Assured Guaranty Ltd (AGO) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Assured Guaranty 2nd Quarter 2005 Earnings Conference Call. My name is Ann Marie and I will be your coordinator for today. At this time all participants are in listen only mode. We will be conducting a question and answer session towards the end of today's conference.

[Operator Instructions].

I would know like to turn the presentation over to Ms. Sabra Purtill, Managing Director of Investor Relations. You may proceed.

Thank you, Ann Marie. And thank you all for joining us today for Assured Guaranty's 2nd quarter 2005 earnings conference call. We released our earning yesterday evening and are press release and financial supplement are available on our website at www.assuredguaranty.com.

The speakers on our call today will be Dominic Frederico, Chief Executive Officer of Assured Guaranty Limited, 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 Directive 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 on our website as well as by telephone at 888-286-8610 in the US and 617-801-6888 for international callers. The pass code is 201-52-572. Before turning the call over to Dominic, I would 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 filing as well as our earnings press release and financial supplement for more information on factors that could affect our forward looking statements. Now, I will 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. I am very pleased that once again Assured Guaranty has demonstrated another quarter of tangible progress in accomplishing our strategic objectives. While also continuing to build our new business production, the ultimate driver of earnings growth for our company. A critical element of our business plan and of the long-term value we can create for our shareholders is the improvement of our financial strength rating.

I am pleased to report that the second quarter witnessed significant progress in this area. Specifically, we received a stable outlook from Standard and Poor's on AGC's AAA financial strength rating and a new AAA rating with a stable outlook from Fitch Ratings. We now have 2 AAA stable ratings, both of which are very important in helping us expand our market reach and our fixed income investor base. We are very pleased that both of the rating agencies recognized our clear AAA financial strength, but also the visible progress we have made in building a direct financial guaranty platform while also maintaining our market position as a leading financial guaranty reinsure.

A second key goal was centralization of the reinsurance business in Bermuda. In June, we closed the FSA transaction, which had been previously announced but was pending regulatory approval. That transaction transferred almost $20 billion of our insured from AGC to AG-re, our Bermuda Reinsurance Company. And also reduced our healthcare par insured by over $800 million. This reduction brings AGC's healthcare exposure ratios to well within the industry range. This transaction much like some of the other transactions we have done, like the sale of the single name book, trades short-term earnings for long-term ratings, strengthens stability, which are the cornerstones of our strategy for future shareholder value.

On the business front we are very pleased with our market progress. While this quarter did not have the benefit of any large structured finance deals, our activity in that sector grew on a transactional basis. We closed 16 deals in the quarter compared to 11 in the first quarter. Our progress in the public finance business was even more impressive. On our earnings conference call last quarter, we indicated that based on second quarter closed and committed public finance volume was expected to double first quarter's production in the second quarter.

We did better than that. We closed 14 transactions in the quarter for $386 million in par insured. Compared to only 5 transactions and $77 million par insured during the first quarter. On a PVP basis, our public finance production was up almost 300% to 6.3 million. Our public finance team is doing a great job in building this business. And their continued success is clearly a factor in the rating agencies analysis of our company.

On the reinsurance side we are very pleased with the continued development of our facultative business flow. We had a record quarter for facultative submissions, indicating that the market continues to value and to need our reinsurance support. In addition, with the FSA transaction closed, we have clearly centralized our reinsurance operations and segment in Bermuda. More effectively utilizing our capital in that operation.

In summary, I am very pleased with our progress of financial results for the quarter and look forward to continuing to build on the momentum in future quarters. As we have told you all along this is a marathon not a sprint and it will be sometime before progress, before the progress we continue to make across all business fronts transforms in sustainable earnings growth. We continue to believe that Assured Guaranty is a great market opportunity, and we will continue to work hard on advancing our strategy. Now, I would like to turn the call over to Bob Mills, our CFO.

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

Net income for the second quarter of 2005 is $66.8 million or $0.90 per diluted share, compared to 43.1 million or $0.57 per diluted share for the second quarter of 2004. The second quarter of 2005 included the affects of 2 major transactions. The CSF securities fraud litigation settlement and the novation of Financial Security Assurance Inc.'s reinsurance book from Assured Guaranty Corp. to Assured Guaranty Re. While the second quarter 2004 contained a number of IPO related transactions. Comparisons will continue to require further analysis.

