Assured Guaranty Ltd (AGO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Assured Guaranty earnings conference call. My name is Torlesha, 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. Please proceed.

Thank you, Torlesha, and thank you all for joining us today for Assured Guaranty's first quarter 2007 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 Limited, 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 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 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 additional information on factors that could effect our forward-looking statements.

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.

2007 has gotten off to a good start, as demonstrated by our financial results and by our continued success in our production activity. Our financial results were solid with strong production growth and good increases in net earned premiums and investment income, which Bob will discuss later.

In the quarter, we also benefited from favorable loss experience due to loss recoveries on older reinsurance transactions, which were underwritten prior to the IPO. We continued to successfully execute on each of our critical objectives this quarter, as we have since the IPO.

Our direct business continues to develop nicely, despite the challenges we face in the U.S. public finance and flow ABS businesses due to our split rating. PVP production in the direct segment was up 101% as we continued to gain traction in our core markets and we look for new opportunities.

For example, we now have several transactions under review for the Asia-Pacific region, reflective of one of our 2007 goals of growing our international business. We also recently announced the hiring of our new group head for our consumer and mortgage backed securities team, who has also added additional members to his group.

These initiatives should help us continue the expansion of our financial guarantee direct franchise in these two strategic segments of the market for Assured Guaranty.

Our reinsurance also did well in the quarter with a 15% increase in production. We further expanded our market presence in reinsurance, having recently signed a treaty with XLFA, and also renewed our treaty with FSA for the 2007 year.

The facultative reinsurance business continues to be the growth driver for this segment and represented about two-thirds of total production in the quarter. Although the facultative business can increase quarterly PVP volatility due to the timing of large deals, it allows us to better control underwriting and pricing decisions.

Our commitment to strict underwriting standards was once again demonstrated in the quarter. Our total net par outstanding, which has grown 30% over the last 12 months, has maintained its average rating of Double A minus, with over 46% of all outstanding par rated Triple A. Of the $10.4 billion in gross par written in the quarter, 72% was rated Triple A.

Our credit experience was also very favorable in the quarter, with favorable loss activity on some older aircraft-related transactions and continued positive development for both our below investment grade and closely monitored list of credits. Both the BIG and the CMC list decreased in the quarter and are now at the lowest level on a dollar and a percentage of par outstanding basis since our IPO.

We also continued to make progress on the ratings front with Moody's announcement in March that it's placed the ratings of Assured Guaranty Corp. and Assured Guaranty U.K. Limited under review for possible upgrade. While Moody's has not formally announced a timeline for their review, we have met with them to discuss the remaining comments, and we anticipate that their review and rating conclusions will be completed in the near-term.

I'm sure most of you understand the importance of the Triple A rating for the advancement of our company. I can assure you that achieving this rating is crucial to our sustainable growth of the direct franchise, particularly in U.S. public finance, flow ABS and international infrastructure markets.

In addition to our core goals that I just discussed, we are also focused in 2007 on increasing profitability across all business segments by choosing the right risk and markets and controlling our expenses. We constantly look for further ways to improve our returns to shareholders and are proactive in analyzing capital utilization and deployment.

Changes in market conditions in the quarter varied by market sector. Spreads widened considerably in the subprime market, additionally, we have experienced the firming of premium rates across most ABS sectors. Credit spreads in the U.S. public, finance, and international markets remain compressed.

We are seeing increased opportunities in the ABS market, notably in the residential mortgage sector, and we wrote approximately $1 billion of subprime mortgage business in the first quarter. This business was all rated Triple A and is well diversified by issuer.

We remained focused on identifying opportunities that provide attractive returns as market conditions change. We continue to find attractive areas to put our capital to work despite the challenging spread environment. We believe that our business and corporate structure provides benefits to shareholders that many of our competitors cannot replicate.

Looking forward, our second quarter pipeline is developing nicely and we hope to report additional progress on achieving our 2007 strategic goals when we report second quarter results.

