Assured Guaranty Ltd (AGO) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 Assured Guaranty earnings conference call.

(Operator Instructions)

Now, I'd like to turn this presentation over to your host for today's call, Ms. Sabra Purtill. Please proceed, ma'am.

Thank you and good morning. Thank you for joining us for Assured Guaranty's first quarter 2005 earnings conference call. We released our earnings yesterday evening and our press release and financial supplement are available on our website at www.assuredguaranty.com. The speakers on our call today will be Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd., and Bob Mills, Chief Financial Officer.

Following their prepared remarks, they and other members of senior management, including Michael Schozer, head of our financial guaranty direct business, and Pierre Samson, head of our financial guaranty reinsurance segment, will be available to address your questions. A replay of this call will be available for the next month on our website as well as by telephone at 1-888-286-8010 in the U.S. and at 1-617-801-6888 for international callers. The passcode for the replay is 21847564. This information is also available on our earnings conference call press release that we sent out several weeks ago.

Before turning the call over to Dominic, I'd like to remind you that our commentary today may contain forward-looking statements such as statements relating to our financial outlook, business strategy, growth prospects, ratings goals, personnel, demand and other market conditions. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplement, which are available on our website for more information on factors that could affect our forward-looking statements. With that, I'd now like to turn the call over to Dominic.

Thank you, Sabra, and thanks to all of you on the call and webcast for your interest in Assured Guaranty. Assured Guaranty reported its first quarter 2005 earnings last night, which completes our first full year as a public company. Although it has been only a year, a significant amount of progress has been made in building our financial guaranty organization.

I am very pleased, not only with the level of our business activity, but also with all the other objectives that we have worked on in order to advance our strategic plan. Bob will discuss our financial results in more detail and I will focus on our production as well as overall market conditions. I will also talk about some of our strategic accomplishments.

This quarter's new business production, as measured by the present value of premiums written or PVP was $88.3 million, our high production since the IPO. On the direct side, our production was spread across all transaction types, with significant activity in our structured finance division.On the reinsurance side, volume remains strong, although down from the prior year, due to some large sessions we received in the first quarter of 2004 that were not repeated this year, given market conditions and the change in our reinsurance relationships. As for market conditions, credit spreads, pricing and competition are more challenging today than they were a year ago. But issuance has remained strong in the structured and public finance markets, indicating that our biggest competition is whether fixed income investors will demand credit enhancement as part of their investment purchase requirements. For example, we and the industry overall underwrote less RMBS paper in the first quarter than in the fourth quarter, reflecting lower investor demand for wrapped paper in this asset class.

Market conditions, however, do present some near-term challenges, but we think our position is somewhat unique within the industry. We have told you previously that we believe that Assured Guaranty can grow its direct business in any market, due to our current market share and the diversification demand by the investor community. We are winning our business today due to unique capabilities in certain business classes, dedicated and experienced personnel and our customer focus. As an example, we have mortgage expertise and a capitalized company that allows us to write reinsurance of residential mortgage insurance outside the traditional RMBS structure. The current quarter benefited significantly from this capability. In addition, we are starting to get repeat business from issuers and bankers with whom our individual underwriters have had a successful execution. In other words, those clients have had hands-on experience with our team and have confidence in our ability to get the transaction done on an efficient basis.

During the quarter, we as a company also achieved other successes that will continue to build our franchise, financial strength and future earnings power. Bob will comment on some specific financial transactions and I'd like to review some of other strategic accomplishments. First and foremost is AGC's Fitch AAA rating. Fitch Ratings awarded our financial guaranty direct company a AAA insurer financial strength rating with a stable outlook. We are very happy to have received this rating and it will help broaden our market reach, particularly in the public finance markets. This was an entirely new rating done from the ground up with a thorough review of every aspect of AGC and AGR, based on current financial information and projections. As our ratings improve and develop, we will be able to access more business opportunities. We also view this rating as a confirmation of our company's strategy and progress achieved.

Second, the centralization of reinsurance in Bermuda. The reinsurance of the FSA book of previously seated reinsurance from AGC to AGR completes yet another goal in our strategy of centralizing our reinsurance operations in Bermuda. This transaction will better utilize our Bermuda capital at Assured Guaranty Re and free up capital at AGC to support the growth of our direct business. We are currently waiting for regulatory approval of this transaction, but the agreement will be effective as of January 1, 2005 once approved.

