Assured Guaranty Ltd. · NYSE:AGO
Assured Guaranty — Q4 2013 Earnings Presentation
59 slides from Assured Guaranty's earnings presentation, February 2014
Slide 1: Equity Investor Presentation December 31, 2013
EMBRACE POSSIBILITIES, INVEST IN CERTAINTIES Equity Investor Presentation December 31, 2013
Slide 2: Forward-Looking Statements and Safe Harbor Disclosure
Forward-Looking Statements and Safe Harbor Disclosure • This presentation contains information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give the expectations or forecasts of future
Slide 3: Conventions and Non-GAAP Financial Measures
Conventions and Non-GAAP Financial Measures • Unless otherwise noted, the following conventions are used in this presentation: – Ratings on our insured portfolio and on bonds purchased pursuant to loss mitigation or risk management strategies are Assured Guaranty’s internal ratings. Internal credit
Slide 4: Table of Contents
Table of Contents • 2013 accomplishments • Assured Guaranty overview – Track record of creating shareholder value – Simplified corporate structure – Dividend limitations • Underlying value – Selected company assets and liabilities – High quality investment portfolio – Deleveraging while maintaining
Slide 5: 2013 Accomplishments
2013 Accomplishments • Repurchased over 12 million common shares well below operating and adjusted book value • Successfully litigated the first R&W claim in court, against Flagstar • Reached five R&W agreements • Reached settlements with the estates of two bankrupt R&W entities • Reached tentative
Slide 6: Assured Guaranty Overview
Assured Guaranty Overview
Slide 7: Assured Guaranty Overview
Assured Guaranty Overview Assured Guaranty Ltd. • We are the leading financial guaranty ($ in billions) December 31, 2013 January 1, 2008 franchise, with over a quarter-century of (pro-forma)1 experience in the municipal and Net par outstanding $459.1 $626.6 structured finance markets U.S. public fi
Slide 8: Track Record of Creating Shareholder Value: Operating Income
Assured Guaranty Overview Track Record of Creating Shareholder Value • Since our initial public offering in 2004, we have grown our operating income1 from $141 million in 2004 to $609 million in 2013, an 18% compounded annual growth rate (CAGR) • Operating income1 has grown through acquisitions (acq
Slide 9: Track Record of Creating Shareholder Value: Dividends and Buybacks
Assured Guaranty Overview Track Record of Creating Shareholder Value • In addition, we have returned excess capital to shareholders by distributing dividends and opportunistically repurchasing our common shares – Since the 2004 IPO, we have more than tripled our quarterly dividend, reaching $0.10 pe
Slide 10: Simplified Corporate Structure
Assured Guaranty Overview Simplified Corporate Structure1 Current Corporate Structure Shareholders Assured Guaranty Ltd. Assured Guaranty Ltd.’s (Head Office – Bermuda total investment portfolio Tax Residence – U.K.)1 and cash is $33 million Assured Guaranty US Holdings Inc.’s and Assured Guaranty R
Slide 11: Dividend Limitations
Assured Guaranty Overview Dividend Limitations1 Assured Guaranty Re Ltd. Municipal Assurance Corp. (Bermuda) (U.S.) Dividend Limitations1 Dividend Limitations1 Based on regulatory capital requirements, AG Re has $600 million in excess capital The Company does not currently anticipate MAC distributin
Slide 12: Underlying Value
Underlying Value
Slide 13: Selected Company Assets and Liabilities
Underlying Value Selected Company Assets and Liabilities Selected Company Assets and Liabilities • Investment portfolio comprises 66% As of December 31, 2013 of our total assets, of which 90% is ($ in millions, except per share) invested in fixed income securities Total investment portfolio $10,785
Slide 14: High Quality Investment Portfolio
Underlying Value High Quality Investment Portfolio Investments Available for Sale and Cash1,2 by Rating Loss Mitigation 100% • Highly rated, with 74% of fixed maturity and short-term investments rated AA or higher A 18% BBB • Very liquid, with approximately $1 billion 1% 4 Non-Loss invested in short
Slide 15: Deleveraging While Maintaining Total Invested Assets
Underlying Value Deleveraging While Maintaining Total Invested Assets • Our net par outstanding to total invested assets and cash net of losses to be paid has declined from 68:1 in 4Q-09 to 46:1 as of 4Q-13, putting us in a stronger capital position – Deleveraging should continue in the near term as
Slide 16: Investment Income Generates Capital
Underlying Value Investment Income Generates Capital • Investment income1 is higher than Investment Income1 ($ in millions) the combination of operating and Net investment interest expenses, a spread that income $393 $390 $392 fosters capital growth Estimated net $361 investment income $338 $311 $30
Slide 17: Share Price Trades at a Discount
Underlying Value Share Price Trades at a Discount • Operating book value1 is GAAP book value adjusted to remove fair value (mark-to-market) movements and the effect of consolidating FG VIEs • Despite the financial crisis that began in 2007, operating shareholders’ equity per share1 has increased 44%
Slide 18: Historical Growth
Underlying Value Historical Growth Adjusted Book Value1 per Share Adjusted Book Value1 ($ in millions) $48.92 $49.32 $49.58 $9,151 $9,033 $48.26 $47.17 $8,887 $8,989 $8,988 $41.90 $41.97 $14.95 $3,101 $2,723 $19.12 $15.98 $3,484 $3,810 $7.38 $21.08 $4,236 $9.05 $35.66 $23.30 $146 $0.80 $220 $5.31 $3
Slide 19: Creating Value
Creating Value
Slide 20: New Business Production: U.S. Public Finance Penetration
Creating Value New Business Production Penetration in the U.S. Public Finance Market • We are focused on building demand for our guaranties, both in the primary and the secondary markets Assured Guaranty New Issue U.S. Public – Secondary market policies totaled 206 in Finance Par and Transaction Pen
Slide 21: New Business Production: Municipal Assurance Corp.
