Assured Guaranty Ltd (AGO) 2006 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Second Quarter 2006 Assured Guaranty Earnings Conference Call. My name is Sheryl, and I will be your audio 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 this conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your hostess for today's call, Ms. Sabra Purtill, Managing Director of Investor Relations. Please proceed, ma'am.

Thank you. Good morning, and thank you all for joining us today for Assured Guaranty's Second Quarter 2006 Earnings Conference Call. We released our earnings press release and financial supplement yesterday evening, and these materials, as well as other information on Assured Guaranty are available on our website at www.assuredguaranty.com.

Our speakers today will be Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd., and Bob Mills, Chief Financial Officer. After their remarks, the operator will poll the audience for questions. 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. In addition, for those of you listening to the webcast or the replay of this call, please be advised that more recent information may be available on Assured Guaranty. Please refer to our most current SEC filings, as well as our earnings press release and financial supplement, 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. The second quarter was a very successful quarter, and a further complement -- confirmation of our strategic plan and our ability to execute. First and foremost, from the time of the IPO, our primary goal has been the improvement of Assured Guaranty Corp.’s, financial strength ratings. In the second quarter, we took the next to the last step with the change in AGC's outlook to positive by Moody's. It has been a long process, but we can now see the light at the end of the tunnel. Most importantly, it provides a clear signal to the marketplace of our full qualification as a AAA mono-line insurer by Moody's in the near-term adding to the two AAA as we already have from S&P and Fitch. The Moody's announcement also laid out specific steps that we need to take to -- or maintain that will ultimately result in our upgrade to AAA. We are extremely confident in our ability to meet these Moody's requirements.

Secondly, our long standing strategy is it to target markets where we believe Assured has competitive opportunities based on a dedicated resources and commitment to execution. In the second quarter, this philosophy resulted in post IPO highs in PVP in both our direct and reinsurance segments, a remarkable accomplishment. As was mentioned last quarter during our earnings call, our direct deal pipeline leading into the second quarter was the largest in the Company's history. That pipeline and our commitment to service resulted in the largest new business production ever by this segment. The production results also validate our view of the markets need and acceptance of an additional financial guarantor as we saw broad opportunities across most asset classes and markets. Additionally, we were further benefited by a number of large deals. In the quarter we wrote four deals with PVP of greater than $5 million, whereas we did not have any deals greater than $5 million in the 2005 quarter. However, to further demonstrate the success we achieved this quarter, even if you exclude these deals, our direct PVP would still have more than doubled over the prior year.

We also had a record quarter in financial guaranty reinsurance with PVP of almost $50 million, our highest quarter since the IPO. Activity was strong in both the facultative and treaty areas where large deals once again had a significant impact. For the quarter, facultative business accounted for 44% of our PVP written. As we discussed last quarter, larger deals can have a big impact on this segment. In our first quarter of '06, PVP was below expectations due to the absence of large deals which we define as PVP of more than $1 million for the reinsurance segment. In this quarter, we've benefited by closing a number of such deals. Once again as a demonstration of market activity, even with the exclusion of the large deals, reinsurance PVP was up 30% over the prior year's quarter, a very good result.

Please keep in mind that our quarterly new business production results for both direct and reinsurance may be lumpy because of these large deals. Nonetheless, we believe we can continue to grow even in the current challenging market environment. We believe that by remaining focused on building our new business pipeline, we are creating a company that can generate increasing shareholder value for the long term.

In addition to these accomplishments, I am equally pleased that we achieved our market share and new business production gains without sacrificing our credit standards. We have maintained an average insured portfolio credit quality of AA-, while growing our net par outstanding by 21% since December of 2004. During the most recent quarter, about two-thirds of our new financial guaranty business was rated AAA. As of quarter end, 38% of our current in force portfolio is rated AAA. This focus on credit quality, particularly given current high credit spreads and the lack of new business flow in some traditional ABS classes, is a testament to our focus on finding market niches that are available to us, given our split rating, but that meet our underwriting and return standards.