Our operating income per share, which we calculate at net income, excluding realized gains and losses on investments. An unrealized gains and losses on derivative financial instruments with $75.2 million or $1.02 per diluted share, compared to $27.9 million or $0.37 per diluted share for the second quarter of 2004. Earnings from municipal bond refundings from reinsurance, which were reported on a one quarter lag, contributed approximately $0.02 per share in the second quarters of both 2005 and 2004.

The PVP or present value of written premiums totaled $57.9 million for the quarter, an increase of 6% compared to the second quarter of 2004. Management and investors use PVP as a measurement of new business written during the quarter. PVP for the direct segment totaled $22.7 million and increase of 58% from the second quarter of 2004 amount of $14.4 million. As Dominic mentioned, production in the direct segment included very strong progress in the public finance sector. As well as, solid production in the structured finance sector.

PVP for the reinsurance segment totaled $35.2 million a 12% decline from the second quarter of 2004 amount of $40.1 million. The decline reflects a $12 million decrease in PVP because of the non-renewal of 2 quarter share treaties that occurred in mid-2004, partially offset by increases in facultative reinsurance and other treaty business. This segment reports PVP in par written on a one quarter lag basis, due to delay in receiving new business information from the primary companies. There was no production in the mortgage segment, neither the second quarter of 2005 or 2004.

As I have previously discussed, this business is somewhat lumpy, that the transactions are large and multi-year in nature, and PVP will be volatile quarter to quarter. Looking at the embedded value of our business. The present value of installment premiums in force and the net unearned premium reserve to June 30, 2005 was $885.5 million, a modest increase over the June 30, 2004 balance of $868.5 million. This reflects increases in business being largely offset by the impact of the FSA Healthcare transfer as well as, normal business runoff and the change in the estimated lives of certain consumer receivable transactions.

Net earned premium for the quarter totaled $48.3 million compared to $-9.3 million for the second quarter of 2004. The net earned premium for the direct and reinsurance segment increased by 5% in the second quarter of 2005, compared to the second quarter of 2004. For the direct segment, net earned premiums totaled 16 million for the quarter, compared to 16.1 million in the second quarter of 2004. The amount in 2004 included $1.9 million of net earned premium from that single name credit default swap business, which we sold in the first quarter of 2005.

Net earned premiums for the reinsurance segment were $27.2 million up 6% from the second quarter 2004 amount of $25.6 million. The 2005 amount is net of a $3 million reduction related to the Healthcare book returned as part of the FSA transaction. Net earned premiums for the mortgage segment were $5.1 million down 66% from the second quarter of 2004 amount of $15 million. This reflects the continued runoff of the quarter share mortgage business, as well as the $8.8 million impact of a significant commutation in the second quarter of 2004.

Loss and loss adjustment expenses incurred totaled $59.1 million benefit for the quarter. Mainly attributable to a loss recovery of $63.7 million from the CFS litigation settlement. For the second quarter of 2004, loss and loss adjustment expenses incurred totaled a $60 million benefit. Which included a benefit of $57.4 million in the other segment as a result of a reinsurance transactions entered into as part of the IPO.

During the second quarter there were 2 substantive case losses established which weren't reviewed. In the direct segment the case reserved in the amount $4.5 million was established, related to a sub prime mortgage transaction which was originated in 2000. In the reinsurance segment, the case reserved was established in the amount of $1.2 million, related to a manufactured housing transaction that was seeded to use under a treaty that was not renewed in 2004. Both of these credits were previously included in our closely monitored credit's listing and have been subject to ongoing monitoring.

There were also other net case reserved and loss adjustment expenses for the quarter of $2.1 million. Portfolio reserve additions for the quarter for the financial guaranty segments totaled $2.7 million. This amount was offset by portfolio reserve reductions related to credit changes, continued runoff of CDOs and the normal runoff in the insurance segment settling $5.5 million.