Now I'd like to turn the call over to our CFO, Bob Mills, who will discuss the financial results of the quarter in more detail.

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 division and results of operations. I will begin this quarter with a few brief remarks about accounting principles applicable to the financial guaranty industry.

The Financial Accounting Standards, or the FASB, has issued an exposure draft regarding changes in the application of accounting principles related to premium income recognition and loss reserves. If this exposure draft is adopted as presented, there would be significant changes to the existing accounting principles applied in the areas addressed.

Assured Guaranty is participating with AFGI, the Association of Financial Guaranty Insurers, to prepare and submit a comment letter relative to changes we believe are necessary to be made to the exposure draft prior to the adoption by the FASB. I urge interested users of financial guarantee financial statements to review the FASB exposure draft and submit comments to the FASB during the comment period.

Now, turning to our performance for the quarter. Net income for the first quarter of 2007 was $39 million, or $0.57 per diluted share compared to $34.9 million, or $0.47 per diluted share for the first quarter of 2006.

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 financial instruments, was $46.1 million, or $0.67 per diluted share compared to $35.6 million, or $0.48 per diluted share for the first quarter of 2006.

Let's look at the results in a bit more detail. PVP, or the present value of gross written premiums, totaled $106.7 million for the quarter compared to $61.8 million for the first quarter of 2006. PVP for the direct segment totaled $83.7 million, an increase of 101% from the first quarter 2006 amount of $41.6 million.

Production in the direct segment included strong performance across all sectors of the business, as exhibited by an increase in transaction volume from 26 in the first quarter of 2006 to 51 in the current quarter. PVP for the reinsurance segment totaled $23.1 million, an increase of 15% from the first quarter 2006 amount of $20.1 million.

Facultative business was again a significant contributor during the quarter and was influenced by four large transactions. Treaty cessions declined quarter-over-quarter due largely to the cancellation of the final Ambac treaty in 2006.

Net earned premium for the quarter totaled $53.9 million, up 12% from the first quarter 2006 amount of $48.1 million. For the financial guaranty direct segment, net earned premiums totaled $28.9 million for the quarter compared to $20.7 million in the first quarter of 2006, an increase of 40% in the current quarter, which is reflective of continued expansion in our direct book of business.

Net earned premiums for the reinsurance segment were $21.9 million, a decrease of 6% from the first quarter 2006 amount of $23.3 million. This amount is, for the most part, in line with our expectations and will vary based on refundings.

Net earned premiums for the mortgage segment were $3.1 million, down 26% compared with the first quarter 2006 amount of $4.2 million. The decrease reflects the run-off of the business from this segment. There was no new business written during the quarter as was our expectation.

Loss experience continued to be favorable in the quarter. Loss and loss adjustment expenses incurred totaled a benefit of $4.7 million for the quarter compared to a $.4 million benefit in the first quarter of 2006. The net recovery for the first quarter of 2007 was principally in the reinsurance segment related to aircraft transactions which were booked primarily in the U.S. and subject to tax.

As we previously stated, relative to subprime RMBS exposure, we've been conservative in writing risk in this asset class for quite some time. Some older season subprime credits have been internally downgraded, but there was no significant impact on our reserves relative to these credits during the quarter. We remain comfortable with our subprime and prime RMBS exposures.

The investment portfolio increased $23 million from a balance as of December 31, 2006. The result of normal operating cash flow during the quarter.

Yields increased approximately 20 basis points comparing the first quarters of 2007 and 2006, with pre-tax book yield of 5.1% at the end of the current quarter, while the duration remained relatively flat at 4.1 years.

There's been no significant change in the investment portfolio asset allocation during the quarter and the average credit quality of the portfolio remains at the Triple A level. There was also no significant change in the market value of the investment portfolio during the quarter.

Operating expenses increased by $3.5 million, or 20%, in the first quarter of 2007 compared to the first quarter of 2006. The increase was attributable to a number of factors including expanded headcounts since the end of the first quarter of 2006, as well as expenses related to share grants vesting over a four-year cycle and share-based grants to retirement eligible employees which are recorded on an accelerated basis in accordance with FASB 123R.