Third, we sold off predominantly all of our single name credit default swap book. Although this book had a good credit quality and earnings contribution, it had a short tenor remaining, absorbed capital and wasn't consistent with our strategic plan. We sold this business for a little more than our carrying value, indicating that our mark-to-market was consistent with the actual market value.

Fourth, we closed our first international transaction. In February, Assured Guaranty UK closed its first deal, a euro denominated ABS transaction. We are seeing a good flow of opportunities and look forward to doing more transactions in this growing market.

Last, but not least, we continued the expansion of the Assured Guaranty team. Assured Guaranty continues to attract and hire highly talented people to join our growing direct financial guaranty team. Since our last earnings conference call, we hired 10 more people and our total headcount is now 116, the highest level since our IPO. While the pace of new hires will probably slow over the balance of the year, we remain focused on adding additional underwriting expertise in growing asset classes and market opportunities.

All in all, it was really a good quarter for Assured Guaranty, building on all the work we did in 2004 and adding to the new business momentum you saw in the fourth quarter. Now, I'd like to turn the call over to Bob Mills, our CFO.

Thanks, Dominic, and good morning to everyone. Before I would begin, I'd like to remind everyone to refer to our press release and the financial supplement for segment level details and further explanations of our financial position and results of operations.

Net income for the first quarter of 2005 was $44.3 million or $0.59 a share compared to $46.9 million or $0.63 a share for the first quarter of 2004.Comparisons with the first quarter of 2004 will continue to be a challenge. As you will recall, that period contained a number of IPO-related transactions. Our operating income per share, which we calculate as net income excluding realized gains and losses in investments and unrealized gains and losses on derivative financial instruments, was $41.3 million or $0.55 a share compared to $43.7 million or $0.58 a share for the first quarter of 2004. Earnings from municipal bond refundings from reinsurance, which are reported on a one quarter lag ,contributed approximately $0.01 per share in the first quarter of 2005 compared to $0.02 per share in the first quarter of 2004.

Let's take a moment to review the results in a bit more detail. The PVP or present value of premiums written totaled $88.3 million for the quarter, a decrease of 15% compared to the pre-IPO first quarter of 2004. PVP for the direct and mortgage segments totaled $50.6 million, an increase of 87% from the first quarter of 2004. Both segments produced excellent levels of new business. Production in the direct segment included encouraging progress in public finance sector as well as continued strength in the structured finance sector. Production in the mortgage segment was strong, but this business is somewhat lumpy as the transactions are large and multi-year in nature and PVP will be volatile from quarter to quarter.

PVP for the reinsurance segment totaled $37.7, a 52% decline from the first quarter of 2004. Excluding two reinsurance contracts not in force in 2005 that were in force the prior year, the decline is 15% reflecting the fact that the first quarter of 2004 included a high level of business ceded from one client. As I stated in the fourth quarter, reinsurance PVP volume overall is expected to decline in 2005 unless market conditions improve enough to offset the PVP related to the non-renewal of the two quota share treaties that occurred in mid-2004. PVP related to these treaties represented 30% of the 2004 PVP for the reinsurance segment. This segment reports PVP of par written on a one quarter lag basis, due to delay in receiving new business information from the primary companies.

As we build our franchise over time, a good measure of our progress is the increase in the embedded value of the business, the present value of installment premiums in force and the net unearned premium reserve. In March 31, 2005, the present value of installment premiums in force and net unearned premium reserves totaled $920 million, an increase of 6% over the $870 million in balances at March 31, 2004.

Net earned premium for the quarter totaled $48.1 million, down 45% from the first quarter of 2004. If we exclude the other segment’s net earned premiums of $17.2 million and IPO-related transactions of $24.2 million recorded in the first quarter of 2004, the direct reinsurance and mortgage segments’ net earned premiums increased by 7% in the first quarter of 2005.

For the direct segment, net earned premiums totaled $20.4 million for the quarter, up 24%, excluding the previously mentioned IPO activity from the first quarter of 2004. Included in the 2005 amount is net earned premium from the single name CDS book which was sold. Of the total earned premiums for that book of $4.4 million, $2.4 million of that was the result of the sale. This amount would have been earned, to a very large extent, over the remaining quarters of 2005. Net earned premium for the reinsurance segment was $23 million, up 13% from the first quarter of 2004. Net earned premiums for the mortgage segment were $4.6 million, down 45% from the first quarter of 2004. This reflects the continued runoff of the quota share mortgage business.