There were no changes in the reserving process in the quarter. As you are aware, the FASB is currently evaluating the principals surrounding any establishment of loss reserves in the financial guaranty industry. We are aware of no substantive process on this issue during the second quarter. We are very comfortable with our loss reserve processes and methodologies and will keep our investors informed as the FASB discussion regarding the industry issue evolves.

The investment portfolio grew slightly from the beginning of the quarter. Yields were substantially unchanged comparing the second quarter of 2005 and 2004. The current pretax book yield is 4.7%, and the duration has continued to decrease to approximately 4.2 years. There has been no significant changes in the investment portfolio during the quarter. Although the average credit quality for the portfolio has creeped up to the AAA level.

As investing opportunities change, I would expect the duration will extend slightly. And the average quality will again return to the AA+ level. During the quarter the market value of our investment portfolio appreciated by $22.1 million net of tax, as a result of flattening of the yield curve. Since this portfolio's long-term in nature, changes in value are reflected in the accumulative other comprehensive income accounts.

Other operating expenses were relatively flat in the second quarter, compared with the first quarter of 2005. That decreased by 45% compared with the second quarter of 2004 which included the $11.3 million charge related to the IPO investing of pre-IPO employee stock awards. During the current quarter, we incurred one time banking fees of $2 million associated with the issuance of the $200 million soft capital facility. This expense is included in the category "other expenses" which also includes interest expense.

Our book value per share was $21.63, increased from the $20.45 book value per share at the end of the first quarter of 2005. Adjusted book value which adds the embedded value from after tax installment premiums in force and after tax unearned premium reserves net of GAAP is $29.71 per share quarter end, increased from $28.12 per share at the end of the first quarter of 2005. This measure is used by management investors to evaluate growth in the Company's equity and in force books of business.

The Company is operating ROE in the quarter which is calculated by dividing our annual lives quarterly operating income by average shareholders equity, excluding accumulated other comprehensive income; was 19.9%. Reflecting the benefit of the CFS loss recovery. The CSF loss recovery contributed 11 percentage points to the operating ROE for the quarter.

We expect to release our third quarter earnings for 2005 during the first quarter of November, excuse me - - first week of November. And we will update you on the time and date as that time draws closer. With that I would like to turn the call over to the operator to poll for questions.

Thank you, sir.

[Operator Instructions].

And your first question will come from Jeffrey Dunn, with KBW, you may proceed.

Good morning. Dominic, could you provide a little bit color on the production I the direct both municipal and structured segments? Specifically, any new asset areas you might have expanded into during the quarter?

Sure, Jeff and good morning. As I said, the quarter was pretty remarkable from the standpoint of total transactional activity. We did approximately 21 transactions in the quarter and more importantly, we continue to expand our involvement in the municipal finance area, which is obviously a key component from the rating agency point of view. In terms of significant transactions or new assets, the first one I would tell you would be the commercial mortgage back security area.

As you know, we recruited some new individuals into the Company over the last few months and obviously they were well respected, came in with a great reputation and kind of hit the ground running. And the type of business we did in the quarter was the super senior traunches of these pool of CMBS so, extremely safe, conservative risk that we took a good opportunity to market and wrote a number of those deals in the quarter.

In terms of the other areas, I mean municipal area we still continue to expand the nature of the deals we do into higher ad, but also in other tax back revenue, bonds, and other project areas scattered throughout the century, I guess the largest would be Suffix University as one that would come to mind. So, very good at this point, we saw traditional work in the structured area in terms of CDOs or preferred securities, super senior high-yield loans, those type of assets.

Okay, and on the public finance side, judging by what your pipeline is looking like. Is this an example of what you think your quarters are looking like going forward? Or, was there an abnormal strength there?

I've got Mike Schozer diving across the table once again as he does every quarter, when pipeline comes up. All I can tell you is obviously the ratings now help, fairly significantly in us having the ability to go out and at least participate in other segments of the market. If I looked at our pipeline in terms of overall statistics, which obviously we monitor very closely.

The difference in the pipeline between say, the current quarter beginning versus last quarter still continues to show improvement. So, we are building up further and further transactional opportunities, but obviously it is a competitive market, so we have to see how that plays out. We are now starting to get into kind of the next level of competition. So, we are no longer kind of hunting where nobody is.

