Assured Guaranty Ltd. ($AGO)

Good morning, and welcome to the Assured Guaranty Limited First Quarter 2026 Earnings Conference Call. My name is Ed, and I'll be the operator for today's call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to our host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead. .

Thank you, operator, and thank you all for joining Assured Guaranty for our first quarter 2026 Financial Results Conference Call. Today's presentation is made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you're listening to a replay of this call, or if you are reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures in our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com. Turning to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; Rob Bailenson, our Chief Operating Officer; and Ben Rosenblum, our Chief Financial Officer. After their remarks, we'll open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you'd like to ask a question. I will now turn the call over to Dominic.

Thank you, Robert, and welcome to everyone joining today's call. Assured Guaranty began 2026 with a strong first quarter. The quarter's adjusted operating income per share came in at $2.50. Our new business production generated $73 million of PVP almost twice the PVP of last year's first quarter, as we saw increases for each of our 3 financial guaranteed underwriting groups. Rob will fill in the production details in a few minutes. We also produced $44 million of adjusted operating income in our Asset Management segment during the first quarter of 2026, nearly 4x the amount produced in the first quarter of 2025. Our pivot to increasing the proportion of alternative investments in our overall investment portfolio over the past few years has increased the all-in return of the investment portfolio. The inception to date annualized internal rate of return for all of our alternative investments was 12% at the end of the first quarter 2026. The Assured Life Re team has received positive feedback from potential customers with clear interest in our double insurance from agro as well as general market desire for fresh reinsurance capacity. Currently, we've had positive discussions with potential partners in the U.S. MYGA market and in the U.K. PRT market, in addition to interest from other non-U.S. potential partners. We made good progress integrating our stand with experienced employees already employed by Assured Life Re. Annuity Reinsurance exemplifies the type of business opportunities we look for those which will further diversify the company, create synergies with our existing business lines, generated attractive returns, have risk profiles in line with ours and benefit from our core competencies. Economic certainty, political and geopolitical discord and war permeate the news investors have been seeing recently. Investors understand well we find high-quality municipal bonds attractive. Our guarantee can expand the supply of high-quality bonds and in certain cases, reduce the borrowing costs and support the market value of even naturally AA-rated municipal bonds. We believe municipal bond issuance will have another strong year. We're off to a good start for 2026. I believe our financial [indiscernible] business will provide us with many insurance opportunities as we continue to expand our business in U.S. municipals, global infrastructure and structured finance. We are also focused on building out our new annuity reinsurance business and managing our capital prudently and profitably to support the growth in these businesses while protecting our policyholders and rewarding our shareholders. I will now turn the call over to Rob to provide more details about our production results. .