The level of all other operating expenses remain relatively flat in the first quarter of 2007 and continues to be in line with expectations.

The effective tax rate on operating results for the quarter was 8.5%. This reflects a $4.1 million benefit due to the issuance of new regulations by the IRS in March, associated with consolidated losses and the impact of those regulations on pre-IPO transactions. On an ongoing basis for the balance of 2007, the quarterly effective tax rate will more closely approximate 15%.

During the quarter we had after-tax unrealized losses on derivatives of $6.9 million. This was attributable to spreads widening.

The segment of the portfolio most significantly impacted was, not surprisingly, the subprime RMBS book which accounted for approximately 80% of this amount. The net asset on the balance sheet attributable to the market to market of derivatives was $36.2 million at March 31, 2007.

Our book value per share was $25.04 per share, increased from the $22.67 book value per share at the end of the first quarter of 2006. Adjusted book value, which reflects the book value and adds the embedded value from after-tax net present value of estimated future installment premiums in force and after-tax net unearned premium reserves (net of DAC), was $37.34 per share at quarter end, an increase of 20% from $31.15 per share at the end of the first quarter of 2006.

The Company's operating ROE in the quarter, which is calculated by dividing our annualized quarterly operating income by average shareholders' equity, excluding accumulated other comprehensive income, was 11.3%.

Lastly, I would like to provide an update on our direct market share information based on percentage of par written. Our actual direct market share for the fourth quarter of 2006 was 7.4%. I had previously estimated this amount to be in excess of 7%.

For the first quarter of 2007, since not everyone has announced results yet, I'm again only able to estimate the amount. I believe our market share will be approximately 6% for the first quarter. The first quarter of 2007 marks the sixth consecutive quarter exceeding the 5% threshold established by Moody's moving toward the final upgrade to Triple A.

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

Thank you. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Geoffrey Dunn with KBW. Please proceed.

Thank you. Good morning.

It sounds like the Moody's upgrade is finally getting very close. Could you just update us in your various segments from a high level where you're trading differential currently stands and what impact on that you think the upgrade will have?

Okay. Well hopefully from your lips to God's ears on the timing of this thing.

In terms of trading differential, Geoff, obviously we continue to see a narrowing and if you'd remember in the old days, public finance used to be on the fixed rate side anywhere between, say, 15 and 25 and now we're down to a 7 to 10 type of range, and obviously as we've talked before, that trading differential is two pieces, right? It's the difference in rating as well as the difference in liquidity or the amount of paper in the market, so a Moody's upgrade will do a lot for the difference in rating but you still got liquidity issues that will take some time to absorb.

On the ABS side, typically we're in a 2 to 4 range in terms of pricing differential, and then it would really vary as well in terms of deal structure, tenor, and markets and investors and some places we trade right on top. So I'd say to use the public finance of that kind of 7 to 10 and the structured area of anywhere between 2 to 4 or 2 to 5 would make a lot of sense.

Okay.

And we've seen other companies come in, new Triple A entrants where it probably takes them 8 or 10 years to get rid of that differential. You're in a much different position given that you've been around a long time and your name's in the market.

How quickly, I think probably the 30-year fixed muni paper's going to be the toughest thing to eliminate. What do you think from a time frame perspective it will take to eliminate your differential completely?

Well it's hard for us to estimate time. The only thing we could say is A, the market today is a lot more transparent. We are extremely transparent as a company.

There's a hell of a lot more volume activity out there than there has been in the past when you're quoting the kind of old days how people got equated in trading value, so we obviously anticipate it to be a lot shorter time frame. We've done a lot foundation work in terms of reaching out to investors, to issuers, to make sure they understand the story, understand the name. We've been put on a lot of approved lists, we've got a lot of pending approvals relative to the upgrade.