We are now getting into the areas where there are other peoples and we do have the pricing differential that we have to work through. So, no pipeline builds name continues to get further recognition and traction. We are very pleased with the progress as I said, on an aggregate basis we have got more opportunity today than we have had at any previous time at a quarter's end going into the next quarter.

Okay, thank you.

And you next question will come from Rob Ryan, with Merrill Lynch. You may proceed.

Good morning.

Good morning, Rob.

I was hoping you could summarize for us the various facts of the FSA transaction on certain line items, like gross and net premiums written. The net premiums earned you mentioned, how much the par outstanding went down as a result to healthcare? And what did this actually do to your healthcare percentage of the overall book?

Okay, I'll give that to Bob, since he has the piece of paper right in front of him.

Okay, the healthcare part of the return was $820 million. The impact if you look at the various lines of the revenue statement and it is a bit detailed, but I will do it by line for you. First premiums written and net premiums written both decreased by $18.4 million, while net earned premiums decreased by $3 million, as I had mentioned in my discussion. Loss and loss adjustment expenses went down by half a million dollars. Acquisition costs down by $1.5 million and operating expenses went up by $1.8 million as a result of the excise tax.

So, that comes down to an income before provision income taxes as a result of the transaction of negative $-2.8 million. And then there is a tax benefit, and the tax benefit includes the reversal of deferred taxes. So the tax benefit is $4.7 million and the net operating income impact is a positive $+1.9 million. So, those are the one time effects of the FSA transactions. Our healthcare exposure declined from $6.6 billion at the end of the year to $5.7 billion or 6.1% of the net par outstanding as June 30 of the current year, with most of the decline resulting from FSA assuming the $820 million.

Okay, thank you. On a slightly different topic, very different I guess, can you give me the reasons why the new Fitch rating and the clean F&T rating, why they are helpful? What do investors look for, what are their requirements sometime? Or from the issuer's prospective as well?

Well, the issuers really want to make sure there is certainty of execution. And that the RAF securities will be able to be easily sold into the marketplace. From the investor point of view, most have minimum rating requirements and that could run the gamut from 1 AAA to all 3 AAA's. In today's market, obviously, with spread where they are and pricing competition where it is, why settle for 2 when you can grab 3. So, although you are going to be hard pressed to find specific requirements, the natural tendency is if you are going to a RAF instrument, you might as well get the best RAF instrument available in the marketplace.

Okay, but in terms of the differentials how might you be in a better position now, than four months ago?

Okay, for us the 2 AAA as well as our market activity begin to narrow our spread differential against the other model lines. And if you think about it on every deal we have looked at in terms on just a pure price basis, that differential has to somewhere enter into the calculation of what premium we can charge. As that narrow, which is principally a function of both ratings as well as investor kind of appetite for our paper. We then get to look at a greater segment of the market.

So, if we use the municipal market, historically, we said under our old rating formula, we were only able to look at about 1 to 2% or 2 to 4% of the market because of the split rating and the width of our spread. With the 2 AAA's and the narrowing of our trading differential against the other mono-lines that opportunity in the marketplace, say in the public finance area, will now expand.

So, maybe we can look at 20% of the market with the real opportunity though, because understand there is some of that business that we wouldn't write anyway. So, we have our own underwriting guidelines and requirements, but there is an opportunity now to write say, 6 to 8% of the marketplace. Obviously, Moody's continues to be a very critical component in the investors mind in terms of the acceptability and desirability of our paper.

Okay. Are there any apple to apples comparisons for changes over time that would show us on a quantitative basis, improvement in the trading value differential?

Yes, we continue to give out in most of our presentations, especially for the rating agencies spread analysis. That actually looks at our spread on a specific deal over a period of time. And, typically they have narrowed over say the last 6 months -- and Sabra's throwing something in Chinese that I can't read. What was the differential on these - - the spreads have come in say 1 to 2 points on one of the transactions we are writing. Some cases in the asset backed world where shorter tender, we have seen a lot closer tightening of the spread differential. So, there is various examples we can get back to you that would give you actually published data on that. But by and large we are seeing a continued improvement in our spread differential month to month.