Creating Value New Business Production Municipal Assurance Corp. • New U.S. municipal-only bond insurance company Capitalization of MAC1 – MAC is licensed in 46 states and the District of Columbia • $1.5 billion in claims paying resources • AGM ceded $87 billion in par and AGC ceded $24 billion in p
Slide 22: U.S. Structured Finance Business Activity
Creating Value New Business Production U.S. Structured Finance Business Activity • 2013 U.S. structured finance PVP1 was $7 U.S. Structured PVP1 million ($ in millions) $32 $31 • New business production tends to fluctuate as large, complex transactions require a long time frame • Our future pipeline
Slide 23: International Business Activity
Creating Value New Business Production International Business Activity • During 2013, guaranteed the three new- Time Between First Inquiry and Closing Date issue bonds for U.K. PPP infrastructure financings issued since 2008: – £102 million bond issued by the Sustainable Communities for Leeds (sc4l)
Slide 24: Underwriting and Pricing Discipline
Creating Value New Business Production Underwriting and Pricing Discipline • Our focus on underwriting discipline and pricing has continued throughout the financial crisis as our average rating for new business remains relatively unchanged • New business written reflects the current economic environ
Slide 25: Reinsurance Platform
Creating Value New Business Production Reinsurance Platform • Reassumption of previously ceded business has increased the unearned Ceded Par Outstanding by Reinsurer2 As of December 31, 2013 premium reserve and adjusted book value1 – Reassumed $2.9 billion of par in 2009 Net Par ($ in millions) Outs
Slide 26: R&W Activity
Creating Value R&W Activity • The cumulative total (gross of reinsurance) of settlement receipts and commitments and R&W putback receipts was approximately $3.6 billion.1 The putbacks flow through the transaction waterfalls and do not necessarily benefit us dollar-for-dollar. • Favorable ruling in F
Slide 27: Bond Purchases
Creating Value Bond Purchases • We have a program to purchase securities we have insured in order to reduce our losses and potentially relieve rating agency capital charges, enhance yield and increase future investment income – We have purchased approximately $2.2 billion of par on insured securitie
Slide 28: Agreements to Terminate Guaranties
Creating Value Agreements to Terminate Guaranties • Actively pursue termination of contracts – At beneficiary’s request: keep all economics, possibly more – At our request: share economics with beneficiary – To eliminate high capital charges: share or possibly give up some economics • Since January
Slide 29: AG & Company
Creating Value AG & Company • Management consulting arm established in 2013 to fill a need for better servicing of residential mortgage-backed securities • Develops strategies designed to lower losses, increase the quality of loan modifications, accelerate resolution timelines and generate recourse
Slide 30: Financial Results
Financial Results December 31, 2013
Slide 31: Fourth Quarter 2013 Operating Results
Fourth Quarter 2013 Operating Results (Excluding Consolidation of VIEs) ($ in millions, except per share data) Quarter Ended % Change Year Ended % Change December 31, vs. 4Q-12 December 31, vs. 2012 2013 2012 2013 2012 Net earned premiums and credit derivative revenues1 $222 $352 (37)% $932 $1,133 (
Slide 32: Loss Expense Accounting and Economic Loss Development
Loss Expense Accounting1 and Economic Loss Development • Loss expense included in operating income1 does not necessarily represent the Company’s economic loss development in a period – All losses must be calculated on a transaction by transaction basis, and each transaction's expected loss estimate,
Slide 33: Portfolio Overview
Portfolio Overview December 31, 2013
Slide 34: Four Discrete Operating Companies with Separate Capital Bases
