Assured Guaranty Ltd. Reports Results for First Quarter 2021

GAAP Highlights

• Net income attributable to Assured Guaranty Ltd. was $11 million, or $0.14 per share,⁽¹⁾ for first quarter 2021. This includes a $13 million after-tax write-off of an intangible asset attributable to the insurance licenses of Municipal Assurance Corp. (MAC) as a result of an internal organizational restructuring.
• Shareholders’ equity attributable to Assured Guaranty Ltd. per share was $84.67 as of March 31, 2021, the second highest ever reported.

Non-GAAP Highlights

• Adjusted operating income⁽²⁾ was $43 million, or $0.55 per share, for first quarter 2021. This also includes a $13 million after-tax write-off of the MAC insurance licenses.
• Adjusted operating shareholders’ equity⁽²⁾ per share and adjusted book value (ABV)⁽²⁾ per share reached record highs of $79.44 and $116.56, respectively, as of March 31, 2021.

Return of Capital to Shareholders

• First quarter 2021 capital returned to shareholders was $95 million, including share repurchases of $77 million, or 2.0 million shares, and dividends of $18 million.

Insurance Segment

• Adjusted operating income was $79 million for first quarter 2021.
• Gross written premiums (GWP) were $87 million for first quarter 2021, the highest first-quarter result in four years.
• Present value of new business production (PVP)⁽²⁾ was $86 million for first quarter 2021.

Asset Management Segment

• Adjusted operating loss was $7 million for first quarter 2021.
• Gross inflows were $1.0 billion for first quarter 2021.

HAMILTON, Bermuda–(BUSINESS WIRE)–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 March 31, 2021 (first quarter 2021).

Commenting on first quarter activity, Dominic Frederico, President and CEO said: “Assured Guaranty has now reached important new consensual settlement agreements relating to Puerto Rico that, combined with a previous agreement, will resolve over 93% of our net par outstanding of Puerto Rico exposures, once court-approved and implemented. Of our additional $241 million of net par, almost all relates to credits that have not missed any principal or interest payments.

“Additionally,” he continued, “in a quarter when our important shareholder value measures of adjusted operating shareholders’ equity per share and adjusted book value per share again achieved new highs, our new business production generated $86 million of PVP, more than in all but one first quarter since 2009, driven by very strong U.S. public finance production. The $5.5 billion of municipal new issue par sold with our insurance was the most we insured in any first quarter since 2010, and our 65% share of insured municipal par sold was better than our market share in any quarter since 2014.

“The first quarter also saw a resurgence in the global CLO market that benefited our asset management business, which issued two new CLOs during the quarter and continued to sell legacy CLO equity to third parties. CLO management fees for the quarter were more than double those of last year’s first quarter.”

As of March 31, 2021, on a per share basis, shareholders’ equity attributable to AGL was the second highest ever reported, and adjusted operating shareholders’ equity and ABV both reached record highs.

Shareholders’ equity attributable to AGL declined, on both a nominal and per-share basis, due mainly to unrealized losses on the fixed-maturity investment portfolio. Share repurchases and dividends also reduced shareholders’ equity attributable to AGL. See “Common Share Repurchases” on page 10.

Adjusted operating shareholders’ equity and ABV decreased on a nominal basis primarily due to share repurchases and dividends, partially offset, in the case of ABV, by net premiums written on new business production. On a per share basis, adjusted operating shareholders’ equity and ABV benefited from the repurchase of an additional 2.0 million shares in first quarter 2021.

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 international public finance (including infrastructure) and structured finance markets. The Insurance segment is presented without giving effect to the consolidation of financial guaranty variable interest entities (FG VIEs) and therefore includes premiums and losses of all financial guaranty contracts, whether or not the associated FG VIEs are consolidated, and also includes its share of earnings from funds managed by Assured Investment Management LLC (AssuredIM LLC) and its investment management affiliates (together with AssuredIM LLC, AssuredIM) (AssuredIM Funds).