So with that and with the increase in volume, we think we will be able to make pretty good progress, and as you hopefully are aware too, in some markets and some structures, we trade right on top of some of the newer Triple A's today. So I think we'll have better experience than it's been had in the past but I'm a little hesitant to give you an exact time frame.

Okay. Thank you.

You're welcome.

Our next question comes from the line Darin Arita with Deutsche Bank. Please proceed.

Hi. Good morning.

Good morning, Darin.

Hi.

Can you give us a sense of how your public finance strategy will change assuming you get the Moody's Triple A rating in terms of sectors that you would start to look at and also size of deals?

Good question. Well, there's probably three components to a change in our public finance approach relative to an upgrade. Two of them are internal and then one's external.

On the internal side, obviously, we spent a lot of the last, say, 15 months building a new front end system for our public finance underwriting operation so that we will be able to handle efficiently kind of a more influx of opportunities and paper flow and be able to handle that additional volume.

The second thing we've had to do internally is to really segment our underwriting or credit approval process because as you can appreciate, in the segment of the market that would open up to us relative to an upgrade is more in the general obligation, general government structures to which we don't have the capability or pricing power to compete in today. And they, of course, take a different underwriting process than what we currently have done in terms of private higher ed and healthcare.

So you've got to really hone down the underwriting process and go to a different set of committees to make that approval process on those, what I'll call standard deals, so they're highly rated issuers, extremely stable revenue stream supporting the funding, great historical performance record. They will take a different track in terms of the approval process to make that more efficient. So those are the two internal things.

So then we go to the external side and really what we're looking at is those general obligation type structures, how we're supported by dedicated revenues in the highly rated areas. There's not so much an issue of limit. I mean, limit will play, but in terms of average limit we have not done badly in what the market is currently providing.

But in that case, it's us getting out both from the investor side and making sure we get on all of those remaining approval lists for the last Triple A, as well as touching the markets that are involved in the actual origination. So that's the consultants and the bankers, a regional strategy which we've always had as part of our, you know, 'look where the other guys aren't' type of approach, so all those things kind of turn up a huge notch.

Obviously, we'll be looking to compete more or be more of a factor in the competitive bid process. We'll be looking at more highly rated deals where we'll have the ability to compete because of the tightening of our pricing differential, and yes, there will be an impact on larger deals but I don't expect that to be significant.

Okay. Great.

And I guess with the strong new business production over the past four quarters it seems that the Company has gone from generating excess capital to utilizing its excess capital. And can you give us a sense of the size of the excess capital and the balance sheet and how you're thinking about the Company's capital position over the next 12 to 24 months?

Sure. If I tried to give you the size of the excess capital, I'd have to qualify my statement on at least four different basis, because addition to how we look at it from a risk management enterprise, risk management point of view internally in the Company, we obviously have the three masters being Moody's, Fitch and S&P who have totally different capital models and in some cases look at the Company totally differently.

One looks at us on a consolidated basis, the other one kind of breaks down the two organizations, and one breaks them down but then says they're highly correlated or related. So suffice to say we've been extremely successful and kind of a victim of our own success to a certain extent in utilizing the Bermuda company to A, centralize our reinsurance there. And what you guys don't see on a GAAP basis is the internal reinsurance that also goes down there to utilize Bermuda capital.

So Bermuda, today, is highly efficient and generates a reasonably competitive return relative to the rest of the monolines in the marketplace. We still have excess capital in the direct company and obviously, we now consider based on the continued growth that we have achieved, are starting to utilize that but still have excess as of today, and we will continue to monitor that as we go through the remainder of this year as well as looking towards next year.

But so we're still over capitalized which impairs our returns on the domestic side, very efficiently using capital in the Bermuda. In total, we're fine on a capital basis but we still have to look forward to A, how these models affect different segments of the business, and assess our capital position kind of year-over-year.

Okay. Great. Thank you.

You're welcome.

And our next question comes from the line of Tamara Kravec with Banc of America Securities. Please proceed.

Thank you. Good morning.

Good morning.

