Assured Guaranty(AGO) - 2022 Q4 - Annual Report

Part I Business Assured Guaranty Ltd. operates through two primary segments: Insurance and Asset Management, focusing on credit protection and investment advisory services - The company operates in two distinct segments: Insurance and Asset Management, alongside a Corporate division[25] - Key business strategies are centered on three areas: (1) insurance growth and loss mitigation, (2) asset management and alternative investments, and (3) capital management[26] Insurance The Insurance segment, the company's largest business line, offers financial guaranty insurance for U.S. and non-U.S. public and structured finance markets - The company's primary insurance operating subsidiaries are Assured Guaranty Municipal Corp. (AGM), Assured Guaranty Corp. (AGC), Assured Guaranty UK Limited (AGUK), and Assured Guaranty (Europe) SA (AGE)[27][33] - U.S. insurance subsidiaries (AGM and AGC) provide support to European subsidiaries (AGUK and AGE) through reinsurance, co-guarantee structures, and net worth maintenance agreements to ensure capital adequacy[28][29][37] - The company insures a wide range of U.S. public finance obligations, including General Obligation Bonds, Tax-Backed Bonds, Municipal Utility Bonds, and Infrastructure Bonds[53][54][55] - The structured finance portfolio includes Residential Mortgage-Backed Securities (RMBS), Pooled Corporate Obligations, and Consumer Receivables Securities, with no new primary market RMBS insured since 2008[68][70][71] Asset Management The Asset Management segment, significantly expanded by the BlueMountain acquisition, diversifies revenues through a fee-based platform managing CLOs and opportunity funds - The Asset Management segment was established through the acquisition of BlueMountain Capital Management on October 1, 2019, for $157 million, diversifying the company's revenues into a fee-based platform[116] - The U.S. Insurance Subsidiaries are authorized to invest up to $750 million in funds managed by AssuredIM, enhancing returns and facilitating the growth of AssuredIM's CLO, asset-based, and healthcare funds[120] Assets Under Management (AUM) - CLOs | Metric | Value | | :--- | :--- | | AUM in CLOs | $15.2 billion (as of Dec 31, 2022) | | Global Manager Ranking | Top 25 by AUM | - Asset Management revenues are primarily composed of management fees based on a percentage of AUM and performance-based fees, which are subject to hurdles and market conditions[132][137] Investment Portfolio The company's investment portfolio, primarily fixed-maturity securities, serves as a key cash flow source, managed for liquidity, income, and high ratings Investment Portfolio Composition (as of Dec 31, 2022) | Category | Fair Value (USD) | % of Portfolio | | :--- | :--- | :--- | | Total Investments | $8.4 billion | 100% | | Externally Managed | $5.6 billion | 67% | | Puerto Rico New Recovery Bonds & CVIs | $661 million | 7.9% | | Loss Mitigation Securities | $508 million | 6.1% | | Managed by AssuredIM (IMA) | $537 million | 6.0% | - As a result of the 2022 Puerto Rico Resolutions, the company received substantial amounts of cash, New Recovery Bonds, and Contingent Value Instruments (CVIs)[145] - The Insurance segment has authorized up to $750 million to be invested in AssuredIM Funds, with a fair value of $569 million as of December 31, 2022, consolidated as assets of consolidated investment vehicles (CIVs)[151][152] Risk Management The company employs an enterprise-wide risk management framework, overseen by the Board and committees, covering credit, market, liquidity, and operational risks - The Board of Directors has ultimate oversight of risk management, with specific responsibilities delegated to committees like the Risk Oversight, Audit, and Finance Committees[154][155] - Surveillance personnel monitor each risk in the insured portfolio, assigning and updating internal credit ratings and recommending remedial actions to management to mitigate potential losses[165] - The company has integrated climate change risk into its underwriting, surveillance, and investment processes, evaluating obligors' vulnerability to climate-related perils and resilience factors[173][174] - To manage cybersecurity risks, the company utilizes tools like firewalls, anti-malware, multifactor authentication, and conducts penetration tests, also establishing policies for data protection to comply with regulations like GDPR[171][172] Regulation The company's global operations are extensively regulated in the U.S., Bermuda, the U.K., and France, impacting dividends, capital, and risk limits - U.S. insurance subsidiaries (AGM in New York, AGC in Maryland) are subject to state regulations that limit dividend payments without prior regulatory approval, with AGM able to pay up to $209 million and AGC up to $102 million in 2023 without approval[192][193][773] - State insurance laws establish single risk limits, typically capping insured average annual debt service for a single municipal risk at 10% of the insurer's policyholders' surplus and contingency reserves[198] - Bermuda-based reinsurers AG Re and AGRO are regulated by the Bermuda Monetary Authority, which imposes minimum solvency margins, enhanced capital requirements, and restrictions on dividend payments[213][217][218] - European subsidiaries