Good morning, and welcome to the Assured Guaranty Ltd. second quarter 2022 earnings conference call. My name is Danielle, and I'll be the operator for today's call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, press Star then two. 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 second quarter 2022 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're 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 supplements 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 Ltd., and Robert A. Bailenson, 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 would 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. At the halfway mark of 2022, Assured Guaranty's adjusted operating shareholders equity per share and adjusted book value per share were at the highest levels in our history, $90.18 and $134.91, respectively. Second quarter and the first half of 2022 were marked by extreme market volatility, rapidly increasing inflation and Fed action to raise interest rates. Rob will cover how the shifting interest rate environment affected our financial results, but I am pleased to say that our core insurance business continued to perform well in this year's volatile markets. New business production has been strong and consistent with recent years' excellent results.
First half 2022 PVP totaled $145 million, and its sources were diversified across U.S. public finance, international infrastructure, and global structured finance. In terms of direct PVP, we again produced more than $100 million of first half direct PVP, making it 5 times out of the last 6 years that we've exceeded that milestone. In U.S. public finance during the same period, this year's $106 million of first half direct PVP was second only to last year's first half production and would have easily been the best first half of any year with the inclusion of one of our large transactions that sold in the second quarter but closed in the third quarter. During the first half of 2022, municipal bond yields trended higher and credit spreads also widened, though to a lesser extent.
The June 30th benchmark yield of 3.18% for 30-year AAA GO bonds reflected a 65 basis points increase in the second quarter alone and was more than double the yield at the start of the year. However, yield and spreads were unusually volatile. New money issues rose modestly in par volume and dominated the market, but rising interest rates also pushed some potential refundings, including taxable advance refundings, out of the money, causing overall market volume to decline. We continue to see high demand for our bond insurance compared with pre-pandemic levels. First half 2022 insured penetration of 8.8% was higher than the 8.4% in the first half of 2021 and significantly higher than the 5.9% in 2019's first half.
We believe that 2 important factors have helped to amplify the use of bond insurance. Wider investor awareness that insurance offers safety from the many potential consequences of the volatile economic conditions and a larger number of issuers recognizing the cost effectiveness of bond insurance. For the first half of 2022, Assured's share of the insured primary municipal bond market exceeded 56%. We guaranteed 380 new issues with a total of $10 billion in insured par sold. We set 12-year records for first half secondary market par written at almost $1.8 billion and combined primary and secondary market insured par sold at $11.8 billion. Our direct gross par written on U.S. municipal transactions closed during the first half was also the highest in 12 years.
Contributing to this were 17 primary market transactions where we guaranteed $100 million or more of par each. We believe deals of this size reflect significant institutional demand for our insurance due to the financial strength of our guarantee and the relative price stability and increased market liquidity our insurance can provide. Looking at the second quarter, our insured par totaled $6.5 billion, of which $1.4 billion was secondary market par. Total insurance penetration for the quarter was 8.9%. Our bond insurance market share was over 54%. We also guaranteed 10 large transactions sold in the quarter that utilized over $100 million of our insurance each.
These included a $608 million New York Power Authority issue, entirely wrapped by Assured Guaranty, and a $468 million portion of an Alameda County Transportation Authority issue, which closed after the quarter end and has contributed to the strong start we've seen for our third quarter PVP results. In fact, across our company, in the weeks since the third quarter began, we have already written more than $75 million of PVP. Remember, our first half total PVP was $145 million. A sign that investors recognize the strength of our guarantee, we continue to add value on double-A credits. For the first half of 2022, we insured $1.6 billion of par through 79 primary and secondary market policies on bonds rated in the double-A category by S&P or Moody's or both.
This included $1.1 billion of par on 52 deals sold in the second quarter, of which approximately $300 million was insured in the secondary market. International Public Finance produced $30 million in PVP during the first half of 2022, including eighteen million dollars in the second quarter. In May, we wrote a large secondary market guarantee for an institutional investor. Our pipeline of potential international public finance transactions looks very good and includes a number of significant transactions that we consider likely to close in 2022. As I said previously, we have already seen a strong start in the third quarter. In global structured finance, we continue to see potential opportunities with such clients as life insurers, banks, other direct lenders, pension funds, and asset-backed investors.
We closed our second guarantee of a subscription finance facility for a bank during the second quarter and see many opportunities to work with new counterparts in the fund finance sector. The CLO market remains an important area of focus, and we are speaking with current and potential CLO investors about opportunities created by the recent spread widening. More importantly, our insured portfolio quality continues to improve. During the first six months of this year, our exposure to below investment-grade credits decreased by almost $2 billion of par, including the $1.3 billion of Puerto Rico exposure we extinguished as a result of the Commonwealth GO PBA plan of adjustment. Our BIG par exposure now represents only 2.3% of our insured portfolio.