Loss and loss adjustment expenses incurred total a $9.4 million recovery for the quarter compared to a $23.7 million expense for the first quarter of 2004, which included loss provisions of $19.8 million in the IPO-related transactions. In the aggregate and at the segment level, there were no material additions to case reserves during the first quarter of 2005. There was salvage recovery and litigation on one loss incurred in 1998 in the amount of $6.8 million. There was also case reserve and loss adjustment expense recoveries of $1.7 million.

Portfolio reserve additions for the quarter for the financial guaranty segments totaled $2.5 million. This amount was offset by portfolio reserve reductions related to the continued runoff of CDOs and the sale of the single name CDO portfolio and normal runoff in the reinsurance segment totaling $3.4 million. There were no changes in the reserving process during the quarter.

As you're aware, the FASB will be evaluating the principles surrounding the establishment of loss reserves in the financial guaranty industry. We have included extensive disclosure regarding our processes in our 10-Q and have also included them in the 10-K. Our 10-Q will be filed early next week. We're very comfortable with our loss reserve processes and methodology and will keep our investors informed as the FASB discussion regarding this industry issue evolves.

The investment portfolio grew slightly from the beginning of the quarter. Yields were down slightly from the fourth quarter of 2004 and were relatively flat compared to the first quarter of 2004, reflecting the current rate environment and slight changes in the investment mix. The current pre-tax book yield is 4.7% and the duration is approximately 4.6 years. The duration is decreased from five years, at the end of the year, because we changed investment managers at January 1 and their calculation methodology for duration for municipal securities is performed differently from the previous investment managers, relying on empirical trading data rather than Bloomberg information. There has been no significant change in the investment portfolio during the quarter. Also during the quarter, the market value of our investment portfolio decreased by $22.1 million as a result of rising interest rates. Since this portfolio is long-term investment in nature, this decline is reflected in accumulated other comprehensive income account. Operating expenses were substantially flat with the fourth quarter of 2004 and reflect a 15% increase over the first quarter of 2004, the result of ongoing expenses related to operating a holding company infrastructure and increased staff in the direct business.

Our book value per share increased to $20.45 per share from $20.19 per share at end of 2004. During the quarter, we repurchased 0.8 million shares of our stock at an average price of $18.87 per share. We completed our $25 million share buyback program shortly after the completion of the quarter. The main purpose of this program was to offset dilution from the employee share compensation program. We have not, at this point in time, proposed to the board of directors that extend the program.

Adjusted book value, which adds the embedded value from installment premiums in force and unearned premium reserves, net of DAC and taxes, and is used by management investors who evaluate growth of the company's equity and in-force book of business was $28.12 per share at quarter end, increased from $27.67 per share at the end of 2004.

The Company’s operating ROE in the quarter, which is calculated by dividing our annualized quarterly operating income by average shareholders equity excluding accumulated other comprehensive income was 11.3%, reflecting the benefit of the salvage recovery in the quarter. Excluding this item, the operating ROE was 10.1%.

It was a very strong quarter from the standpoint of new business and we continue to make solid progress on all fronts. We expect to release our second quarter 2005 earnings during the first week of August and will update you on the time and date, as the time grows closer. With that, I'd like to turn the call back over to the operator to poll for questions.

Thank you, sir. (Operator Instructions)

Your first question comes from the line of Geoffrey Dunn from KBW.

Thank you. Good morning and congratulations on such a strong production quarter.

Thanks, Geoff.

First, a clarification. On the recoveries, I think, through the numbers it suggests there's about $8.5 million of recovery, which would more than account for the net $7 million reserve development in the reinsurance segment. Is that the correct way of looking at it?

Yes, it is, Geoff, and thanks for the comment and thanks for being on the call.

Okay. And then, two things. First, can you comment on the mortgage business production that you were doing in quarter? Are you winning that business because of capacity availability and people coming to your name or is that being won on a bidding basis?

Well, remember, you've got to split our mortgage into two pieces. We have the mortgage reinsurance business ...

Yes, I'm specifically looking at direct.

Okay. On the RMBS side, we didn't do that much mortgage business, as we talked about in the call. What I can tell you is the activity we have is, on a capacity basis, principally, we don't really compete on price. I mean there, the price is really set by the market, so it's not us against one of our competitors. The price is going to be pretty much similar in that marketplace, especially depending on the investor. We trade very narrow to the other monolines, therefore the pricing is not that different. Typically, those deals are rated AAA and therefore the return implications on the current market pricing is still fairly positive.

