Assured Guaranty Ltd (AGO) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 Assured Guaranty earnings conference call. My name is Twalecia and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate 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 call over to your host for today, Ms. Sabra Purtill, Managing Director of Investor Relations and Strategic Planning. Please proceed.

Thank you, and thank you all for joining us this morning for our fourth-quarter 2006 earnings conference call. As you may be aware, we released our earnings press release and financial materials 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'd like to remind you all that our commentary today may contain forward-looking statements such as statements relating to our financial outlook, business strategy, growth prospects, rating 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 recent SEC filings as well as our earnings press release and financial supplement for other information that would be available on our website 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. 2006 was a year of continued accomplishments at Assured Guaranty as we again demonstrated our ability to grow both the direct and reinsurance financial guaranty operations despite many challenges. I am pleased with our progress on our five key strategic goals which we had laid out at the time of the IPO and have discussed with you on many occasions. Those goals are -- developing the direct financial guaranty business, maintaining the reinsurance franchise, sustaining underwriting discipline, improving our ratings and managing our capital efficiently.

Without question our direct segment made significant progress during 2006. We achieved our highest market share ever which we estimate at least 7% for the year which is more than double our 3.4% share in 2005. Direct par written exceeded $41 billion, a record, which also meant for the first time in the Company's history our direct par outstanding exceeded reinsurance par outstanding. Direct PVP was $302 million, five times what we wrote in 2004 and more than double what we achieved in 2005.

Each of our three principal direct markets posted exceptional performance -- international grew the most, consistent with being our newest market, and produced $13 billion of par written, about 30% of the segment's total. Business production from our U.S. public finance group, where we are the most ratings impaired, was also up with significant increases in both par written and PVP.

Our average par written per deal in this market almost doubled in 2006, indicative of the favorable responses we are receiving as a new financial guaranty name in that market. Structured finance had a very strong year as well with $147 million of PVP. We closed 72 transactions in that sector including notable deals in the commercial ABS, CMBS, CDO, structured credit and XXX insurance markets.

Our reinsurance business continues to be robust and has maintained its market leading status during the year. We continue to have the largest amount of par insured in capital base of any monoline company in the financial guaranty reinsurance market. Reinsurance PVP increased to $152 million, up 19% from the prior year, despite the continued absorption in 2006 of treaties lost with two large financial guarantors since our IPO and modest industry growth.

Once again, large deals were a significant driver of production and comprised almost two-thirds of total new business volume. This is consistent with our strategic vision on facultative business which generated 44% of new business production for the year compared to about 10% at the time of our IPO. We had envisioned this change to more facultative executions and made sure that we had the right people with the appropriate underwriting expertise to support this market focus.

During the quarter was signed a new master facultative agreement with MBIA and now have master facultative relationships with every AAA rated primer. We continue to believe that the financial dynamics of this business are attractive, especially having centered our operations here in Bermuda after the IPO.

Our focus on underwriting discipline has been and will continue to be a critical element of our strategy. We consciously decided to underwrite higher credit quality transactions this year given market conditions and our split rating. Our insurer portfolio maintained an average credit rating of AA-, even with the significant growth experienced during the year. At year-end 43% of par outstanding was rated AAA, up from 34% the prior year across both portfolios. For the full year 67% of new par insured was rated AAA while new business had an average overall rating of AA.

We did not experience any significant credit events during the year despite market concerns about some asset classes such as RMBS. In fact, we continue to have favorable credit experience on some older transactions including recoveries on businesses discontinued as part of our IPO. The performance of our closely monitored credits, or CMC list, attest to this positive experience and is supported by our more than 19 plus years of underwriting experience in the financial guaranty market. Since the IPO the dollar amount of par on our CMC list has declined more than 30%.

We also continue to make progress on the ratings front with the Moody's upgrade of Assured Guaranty Corp.'s ratings outlook to positive in the second quarter of 2006. As many of you are aware, Moody stipulated at that time that an upgrade to AAA would be dependent on us staying the course for underwriting and capital while demonstrating a 5% par written market share. Well, we have stayed the course while also not only achieving but exceeding the market share goal since the third quarter of 2005. We are highly confident that Assured Guaranty Corp. has met the remaining hurdles for a Moody's upgrade.