AGUK (U.K.) and AGE (France) are regulated under the Solvency II framework, which sets rules on capital adequacy, governance, risk management, and reporting[231][241] Human Capital Management The company focuses on attracting, retaining, and developing a diverse workforce through competitive compensation, professional development, and an inclusive culture Workforce Statistics (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Employees | 411 | | Female Workforce | 36% | | Male Workforce | 64% | | Average Tenure | 11.9 years | - The company's compensation program includes base salary, annual cash incentives, and deferred compensation (cash and/or equity) to attract and motivate talent[258] - Diversity and inclusion initiatives are supported by an employee-led committee, Employee Resource Groups (ERGs), bias awareness training, and inclusive recruiting strategies[261][263][265] - In response to COVID-19, the company has adopted a hybrid work model, offering employees the option to work remotely for a portion of their time[269] Tax Matters The company's complex global tax structure involves U.K. tax residency, Bermuda tax exemption, U.S. corporate tax, and potential U.S. shareholder implications - AGL became tax resident in the U.K. in November 2013, making it subject to U.K. corporation tax on worldwide profits but also providing access to the U.K.'s tax treaty benefits[282][283][284] - Under current Bermuda law, AGL and its Bermuda subsidiaries are not subject to income or profits tax and have received an assurance this will remain the case until March 31, 2035[273] - The company believes that due to dispersed share ownership, no U.S. person should be treated as a 10% U.S. Shareholder, mitigating the risk of AGL or its non-U.S. subsidiaries being classified as a Controlled Foreign Corporation (CFC)[294] - The company intends to operate in a manner to qualify for exceptions to the Related Person Insurance Income (RPII) rules, which could otherwise require U.S. shareholders to include a share of certain insurance income in their gross income[297] Risk Factors The company faces diverse risks including economic volatility, credit spread changes, Puerto Rico exposure, competition, cybersecurity threats, and complex tax regulations - Economic risks include adverse developments in global financial markets, budget deficits of governments the company insures, and significant losses from large or correlated exposures like Puerto Rico[343][344] - Strategic risks involve intense competition, the possibility that strategic transactions do not result in anticipated benefits, and the risk of a downgrade of the insurance subsidiaries' financial strength ratings[345][380][383] - Operational risks include cybersecurity attacks, the loss of key executives, potential liquidity shortages to meet significant claim payments, and the inability to raise additional capital on favorable terms if needed[345][398][400] - Taxation risks are substantial, including potential changes in U.S. tax laws, the possibility of non-U.S. subsidiaries being subject to U.S. tax, and adverse tax consequences for U.S. shareholders under CFC, RPII, or PFIC rules[346][417][424] Properties The company leases office space in Hamilton, Bermuda (principal executive offices), New York (U.S. operations), London, and Paris, which are deemed adequate for its needs - The company's principal executive offices are located in Hamilton, Bermuda, with a lease expiring in April 2026[465] - Primary offices for U.S. Insurance Subsidiaries and AssuredIM are in New York, with leases expiring in 2032[465][470] Legal Proceedings Details on the company's legal proceedings are incorporated by reference from specific notes within the consolidated financial statements in Part II, Item 8 - Details on legal proceedings are incorporated by reference from Notes 3, 4, and 18 of the Consolidated Financial Statements[466] Information About Our Executive Officers This section provides biographical information for Assured Guaranty Ltd.'s executive officers, including their names, ages, positions, and business experience - Dominic J. Frederico has served as President and Chief Executive Officer of AGL since December 2003[469] - Robert A. Bailenson has been the Chief Financial Officer of AGL since June 2011 and has been with the company or its predecessors since 1990[470] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Assured Guaranty Ltd.'s common shares trade on the NYSE, supported by an active share repurchase program and quarterly cash dividends 2022 Share Repurchase Summary | Metric | Value | | :--- | :--- | | Total Shares Repurchased | 8,847,981 | | Total Cost | ~$503 million | | Average Price per Share | $56.79 | - As of February 28, 2023, the company had $201 million remaining under its share repurchase authorization, which has no expiration date[481] - The company paid quarterly cash dividends of $0.25 per common share in 2022[479] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results, analyzing segment performance, key strategies, and liquidity Overview The company's business, comprising Insurance and Asset Management, navigated a 2022 economic environment marked by rising inflation and interest rates, impacting its strategies - The economic environment in 2022 saw a 2.1% increase in real GDP, a 