Okay. And then, we've seen some changes on your treaties for the reinsurance segment. But could you comment to the facultative opportunities? It seems like some of the treaties may be migrating off the books, but you're probably seeing some additional interest in facultative. Can you comment on that?

Yes, I can. And as we've talked in the past, today's marketplace, where spreads are down, volumes are a little bit challenging, more from the standpoint of competitors as opposed to overall lines in the market, the demand for portfolio-type reinsurance from the existing monolines is different. And we saw that, from a risk management perspective, where reinsurance comes in as the substitute of capital - things like single risk as well as accumulations would still need to be met and although not through treaty, but through fac. And we talked last year that we would expect facultative opportunities to grow and therefore facultative to become a larger segment of the reinsurance book of business and specifically in light of the treaty term changes.

As we talked last quarter, the 2004 year, facultative as a percentage of total reinsurance premiums grew significantly through the period. And I'll go back and just remind you of those numbers. It was 8.4% in first quarter 2004, 11.7 in second quarter 2004, up to 30.1% in third quarter 2004, which really began the treaty changes that we had discussed, 36.1% in fourth quarter of '04 and first quarter of 2005, it was 34.2% facultative to treaty. So, that mix of business is really dictated or predicated based on market conditions, treaty arrangement and we do still see that the way the existing monolines will meet the reinsurance needs, could be dictated through a facultative type execution.

Right. The number of facultative submissions that we're seeing each quarter is continuing to grow. So, it's not just - the percentages aren't changing just because a couple of treaties have fallen off. The facultative submissions that we're receiving each quarter are increasing also.

Yes, and a final comment, Geoff, just to follow up, is that we did announce last quarter that we signed a master fac agreement with FGIC. We did announce this quarter we signed a master fac agreement with Ambac.

Okay. Thank you.

Your next question comes from the line of Mark Lane from William Blair.

Good morning.

Hi, Mark.

Good morning, Mark.

My first question is regarding reserve movement. Bob, I think you said that the portfolio reserve, you added $2.5 million for just your normal process and then ...

That's the - that was the gross additions that happened predominately as a result of new business put on.

Right. And then, the runoff was negative $3.4?

The $3.4 is two pieces the continued runoff of the CDO book, that's $2.2 million. There is $0.9 million, which is the portfolio reserve reversal from the sale of the single name book. And then, $300,000 related to normal runoff activity in the reinsurance segment.

Okay. So, plus $2.5 minus $3.4 is zero - negative $0.9, but it actually was down $2.3 sequentially? So, where was the other movement.

The - I mean, the pieces that made up the $9.4 million are the one recovery, in litigation, which 6.8 million, the $2.5 million addition to the portfolio reserve, the runoff of the CDO, the single names and the reinsurance, which is 3.4 million and then there was, as I had mentioned in my remarks, there was a case reserve and loss adjustment expense recoveries across the segments that total $1.7 million. The sum of those numbers should give you 9.4 million recovery.

Okay. And then, on IBNR, so with the single name book being gone, the $23.8 million in reserves within the other - I'm sorry, the $19.9 million of reserves within other, what is the case reserve exposure being - what type of transaction is that being held against and what sort of transactions is the IBNR protecting within the other segment?

In the other segment?

Yes.

That's CTA ACE, that's an inter-company transaction that happened as part of the spin-off, the IPO transaction. It's on both sides. There's no net exposure as far as we're concerned ...

So, with the CDS single name gone, there's no residual exposure within other any more.

No, that's not ...

Well, the in and outs that we have to pass through, some of the reinsurance sessions we made to ACE when we did the IPO. So, to the extent that we've got some trade credit and residual value activity, they’re subject to a session to ACE, we would still run the numbers through our books gross and then cede them back with no net.

And then, on the operating expense - $14.5 million in the aggregate in the first quarter, is that a decent run rate for the rest of the year or should that continue to move up or should that move up, given plan new hires, et cetera?

Yes, it should only move up incrementally. I mean, we've now absorbed all the cost, by and large, of setting up the holding company structure, getting in the personnel necessary to drive those type of requirements reporting, et cetera. And as we talked about, we've made some significant additions to staff and we that activity at least slowing down for the time being. Obviously, that could change, based on changes in market opportunities, but you're talking about hiring two or three at a time and that shouldn't move the expenses significantly.

Okay. And the last question is, on the mortgage guaranty side, can you explain the differences than - you talked about the structure outside of the normal RMBS transaction. And how long of contract is the business that you wrote in the first quarter? Over how many years will that be earned?