During 2006 we also delivered on our commitment to manage shareholder capital efficiently. In May we announced a 1 million share repurchase plan that was substantially completed by year-end. More recently we completed a separate $150 million share repurchase from ACE Limited at the end of December. This transaction had virtually no earnings impact on the fourth quarter given the December closing of this transaction; however, we expect it to be accretive to EPS and ROE in 2007.

The repurchase did not reduce capital at our operating company, so the capital test used by the rating agencies for our insurance companies were only affected by the debt service of the finance. We financed this purchase by using $150 million of a new innovative debt security often referred to as a hybrid by the fixed-income marketplace. This received significant equity credit from the rating agencies. In fact, we were the first publicly traded financial guaranty company to issue this type of security.

There is no doubt I am pleased with our accomplishments in 2006. We exceeded our expectations for new business production and continue to benefit from favorable credit experience. We remain steadfastly committed to our strategic goals and are sharply focused on building our 2007 new business pipeline which continues to be robust. We continue to expand into new asset classes, markets and regions. For instance, we recently hired a managing director for the Asia-Pacific area, launching the growth of our company into the Australian and Asian markets. We believe that we can find opportunities to grow given our relatively small historical presence in the direct market and the continued demand by fixed-income investors for diversifications among financial guarantors.

In April it will have been three years since our IPO, and over that time we have made major progress on our strategic goals and we still have a long way to go. I am highly confident that we will continue to move forward and create a leading financial guaranty company based on the goals and strategies that we laid out at the time of the IPO. We look forward to continued success in 2007 as we continue to create long-term shareholder value. I'd like to now turn the call over to Bob Mills to discuss our financial results. Bob?

Thanks, Dominic, and good morning. I want 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 operations. You will note that we've added some disclosures to the supplement this quarter to improve transparency including a schedule of unearned premium and installment premium runoff.

Net income for the fourth quarter of 2006 was $42.4 million or $0.58 per diluted share compared to $38.2 million or $0.51 per diluted share for the fourth quarter of 2005. Operating income per diluted share, which we calculate as net income excluding after-tax realized gains and losses on investment and after-tax unrealized gains and losses on derivative financial instruments, was $41.5 million or $0.56 per diluted share compared to $34.6 million or $0.46 per diluted share in the fourth quarter of 2005.

Let's look at the details of this a little closer. PVP, or the present value of gross premiums written, totaled $116 million for the quarter compared to $83 million -- $83.9 million, excuse me, for the fourth quarter of 2005. PVP for the direct segment totaled $70.8 million, an increase of 54% from the fourth quarter 2005 amount of $46 million. Production in the direct segment included strong performance across all sectors of the business and was affected by large transactions. There were two transactions closed during the quarter with PVP in excess of $5 million compared to only one transaction in the fourth quarter of 2005.

PVP for the reinsurance segment totaled $45.2 million, an increase of 19% from the fourth quarter of 2005 amount of $37.9 million. Facultative business was especially strong during the quarter and was influenced by one very large transaction. Treaty sections declined quarter-over-quarter, again substantially the result of large transactions with PVP in excess of $1 million but significantly influenced treaty production in the fourth quarter of 2005. We continue to see that the PVP in this segment will be volatile as the volume and size of large transaction fluctuates period-to-period.

Net earned premiums for the quarter totaled $58.5 million, up 22% from the fourth quarter 2005 amount of $47.8 million. For the financial guaranty direct segment net earned premiums totaled $26 million for the quarter compared to $19.8 million in the fourth quarter of 2005, an increase of 31% in the current quarter which is reflective of continued expansion in our direct book of business. Net earned premiums in the direct segment increased 20% for the full year. I expect this growth to continue in 2007.

Net earned premiums for the reinsurance segment were $22.6 million, a decrease of 4% from the fourth quarter 2005 amount of $23.5 million. This amount is in line with our expectations considering the lower level of refundings in the current quarter. Looking to 2007 reinsurance earned premiums should remain relatively unchanged without giving consideration to the level of refundings.

Net earned premiums for the mortgage segment were $9.9 million, up 115% compared to the fourth quarter 2005 amount of $4.6 million. The increase reflects two terminations completed during the quarter. There was no new business written during the quarter. The significant terminations and the runoff of the quota share book of business will result in lower earned premiums for 2007 in this segment.