Great, thank you.

Thank you.

And your next question will come from Mark Lane with William Blair and Company. You may proceed.

Thank you, good morning.

Good morning, Mark.

On the new business front, can you tell us what production was in July?

No, all I can tell you is that we are very pleased by the pipeline. We do have a number of committed transactions much like we have had last quarter and the quarter before that. And as I said, in overall the vines are up and if you can turn to the year end they are up fairly significantly.

Okay.

In the reinsurance side, we talked about having the best month or quarter in our history in terms of facultative submissions. July has started off even stronger than what we say in last quarter.

Okay. And then just to clarify the number of deals, because there were a couple of different numbers that you had given out. Last quarter you had said that in the first quarter you did 23 deals and in the fourth quarter you had done 36 deals? And then when you had given the structured finance and public finance numbers in your prepared remarks those numbers seemed to be a little bit different. I don't think those were exhaustive numbers, but can you just give us the total number of transactions in each of the past 3 quarters?

Well, I can give you - - because the one problem we have is sometimes you will do a secondary trade or multiple issuances of different securities. So, we have a tough time consistently counting whether it is 1 or many. But to give you an idea in the current quarter, we did 31 deals. Of which, if you broke it down 14 were municipal and the 11 were structured finance. And then the rest become a combination of international and or restructured finance, we call the hard asset ABS.

The other difference was the other structured finance which is the financial asset of ABS. Okay. In terms of what I have statistically, if you go back to first quarter, eliminating the double counters we would have had 17 deals, but it could have actually been 22 depending on what you count individual issuances or by issuer. And then go the quarter before that it is 16 or 15 deals depending on how you count it.

15 or 16?

Oh, I'm sorry that is quarter of '04. You wanted fourth quarter of it was 12, that can't be right either that is too low. Yes, that right 3 - - I have to look for it hang on a second. Okay, I'll go from the top. So, 31 in second the quarter of '05, 17 in first quarter of '05, and I'm missing the fourth quarter of '04. But it would be more than that; it would probably be like in the 38 range. Obviously it was our best quarter.

Okay, and do you have plans assuming that it was somewhat anticipated, and I don't think was included in the rating - - well particularly S&P's capital adequacy review. The CFS salvage recovery, do you have any plans to do anything with that capital?

Invest it wisely.

I think at this point in time, and as we are very focused on our strategic objectives. Getting that third AAA at this point. Two down, one to go. So, I would say that at this point in time, it will be invested in the business. It gives us more capital for the basic business. There is no specific unusual plan, when I get the $63 million in the door, first I have to pay some taxes. After paying taxes in the short-term it will be added in the investment portfolio. But it basically is going to support in our strategic businesses.

And the direct business - -

Mark, this is for better color. We want to be to the market, to our shareholders, an efficient capital manager. And obviously, then under other times, that might dictate a different level of activity for a settlement of this nature, or this type of transaction. However, we are in the still trying to acquire ratings, kind of position of our lifetime and therefore, for us to generate every possible reason, and as I have talked about in my commentary, we do other transactions that really penalize us economically, such like the healthcare transaction.

They were good risk we gave up obviously a mainstream of earnings off of that business. But it was one of those "but fors" from the rating agencies that say, well you look at your healthcare you are higher than the other guys. Okay, it wasn't a specific issue but our goal was to take away every "but for", we could possibly look at and have the ability as a management team to address in trying to drive the ratings. Because the long-term success of this company is really incumbent on those ratings. I'm sorry, you next question.

Okay. It's all right. Net earned premium in the direct business in the second quarter was $16 million. If you look at least in the second half and then end of 2006, what you know is going to runoff either in the second half or next year. Can you quantify any sizable premium that you know is going to runoff either in the second half or next year?

Well, we know we are going to get the continued runoff of the quota share mortgage book and the CVO book that we have. Obviously, in a comparative nature I think that healthcare session and the sale of the single name book will have continuing negative effects. We continue to try to look at the portfolio, because we look at it from 2 sides. In terms of we are looking to our future and two to look at if there are any other optimistic transactions that continue move us along rating strength migration.

