfolio has literally never been better. The HTA will likely be resolved this month, while PREPA will be the last one likely later in the year, and Puerto Rico exposure has never been lower. As I mentioned earlier, I’ve bought the selloff and I think the opportunity for 50% returns in the next 18-24 months is quite good, with relatively low risk in my estimation due to the margin of safety!
For further details see:
I Bought The Silly Selloff In Assured Guaranty Aggressively