Loss and loss adjustment expenses incurred totaled a benefit of $0.7 million for the quarter compared to a benefit of $0.2 million for the fourth quarter of 2005. During the fourth quarter of 2006 there were net case losses and loss adjustment expenses of $3.5 million and net portfolio reserve expenses of $1.2 million. There was also a decrease in reserves of $4.2 million in the mortgage segment associated with a profit commission payment which is reflected as a separate line in the income statement. In addition, there was a litigation recovery of $1.2 million in the other segment.

Looking strictly at case losses and loss adjustment expenses for the fourth quarter of 2006, the major items that comprised this net amount are a $1 million expense in the direct segment related to a sub prime mortgage transaction originated in 2001 and a $1.6 million expense in the reinsurance segment associated with an adjustment in salvage estimate related to Allegheny Health, an exposure dating back to 1998. While certain well seasoned sub prime MBS deals have experienced stress, we've been conservative in writing these risks in this asset class for quite some time. In fact, 89% of our sub prime exposure is rated AAA. We remain comfortable with our sub prime MBS and prime RMBS exposures.

The investment portfolio increased $215 million from the balance as of December 31, 2005 as a result of excellent operating cash flow during the year. Deals increased approximately 20 basis points comparing the fourth quarters of 2006 and 2005 with pre-tax book yield of 5.1% at the end of the current quarter while the duration remained relatively flat at 3.9 years. There's been no significant change in the investment portfolio asset allocation during the quarter and the average credit quality for the portfolio remains at the AAA level. There was also no significant change in the (technical difficulty) of our investment portfolio during the quarter.

Operating expenses increased by $3.7 million or 25% in the fourth quarter of 2006 compared with the fourth quarter of 2005. The increase was principally attributable to the adoption of FASB statement 123R for share based payments in 2006 and incentive based compensation expenses. In total these items were approximately $4 million higher than the amounts recorded in the fourth quarter of 2005. The level of all other operating expenses declined modestly in the fourth quarter of 2006 and continues to be in line with expectations. Looking to 2007 I expect operating expenses to increase in the range of 9%.

Our book value per share was $24.44 a share, increased from $22.22 per share at the end of the fourth quarter of 2005. Adjusted book value, which adds the embedded value of after-tax net present value of estimated future installment premiums enforce, and after-tax net unearned premium reserves net of DAC was $36.54 per share at quarter end, an increase of 20% from $30.39 per share at the end of the fourth quarter of 2005. The adjusted book value reflects the accretive effect resulting from the issuance of the $150 million hybrid security and the reacquisition of 5.7 million shares of common stock. 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 10.2%.

Lastly, I would like to provide an update on our direct market share information based on the percentage of par written. Our actual direct market share for the third quarter of 2006 was 8.3%. For the fourth quarter 2006 since not everyone has reported results yet I'm only able to estimate the amount. I believe that our market share will be in excess of 7% in the fourth quarter. Based on these results our direct market share for all of 2006 was in excess of 7%. The fourth quarter of 2006 marks the fifth consecutive quarter exceeding the 5% guidepost threshold established by Moody's moving towards the final upgrade to AAA. With that I'd like to turn the call over to the operator to poll for questions.

(OPERATOR INSTRUCTIONS). Mark Lane, William Blair.

Good morning. First question is regarding the amortization schedule you supplied for the first time. So Bob, I heard what you said about the fourth quarter, that the pickup in growth was driven by the growth in new business more recently and you would expect growth at around similar levels for 2007. But if you look at the schedule on page 15, if the schedule for next year is $99 million for '07, do you have any idea how much premium you recognized this year on new business written this year?

Off the top of my head I don't have that. I can get that for you, Mark, but I don't have that in front of me at the moment.

As a rough rule of thumb it's going to dependent upon the maturity of the business we wrote. So of the $300 million of PVP that we wrote during the year that's written about half year, the rule of thumb would be to take about half of that number and then divide it by the expected maturity schedule. So you would have -- depending on the mix of business you'd have roughly 10 or $15 million that would be earned in a given year.