We really look at in terms of looking at the future is a gross PVP versus our gross written premiums. To say, are we building future earnings into the company? And if you look at that from say the fourth quarter on, and I can give you some numbers on a consolidated basis in fourth quarter we had $82 million roughly, of PVP against only $66 million of gross written premium. First quarter it is $88 million versus $78 gross written.

This quarter it is $58 million versus $48 million of gross written. so, you can see that you are starting to build up your taking down currently in the quarter, less than you are putting up for future periods. And that is going to be the true kind of barometer of where we are going to see earnings gross start to develop. Today, we are earning off of, obviously our past which is the reinsurance book predominantly. And very low production quarters in most of 2004 on the direct business and that is having a substantial impact into the earned premium.

So, hopefully, we believe because of the results that we start to generate as of fourth quarter that will know reverse its trend and start to show positive upward movement. But as I said before, our competition has years and years of worth of those transactions that they are able to earn each and every quarter. We are still starting on quarters and quarter's worth of those transactions. And therefore it is going to take some time. We are going to see a real build up and real growth in the earnings area.

Last quick one, Bob. Operating expenses on a consolidated basis, the $14.5 million has stayed remarkably stable the last three quarters. Is that a good run rate for the second half as well?

You know we have increased some of our personnel because as part of our business development effort. I don't - - we will probably still do that on a selective basis. So, in doing that you may see some creep up and it is a pretty decent measure at this point.

Okay, great thanks.

Thank you.

And you next question will be come from Richard Diamond with Inwood Capital. Please proceed.

Yes, good morning gentlemen. Quite progress.

Thank you.

Overall you seem to have a fair amount of exposure to Ameriquest in your structured finance sector. On a percentage basis in structured finance, how much exposure do you have to the non-prime mortgage industry?

Hang, on a second, I do have that. Soon as I find the right pile here. Sorry, for taking so long, but I have a host of papers in front of me and I can't find the one I am looking for. Here it is - - nope. In general we have, starting from the top, mortgage backed exposure of about $11 billion, which represents 11% of our net par outstanding. The average rating of that as double lag, so fairly secure. That is actually down from last quarter, because obviously this is something that pays off pretty quickly, has a short life. If we go into the categories that breakdown between prime, HELOC, sub-prime and manufactured housing. The sub-prime is about $6.4 billion; you know a part of that $11 billion total, of which 85% of that round number is AAA.

Now, of those securities, what percentages are have IOs and adjustable rate mortgages?

That is hard to give you. We could go back and dig that out. Obviously, every deal that we do, we do a full analysis of what makes up the body of the mortgages. So, it becomes IOs, cash outs, negative ands. It also look sat the geographic spread as well. And all that is laid in our systems and obviously we can provide you that answer if you would like to call Sabra and her folks on a direct basis. It is available.

But, we monitor that very, very closely and obviously as we have looked at the activity today, in the mortgage backed world, we ourselves have changed modified our underwriting guidelines to say, we won't attach below an A rating. And we look very specifically at those key characteristics, such as negative amortization loans, interest only, etc. As part of the - - and now even the 100% mortgages as part of the deal.

Now, another way of looking at it, when we look at the non-prime in that structured mark is it fair to say, that industry statistics say about 30% of non-prime volumes come from California, do you believe that you have the same types of exposure?

Absolutely.

And, if there were to be a meltdown in California, could you talk about some of the remedies you have or some of the risk mitigation efforts you have in place to make sure that losses are minimized.

Well, first and foremost you have to look at the quality of our portfolio, as I said 85% is AAA. So, even under the scenario the meltdown, because remember you do get a fair amount of salvage or subrogation in this area. The ultimate amount of the loss you pay is significantly less than the par insured. That really puts us way, way out of the game. And as we go back I can look at our underwriting in this area. We continue to stress each deal, so that we look at what is the worst experience that has been had over time in that category and make sure that our forecast reporting can obviously well withstand that and a multiple of it. So, by and large, California by itself would not create an issue for us.

Thank you very much.

You're welcome.

And your next question will come from Mike Brazier (ph) with Piper Jaffray, you may proceed.