On our last call, I mentioned as part of the Commonwealth GO PBA plan of adjustment, we received cash and new GO bonds totaling approximately $1.2 billion, plus additional contingent value instruments. In addition, concerning the Highway and Transportation Authority revenue bonds, in July, we received from the Commonwealth, pursuant to the Commonwealth GO PBA plan of adjustment and the terms of the HTA plan support agreement, $147 million of cash and $668 million notional of contingent value instruments. The HTA plan of adjustment confirmation hearing has been set for August seventeenth and eighteenth. Assuming the current HTA plan is confirmed and implemented, we expect to receive additional recoveries in the fourth quarter. Firstly, all responsible parties understand that completing the island's debt restructuring is a key factor for its further economic progress in Puerto Rico.
Federal Title III Court is applying pressure to complete mediation to achieve a consensual resolution of the treatment of the Puerto Rico Electric Power Authority revenue bonds, our last unresolved Puerto Rico exposure. On July twenty-ninth, the judge extended the term of the mediation to August the fifteenth. The improved quality of our already high-quality insured portfolio adds to the reasons for our insurance subsidiaries' high financial strength ratings. S&P has recently affirmed its double A financial strength rating for all of our financial guarantee companies, citing both our very strong financial risk profile and very strong business risk profile in its annual review of Assured Guaranty. This report describes many strengths supporting our double A ratings, including S&P's view that we have excellent capital and earnings with a meaningful capital adequacy buffer. You can read the entire report on our website, assuredguaranty.com.
On the asset management side of our business, during the second quarter, we increased assets under management by approximately $950 million to $17.9 billion, of which 96% is now fee earning. Third-party inflows totaled $1.3 billion. We closed a new CLO and held an oversubscribed final closing for our latest healthcare fund, and we continue to execute on our other strategic objectives. Given the uncertainty in this economic environment, it's good to reflect on the proven resiliency of our company. The first year of the pandemic, we saw investor appetite for bond insurance increase, and that heightened interest has been maintained as this year's developments continue to remind investors that the future is often volatile.
We have succeeded through decades of economic cycles by delivering on our commitments to protect investors' principal and interest against all risks while proving our resilience through disciplined risk management and responsible stewardship of capital. Our insurance subsidiaries aggregate $11 billion of claim-paying resources today, are approximately the same as they were at the end of 2007, even though since then, we have paid gross claims exceeding $13 billion to keep investors whole and returned more than $5 billion to shareholders through share buybacks and dividends.
We maintain those numbers by mitigating losses on gross claim payments to only $6 billion of net claims through recoveries, reinsurance, and reimbursement, and by earning more than $6 billion in adjusted operating income over the same period. Our $11 billion of claim paying resources now supports a much smaller and higher quality portfolio of insured risks. By every measurement that compares our capital resources to insured exposure, our insured leverage is less than half of what it was at the end of 2009. This resilience has positioned us to thrive as business and market conditions are creating more incentives for the use of financial guarantees. We've never been better prepared to serve our clients, protect our policy holders, and create value for our shareholders. I'll now turn the call over to Rob.
Thank you, Dominic, and good morning to everyone on the call. In the second quarter of 2022, adjusted operating income was $30 million, or $0.46 per share, compared with $120 million, or $1.59 per share in the second quarter of 2021. The largest drivers of the quarter-over-quarter variance are mark-to-market movements on alternative investments, which had a $27 million after-tax loss in the second quarter of 2022 versus $38 million after-tax gain in the second quarter of last year. The trading portfolio, which consists of Puerto Rico contingent value instruments and that experienced a $15 million loss in the second quarter of 2022. Our core underwriting results, excluding these fair value adjustments, remain strong.
As I mentioned in the past, quarter-to-quarter comparisons of adjusted operating income are volatile due to the nature of these investments and the corresponding accounting that requires recognition of these mark-to-market movements in income. However, it's important to note that for these short-term funds, which account for most of this variance, the inception-to-date mark is a pre-tax gain of $98 million. This represents a 10.8% total return, which is in line with our targeted return, demonstrating the value of our investment diversification strategy into alternative investments. As for the Puerto Rico CVIs, or contingent value instruments, the company received these instruments as part of the March 2022 resolution of the GO/PBA exposures, which resulted in a $1.3 billion reduction of our insured exposure to Puerto Rico. We now manage this component of our Puerto Rico exposure as tradable instruments.
Any gains and losses we recognize in adjusted operating income on this portfolio are a reflection of current market pricing. Both of these mark-to-market adjustments, which account for $80 million of the variance, are reflected in the insurance segment, which had adjusted operating income of $55 million in the second quarter of 2022, compared with $152 million in the prior year. Insurance segment net earned premiums and credit derivative revenues were $86 million in the second quarter of 2022, compared with $106 million in the same period of last year. The refunding component of earned premiums, as well as changes in debt service assumptions, accounted for the majority of the change.