Thank you, Dominic, and good morning to everyone on the call. Assured Guaranty closed $73 million of PVP in the first quarter of 2026, compared with $39 million of PVP in the first quarter of last year. Year-over-year, total PVP and U.S. public finance PVP each nearly doubled their first quarter results, and struck finance more than doubled its PVP result. U.S. Public Finance led the way in PVP production with a 92% year-over-year increase to $48 million of PVP, and non-U.S. public financing, global structure finance contributed $8 million and $17 million of PVP, respectively. For the first quarter of 2026, Assured Guaranty, continue to guarantee the majority of insured municipal par issued at 53%. We insured $4 billion of par in the primary and secondary markets on a close date basis. Market conditions and our mix of business allowed us to produce significantly more PBP than in first quarter 2025, while taking on less nominal exposure. In the secondary market, during the first quarter of 2026, we issued 227 policies compared to 144 policies in the first quarter of last year. Our guarantee has been instrumental in supporting large transactions within the municipal bond market, highlighting the institutional demand for our guarantee. This interest demonstrates that institutions are increasingly acknowledging the benefits our insurance provides, including greater price stability and improved market liquidity. Our guarantee also allows issuers to attract a broader, often more diversified base of investors, reduce borrowing costs or raise more proceeds without increasing interest rate cost. The first quarter of 2026 included 9 large transactions within short par over $100 million, including $444 million of a taxable military housing bond for Fort Carson where over 70% of the bonds had an underlying rating of AA and the balance was rated single A. $243 million of Hartford Healthcare revenue bonds issued by Connecticut's Health and Educational Facilities Authority. $201 million for the Western Maricopa Education Center District in Arizona and $102 million in taxable bonds for Brown University Health. Among AA municipal credits, during the first quarter of 2026, we insured 20 primary and 5 secondary market transactions on a closed basis, amounting to a total of nearly $900 million in insured par. This activity highlights the value, our guarantee provides as a backstop against headline risk and unexpected fiscal stress, whether from broad economic or financial developments, natural events or other causes. For non-U.S. public finance, new business in the first quarter of 2026 included a secondary local authority transaction in the U.K., annual extensions of liquidity facilities and a primary social housing transaction in France, marking our inaugural primary market guarantee in the social housing sector within the European Union. Our global structure finance results were produced primarily by fund finance and financial guarantees for life insurance capital management purposes. Fund Finance continues to be a strong area of focus for us. This business is typically repeatable flow business. And since the transactions have relatively short lives, we earn the premiums much more rapidly and can recycle the capital more quickly, often within 1 to 2 years. For example, the fund finance transactions we insured in the first quarter of 2026 have maturities that range from a few months to a little over 2 years. And as we said, we expect the majority of these transactions will be renewed at maturity. As we have discussed in the past, both non-U.S. public and structured finance have expanded the application of our products into various new sectors and geographic markets, and we look to continue to develop additional product applications and new counterparty relationships in line with our strategic objective to accelerate our business growth. For instance, in first quarter 2026, we closed a significant capital relief transaction with a major financial institution in the Asia Pacific region guaranteeing a portfolio of fund finance exposures for a counterparty that we had previously done a modest amount of business with. In closing, we expect demand to continue for our core products and believe we have abundant opportunities to further growth and greater diversification. We are off to a promising start in the second quarter of 2026, with a good pipeline ahead. Already in the second quarter, for instance, we have insured or issued commitments for $636 million for the city of Houston's convention and entertainment facilities department, approximately $130 million of senior student housing revenue bonds from Morgan State University in Maryland, approximately $300 million for the Burbank, Glendale, Pasadena Airport Authority in California and several large global structured finance deals. We continue to maintain that at times when challenges or uncertainty arise in the economy in financial markets. When the cost of borrowing goes up, when market execution becomes less certain, rentees are trying to better manage their capital utilization, our products can help optimize a wide variety of transactions so our clients can accomplish more with lower financing costs and obtain capital more efficiently. I will now turn the call over to Ben to discuss our financial results.

Thank you, Dominic and Rob, and good morning. I am pleased to report first quarter 2026 adjusted operating income of $115 million or $2.50 per share. This quarter's results include 2 noteworthy items. First, a $21 million after-tax benefit attributable to the recognition of carried interest from a sound point fund that sold its single underlying asset, and second, a $33 million onetime tax benefit due to changes in the U.K.'s Pillar 2 global minimum tax legislation enacted in the first quarter that reduced the company's global minimum tax accrual. This compares to adjusted operating income of $162 million or $3.18 per share in the first quarter of 2025, which included an $82 million after-tax benefit related to the resolution of the LBI litigation. Recent new business production has contributed to a steady stream of scheduled net earned premiums and credit derivative revenues which were $90 million in the first quarter of 2026, compared with $89 million in the first quarter of 2025. Our deferred premium revenue held steady compared to last quarter at $3.8 billion. In addition, Alternative investments remain an important part of our overall investment strategy. We have an inception to date IRR of approximately 12% on the alternative investment portfolio, which compares to an average yield of 4.2% over the past 3 years in our fixed maturity portfolio. As of March 31, 2026, our alternative investments had a fair value of $965 million. This portfolio generated $35 million in pretax adjusted operating income in the first quarter of 2026 compared with $53 million in the first quarter of 2025. Other than the CLO investments, which experienced a decline in value quarter-over-quarter, our remaining alternative investments performed well and delivered relatively consistent results. The remainder of the available for sale and short-term investment portfolio also performed well, generating $82 million of net investment income in the first quarter of 2026, up from $75 million in the first quarter of 2025 as we shifted that portfolio towards higher-yielding corporate securities. Turning to our below investment grade exposures. Economic loss development was $44 million in the first quarter of 2026, primarily attributable to Brightline and PREPA. However, loss expense included in adjusted operating income was primarily related to PREPA as the bright line losses are well within our unearned premium reserve and therefore, have not yet been recognized. In terms of capital management, in the first quarter of 2026, we repurchased 882,000 shares for $75 million at an average price of $85.58 per share and also returned $18 million in dividends to our shareholders. After over 13 years of consistent share repurchases, we have now bought back 81% of the shares that are outstanding at the start of the program. And in that time, we have returned $6 billion to the shareholders under the program. During that same period, we increased our quarterly dividends per share from $0.10 per share to $0.38 per share which amounted to $929 million of additional distributions to shareholders. As always, we actively assess the various opportunities to deploy our capital effectively and aim to invest in those that we believe provide the most attractive returns. At this time, we have decided to reduce our share repurchases over the next 3 months to a target of $30 million in order to use a portion of available capital to support our growth opportunities in our financial guarantee insurance and our new annuity reinsurance businesses in addition to other strategic considerations. We are excited to grow this platform, and we are advancing several promising opportunities for new business. Our holding company liquidity as of today is approximately $153 million of which $56 million is at AGL. As of the end of the first quarter of 2026, we had reached record per share valuations of $128.61 for adjusted operating shareholders' equity and $188.74 for adjusted book value. reflecting the successful execution of our key strategic initiatives. I will now turn the call over to our operator to give you instructions for the Q&A period.