Good morning, congratulations on the quarter.

Thank you very much.

And, Dominic or maybe even Mike Schozer, if you could comment just on the competitive landscape just from the standpoint, not just the pricing and the spread environment, but in terms of what competition maybe doing in terms of structure during the deals. Or any terms that maybe different than usual.

I let Mike add where he would like. The competition today, is no real different than what it was last quarter or even going back in terms of the spread environment at the last year. Obviously there are exceptions. Remember, most of our strategy is kind of a hunt where they ain't. And especially in the municipal area. As we look forward now, as I talked about previously, we will start to see more competition come in. But, our view is we bring to the market some additional benefits as a diversification benefit we give obviously, an execution or commitment to provide superior service.

We have great relationships; the people we have hired have come in with a real good recognition in the marketplace. So, competition is what it is. We understand that, we are very pleased with both the opportunity and the price and we are able to achieve as you would compare to our benchmark returns. So, by and large we know that it exists; we are able to manage it at this point and time. And obviously we, like everyone would be very happy to see a turnaround in the spread environment. But we are quite satisfied where we are.

In terms of the issuers that you are working with the structured side, particularly in the mortgage area. Have you seen any change in their standards in terms the underwriting that they are actually doing?

Well, I can't comment on behalf of issuers, obviously, we have are underwriting guidelines, criteria and standards and that is all that matters to us. So, as we talked about we are very concerned on the residential side, we expect to see some blips in that marketplace over the next few months. We have altered our appetite in terms of their rating or the attachment point that we are willing to accept as part of that deal and as I also said, we monitor very closely those other little transactions that are in the pools. In terms of the negative amortizations and the interest only, etc. So, there transactional focus is totally different than ours.

Okay, thanks for that. And then, Bob could you - - do you have a ROE number you had said ROE in the quarter was impacted by was it an 11 percentage point?

Right the CFS recovery was 19.9 and if you take the CFS recovery out of it, it is 8.9. Now there are a myriad of other things like the case reserves and the soft capital fees, which you can move things, in and out and around on that. Just those 2 items.

Okay, and the tax rate we are still on target for about 17.5.

Yes, because of the FSA transaction, that has an ongoing benefit besides just the one time benefit. So, we would have looked 15 to 17 in the past, I would say it is probably 13 to 15 now. That is going to have - - vary on quarter to quarter if you look at the current quarter's rate it is actually quite low. When you take out even the FSA and the salvage transaction, because tax deductibility, the taxable income in the United States this quarter was much lower because the case losses were all tax deductible, and the banking fees were tax deductible. So, the effective rate this quarter is even lower. But on an ongoing basis, even the 15 looks good to me right now.

Okay, thanks very much.

Thank you.

[Operator Instructions].

And your next question will come from Darin Arita, with Deutsche Bank. You may proceed.

Hi, good morning.

Good morning:

Is there some sort of ongoing costs that we should think about with respect to the contingent capital facility?

Yes, the contingent capital facility which we did in this quarter, that had the initial $2 million worth of banking fees, which we ran through other expenses. Which the other participants in our industry have changed to do that now, also. On an ongoing basis, it is about $250, 000 a quarter for the soft capital facility.

Okay, and with respect with the case reserves, can you just remind us what Assured Guaranty's approach is in establishing case reserves and can you provide a little bit of color on what led to the $4.5 million of case reserves this quarter?

I think the best detail and explanation relative to our process relative to reserves is included in the 10Q, the disclosure there is really extensive and it describes it in quite a bit of detail. Our process for portfolio reserves is a very detailed process that involves a loan by loan analysis to historical loss experience based upon rating. The - - on the case reserves this quarter we had 2 sub-standard case reserves. Both of those cases had been monitored by us, they were included in our closely monitored credit list.

As a credit deteriorates and gets to the point where a loss is probable, at that point and time, by assessing the individual case specific, we will book a reserve based upon what we expect the loss to be at that time. That is where a case - - a situation can deteriorate further or a case can improve at over time or through subrogation. So, it is a very detailed analysis on a case by case basis. And it is all part of the normal process where we establish our closely monitored credit list, which is detailed pretty significantly in our supplement and the footnotes to the financial statement.