3.5% unemployment rate, and a 6.5% inflation rate (CPI-U) for the 12 months ending December 2022[491][492] - The Federal Reserve raised the federal funds rate seven times in 2022, from near zero to a range of 4.25%-4.50%, to combat inflation[493][494] - The company's key strategies are to grow the insurance business, expand asset management and alternative investments, and efficiently manage capital, including significant share repurchases[497] - From 2013 through February 28, 2023, the company repurchased 141 million common shares for approximately $4.7 billion, representing about 73% of the shares outstanding at the start of the program[524] Financial Performance of Assured Guaranty Assured Guaranty reported a decrease in 2022 net income to $124 million, primarily due to loss expenses and investment losses, despite an increase in adjusted book value per share Financial Results Summary (GAAP) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income attributable to AGL | $124 million | $389 million | | Net income per diluted share | $1.92 | $5.23 | Financial Results Summary (Non-GAAP) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted operating income | $267 million | $470 million | | Adjusted operating income per diluted share | $4.14 | $6.32 | - The decrease in 2022 net income was primarily driven by loss and LAE expense, losses on equity method investments, and higher foreign exchange remeasurement losses compared to 2021[538][539] Book Value Metrics Per Share | Metric | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | Shareholders' equity per share | $85.80 | $93.19 | | Adjusted operating shareholders' equity per share | $93.92 | $88.73 | | Adjusted book value per share | $141.98 | $130.67 | Results of Operations by Segment The company's segment performance shows a decrease in Insurance segment income due to investment losses, a narrowed Asset Management loss from higher fees, and a reduced Corporate loss due to non-recurring debt extinguishment Adjusted Operating Income by Segment | Segment | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Insurance | $413 | $722 | | Asset Management | $(6) | $(19) | | Corporate | $(134) | $(263) | | Other | $(6) | $30 | | Total | $267 | $470 | Insurance Segment The Insurance segment's adjusted operating income declined to $413 million in 2022, primarily due to alternative investment losses and a shift from loss benefit to expense Insurance Segment Adjusted Operating Income | Year | Adjusted Operating Income (in millions) | | :--- | :--- | | 2022 | $413 | | 2021 | $722 | - Net earned premiums and credit derivative revenues increased to $508 million in 2022 from $438 million in 2021, primarily due to $133 million in premium accelerations related to the 2022 Puerto Rico resolutions[579][580] New Business Production (PVP) | Year | PVP (in millions) | | :--- | :--- | | 2022 | $375 | | 2021 | $361 | - The segment experienced a $51 million loss from equity in earnings of investees in 2022, compared to a $144 million gain in 2021, mainly due to mark-to-market losses in a private equity fund and the dilutive impact of a healthcare fund's subsequent close[593][595] - Net economic loss development was a benefit of $125 million in 2022, primarily from a $143 million benefit in U.S. RMBS due to improved transaction performance and higher recoveries[599][605] Asset Management Segment The Asset Management segment's adjusted operating loss narrowed to $6 million in 2022, driven by increased performance and management fees, with stable total AUM Asset Management Segment Adjusted Operating Income (Loss) | Year | Adjusted Operating Loss (in millions) | | :--- | :--- | | 2022 | $(6) | | 2021 | $(19) | Asset Management Fee Revenue | Fee Type | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Management Fees | $85 | $76 | | Performance Fees | $21 | $1 | Assets Under Management (AUM) | Date | Total AUM (in billions) | | :--- | :--- | | Dec 31, 2022 | $17.5 | | Dec 31, 2021 | $17.5 | - Goodwill and finite-lived intangible assets associated with the BlueMountain acquisition had a carrying value of $117 million and $40 million, respectively, as of December 31, 2022, with no impairments recorded to date[630] Corporate Division The Corporate division's adjusted operating loss significantly narrowed to $134 million in 2022, primarily due to the non-recurrence of a large debt extinguishment loss from 2021 Corporate Division Adjusted Operating Income (Loss) | Year | Adjusted Operating Loss (in millions) | | :--- | :--- | | 2022 | $(134) | | 2021 | $(263) | - The 2021 loss included a $175 million pre-tax ($138 million after-tax) loss on extinguishment of debt related to the redemption of AGMH and AGUS debt, which did not recur in 2022[647][648] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Operating Income, Adjusted Book Value, and PVP to provide clearer insight into performance by excluding volatile, non-economic items - Adjusted Operating Income excludes items like realized gains/losses on investments, non-credit impairment-related unrealized fair value changes on credit derivatives, and foreign exchange remeasurement gains/losses[683] - Adjusted Book Value is a key metric used by management to measure the intrinsic value of the company, adjusting shareholders' equity for unrealized gains/losses and