Good question. Typically, these things are subject to, just like in the normal mortgage deal, prepayment. And therefore, there's a legal final, but there's a practical final. We would expect it to be in the kind of 5-10 year, depending on prepayment activity based on reserves. As we said, we always felt that our mortgage capability outside traditional RMBS, because it's a different structure, different animal, give us competitive opportunities. And we did write that business, as you're referring to ...

So ...

I'm sorry.

So, should we view that then as a regular mortgage backed type deal that could have been written in direct, but because of different execution, it was written in mortgage guaranty?

Let's put it this way. The risk itself is extremely similar, right? It has a credit score per borrower. It's got geographic distribution. It's got indexing of the housing values. It's got subordination. And it is rated. So, in terms of the easiest comparison I can give you, every deal we do is A) investment grade and B) rated by the rating agencies. And this deal was rated, I believe, A) by the rating agencies.

Okay. Thank you.

Next question.

Sir, your next question comes from the line of Rob Ryan from Merrill Lynch.

Good morning.

Good morning, Rob.

Hi, Rob.

On taking a look at some of the lumpiness on earned premium for the reinsurance segment, can you give us any color on what might have increased reinsurance earned premium during the fourth quarter that contributed to a relatively large sequential drop outside of the issue of simply refundings, which we know can be lumpy.

Yes, Rob, there are three components that are affecting that and we watch it, too. So, thanks for having the interest. First, there is the difference of refundings and the difference of refundings was fairly significant fourth to first quarter, about $3.5 million. The second thing was changing in the earning patterns, due to accelerated prepayment activity. And we're trying to always catch up on that data because, as you know, we get the reinsurance statistics on a quarter lag basis than thebordereau. And then, lastly - so, that accounted for a fairly significant amount of that difference.

And then lastly, we do get the detail that gives us absolute confirmation of earnings pattern, which then has us go back, historically, and adjust, on a quarter-to-quarter basis, earnings amortization of the various deals. So, the three components kind of move together and, of course, at year-end everybody's trying to catch up on all the processing. So, you typically get a lot of information thrown in the last quarter.

There were a couple of other small items in there, Rob. There was a couple of structured transaction terminations that came through from reinsurance, which added another lump of a couple million dollars to the process.

Okay. Now, switching over to a similar analysis on the direct side. How much was the earned premium of all in, related to the termination of the - of credit default swap or the sale of that credit default swap book against the 4.4 and going forward, that zero.

Right. The - I mean, all in for the single name book was 4.4 million - 2.4 million of that came in really as a result of the sale. That probably - the vast majority of that would have come in through the balance of 2005, but those are the two pieces of it.

And by how much did the sale of the credit default swap book reduce your net par outstanding in the direct segment?

Probably $2 billion.

$2 billion.

Okay. So, excluding that sale, the net par outstanding actually grew for the segment.

Yes.

Right.

Okay. Thank you.

Thank you.

Your next question comes from the line of Mike Grasher from Piper Jaffray.

Good morning.

Good morning.

I wanted to touch on credit for a moment. Overall, it looks like credit improved. If I look at - if I look at the closely monitored credits, overall, they're down. But it looks like there was a shift between - or at least category two rose a bit and I'm wondering if that's a shift between category one and category three or exactly if you could give us a little more detail around what that overall picture looks like.

Sure. As you noted, overall credit quality improved quarter on quarter. Roughly about $170 million came out of the - what we call the closely monitored list, the CMC list. But as you point out, there was a significant shift to category two. That shift was for one risk at the Eurotunnel, that we moved up from category one to category two, related to, obviously, the continuing problems and the current discussion is, I think, scheduled for - towards the end of the year on the refinancing of the obligation of the Eurotunnel.

So that was the only one that went over?

Yes.

Okay. And then, Dominic, could you speak a little bit, also, just in terms of what the pipeline looks like? You mentioned continuing to see opportunities internationally. Does that imply pipeline as well? And then, pipeline in the direct public finance - particularly, public finance.

Yes, the public finance is an interesting situation. We really have tremendous activity in that area, as we've talked about in the past. We're very pleased with our penetration in the market. Although first quarter closings were light, that really represented more, kind of a shifting in the timing of closings and you will see in the second quarter, kind of the activity that we have anticipated. To give you some statistics, in April, we'll close roughly two-thirds of the volume that we did in the first quarter. We have further commitments already agreed that will then, once again, double the first quarter statistics. So, we're happy with that. We've got a good active pipeline. We just has some issues in terms of timing on closing from first quarter. But we see continued opportunity and, as you know, we've built up significantly the resources in that area.