But as we've discussed, Mark; one of the things that's changing about the composition of our book of business is that as we write more traditional financial guaranty business, particularly in the public finance markets, or for instance in the international infrastructure markets, the average life of the book of business that we're writing will be extending.

I can get you that number, Mark. I just don't have it in front of me.

Okay. And just a couple other small ones. I'm assuming that the FSA reinsurance treaty renewed with no changes at all or no major changes?

That's a good assumption.

So what would the tax rate the associated with the income within the mortgage business?

It's a normal tax rate.

Remember, most of that is written in the U.S. tax paying entity and some of the large (multiple speakers).

That's a 35% rate.

The large recoveries that we've had as well as the mortgages written in that facility, so you're going to see U.S. taxes on that.

So Mark, if you're trying to get to what the net impact of the termination was on net income, it was $2.9 million.

Okay. And then finally, Dominic, can you talk a little bit -- if you can provide any additional insight about how your business has developed within the U.S. public finance market during the quarter. It seemed to be a little bit more active maybe?

We were a little bit more active, but I'll caution you that it's still principally in the healthcare field. Obviously our ability to write the standard general obligation on the municipal side is significantly impaired by the Moody's rating. We continue to make inroads on smaller issuers as we've been doing in the past and paying attention more to regional approaches to that book of business. But the success that you see in the quarter is driven principally off of healthcare.

Okay, thank you.

Darin Arita, Deutsche Bank.

Good morning. I guess with respect to facultative reinsurance, can you talk about whether you've seen any change in demand by the market throughout 2006 and into 2007?

Sure. That's exactly what we see. As the market continues to evolve both on our market expectations of overall volumes by the monolines and how they're going to manage their risk in the traditional sense of past years more done on a quota share basis. But today with the greater attention paid to premium volumes across the board, we envision a shift as well as, at the same time, increase in size of transactions.

Especially on the infrastructure side, we saw the shift to a different purchasing type in the reinsurance market really switching to facultative so that they could better shape portfolio, retain a lot more of the business for their own bottom lines, but yet still go out and get protection where they need it for large deals. And 2006 was significantly influenced by that exact scenario where, as we talked about, the percentage of production from large deals was significant.

We see the same thing continuing in 2007 in terms of looking at our pipelines, both on the reinsurance and direct side. They're at their largest levels ever; that's been a continuation basically since we've monitored and started tracking those statistics. So we see the change in the buyer's appetite, we see the need for the shaping based on both size and the size of deals being done in the market and obviously their desire to keep more net bottom-line. So exactly as we think the reinsurance market opportunity is for us we're out there and trying to execute across that base.

And I realize what your strategy here is across the Company, but assuming that reinsurance demand continues to increase and picks up significantly, would you allow that business to grow as it would or would you limit the amount of growth on that business?

Well remember, we manage the two capital bases separately. Obviously they're separately rated as well. We have a real competitive advantage in execution and the reinsurance company being in Bermuda and we think that business is highly profitable, adequately returned based on its capital efficiency and tax efficiency here in Bermuda. So sure, we would let that grow.

Okay, great. And lastly, I guess now that Assured Guaranty Corp. does not have its third AAA rating yet.

Thanks for reminding me, Darin, I appreciate that.

I'm sorry. But can you talk about how the public finance team is preparing and positioning itself to write a wider scope of business after the upgrade is received?

That's an excellent question and all I can tell you is we have spent substantive time over the last -- about three months we started kicking this thing off, and specifically developing our approach, marketing plans, contact list. We've also -- our underwriting process and philosophy and at the same time spent a lot of money in developing a system that will more efficiently handle submissions in the public finance market.

So much as you would hope us to do, we've obviously been planning for this for quite some time. We've got the systems coming on-stream. We've streamlined our underwriting process as we look at that market opening up to us in a lot wider array. And we're all dressed up, we're just ready for the invitation to the dance.

All right, great. Thank you very much.

Mike Grasher, Piper Jaffray.

Good morning and just wanted to follow-up on Darin's question there with regard to the things you've been doing behind the scenes. Anything in the pipeline right now that would indicate that sort of getting up and running is going to be less time than what you ever imagined simply because the name is out there and has been out there now for three years?