adding the value of the in-force insurance portfolio, net of expected losses[685] - Present Value of New Business Production (PVP) is used to evaluate the value of new insurance business, including the present value of estimated future installment premiums, which is not fully captured by GAAP GWP[692] Insured Portfolio As of December 31, 2022, the financial guaranty portfolio's net par outstanding was $233.3 billion, predominantly public finance, with significantly reduced Puerto Rico exposure Financial Guaranty Portfolio Net Par Outstanding | Date | Total Net Par Outstanding | | :--- | :--- | | Dec 31, 2022 | $233.3 billion | | Dec 31, 2021 | $236.4 billion | Portfolio Composition by Sector (Net Par, Dec 31, 2022) | Sector | Net Par Outstanding | | :--- | :--- | | Public Finance | $224.1 billion | | Structured Finance | $9.2 billion | - Net par exposure to Puerto Rico decreased from $3.6 billion at year-end 2021 to $1.4 billion as of December 31, 2022, following the consummation of the 2022 Puerto Rico Resolutions[1007][1011] - The ten largest U.S. public finance exposures by revenue source represent 8.8% of the total U.S. public finance net par outstanding, with the State of New Jersey being the largest at $3.1 billion[708] Liquidity and Capital Resources The company manages liquidity at both holding company and operating subsidiary levels, relying on dividends and maintaining liquid assets to meet obligations - Holding company liquidity is primarily dependent on dividends from operating subsidiaries, which are subject to regulatory limits[735] U.S. Holding Company Long-Term Debt (Principal) | Company | Dec 31, 2022 (in millions) | | :--- | :--- | | AGUS | $1,580 | | AGMH | $300 | | Total | $1,880 (before intercompany eliminations) | - Insurance subsidiaries target a liquid asset balance of 1.5 times their projected net cash flow needs over the next four quarters[761] - The company's consolidated cash flow summary shows a net cash outflow from operating activities of $2,479 million in 2022, largely driven by claim payments related to Puerto Rico resolutions and investment activities within consolidated CIVs[824][825] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including credit spread, interest rate, and foreign currency exchange rate risks, with sensitivity analyses provided for their potential impact - The company's primary market risk exposures are interest rate risk, foreign currency exchange rate risk, and credit spread risk[830] Sensitivity of Credit Derivatives to Credit Spread Changes (Pre-Tax) | Scenario | Estimated Change in Gain/(Loss) (in millions) | | :--- | :--- | | Increase of 25 bps | $(71) | | Decrease of 25 bps | $63 | Sensitivity of Investment Portfolio to Interest Rate Changes (Pre-Tax) | Scenario | Estimated Change in Fair Value (in millions) | | :--- | :--- | | Increase of 100 bps | $(378) | | Decrease of 100 bps | $404 | - As of December 31, 2022, approximately 74% of installment premiums receivable are denominated in currencies other than the U.S. dollar, creating foreign exchange risk[852] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2022, and preceding years, along with the independent auditor's report - The section includes the consolidated financial statements as of December 31, 2022 and 2021, and for the three years ended December 31, 2022, audited by PricewaterhouseCoopers LLP[872][876] - The independent auditor's report expresses an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[877] - A critical audit matter identified was the valuation of the Loss and Loss Adjustment Expense (LAE) Reserve and the Salvage and Subrogation Recoverable, due to the significant management judgment involved in estimating expected losses[884][885] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its upcoming Annual General Meeting - Required information for this item is incorporated by reference from the company's definitive proxy statement[1631] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive proxy statement for its upcoming Annual General Meeting - Required information for this item is incorporated by reference from the company's definitive proxy statement[1634] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners and management, along with equity compensation plans, is incorporated by reference from the company's definitive proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[1635] Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence is incorporated by reference from the company's definitive proxy statement for its upcoming Annual General Meeting - Required information for this item is incorporated by reference from the company's definitive proxy statement[1636] Principal Accountant Fees and Services Information regarding principal accountant fees and services, including the pre-approval policy, is incorporated by reference from the company's definitive proxy statement - Required information for this item is incorporated by reference from the company's definitive proxy statement[1637] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This section provides a list of all financial statements and exhibits filed with the Form 10-K[1640] - Financial statement schedules have been omitted because they are not applicable or the required information is included elsewhere in the report[1642]