Across all other businesses, the direct guys, especially Mike Schozer, has been saying, talk these guys down. We've had two strong quarters. I'm not going to promise that every quarter. So, we are very, very pleased with the activity. We get more and more opportunities. Our name is, obviously, getting greater acceptance in the market. I think people are finding it easier and easier in terms of the execution. And obviously, one of the things we've dedicated ourselves to is providing high-quality service, so that we are responsive. We dedicate to personnel. We commit ourselves to the transaction. And we really make sure that everything moves as smoothly at possible, including supporting every aspect, including the ultimate investor sale.

So, activity is good. We talked to you third quarter about good fourth quarter and I think we met it. We talked to you in fourth quarter about good first quarter. We met it. And I'm going to stand here today and say we still have very good activity and it's continuing to build. And things like the Fitch AAA just only continue to support that opportunity.

Thank you. And congratulations again on the quarter.

Thank you very much

Thanks, Mike.

Sir, your next question comes from the line of Darin Arita from Deutsche Bank.

Hi. Good morning.

Good morning.

Hi, Darin.

The ROE was very strong in the quarter at 11% and I understand that includes some items in there. But can you give us an update on what your expectations are for the ROE for 2005? I think I remember the last time you talked about it, you said it would difficult to improve the ROE from the 2004 levels.

Yes, we've been pretty adamant about not trying to forecast the ROE. And specifically because, in our position our ratings opportunity, which is still a very liquid situation, will have tremendous impact on our ability to look at market opportunities, narrow our pricing differential and obviously get us more and more market spread. We've had two solid quarters of production. And that will ultimately dictate to earnings contribution. But we're not going to see a real dramatic improvement in that ROE until we have four A quarters of that kind of market penetration such that we get that beneficial flow effect on earnings so that, in a given quarter, I've got eight solid quarters contributing instead of two.

And therefore, we're asking for patience and that's why we're kind of staying away from projections such that, when that earnings stream does develop off of these writings, you'll see a fairly reasonable ramp-up of ROEs. We're pleased with where we're at, but understand we appreciate that that's still off the back of these kind of shifts in business and transactional changes that we have experienced in moving the company into the strategy of a AAA monoline. And yes, we'll eat off of that as long as we possibly can, but we understand, really, core earnings has to come out of, basically, core production. You're seeing some of that and we want to continue that and then that will take care of the earnings issue.

Okay. Great. And the second question is just on, if you could help us think about the impact, if any, if the downgrades of GM and Ford on the portfolio reserves for CDOs or the rest of your structured finance business.

Yes, that's an excellent question and we figured that was coming. With the only guy to do an earnings call after the downgrades, that puts us squarely in the box. As you know, with the single name books sold, we did have some GM exposure in that, so that's gone away. So, timing is everything in this business. And what we're really exposed to then is our auto securitization deals. And it's hard at this time to give you a real impact because, quite honestly, we don't believe there will be one.

Those deals still have a tremendous amount of subordination. Obviously, they're written at an investment grade level. So, there would have to be a tremendous stressing and, in terms of defaults, before we ever have an issue. Right now, we've got a credits downgrade, not a default scenario. And these securitizations are incredibly important to the manufacturer. So, in terms of further economic stress to them, we believe they will continue to support them.

These fleet rental deals are very different from auto securitizations and those transactional differences, I think, for us really support the fact that we're still comfortable with the credit, but like everything else, it will go on our CMC list, which means it starts to get stressed in terms of the portfolio reserve calculation and we are very active in monitoring that activity.

Great. Thanks very much.

Sir, you next question comes from the line of Richard Diamond from Inwood Capital Partners.

Yes, I have two questions sort of following up on the same issue. And one is more in depth. The other is bigger picture. Could you talk about volatility in the high-yield market and how that may impact your CDOs and how you value them going forward? And as a second question, could you dimension your risk controls. I saw that Argent was, for example, a very large structure issuer. And that you're not insuring 100% mortgages. Mortgages subject to payment shock, very rapidly, if interest rates rise. And just going through your whole risk control on the underlying mortgages you're insuring or reinsuring.

Okay. First and foremost, on the high yield, obviously, every deal we write and there are a lot of - but that we do do programs, CLOs, where the underlying instruments are high-yield debt instruments. And yet understand, we look at those deals, we stress them internally from the standpoint of our underwriting. All the deals are investment grade. They're subject to a third party rating by the rating agencies (ph).