[Operator Instructions] The first question comes from the line of Marisa Lobo.

With about $600 billion -- I'm sorry, could you hear me?

Yes.

With about $600 billion of projected you need supply in '26 and if penetration rates hold, what is your target for 2026 new issue in short par? And is the pricing environment supportive to translate into higher growth premiums?

With the market issuance, we would reject our penetration would probably be a consistent because of the credit conditions that exist in terms of spreads and rates. But we think the volume alone will give us a growth opportunity as well as we have some large deals that we know that are in the pipeline that will also help the year. So we expect a strong year apples-to-apples. And in terms of return, obviously, now we have a very sophisticated ROE model. We calculate on every risk that we write, we have a review function now over the whole process to make sure the ROEs are in line with our cost of capital so that we're not leading at all the value of the company or the opportunities that we see that we're being selective in terms of our underwriting choices as well as the pricing that we're looking for in terms of spread and return. But like I said, volume will help our volume this year. .

And we're seeing more [indiscernible] issuance as well as more infrastructure transactions, and also in health care, which is giving us a significant amount -- significantly amount more premium on those transactions. .

Remember, we're the slave to large deals, the large deals have their own time frame in terms of closing. We've many quarters where we expected a number of X. And because 2 deals didn't close at the end of the quarter and well into the next quarter, you have a very different volume structure. But as I said, if we look at over the year, apples-to-apples, we expect the year to be a strong year relative to public finance and [indiscernible] return hurdles from the same but to profitability. .

Okay. Great. And how are you incorporating AI into your processes? And where do you see the biggest opportunity for it to improve your credit selection?

That probably has to most discussions we're having in the organization. So obviously, AI represents a great opportunity for us in terms of being able to do the work we do, which is you appreciate, fairly repetitive on a credit-by-credit basis on a surveillance basis, on a review of the portfolio basis. A lot of those functions can be machine learned, and we're obviously applying it in every facet of our business. And most importantly, you've seen the activity in the secondary market, where we continue to push those numbers up significantly, utilizing artificial intelligence as part of the process. pBut remember, the even being also look at it to approve it. But at the end of the day, the compilation, the accessibility of the data, molding the data into a format that we've got our process for [indiscernible] and surveillance. It's critical to us. . So we think as a company that does a lot of repeat functionality, we should be most benefited by the use of AI, and we've got Lilly, an AI committee that looks at everything. We're applying applications kind of across the board in areas you would even think of. like financial reporting, [indiscernible]. So there's a lot of implications or opportunities that we're applying it to and we think it's a critical tool for us to use in the future relative to how we want to manage the company in the business. .

Marissa, we're actually -- that's why you see the velocity of our secondary market transactions go much more quickly because it's -- we're actually using AI to interact with our clients much more quickly. In addition, we're -- our credit reports are being done using AI, but an individual actually views it, but it takes less time for an analyst to actually write them. .

That's great. And just moving, if I could, to the loss development. on Brightline, with the going concern audit opinion that was just issued and the interest payment grace period expiring. Can you talk to us, is there any -- have they been approached for any forbearance or restructuring. What scenario might it move to big category 3 here? .