Insurance adjusted operating income for first quarter 2021 was $79 million, compared with $85 million for the three-month period ended March 31, 2020 (first quarter 2020). The decrease was mainly due to the following:

• In first quarter 2021, the Company received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into Assured Guaranty Municipal Corp. (AGM), with AGM as the surviving company. As a result, the Company wrote-off the $16 million carrying value ($13 million after-tax) of MAC’s insurance licenses in first quarter 2021. MAC was merged with and into AGM on April 1, 2021. This restructuring of the Company’s U.S. insurance subsidiaries will simplify the organizational and capital structure, reduce costs, and increases the future dividend capacity of the U.S. insurance subsidiaries.

• Loss expense was $12 million higher. Loss expense in first quarter 2021 was primarily attributable to certain Puerto Rico and U.S. residential mortgage-backed securities (RMBS) exposures, partially offset by a benefit in certain European exposures. Loss expense in first quarter 2020 was primarily attributable to Puerto Rico exposures, partially offset by a benefit on first lien U.S. RMBS exposures.

These decreases were partially offset by higher income from the investment portfolio, which was $92 million in first quarter 2021, compared with $74 million in first quarter 2020, consisting of the following components:

The decrease in net investment income was primarily due to lower average balances in the fixed-maturity investment portfolio, which declined due to dividends paid by the insurance subsidiaries that were used for AGL share repurchases, lower reinvestment yields on short-term investments, and lower income on securities purchased for loss mitigation purposes.

Investments in AssuredIM Funds are recorded at net asset value (NAV), with the change in NAV recorded in the line item “equity in earnings of investees” in the Insurance segment. These include investments in healthcare funds, collateralized loan obligations (CLOs), a municipal bond fund and an asset-based fund. Equity in earnings of investees also includes the Company’s proportionate interests in other alternative investments managed by third parties. To the extent additional fixed-maturity securities are shifted to AssuredIM Funds and other alternative investments, the corresponding income in the condensed consolidated statements of operations will also shift from net investment income to equity in earnings of investees.

Equity in earnings of AssuredIM Funds in first quarter 2021 was a gain of $10 million, primarily attributable to changes in the NAV of CLO funds. In first quarter 2020, equity in earnings of AssuredIM Funds was a loss primarily attributable to CLO and asset-based funds. In addition, other alternative investments also generated gains of $9 million.

The Insurance segment is authorized to invest up to $750 million into AssuredIM Funds. As of March 31, 2021, the Insurance segment has total commitments to AssuredIM Funds of $587 million of which $335 million represents net invested capital and $252 million is undrawn. The Insurance segment’s interest in AssuredIM Funds was valued at $368 million as of March 31, 2021.

Net earned premiums and credit derivative revenues were consistent between first quarter 2021 and first quarter 2020, and consisted of the components presented in the table below.

Economic Loss Development

Net economic loss development of $13 million in first quarter 2021 primarily consists of $11 million in loss development on U.S. RMBS, which was mainly attributable to lower excess spread of $58 million, offset by a benefit of $33 million related to changes in discount rates, and a benefit of $14 million related to improved performance and recoveries on previously charged-off loans in certain second lien transactions. Certain U.S. RMBS transactions with insured floating-rate debt linked to the London Interbank Offered Rate (LIBOR) are supported by large portions of fixed-rate assets. When LIBOR increases, as it did in first quarter 2021, excess spread decreases. The economic development attributable to changes in discount rates for all transactions was a benefit of $48 million for first quarter 2021. Net economic loss development in first quarter 2021 includes the impact of the Puerto Rico plan support agreements announced through [yesterday].

New Business Production

GWP relates to both financial guaranty insurance and specialty insurance and reinsurance contracts. Financial guaranty GWP includes: (1) amounts collected upfront on new business written, (2) the present value of future contractual or expected premiums on new business written (discounted at risk free rates), and (3) the effects of changes in the estimated lives of transactions in the inforce book of business. Specialty insurance and reinsurance GWP is recorded as premiums are due. Credit derivatives are accounted for at fair value and therefore are not included in GWP.