Economic development on our BIG insured portfolio was a benefit of $32 million, primarily consisting of a $39 million benefit in U.S. RMBS. Included in total economic development is the effect of increasing discount rates, which was a benefit of $42 million in the second quarter of 2022 across all sectors. This resulted in a benefit in loss expense of $17 million, which is a function of both economic development and amortization of deferred premium revenue. For the insurance segment, income from the investment portfolio consists of several components, net investment income on the available for sale portfolio and changes in fair value of trading securities and alternative investments.
Net investment income was $66 million in the second quarter of 2022, compared with $71 million in the second quarter of 2021, primarily due to lower average balances. Equity and earnings on alternative investments was a net loss of $34 million in the second quarter of 2022. The losses were a result of lower net asset values of the CLO funds and dilution from rebalancing following a final fundraising close for the healthcare fund. In the second quarter of last year, these funds had gains of $48 million. This volatility was the single largest driver of the quarter-over-quarter period variance in adjusted operating income. Fair value losses on the trading portfolio were $18 million, which represent mark-to-market movements on the Puerto Rico contingent value instruments.
The asset management segment adjusted operating income increased to breakeven in the second quarter of 2022. With respect to our capital management objectives, we repurchased 2.6 million shares for $151 million in the second quarter of 2022. As we went to the quarter close, we repurchased over 600,000 shares for $35 million. On August 3, 2022, the board of directors authorized the repurchase of an additional $250 million of our common shares, which brings our current remaining authorization to $365 million. Continued share repurchases, along with our positive adjusted operating income and new business production, have propelled operating shareholders equity and adjusted book value per share to new records of over $90 and $134, respectively.
Since the beginning of our repurchase program in 2013, we have returned $4.5 billion to shareholders, resulting in a 71% reduction in total shares outstanding. From a liquidity standpoint, the holding companies currently have cash and investments of approximately $189 million, of which $135 million resides in AGL. These funds are available for liquidity needs or for the use in the pursuit of our strategic initiatives to either expand our business or repurchase shares to manage our capital. As we look forward to the rest of the year, we remain optimistic that the interest rate environment will be more conducive to new insurance business production. The asset management segment and alternative asset strategies will continue to contribute to the company's progress towards its long-term strategic goals.
In Puerto Rico, our largest single below investment grade exposure will be substantially resolved by the end of the year. In a sign of continued progress, we received $147 million in cash and $668 million in original notional contingent value instruments in July as a part of the pending HTA settlement. I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.
We will now begin the question and answer session. To ask a question, you may press Star, then one on your telephone keypad. To withdraw your question, please press Star, then two. If you're using a speakerphone, please pick up your headset before pressing the keys. At this time, we will pause momentarily to assemble our roster. We'll take our first question. Caller, your line is open.
Hey, good morning, guys. Thanks for taking my questions here. Could you go into a bit more detail on the earned premium decline? I think you attributed somewhat to a change in debt service assumptions. What does that mean for the go-forward recognition of premiums, kind of what you expect there?
Half of it was due to a decline in refundings, and the other part was an extension of life of a transaction because CPI, they're related to CPI Index in the U.K. When you have significant amount of premium associated with that, you have to reallocate that and it's more exposure. If you have more exposure, you then have to earn it over a longer period of time, which makes it slow, which then slows down your expected earned premium.
It doesn't make it smaller, it just makes it go over a longer period of time.
Okay. Got it. It sounds like your demand for your wrap remains strong. Can you talk about pricing on new business relative to the in-force book, both from a perhaps pricing power perspective as well as considering perhaps a more uncertain economic outlook?
Well, as you know, we get paid on debt service, which means as interest rates go up, debt service increases. Therefore, the premium calculation of rate times debt service becomes higher. Number two, typically, as interest rates go up, spreads widen, we get paid based on percent spread. Therefore, it becomes even a more, you know, favorable market for us relative to ultimate return. We calculate return on a transaction-by-transaction basis and business-by-business basis, and then compare it across quarters and years. You know, our goal is always to get a double-digit return. Obviously, there is volatility in that. As you know, sometimes there's a larger transaction that might come in higher or lower on a basis. It's because we do, you know, a given amount per quarter, it could fluctuate the results.
At the end of the day, we're hitting our target in terms of return. We think the market will continue to get better for us as the year progresses. The first half of the year has been so volatile. There's been a little bit of sticker shock relative to, you know, the issuance in the marketplace. As we said, new money's up a bit, but there's virtually little activity on the refunding side. However, this environment for us then creates an even better environment for secondary market transactions. Of course, we talked about secondary market in our narrative where, to give you a statistic, we've written as much business as of the six months in the secondary market that I think is twice what we wrote all of last year.
Yeah, to give you some.
To give you some point of comparison.
Sorry.
