Assured Guaranty Ltd.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Assured Guaranty Ltd. is a financial guaranty insurer, providing credit protection to investors in debt securities, primarily in the public finance and infrastructure sectors. It also provides asset management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Assured Guaranty Ltd. (AGO) operates within a complex and highly regulated industry. The company primarily engages in the business of providing financial guarantees, essentially insurance against nonpayment on debt securities. However, beyond this core business, AGO also provides asset management services.

Business Overview

  • Insurance Segment: AGO’s core operation involves issuing financial guarantees, primarily in the U.S. public finance market, protecting holders of debt securities from default. They also offer guarantees in global infrastructure and other structured finance sectors. Their main products include municipal bonds, infrastructure bonds, and other types of asset-backed securities.
  • Asset Management Segment: This segment focuses on the management of investment portfolios, consisting of government securities, corporate bonds, and asset-backed securities, among others. They seek to generate returns via various investment strategies.

Moat Analysis: 3 / 5

While AGO plays a crucial role in the municipal finance market, its moat is somewhat limited. The insurance industry, as a whole, is difficult to establish a strong moat around, mainly due to the homogeneity of the products.

  • Intangible Assets: The insurance industry relies significantly on a strong credit rating. High credit rating allows companies to provide insurance at better prices and thereby attract more business. AGO has a strong reputation, but its credit rating is just a few levels above junk, and with no credit rating upgrade since 2010 means that there is no moat here. Therefore, any loss of reputation as a strong insurer could hurt its business substantially.
  • Switching Costs: Switching costs are present as the company often has long-term relationships with issuers and investors, as it underwrites the debt of specific companies for multiple years. As such, the company does create stickiness within its clients and would likely take them a lot of time to switch if they wanted to switch. It is a positive to consider here, but does not represent a true competitive advantage.
  • Network Effects: No, because there are a lot of competitors that offer similar services. The value of AGL’s product does not increase based on the number of users it has.
  • Cost Advantages: No real cost advantage because there are multiple competitors of all sizes. Most of the companies are offering relatively similar prices and a customer will choose the company based on other factors.
  • Economic Moat: Based on our criteria, while AGL has some limited structural advantages, it is not very strong. The ratings are the most influential factor in the industry, and while AGO’s ratings are not bad, the lack of an upgrade since 2010 demonstrates an important weakness, hence a narrow moat is given here.

Risks to the Moat and Business Resilience

  • Interest Rate Risk: Changes in interest rates can affect the cost of AGL’s funding and its profitability and its investment portfolio. Given that it is the financial industry, and interest rates have drastically changed over the past year, this is a legitimate concern. The current high inflation and the recent increase in interest rates may prove to be especially dangerous to the company, hurting its margins and net income.
  • Credit Risk: The company’s financial health is susceptible to defaults or downgrades in the credit quality of the securities they insure. This is very apparent in the company’s exposure in Puerto Rico. Another recent risk factor is the current banking crisis as well as debt ceiling negotiations as the company guarantees a number of bank loans. Any failures to pay out a loan that they have guaranteed can affect the company substantially.
  • Regulatory Risk: The insurance industry is heavily regulated, with rules that frequently change or become more restrictive. This presents the company with compliance costs and could make AGL less competitive than other players.
  • Underwriting Risk: The company might not price guarantees well, which can lead to huge losses and can materially harm the company. Because the future is unknown, this is one of the largest and toughest risks the company faces in today’s current economic environment.
  • New Entrant Risk: The industry is pretty open to new entrants and thereby the possibility of new entrants capturing the market share of AGL is also a great danger.
  • Competition Risk: Competition from other insurance companies is also another big risk to consider. If other companies with high credit ratings can offer lower premiums or better terms, it will undoubtedly hurt the company. This industry is not a winner-takes-all.

The company has some resilience from its large size, reputation in the industry, and relationships with its clients, but all its business relies heavily on a strong economy as well as not many defaults.

Business Details

  • Revenue Distribution: AGL’s revenue streams come from net premiums, fee revenue from asset management, and investment income generated from managing its float.
  • Industry Trends: The financial insurance market is characterized by heightened risk awareness after the Global Financial Crisis of 2007-08. This is reflected in the increased focus on the companies’ credit ratings and sustainability. As interest rates rise, margins can decrease substantially. In general, the industry’s total volume of insured securities have been decreasing.
  • Margins: The margins are highly variable based on the success of the guarantees that the company underwrites, as well as investment performance.
  • Competitive Landscape: The financial insurance market is quite competitive, with large players as well as smaller specialized firms. The company competes with players like Assured Guaranty Municipal Corp. (AGM), Build America Mutual (BAM), and other niche insurers. A strong credit rating, as previously mentioned, is one of the best qualities when competing with other insurers.
  • Differentiation: AGL positions itself through offering guarantees in niche areas such as the Puerto Rico debt and also municipal bonds, which may have been seen as risky to other companies. The company’s expertise and data analytics are also utilized to pick the best guarantees that minimize its losses and therefore generate better profitability for the long-term. They also aim to be more transparent than their competitors.

Financials

  • Income Statement: In the latest report, total revenues were $453 million, which is up from $386 million in 2022 and $175 million in 2021. Most of the increase in revenues were from gains on investment and fair values. Net income attributable to AGL was $182 million in 2023, a significant recovery from a loss of $408 million in 2022. The company has been struggling in recent years to achieve a profit. On a per-share level, diluted EPS was $2.65 for the period compared to an EPS of -$7.74 the previous year.
  • Balance Sheet: The Company’s total assets are at $16.7 Billion and total liabilities are $7.9 Billion. Cash, cash equivalents, and restricted cash increased to $207 million.
  • Cash Flow: The company’s cash flow has been steadily declining recently, with a net cash of -$110 Million from operating activities in 2023, down from $312 million in 2022 and $732 million in 2021. The company has also significantly decreased its cash flow for investment activities in recent years. For example, in 2021 it was $1145 million, which in 2022 has been reduced to $157 million and now -$594 in 2023. The company currently has $343 million in cash flow from financing activities.

Understandability: 4 / 5

The business model of AGO is relatively straightforward, being an insurance company. However, it requires a high degree of financial knowledge to understand its operations. Understanding the nuances of the guarantees it provides and its financial statements would require some expertise in finance and accounting, but is still understandable with basic financial knowledge, hence a rating of 4.

Balance Sheet Health: 4 / 5

The company’s balance sheet is solid, with a sufficient reserve to pay debts. With total assets of $16.7 Billion and total liabilities of $7.9 Billion, the company has the assets to cover its liabilities. However, due to changes in the economic landscape, the company may face some financial distress, since the quality of the assets that they own have been significantly impacted by interest rates. Additionally, the company’s credit rating also raises some concerns about its future. These factors cause the balance sheet rating to be a 4.