The non-GAAP measure, PVP, includes upfront premiums and the present value of expected future installments on new business at the time of issuance, discounted at the approximate average pre-tax book yield of fixed-maturity securities purchased during the prior calendar year, for all contracts whether in insurance or credit derivative form. See “Explanation of Non-GAAP Financial Measures” at the end of this press release.

U.S. public finance GWP and PVP in first quarter 2021 both increased over 170%, compared with first quarter 2020, primarily driven by several large transactions as well as an increase in market volume and insured penetration. The average rating of U.S. public finance par written was A-. The Company’s gross par written represented 65% of the total U.S. municipal market insured issuance in first quarter 2021.

The Company has consistently written new non-U.S. public finance business every quarter since the end of 2015. Business activity in the international infrastructure and structured finance sectors typically has long lead times and therefore may vary from period to period.

Asset Management Segment

The Asset Management segment consists of AssuredIM, which provides asset management services to outside investors as well as to the Insurance segment.

Net CLO fees increased in first quarter 2021 compared with first quarter 2020, largely driven by the sale of CLO equity to third parties from legacy funds, the recovery of previously deferred CLO fees, and the issuance of new CLOs. The COVID-19 pandemic and downgrades in loan markets had triggered over-collateralization provisions in CLOs in 2020, resulting in the deferral of CLO management fees, the majority of which reversed by first quarter 2021. Management fees from opportunity funds and liquid strategies increased mainly due to fees from funds created since the Company acquired BlueMountain Capital Management, LLC. Management fees from wind-down funds decreased as distributions to investors continued.

Third party inflows of $873 million in first quarter 2021 was primarily attributable to the issuance of two new CLOs. While total assets under management (AUM) increased slightly in first quarter 2021 from $17.3 billion as of December 31, 2020 to $17.5 billion as of March 31, 2021, fee earning AUM rose by 11.4% over the same period, from $12.9 billion to $14.4 billion primarily due to the issuance of two new CLOs and the sale of CLO equity from legacy funds to third parties.

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 such as Board of Directors’ expenses and administrative services performed by operating subsidiaries for the holding companies.

Adjusted operating loss for the Corporate division was $10 million lower in first quarter 2021 compared with first quarter 2020 due primarily to a $5 million loss on extinguishment of debt and a $5 million write down of an equity method investment in first quarter 2020.

Other Items

Other items primarily consist of intersegment eliminations, reclassifications of the reimbursement of fund expenses to revenue, and consolidation adjustments, including the effect of consolidating FG VIEs and AssuredIM investment vehicles. The majority of the economic effect of the Company’s interest in consolidated AssuredIM Funds, as well as the premiums, investment income and losses associated with consolidated FG VIEs, are presented in the Insurance segment. On a consolidated basis, the ownership interests of the consolidated AssuredIM Funds to which it has no economic rights, are reflected as either redeemable or nonredeemable noncontrolling interests in the Company’s condensed consolidated financial statements.

Reconciliation to GAAP

The following table presents other income items that are not reflected in the Company’s segment metric, along with a reconciliation of net income (loss) attributable to AGL to adjusted operating income.

Non-credit impairment unrealized fair value losses on credit derivatives in first quarter 2021 were generated primarily as a result of the decreased cost to buy protection on Assured Guaranty Corp. (AGC), as the market cost of AGC’s credit protection decreased during the period. These losses were partially offset by higher discount rates. In first quarter 2020, non-credit-impairment fair value losses on credit derivatives were generated primarily as a result of wider spreads of the underlying collateral and lower discount rates, partially offset by gains due to the widening of AGC spreads. 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 losses on CCS in first quarter 2021 were primarily due to a tightening in market spreads during the quarter. Fair value gains on CCS in first quarter 2020 were primarily due to a widening in market spreads during the quarter. 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.

Common Share Repurchases

Contacts

Robert Tucker

Senior Managing Director, Investor Relations and Corporate Communications

212-339-0861

rtucker@agltd.com

Ashweeta Durani

Vice President, Corporate Communications

212-408-6042

adurani@agltd.com

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