Well, there's a lot of activity on Brightline, as you can appreciate in a lot of words in the marketplace in terms of the operations of the organization. However, if you look at our structure in terms of capital, the capital stack is roughly $7 billion. We're half of the top $2.4 billion. So you say yourself as a company worth at least $2.4 billion and the answer is on only comes back, absolutely. We don't see this as a loss situation, but obviously, we have to compare ourselves to what the rating agencies think in terms of what the capital they're going to access, how the regulators view it. As you know, our accounting model requires us to consider all possible scenarios and probably wait things. We got to put a scenario out there. There's got some loss content in it. But at the end of the day, we believe in the structure, we believe in our credit underwriting, we stand back on our historical results. And time is on our side. Remember, in our portfolio, there's not any loss that would be significant to us in terms of in terms of principal and interest only when due. Theres' no acceleration. This, I think, has a $58 million payment annually to about $20 million -- so at the end of the day, it's not free cash flow. And as I said, I don't mind owning a railroad for $2.4 billion.

Your next question comes from the line of ommy McJoynt at KBW.

For investors that have become accustomed to AGO buying back roughly $500 million of stock and 10 in the last 12 years, was the slower pace of buybacks year-to-date and the message of a slowdown in buybacks for the next 3 months, is that meant to signal just a temporary slowdown here? Or is this a true change in the way you guys think about capital distribution? .

Well, when you say temporary, Tommy, that's a good question. I would say we look at the capital management, it's still a critical issue, still a critical strategic objective in the company. It's what we pay the most attention to. But at the end of the day, we front the company significantly. We've got to look at how we manage that remaining capital, where the opportunities lie. As we talked about in the life business, for instance, theoretically based on its growth pattern, it could absorb or need somewhere between $50 million and $150 million of capital to continue to exercise its growth program over the next 18 months. And we want to make sure we have plenty of capital for that as well as still having enough cushion to protect ourselves from some -- myoptic views of loss activities essentially a bright line in terms of what the capital charges are coming out of the rating agencies for that. So we have to protect the company relative to trading. We've got to provide the opportunity to grow the business. We've done a tremendous job, and I think we're going to have the credit we deserve for the capital management we've done as Ben talked about $6 billion, 81% of the outstanding. Well, that's liquidating the company. We want to grow the company. we think we've got great opportunities to grow the company. But at the same token, if we can't use the capital, if we see the tie capital continues to build as it has in the past, we will be aggressive in our capital management, and of course, we'll protect our stock as well.

Got it. And then I think we've talked about this in the past, but I just want to confirm that -- when you think about your sort of first order or second order exposure to the Middle East crisis, I assume you think it's pretty minimal. But perhaps thinking of second order impacts around just the level of heightened risk globally. Have you guys seen an uptick in terms of like the pipeline or demand for sort of risk mitigation strategies from AG specifically over the past few months that you can pinpoint to the crisis in the Middle East? .

No, we haven't, Tommy, Thank God. If you noticed, and I've been in this business in this position for a long time, I've seen probably 4 or 5 recessions, maybe 3 or 4 more global crisis, and at the end of the day, look at the results that Assured's put up, never had a loss in order to buy back the amount of stock and pay the dividends we had, we had to be usually profitable. I see nothing affects that going forward. We haven't seen the demand, as you're saying, in terms of people running for the exits. Our basic policy today where our growth engine is fund finance, which is a very safe, highly rated book of business. We do capital arbitrage, but the volatility in the market does allow us to open up more portals of business opportunity because of spread -- widening spreads increasing, which gives us more opportunity to make money and be looking at more deals, but we don't see the panic at all. And as I said, in our life history, it really has never had an effect because the portfolio is so well written and so well protected from a credit point of view. .

And Tommy, we're seeing the increase in structure fans globally and international infrastructure due to regulatory requirements on banks becoming -- we're part of their solution when it comes to capital -- their capital management and capital efficiency and risk management, so that's where we're opening up and they're looking at our financial guarantee as a solution to helping their regulatory capital.

Yes. I think what that says about the company, right? We're opening up more counterplay relationships against banks across the world globe but providing us significant lines of credit capacity that they're going to absorb in terms of insurance -- credit risk, why would that be? Because we realized the strength of the company, the strength of the financial ratings, the ability to provide this capital arbitrage in spite of the market and the results that we've been able to generate in the past. So I think that alone would indicate the confidence that the market has in us and continues to provide us those opportunities. .

I also just want to add that in these banks core lending portfolios. It's not anything that they're risks that they're concerned about is the core lending they want to service their clients even further.

And then if I could just sneak one last modeling 1 in. Looking at the investment portfolio, excluding the alternative investments, -- what was your new money yield in the quarter relative to the effective yield on the portfolio?

So I'm going to spend the number right in front of me, but I'm going to say we're probably -- the new money yield is probably somewhere a little north of 4%. It's probably 4.4 or so. may be off 10 or 15 basis points there.