Could you talk about the residential mortgage backed business that you wrote in the quarter? It seems like the market's still kind of, the spreads have widened but your peers are remaining a little bit farther away from the market than you are and you wrote a considerable amount in the first quarter, so could you talk about what you're seeing there, how you're feeling about the pricing and what really types of transactions you wrote in the quarter? Thanks.

Sure. As we've said, we've been very concerned over the subprime mortgage now. This is our third year and we've been highly conservative in our approach to that market and even in the quarter as you refer to the business written. We wrote a couple of prime deals so we'll put them aside for the moment and a large, or a large set of subprime deals but all at the Triple A level.

We obviously look at the Triple A level where there has been an expansion or a strengthening of pricing as a real good market opportunity for us where we think we're getting paid a very reasonable, beneficial, matter of fact return relative to what we still consider an out of risk transaction. These were well diversified by issuer, Triple A rated structures across a diverse pool of residential mortgages.

On the prime side, obviously we still consider the prime, and in this case it was mortgages and HELOCs, and once again, very well diversified pool, (highly) well structured, proper what I'll call terms and conditions, and good pricing that we also executed that in the quarter.

Great. Thank you.

Thank you.

And our next question comes from the line of Gary Ransom with Fox-Pitt Kelton. Please proceed.

Yes. Good morning. I had a couple of numbers questions.

One was on the tax benefit. If I take that out of the taxes, the tax rate looks high. I may have heard the answer, but --

That is associated, when I talked in my remarks about the losses, I noted that the recovery, net recovery in the airline transactions was principally taxable.

Right. Okay. There's nothing else other than that then?

No, no. I mean, if you peel those things out, your effective rate is much more in line with the numbers we've had in the past, more than 12 to 13%.

Okay.

And then on the expense side where you're talking about the accelerated vesting, is there some component of that in the quarter that's one-time or can you help quantify what --

It becomes seasonal, because under 123R for the employees that are retiree eligible, even though they aren't retiring, when there is a grant, and our grants happen in the first quarter only, those are expensed at that point in time on an accelerated basis. So there is a first quarter seasonality and it's roughly $1 million.

There's two issues in there, Gary, just so you understand. We have the accelerated recognition of grants to retiree eligible employees. In addition, as we are still a new public company, what you're still getting of the effect is the laddering of the recognition of expense relative to awards granted over the last four years.

So the '08 year, or the '07 year, rather, being the fourth year in a four year vesting schedule. So think of it in '07 we still have remnants of '04, '05, '06, and now the new '07, this will be the last year that you've added that last rung to the ladder.

So in '08, we'll always have now four years contributing to the expense, and each year prior in '04 we had one year in '05 we had two years and '03 we had six years and now '07 we now have the fourth year of a four-year vesting schedule. So between the retiree eligible and this laddering effect, that's why you're getting the significant increase across that expense line.

Okay. That's very helpful. Thank you very much.

You're welcome.

And our next question comes from the line of Heather Hunt with Citigroup. Please proceed.

Thank you and good morning.

Good morning.

Congratulations on good production again.

I just wondered, as you are de-emphasizing reinsurance and mortgage reinsurance, or maybe just not emphasizing reinsurance as much, and the premiums are coming down, do you get sort of a capital release benefit from that?

No. A couple things. One, we're not de-emphasizing reinsurance, thank God, and we just had the guy that runs reinsurance faint at the table, so let's revive him for a couple of minutes. I think he just flatlined his monitor.

So A, we think reinsurance is still an attractive business. We continue to evaluate that based on the competitive environment and we still think we have a great opportunity and we see that demonstrated by the continued growth in that franchise and activity.

Two, remember on a GAAP basis you do not see the AGC cession, domestic company to AG Re, which makes it highly efficient. So there will be no capital release. To the extent that third party business would be impacted we would increase first party business.

Okay.

And so this year, your earned premiums are kind of trending down and it's a difficult comparison from the strong '06. Do you see that sort of leveling out and reversing and starting to come back up or is it going to sort of stay in the same?