To give you an example of how we really look at this to kind of protect overall credit, in the current quarter, we did a number of CLOs - approximately, just off the top of my head - seven. All seven are rated AAA. So that, although your in that environment of, say, high yield or highly leveraged debt instruments, the way the deals are structured provide a high level of protection on behalf of the company and how we look at those programs.

The second thing, in terms of risk management, especially on the mortgage side, the mortgage side follows the same track in that the structured deal, subordination, rating - typically our mortgage deals are AAA rated. In the one case, though, the mortgage reinsurance is an A-rated deal. So, those things can absorb what we'll call even significant strengths. Obviously, they don't respond if there was a catastrophic situation, but, obviously, that's why they're still rated. And in our portfolio management, we do require single risk limits be applied on every deal written.

We look at, in the mortgage area, servicer risks. Obviously, a part of that is geographic concentration is also looked at across the board. We stress our portfolio every quarter through our surveillance and we have a risk control senior committee held up at the holding company. Even most recently, this week's our board meeting. We've established a board risk control committee that, once again, looks at the same items. So, I think we've got the appropriate means and controls in place. It's a part of the business that we look at on a very, very specific basis and, through our surveillance and credit monitoring activity. So, I think we're able to assess potential impacts of those things and are comfortable that we've maintained the proper limit control, aggregate control to keep our business basically very safe.

So, if I were to summarize that, I could say that you do underwrite bonds containing 100% mortgages and payment shock, but you're comfortable enough with the structures that if, even if there are defaults, you're well protected in where you rest.

And - yes, but we don't - I wouldn't say we have the 100% risk because remember, in the mortgage reinsurance, we attach in an excess position, so there's a lot of loss activity before our policy would ever come into play. And the same thing on the traditional RMBS structure. There's a tremendous amount of subordination. There's typically other credit enhancements worked into the deal in terms of trapping some excess spreads based on some conditions applying that would allow us that opportunity. So, you're never paying first dollar.

Okay.

Let me - just a couple of other points on that. The - as far as the high yield CDOs, I guess we don't really believe that price volatility is a significant risk to our CDOs. It's really default risk and we generally attach those at a AAA level. So, the default risk is, we believe, quite remote. On the mortgage risk, you referred to Argent. I mean, that is a sub-prime deal, stressed for interest rates, expecting weaker housing markets and higher rates. And we've raised our minimum rating requirements for any sub-prime credit. So, we believe that we've really got this well covered.

And in the event that default rates on high yield to rise, but not a point where you feel that you're in jeopardy, at a AAA attachment. How would that - would there be impact on the balance sheet from how value some of the credit derivatives?

The one that you're referring to, we would tend to almost look at positive news to be very honest with you because A) we think we're well protected, B) that type of activity should start to widen spreads significantly. And of course, one spreads wide and under the mark-to-market requirements for the derivative accounting, we would then start to, in effect, recognize losses on the repricing of those instruments. We do carry an asset on the balance sheet that reflected that activity as spreads narrowed. So, if it blows out on the other side, you start to see, on a net income basis, losses that will just, in effect, relieve us of that asset.

Right. That movement in market value of derivatives, on the way up, has not been part of operating income. It's part of net income. It's excluded from operating income. It would be the same thing as ...

We wouldn't mind seeing it go away. It's an asset that I don't like carrying. It's what we're required to do from the accounting rules. We, obviously, don't agree with them that we have mark these instruments because we hold the maturity. It's really the underlying credit risks that we take. So, you are, stuck with the mathematic gymnastics that happened in that instrument. But for us, those defaults would hopefully push out spreads.

Thank you very much.

Again, ladies and gentlemen, as a reminder, if you would like to ask a question or make a comment, please press star, one. Sir, you have a follow-up question from the line of Geoffrey Dunn from KBW.

Thanks. I wanted to follow-up on Rob's earlier question about the premium lumpiness, specifically in reinsurance. Bob, would you be able to give us a rough breakdown of the premium contribution from the municipal business versus structured, since there's so many moving parts that are influencing those levels?

I'll have to dig for that for a second.

I can follow up, if that's easier.

Well, we've got a lot of data, Geoff.

... right here. The - bear with me.

Pierre is paging feverously through his report.

You want - I'm sorry. You wanted to know earned premium breakout between ...

Between muni structured and we already, I guess, know the refunded fees.