If you take the sub-prime deal that it is there, monitoring delinquencies or have monitored delinquencies very closely. And looking at the higher and increasing delinquencies, lower recovery and high pre-payments, and all of these lead us to believe that there is a significant possibility that we will have a loss.

Yes, as in all accounting we tend to file FASB5 which says that you have to believe a loss event has occurred or a loss has occurred or you estimate it and in the one case it was a reinsurance claim. Therefore, we got that from the seeding company and booked the reserve that they had advised us and now we will start our own investigation to make sure we are comfortable with the reserve being carried. And on the first case the sub-prime, obviously it was on the CMC list there was something we are watching.

It is a fairly tender transaction and therefore you would expect certain behavior to start to happen as you get later in the years. Here the behavior has not improved as Bob mentioned, the amount of the recovery is less than what we would have anticipated for deal of this tenor. So, we thought it prudent that we believe we will pay a claim and therefore try to come up with our best estimate of what the claim will be. And that is that $4.5 million.

Okay, thank you and this is just one last question with respect to the reinsurance PVP. Can you give a breakdown on how that is - -what percent of that would be facultative versus treaty?

I know I have that -- it's a matter of digging it out. Okay, the fact would be 11.7 roughly and the treaty would be 23.5 - - no 35.2.

Is that a ratio sort of consistent with that of the first quarter?

Yes, as we talked about the ratio has built significantly over the last few quarters. If you go back to the first and second quarter of last year when we had the amount of treaty business we did. The facultative portion would stay in the 8 to 12 range. And then since that time, we have seen a fairly consistent move up into the 25 to 35 range. Each quarter can have an anomaly in it based on large transactions. Because remember there are certain transactions that the reinsurance company does that are very high PVP in nature and then you could have very little the next quarter. Our first quarter had ratio of 34%, this quarter had 33%. But on a - - and I guess that is a fairly reasonable approach. We would think that facultative will continue to grow over time.

All right, thank you very much.

Thank you.

And you next question will come from Mark Lane, with William Blair and Company. You may proceed.

Just one quick follow-up. Just on Moody's can you tell us when your annual review process with Moody's actually ended and if what your internal expectation is on the timing of when they are report or feedback will come out?

I guess you should ask Moody's when it begins and ends, still probably say it never ends. But we did make our presentation to Moody's approximately 2 weeks ago and I guess the entire industry had a schedule throughout that point and time. When we will go in and give a full presentation on both companies the direct company and the insurance company. It is our expectation they are now, obviously, going through all that information and will be providing some sort of an update for the market within the next 30 to 60 days.

Do you think, even possibly some time in mid-September, the latest --?

I don't know they -- I think they are running a little late this year. At least that is how we viewed our annual meeting with them. For probably other factors that they are addressing. So, I really can't give you a specific date. Our expectation is sometime within these next few months. I guess if not they will probably call us back to update us on that.

Okay, thanks. Operator: And your next question will be a follow-up from Mr. Jeffery Dunn with KBW. You may proceed, sir.

Bob, do you have the breakdown of net earned premium between structured and muni for both the reinsurance and direct businesses?

It is in the queue but it's not in the file. We are thumbing through to get to the right page here. The net earned premium for -- bear with me a second. For reinsurance the split for earned premium for the second quarter is public finances 12.7 million and structured finance is 14.5 million for total of 27.2 million.

And just - - on the direct segment, clearly our direct segment is principally structured finance at this point, on any earned premium from municipal is negligible.

Okay, thanks.

Thank you.

And there are no further questions at this time. I would like to turn the conference back over to Ms. Purtill for closing remarks.

Thank you and many thanks to you all for listening and asking questions today, or listening to the replay in the future. We certainly appreciate you interest in Assured Guaranty and if you have any additional questions, or information needs, please do not hesitate to contact me. I am at 441-278-6665 today, or you can also contact me at -- by email at spurtill@assuredguaranty.com. Thank you again, and have a good day.

Ladies and gentlemen, thank you so much for your participation in today's conference. This does conclude the presentation you may disconnect. Have a great day.