Despite our accomplishments in the quarter, we still faced many challenges, particularly our ratings differential and the market environment. Nevertheless, our pipeline is very healthy for both our reinsurance and direct businesses. We will undoubtedly experience some fall off in the third quarter compared to the second quarter due to the seasonal summer slowdown in the capital market. We also can't predict whether there will be as many large premium deals in the quarter as there were in the second.

However, with our strong pipeline and with some favorable trends emerging in our trading differential in the US public finance market, we are well positioned for the second half of the year. We believe that our focus on service and execution provide us with a competitive advantage in those markets that value our underwriting expertise and where spreads are wide enough for us to be able to compete for business at an acceptable return.

Now I'll turn the call over to Bob Mills, who will discuss our financial results.

Thanks, Dominic, and good morning to everyone. Before I begin I'd like to remind everyone to refer to our press release and financial supplements for segment level details and further explanations of our financial position and results of operations. Dominic noted that Moody's has provided us with guideposts along the path to the final upgrade to AAA. One of those guideposts is market share where Moody's stated that AGC needs to achieve an overall direct market share based on percentage of par written in excess of 5% across several quarters. Our market share for the fourth quarter of 2005 was 5.5% and our market share for the first quarter of 2006 was 5.6%. Since not everyone has reported results yet, I am only able to estimate the amount for the second quarter of 2006. I believe our market share will be in excess of 8% for the quarter. Based on these results, this is our third consecutive quarter exceeding the 5% threshold.

Moving on to results, net income for the quarter of -- second quarter of 2006 was $44.5 million, or $0.60 per diluted share, compared to $66.8 million, or $0.90 per diluted share, for the second quarter of 2005, due to a number of factors. Our operating income per diluted share, which we calculate as net income, excluding after-tax realized gains and losses on investments, and after-tax unrealized gains and losses on derivative instruments, was $41 million, or $0.55 per diluted share, compared to $75.2 million or $1.02 per diluted share for the second quarter of 2005.

During the second quarter 2006, operating income included $6.6 million after-tax from the National Century Financial Enterprises (NCFE) litigation settlement. During the second quarter 2005 operating income included $41.4 million after-tax, due to the CFS Securities Fraud Litigation Settlement.

Let's review the results in a bit more detail. The PVP or present value of premiums written totaled $148.4 million for the quarter compared to $57.9 million for the second quarter of 2005. The PVP for the direct segment totaled $98.8 million, an increase of 335% from the second quarter 2005 amount of $22.7 million. Production in the direct segment included good performance in public finance in the ABS sectors, while the structured finance and the international sectors’ performance was outstanding.

PVP for the reinsurance segment totaled $49.6 million, an increase of 41% from the second quarter 2005 amount of $35.2 million. Treaty Cessions during the quarter were quite strong, increasing 17% from the second quarter 2005 amount. Included in treaties cessions this quarter, is PVP of $11.1 million from the Ambac treaty relationship that expired at June 30 and was not renewed. This is not a new circumstance, as we announced this non-renewal last year.

Facultative submissions received in the second quarter 2006 also showed continued strong volume. The second quarters of both 2006 and 2005, had the benefit of four large facultative transactions closing, with PVP in excess of $1 million. The PVP, however, generated from the large transaction from the second quarter of 2006, was $10 million higher, than that generated by large deals in the second quarter of 2005. The reinsurance segment report PVP and par written for treaty business on a one-quarter lag basis, due to a delay in receiving new business information from the primary companies.

Looking at the embedded value of our business, the present value of installment premiums in force, after-tax and the after-tax net unearned premium reserve net of DAC at June 30, 2006, was $695.9 million, a 20% increase compared to the June 30, 2005 balance of $580.4 million, reflecting solid growth in our underlying portfolio of risks.