Four Discrete Operating Companies with Separate Capital Bases Consolidated Claims Paying Resources and Statutory-Basis Exposures As of December 31, 2013 ($ in millions) AGM AGC MAC2 AG Re3 Eliminations4 Consolidated Claims paying resources Policyholders' surplus $ 1,746 $ 693 $ 514 $ 1,063 $ (814) $
Slide 35: Net Par Outstanding By Sector
Net Par Outstanding By Sector • Assured Guaranty’s portfolio is largely Consolidated Net Par Outstanding concentrated in U.S. public finance As of December 31, 2013 ($ in billions) – 77% U.S. public finance Non-U.S. Structured – 13% U.S. structured finance Finance AA+ Average Rating – 10% Internatio
Slide 36: Net Par Outstanding Amortization
Net Par Outstanding Amortization Consolidated Net Par Outstanding Amortization1 • Amortization of the portfolio reduces rating agency As of December 31, 2013 ($ in billions) capital charges, but also embedded future earned Public Finance premiums $640 Structured Finance $617 • Public finance exposur
Slide 37: U.S. Public Finance
U.S. Public Finance Net Par Outstanding U.S. Public Finance • U.S. public finance net par outstanding is As of December 31, 2013 ($ in billions) $352.2 billion, which is 77% of our total as of December 31, 2013 Higher Other Public Education $14.1 Finance • Our U.S. public finance portfolio has $12.7
Slide 38: Public Finance: City of Detroit
Public Finance City of Detroit Details of Assured Guaranty’s Exposure to Detroit • Municipal utilities exposure is $784 million of As of December 31, 2013 water revenue bonds and $1,018 million of ($ in millions) sewer revenue bonds. Both the water and sewer systems provide services to areas that ex
Slide 39: Public Finance: Puerto Rico Exposure
Public Finance Puerto Rico Exposure • In February 2014, S&P, Moody's and Fitch Ratings downgraded much of the debt of Puerto Rico and its related authorities and public corporations to below Exposure to Puerto Rico investment grade, citing various factors including As of December 31, 2013 limited li
Slide 40: Update on Select Defaulted U.S. Municipal Exposures
Update on Select Defaulted U.S. Municipal Exposures Exposure Net Par Outstanding Current Status Jefferson County's revised plan of adjustment was approved by the bankruptcy court and in December 2013 became effective. As part of the plan of adjustment AGM insured Jefferson $606 million approximately
Slide 41: Consolidated International Finance
Consolidated International Finance International Public and Structured Finance International Finance As of December 31, 2013 ($ in billions) • International exposure is 71% public finance Other and 29% structured finance $13.6 Canada • Approximately 79% of international 28% $3.9 structured exposure
Slide 42: Insured Obligations Within Troubled Eurozone Countries
Insured Obligations Within Troubled Eurozone Countries1 • Approximately 41%, or $1.6 billion, of net par outstanding of exposure to troubled Eurozone countries is to structured finance transactions Insured Obligations Within • M6 Toll Road is a 58km dual carriage motorway from Budapest south towards
Slide 43: Structured Finance Exposures
Structured Finance Exposures Net Par Outstanding By Type As of December 31, 2013 ($ in billions) • We expect Assured Guaranty’s global U.S. and structured finance insured portfolio ($72.9 Other Structured Non-U.S. billion as of December 31, 2013) to amortize Pooled Finance 58% Corporate rapidly ─ 23
Slide 44: Consolidated U.S. RMBS
Consolidated U.S. RMBS • Our $13.7 billion U.S. RMBS portfolio is U.S. RMBS by Exposure Type amortizing on a dollar basis and as a As of December 31, 2013 percentage of the portfolio ($ in billions) Subprime – Total U.S. RMBS has declined from $29.2 First Lien1 $6.1 billion at December 31, 2009 to $
Slide 45: U.S. RMBS Exposure: Loss-Sharing Arrangements
U.S. RMBS Exposure Loss-Sharing Arrangements Net Par Outstanding Included in R&W • 43% of total U.S. RMBS is included in Agreements by Quarter R&W agreements ($ in billions) $22.5 $21.6 $20.9 $19.9 $19.1 • 25% of total U.S. RMBS is included in loss-share arrangements $17.8 $17.1$16.3 $15.4 $0.8 $14.