You bring up a good point. But, A, you don't know what I imagine in terms of time and I have a pretty good imagination. But as you point out, I think that's a critical piece. It's not like we've started from a dead stop here. We've been out in the market, we've been meeting with fixed income investors. we've been getting the approvals in terms of making sure our paper is accepted. We've been meeting with the originators, obviously talking to the banks, the consultants, this regional approach we've taken. We've laid a lot of foundation from an external or third party point of view and what we've really done in the last three months is now make sure the inside of the house is ready to go.

The marketing effort for us has never changed. We've always tried to get on to certain deals if they were available. Remember, we still had opportunities in capacity constrained areas. So it's not like we've been unfamiliar even in the larger markets in terms of the general obligation, so it's just a continuation of that. Obviously our approval list is at the highest level possible from the standpoint of fixed income investors. So we are, I guess, cautiously optimistic that the lead-time that it's going to take us to be able to start ramping up this business should be shorter because we're not coming from a standing start. We've been rolling the car down the road for quite some time.

Right. And then could you update us on your thinking about capital management as we head through 2007 with regard to I guess more share repurchases beyond the current authorization absent any change in the ratings?

We obviously really are dedicated to efficient capital management. We took advantage of what we saw at the end of the year in an opportunity to better constitute our capital but make it more efficient from an ROE and an EPS point of view. We've taken -- and remember, we're subject to three different rating agency requirements in terms of the percentage of debt, etc. So we've pretty much matched the percentages that allow us to continue to maintain the top ratings to which we aspire to.

So looking forward we're kind of at those limits and it will take some time to create some additional excess capacity. But at the same time we've just completed a five-year capital and business plan and we think that we're going to be able to put the capital to use, to be very honest with you.

Okay. And Bob, you did mention transactions in terms of greater than $5 million -- I think two transactions. How many total transactions in the quarter then with the direct?

The total number was 42 in the direct business for the quarter.

Okay. And then I suppose one question just -- and final question. Fundamentally the marketplace overall structured and public in terms of the spread environment, any changes there or are we still very narrow?

The spreads are still very narrow across most asset classes. Obviously we still anticipate some activity in the consumer asset side, especially in the residential mortgage side. And obviously there have been enough articles being written recently that talk about the deterioration in that area. So hopefully that should lead to a widening of spreads. And in some isolated cases there are, but we don't see it being consistent. You'll see it move out and then narrow back. And the rationale is that the cash investors continue to demand down returns every time it looks to widen out.

Okay. Thanks very much and congratulations on a great 2006.

Thank you very much.

Matthew Roswell, Stifel Nicolaus.

Good morning. Two questions if I may. First, in terms of the U.S. structure in the international business, are you all experiencing any trading differentials against your straight AAA peers?

Very slight. Typically in the three to five range, and yet in those deals there typically is enough premium value to allow us to move within that fairly easily in terms of being attractive and competitive in those programs.

Okay. And the second question I had is the direct business is currently writing at a statutory ratio about 93 on the capital side. How high up do you think you can take that once you get the AAA from Moody's?

We've been running capital models and I think we feel we have a significant amount of movement still remaining on the direct side. We look at it a different way than the (indiscernible) capital. Obviously we run the models. But suffice to say, as I say, we just completed a five-year kind of view and we don't anticipate any issues even with the substantial growth that we're achieving on the direct side. You've got to remember, that portfolio is clearly dynamic. We're still getting the benefit of substantial runoff of some of the old TDO business that was written in prior years. As we look to write the new business some of that's becoming more long dated but it's still a pretty active portfolio.

Excellent. Thank you very much.

Heather Hunt, Citigroup.

Thank you and good morning and congratulations on a strong year. And also thank you for the enhanced disclosure. I think you guys have (multiple speakers)

Thank you, Heather, and good morning.

Just two questions. Following up on Matt's question, can you tell us what the trading differential might be in the public finance section? I know that's --

Public finance is like 10 to 15.

Which has come down a little bit (multiple speakers).

Yes, when we were first started this we were in the 15 to 30 range, and obviously that has narrowed substantially. In the variable market on the public finance we're three to five back. When you flip over to the ABS side, depending on the type of asset in tenure it can either being on like a negative basis trade zero and kind of moving between a three and five mark on the other structures.

