Today, Assured Guaranty announced its acquisition of fellow bond insurer CIFG. This is now the 3rd acquisition AGO has made of another bond insurance company. The others, which were FSA and Radian Asset, have been very successful thus far. While this acquisition is a bit smaller, it looks very safe and should add a nice chunk of value to the company. AGO is paying $450MM for $637MM on statutory capital. CIFG’s insured portfolio has very little exposure to Puerto Rico so that shouldn’t really be an issue. AGO is very familiar with this insured performance as it already has a reinsurance relationship with CIFG. Assured Guaranty mentioned in the press release that the acquisition should be accretive to earnings, operating book value per share, and adjusted book value per share. The company also guided that the acquisition should add approximately $300MM to $325MM to statutory capital. I’d estimate that this acquisition should increase the per share value of the stock by between $1.50 and $2.50 per share, or 6-10% from current prices. Normally, on an undervalued stock I’d say maybe the company should have just bought back its own stock. However, in this case the increase in statutory capital should add to AGO’s ability to buy back stock as it will enhance the dividend capacity of the insurance subsidiaries. For AGO, which is so undervalued, this is a very welcome scenario.
There are additional insured portfolios out there that AGO might look to acquire with similar dynamics. One of the reasons I really like AGO is that management is very astute at allocating capital. They do low risk acquisitions, buy insured exposures at discounts to par, and of course buy back their deeply undervalued stock. In regards to Puerto Rico, there is a great deal of news and things are very fluid. I’d say developments could be better and they could be worse, which is actually a welcome development given the troubling political climate that exists in this country. Based on my analysis, I believe that in the very worst case scenario I can imagine using publicly disclosed releases from Puerto Rico, additional losses on PR could be $4.50-5.00 per share. Keep in mind that operating book value per share stood at $43.11 and adjusted book value was at $61.18 at the end of the 4th quarter. I’d expect both numbers to be higher after 1st quarter results are disclosed and this acquisition will also help once it closes, probably in the 3rd quarter. I believe it is also very possible that AGO will end up being overly-reserved for Puerto Rico if negotiations go reasonably, especially when you factor in AGO’s ability to negotiate more favorable outcomes through providing access to capital markets for Puerto Rico. The company has a history of appropriately reserving for losses and for obtaining outcomes that are far better than what most would expect. I view this acquisition as a very favorable development, and believe that once Puerto Rico is resolved the stock can trade dramatically higher than current prices. Thank you very much!