You're talking in the reinsurance segment now?

Yes, reinsurance and premiums.

Well, the reinsurance segment earned premium is a little bit of a challenge because you've got to really look at the mix of the business. And if you go back into their by-line or their segment information, there used to be a heavier component of structured finance in the earnings stream of that business.

And although par's been increasing, so has unearned premium and the present value of future installment premiums which says that is the embedded earnings. What we have found now as you shift more to an international infrastructure composition, you're extending out the maturity so therefore, you're extending out your earnings time frame which then reduces the earnings in a given quarter but extends it out over more periods.

So we're addressing, or trying to come up with a good quantification of what that extension and tenure is doing to the earned premium on the reinsurance side.

I think in the short-term for the year, it's going to be substantially flat, but because of what Dominic says, clearly, it's not going to be a steady decline. It's going to be flat to growing.

Okay.

Just on the FASB proposed changes, I know they're very controversial with respect to the premium recognition and the industry is hoping to maybe redirect that. Can you just comment on if it goes through right now, sort of what you anticipate might be the affect? I know it's not an optimal one.

We've spent a lot of time studying it, and needless to say, at this point in time we're spending a great deal of time in preparing our commentary back to the FASB relative to what we think the appropriate solution is.

At this point in time, our number one, as it's presented, there's no guaranty that it's going to go through that way. And number two, it's reasonably complex and we have not quantified the amount of the impact that it would have, even though it really doesn't change the economics of the business.

Okay. Thank you.

Thank you.

And our next question comes from the line of Matthew Roswell with Stifel Nicolaus. Please proceed.

Yes, it's Stifel Nicolaus. Congratulations on a great quarter. I think it looks really good, and also congratulations on the Moody's, I guess positive watch is the best way to phrase it. Hopefully we'll get that Triple A here soon.

Thank you.

Wanted to follow-up on Darin's question and on the Triple A. To take care of the liquidity piece in terms of the trading differential, would you all have to raise additional capital to sort of hit your public finance plans? I know it's early for the question.

No, it's not early but remember the liquidity piece obviously is related to us getting our insured paper out there so that obviously would indicate a tick up in volume. The funny thing is for capital purposes, public finance typically is capital accretive, because you get the full credit of the unearned premium reserve as well as when you look at the model losses that all the rating agencies use in evaluating the strength of your capital position, obviously the public finance, which is historically positive experience, has a very low capital loss charge against a very high capital credit, it winds up being capital accretive. So we could write as much of that stuff as we like.

Not all rating agencies treat it the same, but in principle, it's a positive thing. Obviously, some rating agencies have it a little bit different but then they have make ups in other areas that are beneficial but in principle, the public finance increase will be a good thing for capital not a bad thing.

So we really are just waiting for the Triple A and then you can go almost go, I don't want to say full bore, but almost full bore into the public finance space?

Well, whatever. You still got to come out with pricing differential, you still got to get out into the market and start to funnel those opportunities. We will go as full bore as we possibly can, obviously we like to see the market cooperate with us at that time.

And as well as pricing. Any move in our pricing in that market would be extremely beneficial as well.

Sure. That's very good news. Thanks.

And our next question comes from the line of Rob Ryan with Merrill Lynch. Please proceed.

Good morning.

Hi, Rob.

Would you give us the public finance versus structured finance deal counts for the quarter?

Sure. Public finance, first quarter '07, 18 compared to 10 in '06 and structured being U.S. 24 in the current year versus 13 in the prior year, and the balance is the international piece.

Okay.

And speaking of international, you mentioned Asia-Pacific. When you think about your strategy as a whole, what kind of deal type, not just necessarily the Asia-Pacific, but what are you seeing generally in the market these days in locations where you're currently active or where you might become active?

Well, by and large, we're precluded from what we'll call the public finance markets, both domestically and international, to a great extent. So where do we look for opportunities in the structured credit, asset-backed market and in certain private transactions? Obviously, a (inaudible) structure, RMBS, CMBS, and some consumer and commercial asset types.