Net earned premium for the quarter totaled $48.2 million unchanged from the second quarter of 2005. For the financial guaranty direct segment, net earned premiums totaled $21.2 million for the quarter, compared to $16 million for the second quarter of 2005, an increase of 33% in the current quarter, reflective of our continued expansion in that market. Net earned premiums in the reinsurance segment were $23.1 million, a decrease of 15% from the second quarter 2005 amount of $27.2 million. This amount is in line with our expectations considering the level of refunding activity this quarter and the effects of the change in business mix as certain treaties run off and facultative business increases principally in public finance. Net earned premiums for the mortgage segment were $3.7 million, down 27% compared with the second quarter 2005 amount of $5.1 million, reflecting the continued runoff of the quarter share book of business.

Loss and loss adjustment expenses incurred totaled $6.5 million benefit for the quarter, compared to a $59.1 million benefit for the second quarter of 2005. The 2006 amount included the NCFE litigation recovery of $10.1 million pretax, while the 2005 amount included the CFS litigation recovery of $63.7 million pretax. Absent these recoveries, loss and loss adjustment expenses would be $3.6 million in the current quarter, versus $4.6 million in the second quarter of 2005. During the second quarter of 2006, there were net case losses and loss adjustment expenses of $1.5 million and a net portfolio reserve addition of $2.1 million. This result coincides with my previous statement that for the balance of 2006, I expect loss and loss adjustment expenses to result in a net expense as new business expands. Notwithstanding loss and loss adjustment expenses are subject to volatility based on production and credit losses.

Looking strictly at case losses and loss adjustment expenses for the second quarter of 2006, the major items that comprise this net amount are $8.4 million recovery in the direct segment offset by a case reserve movement in a number of credits and the establishment of a reserve for loss adjustment expense related to a European infrastructure credit in the reinsurance segment.

The net increase in portfolio reserves was the result of a number of factors including new business, run off of old business, normal credit migration, and the downgrade of the European infrastructure transaction previously included in our closely monitored credit's listing.

At June 30, 2006, the closely monitored credit's list, or CMC list contained 86 credits with net par outstanding of $1.47 billion, an increase of $79 million from the $1.391 billion of March 31, 2006, and up 8% from the $1.360 billion of June 30, 2005. The increase during the quarter was largely due to the addition of one Puerto Rico appropriation credit, offset by the amortization of balances. The number of credits added and removed from the list during the quarter substantially offset.

The investment portfolio increased $42 million from the balance of June 30, 2005, cash and cash equivalents have also increased by $24.5 million. Yields increased 40 basis points, comparing the second quarters of 2006 and 2005 with pretax book yield of 5.1% at the end of the current quarter, while the duration increased only slightly from 4.2 to 4.3 years. There’s been no signature change in this investment portfolio during the quarter, and the average credit quality for the portfolio remains at the AAA level. During the quarter, the market value of our investment portfolio declined by $18 million net of tax, as a result of higher interest rates. Since this portfolio is long-term investment in nature, changes in value are reflected in the other accumulated other comprehensive income account. Operating expenses increased by $1.1 million, or 8% in the second quarter compared to the second quarter of 2005. The major portion of this increase was attributable to the adoption of FASB Statement 123R for share based payments in 2006, and the additional amortization of restricted stock awards. The level of expenses in the second quarter overall continues to be in line with expectations.

Our book value per share was $22.98 per share, increased from $21.63 book value per share at the end of the second quarter 2005. Adjusted book value, which adds to the embedded value from after tax net present value of estimated future installment premiums in force, and after tax net unearned premium reserve net of tax, was $32.48 per share at the end of the quarter, increased from $29.38 per share at the end of the second quarter of 2005. The company’s operating ROE in the quarter, which is calculated by dividing our annualized quarterly operating income by average shareholder's equity, excluding accumulated other comprehensive income was 9.9%.

As part of our $1 million share buyback program we announced last quarter, we repurchased 694,000 shares of our common stock during the current quarter at an average price of $24.77 per share.

With that, I'd like to turn the call over to the operator to poll for questions.

[OPERATOR INSTRUCTIONS]

Our first question will be from the line of Geoffrey Dunn of KBW. Please proceed.

Thank you. Good morning.

Hi, Geoff.