In the secondary market, obviously, it's higher price, higher return business. The more that complements direct primary business really drives ROEs up to very, you know, reasonable or not reasonable, profitable levels for the company.
To give you some of those numbers on secondary market, as Dominic just talked about. In the second quarter, we wrote $27 million of PVP. For the six months, it was $50 million of PVP. That's over $1.4 billion of par for the quarter, and $1.7 billion of par for six months.
Okay. Good. Helpful numbers. Just lastly, could you kind of remind us what your latest sort of calculation is for how much excess capital that you currently have, and whether that be the, a method they're looking at, perhaps rating agency levels or, you know, above an acceptable leverage of CPR to gross par or anything else that you think is relevant?
Well, we look at it from two bases, right? One, rating agencies, it's important that we maintain our AA rating from S&P. Then two, from our own internal capital models to make sure that we continue to provide the necessary protection and buffer relative to the marketplace to ensure the company remains financially strong. Obviously, it's getting a little bit easier for us as the portfolio continues to amortize down, and therefore the leverage ratio decreases. The excess capital position has remained relatively significant. Now, the only number we've given you is 2019. We're trying to get the 2020 number, which was over $2 billion, and we still kind of maintain a significant level of excess capital.
As you well know, in our capital management strategy, the majority of that has been obviously positioned relative to share buyback, which we will continue as part of a capital management strategy. We will continue to evaluate circumstances and situations as the, you know, the market continues to evolve. As the portfolio amortizes, the higher risk in the portfolio has basically continued to decline. Therefore, that excess capital position we still think is significant. Remember, that's after returning right over $4 billion of capital to shareholders. We still got a long way to go relative to working the capital down to a reasonable level that we think can provide us the opportunity for higher ROEs, therefore move up the ROE relative to the cost of capital to get the valuation of the company to improve.
We look forward with a very strong optimism that, A, the financial guarantee business is growing, profitability is widening. That should contribute to higher earned premiums for the next few years. We're still managing the capital down. As we talked a little bit about on the asset management side, we finally have gotten the platform stabilized to break even. Now we still just have to build the verticals to start to increase the profitability of that operation. If you look at all three combined, I think it puts us in a very good situation relative to continuing the improvement of ROE against the lower capital base with the two lines of businesses functioning very, very well in this market space.
Great. Thank you.
Thanks, Tommy.
We'll take our next question from the line of Geoffrey Dunn with Dowling & Partners. Please go ahead. Your line is now open.
Thanks. Good morning, guys.
Hi, Jeff.
Good morning, Jeff.
Rob, I wanted to understand how the new mark on trading securities applies to the CVIs you received. That is a mark that, as I understand correctly, has occurred since you received those CVIs on July eighth, or does that extend back to some of the instruments you received on the GOs as well?
Yeah, it extends back to when we received the original CVI.
Okay. It includes some of the HTA stuff too, or no?
The HTA stuff came in very late, and so the mark-to-market movement is primarily related to that.
General obligations.
Okay.
General obligations, not the HTA.
Okay. What I wanted to understand is, with the mark-to-market noise, and obviously it's gonna bounce around each quarter, does that affect your recovery assumptions on CVIs to be received in the future here, with respect to your reserving at all? Or is it truly just mark noise that doesn't have any implications on the core reserve position?
If you remember, Jeffrey, we book a recovery estimate. Once you physically receive the instruments of the recovery, they get priced on the day of receipt. That sets the recovery period relative to the insurance policy. They now become an investment in the investment portfolio, now subject to any other volatility in terms of pricing in the investment portfolio until you either hold them to maturity or sell them.
We've already locked in what's gonna be in our reserves, and now it's actually gonna flow through that investment portfolio.
That I understand. I'm just wondering if the trading securities you now have in any way influence your recovery expectation on the CVI still to be received in the future.
Not for the insurance policy, but now for the investment return, right? You gotta make sure you understand that. At the date of the settlement, that locks in the recovery ultimately on the insurance policy, period, end quote.
Yeah.
Now it's no longer having anything to do with recovery on insurance or what the ultimate net claim was. It now becomes an investment. Obviously, if you look at those investments, we continue to evaluate market conditions, expectation of return, what the market returns are, and therefore we'll manage that balance accordingly as we go through the period.
Jeffrey, we've already received, maybe this will help. We've already received all of the CVIs that we were gonna get from the GOs and the transportation. We do not expect. We don't, we're not getting any more. It will not affect any reserve assumptions.
On the HTA then all that's remaining is new bonds or is there a cash and new bond component still to come?
There's a cash and new bonds component coming when the plan is approved.
Got it. Okay, great. Thank you.
This concludes the question and answer session. I would like to turn the conference back over to our host, Robert Tucker, for closing remarks.
Thank you, operator, and thank you all for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.
This concludes today's conference call. Thank you for attending. You may now disconnect your lines. Have a great day.