We look at the international expansion, we have a couple of rules. One, we don't go where nobody else is. We're not going to be the market leader because we don't think we have that kind of expertise.

However, based on the continued recognition of the name and the amount of positive feedback we get from execution, we are now being asked to look at other opportunities and as we looked at international being a critical element of our strategy, including the profitability side, we looked at the world beyond Europe and said okay, where do we want to go first and it's really Australia.

We did a good analysis of the Australian marketplace, hired an individual, very highly connected, recognized leader in that market to lead our charge into that area, and of course, with that as I mentioned in my early comments, we're seeing a lot of opportunity and mostly in those classes of the RMBS, CMBS, and other structured credit environments.

Okay.

And just one more thing on the FASB proposals. Regardless of specifics of what it would do to the financial statements, do you have an opinion on, if indeed all three of the changes that are being proposed actually went through, would it at all be realistic to expect a January 1, 2008 implementation?

Yes, well, personal opinion, I highly doubt that all of the exposure draft will be adopted as laid out, certainly some pieces will.

But as far as January 1, '08 adoption, I think that is quite unrealistic and I don't think, because of the delay of the issuance of the exposure draft, I don't even think the FASB had in mind that type of time frame. When it was originally thought that the exposure draft was going to be issued a lot earlier, maybe it made some sense, but the strains that that would put on the systems, all of the members of the industry would be really quite significant.

Rob, as you know, the working out of the present valuing of the installment premiums using a discount rate related to the issuer in and of itself is a programming nightmare.

Oh, yes, I have no doubt and because the implementation typically would be for a full year, if it's not 2008, then I guess we're not looking at anything until 2009.

That would be our expectation.

We certainly would hope so, but I guess I'm much, even much more hopeful that there will be changes more in line with what the industry thinks is most appropriate.

And if the change to industry practice was limited to loss reserving, would that be more realistic to perhaps expect in 2008?

Absolutely. That would not be a problem, Rob.

Remember, we take a very granular look at the losses as it is, so we look at every individual exposure in the portfolio, so for us, it's not much of a change at all.

That would be very easy, Rob.

Okay. Great. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question comes as a follow-up question from Heather Hunt with Citigroup. Please proceed.

Thank you.

Just on your reserve releases, you continue to have sort of good success there and I know you've been very cautious about expecting very much in the future, but do you have any comments on sort of what you expect for 2007 and maybe a little bit in 2008? Are there any pending recoveries that you're anticipating or do you think it will kind of revert back?

No.

We have a couple of items out there, Heather, that you have to think about, right? There's been a lot of activity related to a loss we've talked about at length called Euro Tunnel and as that works its way through the restructuring process would have an implication to us on potential future recoveries.

We also, as you know, reserve on a portfolio basis credits that we have on our closely monitored list. There are a couple of large items out there today and remember, as soon as you get on our list, it triggers a higher portfolio reserve that could have changes during the year that would also kind of force credit to be recognized, however, offsetting that is a very strongly growing portfolio,

And until the FASB issues its new pronouncement, we then take a different look at portfolio reserves, that would cause an uptick. So if you look at the closely monitored list and its impact against our growth, maybe that's a wash. You still have that Euro Tunnel credit as being a big number that we've obviously held reserves for that could have an impact on further releases in 2007.

Okay. Great. Thank you.

And there appears to be no additional questions at this time. I would now like to turn the call back over to Ms. Sabra Purtill for any final remarks.

Thank you and many thanks to all of you for joining us today. We certainly appreciate your interest in Assured Guaranty and look forward to any additional questions that you may have on the Company.

I would note that a replay of this call will be available on our Web site as well as by telephone at 888-286-8010 in the U.S. and 617-801-6888 for international callers. The passcode for that 92524971.

If you have any additional questions, please feel free to contact me or Chris McNamee in our New York office. Thanks again and have a good day.

This now concludes your presentation. You may now disconnect and have a wonderful day.