I guess, first. Could you give us a little bit more color on the types of transactions you saw in the direct international segment? It was a very big number. And then more from a high level talk about how you're winning deals. Are you winning in specific niche areas that you're specializing in? Are you winning deals away from the bigger primary companies? What is generating the traction that you demonstrate each quarter?

Well, thanks, Geoff. You know as we've always said, we have a very specific focus in the market where we think we can compete competitively with the other monolines. In the case of international deals, principally they were UK related utilities that the other monolines were either full up]of the current exposure -- remember we also said, we always believe capacity constrained names are an opportunity for us.

As well as we have a focus on doing, what we call, reverse inquiry, where we find investors that are willing to buy our wrapped paper, and then go out and try to match them up with some debt issuance that we can wrap -- kind of, on a secondary basis to a private investor. So the second quarter had some large deals related to that. Additionally, we did a large XXX deal as well.

And when you're approaching all this business and any area that direct business -- are you winning deals when you're going head-to-head with the pure triple, triple companies, or again, are you kind of coming under their radar still?

We're getting a little big to come under their radar, but once we -- we've always said, we don't have the ability to take them on head-to-head. We just don't have the pricing power to compete. So in this case, it's more based on us finding investors that want our paper. It's us finding areas where there are capacity constraints, opportunities, and obviously we still believe relationships and execution have a very big say in the business that you have that opportunity to write. And in some cases -- some of the businesses don't require the same issue as respects the three AAA's. So we can be competitive off of our current ratings.

Okay. And just a number question. Are you able to break down the 11 million of PVP in the reinsurance that came from Ambac this quarter among muni, structured and international?

No. That's -- I mean that's totally treaty amount, and it's across a number of different places.

Okay. Thank you.

Our next question is from the line of Mark Lane of William Blair and Company. Please proceed.

Good morning.

Good morning.

Can you detail the number of -- the actual number of deals that were wrapped in the direct market, including the number of public finance deals? And also, additionally, were there any new asset class is that you wrote -- or wrapped in the quarter that you hadn't wrapped previously?

The number of deals in the quarter was 46. That would compare to the prior year quarter of 29. So obviously you can see the deal flow has been increasing, but we've been benefited by the large deals of this quarter versus last year's quarter. In terms of the public finance, we wrapped 14 deals this quarter compared to 14 in the prior year. So once again, we're showing reasonably increasing activity, but understand that public finance is the area that we run into the most problems vis-a-vis trading differential on were spreads are today in that marketplace. So, to coin a phrase, we're dancing as fast as we can, but there is a limit to where we can provide our guarantee in that marketplace.

And how about new asset classes, things that you hadn't written in the past?

New asset classes, this time would be more looking at the international utility area in the UK. We did do some, what I'll call, traditionally ABS as well to further expand our penetration into that market, which has been a market that we have not been in, and specifically in the mortgage business. I'd probably focus on those two in terms of the additional market penetration

Okay. And then, regarding the move to positive from stable from Moody's, since that announcement, what sort of activity levels has that created either inbound, inquiries, or your desire to go see investors, etc. And what's your anticipation of what impact that will have over the next couple of quarters?

Well, obviously the announcement came very late into the second quarter, so its impact on the say deal flow that really has not taken hold at this point in time. Where we see the majority of change or activity, it is in the investor community, where obviously the change in positive outlook has been met with, a) anticipation, but more importantly enthusiasm.

So we think this will broaden our market acceptance in the investor community, which is kind of the dog as opposed to the tail, but will ultimately will lead us to see more opportunities, to ultimately narrow trading values, but it's still that we have a step up gradually kind of quarter-to-quarter. We have built -- we've not been shy about going out into the marketplace and trying to meet everyone we possibly can in generating activity. So that hasn't changed, right? So it really relates back to the investor community, and we hope to see continued trades that will narrow the differential, which then obviously, gives us the opportunity to further penetrate that business and higher rated asset classes

Okay. Thank you.

Thank you

We have a question from the line of [Mike] Grasher of Piper Jaffray. Please proceed.

Good morning.

Good morning.