Slide 46: U.S. CMBS Exposure
U.S. CMBS Exposure • We have three types of U.S. commercial mortgage- U.S. CMBS by Exposure Type As of December 31, 2013 backed securities (CMBS) transactions ($ in billions) – Traditional CMBS - $3.4 billion Reinsurance – Collateralized debt obligations (CDOs) of commercial $0.2 real estate (CRE) -
Slide 47: Direct Pooled Corporate Obligations
Direct Pooled Corporate Obligations • Our direct pooled corporate exposure is Direct Pooled Corporate Obligations highly rated and well protected By Asset Class – 82.9% rated AAA As of December 31, 2013 ($ in billions) – Average credit enhancement (CE) of 30.3% $9.8 $2.0 $2.7 • Within our direct poo
Slide 48: Below Investment Grade Exposures
Below Investment Grade Exposures Net Par Outstanding by BIG Category1 Financial Guaranty Insurance and Credit • The majority of our BIG exposures in Derivatives Surveillance Categories2 categories 2 and 3 are in structured ($ in millions) December 31, 2013 December 31, 2012 finance – specifically RM
Slide 49: BIG Exposure
BIG Exposure • Since 4Q-11, BIG net par outstanding has declined by $5.7 billion1 • R&W agreements help decrease our BIG net par outstanding by reinsuring poorly performing transactions with collateralized trust accounts, thereby enabling Assured Guaranty to reclassify large percentages into AA rate
Slide 50: BIG Exposures > $250 Million
BIG Exposures > $250 Million ($ in millions) BIG Exposures Greater Than $250 Million as of December 31, 2013 Net Par Outstanding (excluding loss Internal Current Credit 60+ Day Type1 Name or Description mitigation bonds) Rating Enhancement Delinquencies2 PF Puerto Rico General Obligation, Appropriat
Slide 51: Appendix
ASSURED GUARANTY F | Appendix
Slide 52: HELOC and Option-ARM Delinquencies
HELOC and Option-ARM Delinquencies For Financial Guaranty Direct Transactions Originated 2005-20081,2 Troubled HELOCs 30-59 Days 4.9% 4.1% 4.2% 4.2% 3.6% 3.7% 3.8% 3.9% 3.7% 3.6% 3.5% 3.4% 3.5% 3.5% 3.5% 3.6% 3.3% 3.2% 3.2% 3.6% 3.1% 2.9% 2.7% 2.8% 2.8% 2.7% 3.2% 2.6% 2.7% 3.0% 3.0%3.2% 2.5% 2.4% 2.
Slide 53: Alt-A and Subprime 30-59 Day Delinquencies
Alt-A and Subprime 30-59 Day Delinquencies For Financial Guaranty Direct Transactions Originated 2005-20081 Alt-A 30-59 Days 3.9% 3.8% 3.8% 3.5% 3.3% 3.3% 3.6%3.7% 3.6% 3.3% 3.3% 3.5% 3.5% 3.3% 3.4% 2.9% 2.9% 2.9% 3.0% 3.0% 2.8%2.8% 2.6% 2.7% 2.8% 2.7% 2.8% 2.8% 2.8% 2.8% 2.7% 2.7% 2.7% 2.4% 2.7% 2.
Slide 54: Explanation of Non-GAAP Financial Measures
Appendix Explanation of Non-GAAP Financial Measures Endnotes related to non-GAAP financial measures discussed in the presentation: The Company references financial measures that are not in accordance with GAAP. Assured Guaranty’s management and the board of directors utilize non-GAAP financial measu
Slide 55: Explanation of Non-GAAP Financial Measures (Cont'd)
Appendix (Cont’d) Explanation of Non-GAAP Financial Measures Operating Shareholders’ Equity: Management believes that operating shareholders’ equity is a useful measure because it presents the equity of Assured Guaranty Ltd. with all financial guaranty contracts accounted for on a more consistent ba
Slide 56: Explanation of Non-GAAP Financial Measures (Cont'd)
Appendix (Cont’d) Explanation of Non-GAAP Financial Measures Adjusted Book Value: Management believes that adjusted book value is a useful measure because it enables an evaluation of the net present value of the Company’s in-force premiums and revenues in addition to operating shareholders’ equity.
Slide 57: Reconciliation of PVP to GWP and Operating Income to Net Income
Appendix Reconciliation of PVP1 to Gross Written Premiums (GWP) & Operating Income1 to Net Income (Loss) ($ in millions, except per share data) Reconciliation of Consolidated Operating Income to Net Income (Loss) Three Months % Ended Change 4Q-13 4Q-12 December 31, versus Operating income $134 $184
Slide 58: Reconciliation of GAAP Book Value to Adjusted Book Value
Appendix Reconciliation of GAAP Book Value to Adjusted Book Value1 Reconciliation of Shareholders' Equity (GAAP Book Value) to Adjusted Book Value1 ($ in millions, except per share amounts) As of : December 31, 2013 December 31, 2012 Total Per share Total Per share Shareholders' equity $ 5,115 $ 28.
Slide 59: Assured Guaranty Contacts
Assured Guaranty Contacts: Robert Tucker Managing Director, Investor Relations and Corporate Communications Direct: 212.339.0861 rtucker@assuredguaranty.com Ross Aron Vice President, Equity Investor Relations Direct: 212.261.5509 raron@assuredguaranty.com Equity Presentation December 31, 2013 58