And we just did a future flow deal where we traded three back and we're now three back on the paper. So it narrows. It's in a reasonable range to which we can still execute pretty competitively and obviously we look forward to that continuing to narrow hopefully with some further movement in the ratings.

Okay. So do you find yourself kind of trying to go after the more complex deals because you can just get better pricing? Obviously that's what everybody is going after, but it would seem like you'd feel more compelled to do so.

I wouldn't say complex. I think it's really we try to go after the deals where we have more expertise which allows us a greater opportunity for completion based on the view of the originator issuer in terms of how we can handle that specific program. If you look at our structured credit area, I mean there's not many places where we'll pat ourselves on the back, but we really believe we've got the best group of people that are out in the market on that business. And they've been extremely successful, extremely competitive. And they're the guys that typically can engineer it where we trade pretty much flat. And of course some of those deals are complex, but that's expertise more than type of transaction.

Okay, thanks. And then just litigation. I know you continue to sort of be cautious about anticipating much further recovery, but every quarter it seems like you have another little sort of gain. Do you feel like you're really sort of at the tail end or do you think we might have a few more little --?

Well, if you remember, last year I predicted we'd still have negative loss activity in the year, so I guess my prediction held up true. We typically pay our general counsel a lot of money because he simply runs one of the better profit centers that we have in this business. And maybe some of that litigation is a testament to some of the mistakes we've made in the past so we can't really pat ourselves on the back for that either.

But I think there's still some outstanding litigation. Obviously the significance of it will continue to decrease. As you've the over the three years that we've been in this IPO mode, we really have not had a major credit event in terms of creating a loss which then creates the opportunity for further recovery. So we are looking at kind of the emptying of the glass. There's still some activity out there, so I can't say it will be zero, but it will be less significant than it has been. And maybe in 2008 for the first time we'll produce positive loss incurred numbers, which sounds like a success -- it really isn't when you think about it, but at the end of the day it's more normal.

In the quarter though if you look and break down our loss activity, we really did post about $5.2 million of additional reserves, except it always gets offset by these recoveries as you point out. But we are building up reserves on the business that we're writing. Obviously because of its predominantly AAA rating there's not a lot of reserves you're going to attach to that, but we're still methodically consistently applying the discipline of how we reserve, it's adding reserve value to us obviously being offset by these recoveries.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Rob Ryan, Merrill Lynch.

Good morning. Would you provide the public finance versus structured finance breakdown on the 42 direct deals?

Yes, I will. Of the 42 direct deals, the U.S. public finance was -- there were 16; U.S. structured finance 19; and international 7.

Okay. And within the international transactions, a little color on the areas where you're at -- both geographies as well as asset classes?

Geography is predominantly UK and when we break it down it's -- regulated utilities, which we'll call more public finance, was about in number -- I want to make sure I separate the quarter from the year. So structured was about $1 billion -- they did $5 billion in par; $25 million in PVP of which $3 billion was infrastructure, $1.5 billion -- these are round numbers, Rob -- was other structured finance; public finance was $400 million round numbers and CDOs were $200 million. All predominantly of the AAA. Obviously the CDOs are AAA, infrastructure is AAA, the structured finance is at an average rating of AA plus and the public finance AA.

Of the seven deals I guess there were four in infrastructure public finance, two ABS/MBS and one structured credit.

Okay.

So you have a pretty good flavor. I mean, obviously if you want to speak to specific deals we could probably do that at some time.

Great. There was a pretty sizable sequential jump in your core earned premium within -- or actually your earned premium, core earned premium are the same things in your direct business. I know you're giving us the schedule and that helps us out with the future, but maybe explaining how the writings over the past year or so have caught up and made a difference this particular quarter. And whether there was anything unusual which helped out and if there was would that be sustainable?

I'd first say there was nothing unusual. And remember we've been banking a ton of PVP on the direct side which, although most of it, especially the international side, is long dated. As we talked about, our ability to continue to move up ROE is predicated on how fast the earned premium starts to actually amortize through the financial statement. And we talked about our competitors having seven or eight years to transactions out there that really assist them in terms of generating consistent earnings. We've only been in the game three years and have been writing a substantial amount of premium over the last two, so it's going to continue to be a gradual ramping up.