Just wanted to follow up on that question from Mark, the last question, in terms of trading differential -- what are you seeing since the Moody's announcement?

We have very few data points to really give us a solid comparison, but we're constantly [polling] the market to try to find out where we think they're willing to buy the paper. And therefore, what does that mean in terms of market opportunities.

Okay.

So the easiest area to refer to would be in the public finance area, where we seem to be getting a lot of opportunity or acceptances for us to trade between 12 and 15 back of the other monolines; and that would be compared to 15 to 20 back prior to the Moody's announcement. In terms of the structured credit and ABS and we've fairly type there so if we see one point movement, that would be great. But that's really going to be more a factor of liquidity than anything else.

Okay. And then, if we were talking a year or so ago, you would -- you probably would have told us, hey, even if we get this upgrade from Moody's and you've received the positive outlook now, a year ago you probably would have said, it's still going to take us some time to get out there; and as you alluded to earlier investors, acceptance and appreciation for the change in outlook. Where is that today in terms of how long do you think it would take to, sort of, close that differential gap?

Well, you know, that's like the old "how long is a piece of string?" Obviously, we think it's going to be reasonably timely. And that if you go back over history, when the market was not as liquid as it is today, you could quote periods of, say, a couple of years, we think the markets are lot more efficient. We think it's more dynamic. There's a lot more paper out there. And obviously, we have done a lot of foundation work already in terms of the preparation of us ultimately getting the upgrade. So, although we think it's still going to be a number of quarters, we think it will be a reasonable amount as opposed to stretching over a few years.

Okay. And, Bob, just wanted to say thanks for the market share numbers, and did you ever get a clearer definition of the word several?

I think, Dominic has a great scenario. The technical answer is, no. I think it's subjective, an art rather than science. So -- and I think Moody's will know when it happens, but they have not -- I do not think they know exactly when it is, and they have not shared that with us.

Okay. Congratulations on the quarter, and best wishes for continued success.

Thank you, Mark.

Our next question is from the line of Darin Arita of Deutsche Bank. Please proceed.

Hi, good morning.

Hi, Darin.

Hi, Darin.

I was hoping to turn to the reinsurance -- the PVP there, and was wondering if we could get a little more color on the US public finance PVP, and what's driving that? I know you talked about facultative, but the mix is -- maybe treaty and facultative there and the types of deals that came through.

In the quarter, we were benefited principally by large deals. And to give you a kind of statistic that might surprise you, in the first quarter, it seemed like the market was kind of disappointed in the reinsurance production, and we talked about large deals having a big impact, and that probably fell on more deaf ears than not.

But to give you the comparison, in the first quarter, we wrote 12 facultative deals that we closed. In the second quarter, we wrote 13, and yet the PVP went from 7.7 million in the first quarter to 22 million in the second quarter. So obviously, the large deals have a huge impact there, and that is going to constantly put volatility in the reported results.

In terms of the treaty, the treaty obviously is predominantly or heavily weighted towards public finance, but has more asset-backed content in it, than the facultative. Facultative typically looks at the large deals in the public finance market. And this quarter, obviously, had two such deals. And so, we still weigh the reinsurance a lot more heavy. Public finance -- the predominant mix of the business, it's offset nicely in our portfolio by the direct business, which has obviously dominated in the asset-backed and structured credit market. So as we look at the overall organization, we really see a very, very beneficial mix of our business written in the risk that gets spread out over the entire portfolio.

And then, in terms of the large deals, what types of transactions are these?

I don't want to really give out the specific names. There were two large ones. One was an international kind of PFI deal. The other was domestic. One was kind of general obligations or appropriations, and the other one was the international side. It was healthcare.

Okay. And -- great. And secondly, Dominic, I know you talked about, you know, maybe in the capital structure contemplating some sort of maybe a hybrid security or something. What are your thoughts on that now?

Well, obviously, Moody's have given us a little bit more clarity in terms of the required capital that they are now specifying as this continued guideline that they have provided us with the ultimate upgrade. So that gives us a hard number for them. But quite honestly, we do not have a hard number for S&P and Fitch, and we're kind of working through their models as we speak.