Your next question comes from the line of Geoffrey Dunn at Dowling & Partners. .

Dominic, I know you don't put hard numbers on this, but can you talk about how you think about the level of excess capital in the company or alternatively, the ROE drag from the excess capital in the company. Last time I heard a number, it was north of $2 billion. And so outside looking in, it seems like you have enough money for all of the above to keep an aggressive buyback plan in place as well as consider new alternatives. So -- can you maybe flesh that out a little bit more? And then also, as you pointed out, you bought back over 80% of the company over the last 12 years. How much is the flow of the stock coming into as a factor with your buyback appetite going forward? .

Yes. I don't think [indiscernible] the problems, Dave. So that could be a problem down the road. But today, it's not been a problem. So let's talk about capital. So right now, our capital is predominantly equity capital. As we look to the future and see growth opportunities, that mix of capital has to be looked at and examined, can we bring in more soft capital facilities to let the hard equity capital be aggressively managed from the standpoint of shareholder buybacks or other opportunities. The soft capital also will provide us opportunities to allocate some of that for growth. And right now, we're saying to ourselves, we strength the company significantly. Some of the triggers to now exist on the overall balance sheet or portfolio after we examine more closely in the export soft capital could be a definite wave of the future as well as when we look at the capital, we have a rating agency. We have regulatory when companies come to us for large deals, they look at our balance sheet and the size of that balance sheet also gives them the confidence to write a $2 billion deal, a $2.5 billion deal. So we need to maintain certain size of asset as well for certain sides of the balance sheet to make sure that the issuer has full confidence in our ability to execute on the transaction and obviously provide the value that we expect in terms of the loss cost, liquidity and protection for the open investor. So I think we're going to look at all aspects of the capital and say, are we still a capital management company? Absolutely. And we certainly use buybacks as the capital managed? Absolutely. As we look at the composition of capital, we're going to change the compensation? Absolutely. Do we think we have tremendous type of growth opportunities? Absolutely. So we're trying to balance all those balls in the air, then we're doing a pretty good job. And you'll see it by the end of the year, whether we've been able to meet the promise or not.

I think it's important, Jeff, that the large deals are really get paid. We get paid both on an absolute premium dollar basis, typically, and we get paid on a high return basis. And those are the deals we really need to capture to really grow ROE. Rob ticked off. We had a bunch of deals -- in the first quarter, there were over $100 million to part. These are the deals we're obviously going after. We need big deals, and we need -- and those are the ones that are really going to drive the higher returns that we're looking forward to. .

And don't forget, Jeff, those significantly large fund finance deals earn very, very quickly. So that PVP that comes in in structured finance will earn over the next year .

And also releases the capital every capital exactly. We've got a lot of things to consider, Jeff. As you appreciate, there's kind of a new wave of opportunity, new wave of businesses that we are looking at and all that needs some capital. And as I said, we've got to look at the mix of our capital and move to more soft facilities as opposed to hard cash equity in terms of how we meet some of these requirements and still provide ourselves the ability and the capability to do capital management through share repurchases. .

The magic number has been $500 million for buyback. When you think deploying the business plan for this year, do you anticipate deploying $500-plus million into non-FG, whether it be buyback or annuity RE or anything like that? I'm just curious in terms of the excess capital deployment. Is it just where it's going changes, but your target amounts don't .

Well, we have the balances what's running off in the portfolio from the standpoint of capital requirements were we putting on in terms of new business. And that delta can go anywhere from flat to maybe plus $200 million, depending on the type of business and the way you write the business. So you got that issue. But then we also make money. So that increases the capital. So we look at the balance of the two and then look at the new business I've talked about in the life business, we think, and we're pretty optimistic in terms of what we see in activity that, that could also require us to put out maybe anywhere between $50 million or $100 million of capital for that growth For the next few years. .

Yes, I think we told -- we told you guys we joined the life business. If we're looking at the Life business, we think, roughly 2, 3 years, we'll get to some kind of steady-state equilibrium we could probably be printing a 10% to 12% returns. And again, we are very focused, as Dominic mentioned earlier, on ROE, this is an area we're 100% focused on. We know we can do better. We are doing better, and we're seeing that, but we do need the capital to use to grow that ROE.

This concludes the question-and-answer session. I would now like to turn the conference back over to our host, Robert Tucker for closing remarks. .

Thank you, operator. I'd like to thank everyone for joining today's call. If you have additional questions, please feel free to give us a call. Thank you very much. .

This concludes today's call. Thank you for attending. You may now disconnect.