Everyone is diving in front of me with a note to say, oh, by the way, remember we did those XXX deals. One of them had a stipulation in it that based on the downgrade of the issuer we'd be able to step up the premium. So in that case, just to make sure we're clear, there was a $1.6 million step up premium realized in the fourth quarter, but it was a catch up of two quarter so just don't add that forward. And that will stay as long as the rating of the issuer has been downgraded. We anticipate it to be back upgraded into the -- in 2008.

If you look at the percentage increase, Rob, and the direct premium, it was 31%. And if you take out the step-up premium you'd say it's like 23%. And looking at 2007, what I would say would be probably more -- that's probably a more realistic range going forward from a growth standpoint.

And over the years one of the offsets to your rapid new writings has been the runoff out of the older CDO book. How is that running its course? To what extent will that no longer be a factor at a certain point in the future, how much more do we have to go?

Remember, it was two things. It was the runoff of the CDO, if you look at it from just a direct point of view. But as Bob points out, our direct earned premium has been growing reasonably well. But the fact that for most of our history 50% of our business is reinsurance and that earned premium has been fairly stable and then, based on change of refunding activity, has actually declined a bit. So we're constantly pushing two heavy rocks up a hill. So we think that the CDO book by and large maybe has a little bit more influence left to go but nowhere near as significant as it has been in '05 and '06.

Thank you very much.

James Shanahan, Wachovia Securities.

Good morning. Given the headlines yesterday and really the sort of developing storm here in the nonproblem space residential mortgage, can you discuss your exposure there to non private? It's a sizable portfolio, but can you talk about what typically your vintages are? It's a double -- I guess you're a AA plus average rating, but what is the range of credit ratings? And I guess for the lowest rated guaranty, how much subordination is below your attachment point and how are you thinking about that business right now?

We were anticipating the question, to be very honest with you. So first and foremost, we're very comfortable with our sub prime mortgage exposure. Currently it's around $6.5 billion, but a lot of that -- because it runs off and obviously gets replaced -- was put on in the last year and everything we put on there last year was AAA rated. So in total 89% of all of our sub prime is AAA rated. So we think it's a very safe portfolio.

Number two, that's not to say we don't have things on our CMC list. There is a couple hundred million, about 232, of which we feel very comfortable with the vintage, the experience to date, our expectation for the future. We do have some reserves on the portfolio side set up against that business. We did add to it, as a matter of fact, I think to the tune of about $1 million in the fourth quarter.

So we understand the issue. We look at our portfolio, are extremely comfortable, anything new -- we have not written anything other than AAA in the last two years. So we're very, very confident of that. And to the extent of the stuff that we have out there and in our number we group manufactured housing as well. We're very, very comfortable on the vintage, the experience, where we're at reserve wise.

And it's cross collateralized too, the manufactured housing exposure. If you split that down to 232 is broken up about 100 and sub prime mortgage actually 92 I believe the number is. And then the balance is manufactured housing which is -- I'm very comfortable with. It is generally a cross collateralized group of loans.

Right. So the deals we'd have there are like '01/'02 vintage.

Okay, thanks. And can you comment I guess on how you think about issuers? It looks like from a quick review that you generally try to partner up with higher quality issuers, but what are your thoughts there?

Well, part of our underwriting guidelines is we rate the servicer as well as look at the issuer. So we're very conscious of the servicer exposure that we have. We obviously monitor the servicer's performance as part of most of the deals we have the right to replace the servicer if we see anything that we're not satisfied with in terms of their execution. So it's something we do monitor. We list the top among our own group. We have limits to how much exposure we can take to any one servicer. So I think we play a fairly good level of defense in that regard.

Thank you.

There appear to be no additional questions at this time. I would now like to turn the call over to Ms. Sabra Purtill for any closing remarks.

Thank you, and thank you all for joining us today. We certainly appreciate your interest in Assured Guaranty and look forward to talking to you in the future. Just wanted to note that a replay of this call will be available on our website as well as by telephone at 888-286-8010 in the U.S. and at 617-801-6888 for international callers. The pass code is 369-163-68. Certainly if you have any additional questions or information needs, please do not hesitate to contact me or my staff in New York at 212-408-6044. Thank you again and have a good day.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.