It's our goal to try to get an efficient capital mix. We know we are not efficient today. We've done that for specific reasons, specifically the ratings upgrade. We will continue to evaluate alternatives to that capital structure to see if there is a more optimal mix. As you probably know, our debt percentage is lower than our competitors in the mono-line world as well as what is the current standards or requirements from the rating agencies.

So there seems to be an opportunity to do a greater mixture of debt and to attempt to take out some equity on that basis. So once again, then you got a find a willing seller. So there are enough hurdles out there, but we are still researching everything. We're dedicated to getting this answer right. And we're working through, first, the process of the rating agencies and then the alternatives to the capital structure to come up with some sort of a reasonably more efficient mix.

Okay. Great. Well, thank you very much.

Thank you.

We have a question from the line of Richard Diamond of Inwood Capital. Please proceed.

Yes. Good morning, gentlemen, and congratulations on the great progress.

Thank you.

One of your competitors, namely MBIA, indicated on their call that the new players are writing risky business at substandard ROEs. And could you mention for us how you are able to find attractive business where they are not? And, can you give us some metrics such as the number of submissions that you can -- that you reject, so that you can respond to I guess the larger mono-lines, who are having a lot of issues growing in this market? Thank you.

Thank you. Well, first and foremost, in terms of the risky business, that's what I continually quote our portfolio statistics. Obviously, we are able to maintain a AA- average or AA-3 in the Moody's context rating. We're not writing low-rated deals. Second thing, we have always talked about spreads being as narrow as they are.

The only place where we think you get adequately paid in terms of return orientation is all the way up in the credit structure. So that also forces us to the top in terms of the AAA. In the current quarter, in the direct business alone, roughly 72% of the business written was AAA. So I can't respond to the risky side of it, because obviously that doesn't appear to affect much of what we have done.

Also, when we look at that AAA business, obviously, it takes a very low capital charge. And therefore, the amount that we're able to get in terms of premiums still meets our return hurdle. So as I looked down, and we calculate it for every deal, as I look down our sheet of returns by deals, so sitting in front of me is all 42, I am hard-pressed to find anything that is -- 46 -- I can't even remember my own number. I'm hard-pressed to find anything that would be below that, say, for the public finance area, which we've all always said we would be very necessary aggressive on price, because we think that's a critical measure. It's a critical market in this industry, and it's a place where we have to have a presence, and we will continue to play there. But even if I look at those deals, there is nothing that I would be concerned about. We'd have one deal that would break 10, in other words below 10, and that's 9.8. And everything else is in very, very good shape.

So we look at return, we look at risk, we continually look at the portfolio, as I said, we're 72% AAA in the quarter. So, I'm pretty pleased about that whole scenario, and the focus that our guys have in terms of making sure we meet our underwriting standards and our return standards, and there is no kind of give back on that.

Thank you, very much. I appreciate that.

You're welcome.

Our next question is from Rob Ryan of Merrill Lynch. Please proceed.

Good morning.

Hi, Rob.

Switching over to your prospective as a reinsurer, and therefore getting to see a lot of those pricing, as well as credit information on the market as a whole. How would you characterize the primary market currently, in terms of direct price competition or any signs of relaxation of terms?

Let me build my Chinese Wall before I answer that question, and switch over to the reinsurance side. We are quite pleased with the reinsurance side. Obviously as you point out, we get to see from that point of the business, all the large deals being done in the market. And obviously, we feel we have a preeminent position in that reinsurance market place. We believe we are the most responsive. We have one of the largest capital bases. We have a consistent commitment, as well as capacity that really, I think is a true value-added to the monoline.

So we do see activity, obviously the activity of the quarter was very, very strong for us across all monolines basically. And we have yet to see anything that would give us real cause for concern in terms of a slippage of terms. Obviously price is price, and there are some differentiations in price. But I just dismiss that, because I look our business and hopefully I think the rest of the industry does, you know you got a dynamic risk model; but when you look at a given deal coming in, the impact it has on each company specifically is different, because our mix of business is different.

