ASSURED GUARANTY LTD (AGO) stock intrinsic value fair value estimate & owner earnings analysis

Assured Guaranty is the largest financial guaranty insurer. It guarantees scheduled principal and interest on bonds, mostly U.S. municipal bonds, plus U.K. regulated-utility and infrastructure debt and a smaller structured finance book. Issuers usually pay the premium upfront, and the company earns it over bond lives that often run for decades. At year-end 2025 it had $3.6 billion of premiums collected but not yet earned, and guaranteed $277 billion of principal. It earns money two ways: premiums as they are earned ($380 million in 2025) and income on an investment portfolio of about $8.9 billion ($359 million in 2025, $190 million in the first half of 2026). Against that come claims, about $385 million a year of payroll and operating costs, and about $89 million of interest on $1.75 billion of holding-company debt. It also owns a stake in the asset manager Sound Point. Since January 2026 it has also owned a small Bermuda annuity reinsurer, Assured Life Re, formerly Warwick Re. How we measured earnings. Reported operating cash flow swings widely for reasons unrelated to earning power. Examples are trading inside investment funds the company must consolidate but largely does not own, and paying Puerto Rico claims that were reserved years earlier. So we started from net income. We added back non-cash charges and removed currency remeasurement, investment and derivative marks, and one-time items such as the 2023 sale of the asset management arm and the $103 million Lehman litigation recovery in 2025. We subtracted share-based pay. We counted only the cash that Sound Point and the alternative funds actually paid out. Claims are the hard part. From 2021 to 2025, claims netted to roughly zero because Puerto Rico reserves were being released. Over 2014 to 2025 they averaged about 25% of earned premiums, a period that includes Puerto Rico, the worst municipal default on record. Excluding the two heaviest Puerto Rico years, the average was about 20%. We charged every year a normal claims cost of 18% of earned premiums in place of what was actually booked. On that basis, owner earnings for 2021 through 2025 were $295 million, $336 million, $214 million, $263 million and $264 million. We anchor on the $264 million median, about $5.91 per share on today's 44.6 million diluted shares. The window starts after the 2022 Puerto Rico settlement and covers the business after it sold its asset manager. What changed since our previous estimate. Our base case falls from $114 to $93. First, we previously took the median of the unadjusted years and then subtracted an average claims charge. The median year, 2024, carried a claims benefit, which left the starting point about $20 million too high. Adjusting each year before taking the median fixes this. Second, the first half of 2026 shows costs rising faster than revenue. Payroll and other operating costs rose about $20 million from the first half of 2025, while earned premium rose $4 million. Third, we no longer assume 1% annual growth. The contracted premium base has been roughly flat, not growing. Brightline is better for the company than we previously assumed. Its September 25 bankruptcy plan leaves the insured senior bonds' principal untouched, which lowers our bear-case loss there. But the company has committed up to $248 million of new senior money to the restructuring. Recent trend. Adjusted for normal claims, owner earnings were flat in 2025 (about $263 million in 2024 against $264 million in 2025). They rose about 12% per share because buybacks cut the share count. We start year one at $250 million, below that flat trend, because of the 2026 cost increases. We give no credit for buybacks, since those dollars are already counted as paid to owners. Base case (about $93 per share). Owner earnings of $250 million, held flat for ten years and beyond. Three facts support flat rather than falling. Unearned premiums, the contracted revenue still to come, moved only from $3.72 billion to $3.60 billion over 18 months. New business written roughly matched premiums earned over 2023 to 2025, with $1.03 billion written against $1.13 billion earned. New business in the first half of 2026 was up 48% by present value. The portfolio's yield rose to 4.92% from 4.67% as older bonds are replaced at today's higher rates. We credit that pickup only as an offset to cost growth, not as growth. After year ten we hold earnings flat. Municipal bond insurance has been written for more than half a century, and this company came through 2008, when most competitors did not. We give no value to earnings the business has not shown: no premium boost from bond refinancings, which have nearly stopped with long rates near 5.3%, and nothing for the annuity business beyond what it earns today. The normal claims charge absorbs expected losses on the currently troubled credits at today's reserve levels. The company expects $192 million of losses on those credits, mainly Brightline and Puerto Rico's power authority (PREPA). Bear case (about $54 per share). The contracted premium base keeps shrinking and costs stay sticky, as they did in 2025 and 2026. Owner earnings start at $230 million, reflecting claims at the long-run average of 25% of premiums, and fall 3% a year for ten years to about $175 million. They then hold at that level, because the guarantee franchise itself has survived far worse. On top of that we charge about $475 million after tax, in today's money, for named losses. The first is Thames Water, where the company insures £1.8 billion ($2.4 billion) of senior Class A debt. In June 2026 the U.K. government rejected a creditor rescue plan, and special administration is possible. We assume a 30% write-down paid as scheduled principal falls due from 2037. The second is Brightline, where we assume a second restructuring costs half the new money plus 15% of the $1.13 billion of insured senior bonds. The third is further losses on the company's other troubled credits: $908 million of stressed European renewable energy deals, $393 million of U.K. student housing and $557 million of U.K. hospital financings. We also charge about $250 million for capital put into annuity reinsurance at low returns. Management has said that business may need capital sooner than planned, and it currently earns about $2 million a quarter. Leverage makes this case worse. The company guarantees about 50 times its equity, so a cluster of defaults hits per-share value harder than at an unlevered business. Bull case (about $126 per share). The company's own levers work. Claims run at 10% of premiums, closer to the light 2021 to 2025 experience, and Brightline and Thames come through restructuring largely whole thanks to their seniority. New business stays at the first-half 2026 pace. Scheduled premium earnings keep rising, as they did in the second quarter ($95 million against $88 million a year earlier). Higher reinvestment yields keep lifting investment income. We also credit half of the earnings Sound Point and the alternative funds keep rather than pay out (about $102 million of reported earnings against $56 million of cash received in 2025). Owner earnings start near $294 million, grow 2% a year for ten years and then hold flat. Debt. These values are after the roughly $89 million of yearly interest. Because this is an insurer, we did not also subtract the debt, which would count it twice. As a cross-check, we valued the business before its lenders and then subtracted what it owes. In that view the base case business is worth about $5.65 billion. Against that it owes $1.75 billion, which costs it about $1.55 billion in today's money because $900 million carries 3.15% to 3.6% coupons running to 2031 and 2051. That leaves about $4.1 billion, within about $2 a share of our figures. The next maturity is $350 million in 2028, and even the bear case covers interest several times over. What would make this wrong. The value rests on claims staying near normal while new business keeps pace with run-off. Thames shifting a large write-down onto the insured bonds, Brightline failing again after its restructuring, or trouble at a second U.K. water company would move value toward the bear case. The company also insures $2.9 billion of Southern Water debt. Book value was $126 per share at June 30, 2026, above our base case. The capital behind it earns roughly 4.5% after tax, below the 6% an owner should require, so it is worth less than its face amount. Given the leverage, the active problem credits and how hard the business is to see into, the margin-of-safety price sits about 40% below the base case, just above the bear case.