I'll be honest, Geoff, I don't think I have that.

We have PVP, Geoff, we do not have ...

Yes, I don't have earned. I have PVP at hand.

Right. We can get earned very easily. For the first quarter of '05, PVP and public finance was $34.7 versus $3.1 for structured. The books overall average is about 70% public finance. Obviously, this quarter had a lot higher contribution to that. So, we can give you the earned premium rollout.

I mean, if you went on PVP for the last three quarters, the percentage was very highly skewed toward public finance.

Right.

And the fourth quarter is $26 million public finance, $9 million structured, third quarter $33 million public finance, $5 million structured. The second quarter, $31 million public finance and $8.9 million structured. So, it is skewed towards public finance. We can - I just don't have the split of earned at my fingertips, but I can get that for you.

Okay. Thanks.

Your next question is a follow-up question from the line of Mark Lane from William Blair.

Yes, just two follow-ups. First of all, within the direct business, how many transactions did you do in the first quarter versus the fourth quarter?

Memory serves me correctly, 23 in the first quarter. I think, 36 in the fourth quarter.

Okay. So ...

And a lot of that was around public financing, as we talked about it with timing of closing.

And was there any - were there any large transactions that impacted PVP in the first quarter. I mean, obviously, the par written was significantly lower this quarter than relative to last quarter.

Yes, the par written, quarter to quarter, really represents the RMBS deals that we did in fourth quarter, where the GSEs were the investors, where you do a lot of high par, low premium, AAA rated transactions. Obviously, with the issues with GSE and just the, in general, appetite in terms of non-wrapped business and non-demand for that type of paper, we had a significant drop-off in par. But as you point out, not premium.

Premium, we've been benefiting each quarter by certain large deals, typically in the structured credit area where we think we've got pretty good expertise. We trade fairly tight to the other monolines and therefore, we're able to take a hard look at that business and compete. And we had two large deals in the first quarter that each accounted for PVP greater than $5 million.

And then, as a follow-up to the earlier question about the movement from treaty to fac. So, you've had - two of your three major treaties kind of go more towards fac and you've admitted that that's sort of a trend in the market. So, how do you view then the relationship with FSA and the development of that over the next 12-24 months, given what you've admitted or that you believe is a trend towards buying more on a facultative basis?

Yes, well, remember, that's really dictated by the market and the market opportunities where, if you look, these are the monolines, obviously, they're still doing some large deals. But, and the overall volume of business is down and the spreads are tight, so on the monoline, which we are, you're going to hold as much net as you can, but you still need to buy protection in those areas where either you're going to exceed your risk tolerance on a single risk or aggregate basis and that, ultimately, then dictates itself into a facultative execution.

And we talked about the new fac agreements of both FGIC and Ambac and our absolute performance has proven that in terms of these 30% per quarters over the last three quarters of fac to treaty. Does that continue as the market continues in its current environment of tight spreads and overall volumes being questioned by each of the monolines. Of course, we've now seen some pretty good activity on behalf of some of the monolines for first quarter.

We do anticipate that movement. In terms of our FSA relationship, I think one of the things we would talk about is the fact that we are doing this, in effect, previously ceded novation into the Bermuda Reinsurance Company. FSA now really becomes a significant partner of the Bermuda Reinsurance Company, in terms of how much risk they now have accumulated in that organization which, I think, is an extremely positive trend on behalf of the reinsurance company.

Okay. All right. Thanks.

Thank you.

For Geoff Dunn's question on the split of earned premium. I do have that. The - for the first quarter of '05, the earned premium for reinsurance was $23 million. It was split - public finance $11 million and structured finance $12 million. That really shows the difference in life of the deals, the public finance deals being much longer in tenor than the structured finance deals. But that's the breakout on that, Geoff.

Next question?

Sir, at this time, there are no additional questions in the queue, which ends our Q-and-A session. I'd like to turn this call back to Sabra Purtill for closing remarks.

Thank you, Enrique. Many thanks to you all for joining us today to discuss our first quarter 2005 results. We certainly appreciate your interest in Assured Guaranty and look forward to talking to you next quarter or - between now and the next quarter earnings reports, if we see you personally. In addition, if you have any additional questions, you can reach me today in our New York office at 212-408-6044 or via e-mail at spurtill@assuredguaranty.com. Thanks again and have a good day.

Thank you.

Thank you, ladies and gentlemen, for participating in today's conference. This concludes the presentation. You may now disconnect. Good day.