So what a public finance deal means to me, is going to be different to someone else. And therefore, I would imagine based on the dynamic risk model of your portfolio, you're going to look at it on a different basis, a different price, a different capital allocation. So setting aside price, we look in terms of [very, very] specifically, because that's the only thing we think we can really run into significant trouble. And as of today, we do not see -- and I remember our business is predominantly the larger companies. We are seeing a good flow, however from the smaller monolines, and we see them as a great market for us in the reinsurance business going forward, because they're trying to build books, trying to shape portfolio, there are going to be one of the good buyer of reinsurance. But we've been reasonably pleased with terms and conditions, with the discipline, and we don't kind of look at it as a free for all of any [nature] or any basis.

Great. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]

We have a question from the line of Matthew Roswell of Stifel Nicolaus. Please precede sir.

Yes. Good morning. Congratulations on a good quarter. Why is the switch more to the loss side and loss reserve. Could we get some more color on that European infrastructure, i.e. is it coming from more than one primary, is it a new reserve, is it just an increase to an existing reserve? Those sorts of questions.

Yes. It's from one primary; it is an increase in reserve based on a downgrade of those securities currently in the quarter. We have a portfolio of reserving system that does a risk weighting based on rating, and ultimately then uses that risk rating in both, in the probability of default and severity of the calculated portfolio reserves. So, it is formulaic. As soon as the security is downgraded, it’s kicked into the portfolio reserve calculation, and the activity you see in the quarter is related to a higher reserve on a portfolio basis for that specific instrument.

Do you if the primary has reserved against that credit as well or --?

Remember, we are portfolio reserve not a case reserve, which is -- a very critical difference. So, I can't tell you what portfolio reserves that might be held at a primary level, we do not have a case. Our understanding is the primary does not have the case reserve on it. And therefore, we just look at it from our portfolio point of view.

Okay. And in terms of percentage of the overall exposure there, around where are we?

No. Not meaningful, I can't really provide that. We think we're at a reasonable number, based on what we see today. We do not have a lot of the information; obviously we're not the primary, so we're not involved in the potential remediation or workout. And we will continue to monitor that situation I mean, I think you'll figure out what this European infrastructure is, it's very public in terms of disclosure of our exposure in that as a reinsurer. And we think our portfolio reserving methodology is the one that's appropriate at this point and time, and has calculated today a reasonable reserve amount.

Okay. Switching gears a little bit, the trading differential, how about -- I know earlier in a response to a question you mentioned that you haven't seen it with the Moody's shift to positive. How about over the last, say year or 18 months? Has it been narrowing?

Yes. I think we've seen gradual improvement through say the last 18 months without question. As I said we first talked to you about the public finance even before we start giving numbers, we were probably six months to nine months in, and at that time it was as high as 25. Now we think we're down to a 12 to 15. So obviously that has tightened. On the asset-backed side, we've always been a reasonably tight, but even that has moved in from say, a four to six, or five to seven we used to quote if you go back to some earlier scripts. Now we think we are 0 to 6, and probably settling in a four range.

We continue to look at those things, obviously that has a real impact on where we're able to see and compete within the marketplace. And it's going to continue to evolve. As our liquidity goes up, as the Moody's positive outlook, but supported by the strong AAA of S&P and Fitch, that means different things to different buyers of our paper. We will continue to look for those guys in the market as best we can.

Okay. Thank you very much, and congrats on good production this quarter.

Thank you.

Ladies and gentleman, this concludes our question and answer session. I'll turn the callback over to Sabra Purtill for closing comments

Thank you, Cheryl, and many thanks to you all for joining us today. We certainly appreciate your interest in Assured Guaranty. Our replay of this call will be available on our website, as well as by telephone at 1888-286-8010 in the US, or at 617-801-6888 for international callers. The pass code is 36819807. If you have any additional questions or information you need, please feel free to contact me or Chris McNamee in our New York office. Thanks again, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.