Assured Guaranty Ltd (AGO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q4 2007 Assured Guaranty conference call. My name is Lisa and I will be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Miss Sabra Purtill, Managing Director of Investor Relations. Please proceed.

Thank you, Lisa and thank you all for joining us today for Assured Guaranty's fourth quarter, 2007, earnings conference call. As most of you are aware, our earnings press release and financial supplement were released yesterday evening after the market closed and these materials and other information on Assured are posted on the investor information section of our website. On today's call, Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd., and Bob Mills, Chief Financial Officer, will provide a brief overview of the quarter. After their remarks the operator will poll the audience for question.

Please note that this call is being held for the benefit of analysts and investors and Assured Guaranty. And, while members of the media are welcome to listen, we will kindly request them to confirm any quotations or request clarifications on comments made in the call prior to publishing details from this call. I would also like to remind everyone that management's comments or responses to questions may contain forward-looking statements such as statements relating to our business outlook, growth prospects, market conditions, credit spreads, pricing and other items that are subject to change. Our future results may differ materially from these statements. In addition, our outlook on these items may change. For those listening on the webcast, please keep in mind that more recent information on Assured may be available in later webcasts, press releases or SEC filings. Again, please refer to the investor information section of our website for the most current financial information on Assured and please also refer to our most recent SEC filings for more information on factors that could affect our forward-looking statements. Thank you and I now like to turn the call over to Dominic.

Thank you, Sabra, and thanks to all of you on the call and web cast for your interest in Assured. 2007 was quite an interesting year. On the one hand, 2007 was the year of significant accomplishments for Assured Guaranty. In July we finally achieved our third AAA stable rating from Moody's equaling our ratings from S&P and Fitch. I am proud to say we hold those same AAA stable ratings from all three agencies today as a testament to our strict underwriting discipline, highly rated portfolio and strong capital base. We also achieved record production in 2007 for both our direct and reinsurance operations which was quite an accomplishment.

On the other hand, 2007 was a year of challenges. Our industry and its impeccable record of consistent earnings and unquestionable financial strength has been threatened by the continued deterioration of the performance of securities collateralized by residential mortgages. As many of you know, we did not underwrite CDOs of ABS. This was not due to luck, the lack of a AAA from Moodys or losing bids on price. It resulted from our consistent focus on our five strategic goals of which strict underwriting standards and the maintenance of our financial strength ratings are key and have always been identified as the life blood of our company.

The credit market turmoil caused by the (inaudible) of ABS asset class will continue until residential losses abate and the industry's capital position and ultimate ratings stabilize. Which hopefully will have happen sometime this year. One additional concern is the economy which can have a further negative influence on credit experience. We factor a deteriorating economy into all of our new business and surveillance underwriting models in order to evaluate the future performance of our deals under strict economic stress.

On a more positive note from today's uncertainty., demand for our financial guarantees have never been stronger, proving the value of our product to investors and the need for the financial guarantee industry overall. As one of only two AAA stable rated companies today, Assured Guaranty Corp is clearly benefiting from the retiering of investor demand for financial guarantees. AG Ray, long the largest financial reinsurance company, transacted the largest facilitative deal in the industry's history in the fourth quarter and is uniquely positioned to benefit from the continuing developments in the market, as one of only two financial guarantee reinsurers not currently under credit watch for downgrade. The market continues to recognize the Assured story is different and our prospects have never been better.

In regards to our fourth quarter results, I would like to make it clear that our reported results are consistent with our preannouncement. Our losses incurred, closely monitored credits, production in credit experiences reported yesterday evening did not change what we had previously reported on January 24th. We disclosed at that time that our earnings results for the quarter were negatively affected by our internal downgrades of some heloc exposures. Exposure I would note that have yet to be downgraded by the rating agencies reflective of our conservative view and proactive approach. We have been talking about the problems in the heloc market for quite sometime and unfortunately delinquency levels still remain high in two transactions in particular, the Countrywide 2005 "J" and 2007 "D" deals.

As we have stated in the past, it is not easy to confirm if we have a loss or what amount that loss could be. However, we continue to believe that the possibility of a significant after tax loss which we defined as $100 million or more on our heloc exposures is extremely remote. Nonetheless, the methodology of our portfolio reserving model, which is unique in the industry, does require us to post portfolio reserves appropriately as we down grade exposures. In total, we posted $20.1 million in loss reserve expenses in the quarter for our heloc book. $17.6 million of this was strictly due to the down grades of the $1.8 billion of heloc exposures and the placing of these exposures on our CMC list. It's not certain if we will have unreimbursed net claims on these deals given the substantial protections provided by the terms and conditions. But, we did make a $3.4 million cash payment in January on the 2005 "J" deal.

As we have discussed with you in the past, these transactions contain many loss mitigating terms and conditions which could allow us to recapture this and any future payments. These mitigants include the trapping of all excess spread and the benefit of the rapper amortization trigger once it is breached. For the 2005 "J" transaction, for instance, excess spread is 250 basis points. The other area that I would like to discuss is our new business pipeline. Clearly we were presented with significant opportunities in the current environment given our AAA stable position. Our public finance business is growing by multiples with significantly improved pricing and an expansion into new markets. Our structured finance business including ABS and NBS, as well as structured credit, are seeing a high level of opportunity for secondary market guarantees as well as the opportunity to provide quotes on new deals previously awarded to the other bond insurers who have fallen out of favor. The manner remains strong for international infrastructure transactions where pricing is also improving.

The overall result is that we expect to see improving conditions in market share in all of our markets in 2008. This will be accomplished in spite of an expected downturn in the volume of par insured in the new issue public and structured finance markets. Turning to reinsurance. We have also received a lot of questions about what we see for near term business opportunities. There is a lot of uncertainty about new facultative business flows as many of our facultative customers may not have significant new business opportunities. Fortunately, FSA, our largest reinsurance client, is experiencing an unparalleled market opportunity as well, which could enhance treaty sessions from them. In January, FSA achieved a 62% market share in U.S. insured public finance. We believe there will also be additional opportunities to bid on portfolio transactions for some of the other financial guarantee companies looking for further capital relief. Hence, new business volumes will be difficult to predict, but from a earnings perspective this segment is well positioned for strong earnings growth in 2008 given the volume of new business written in 2007.

Summing up the market opportunities, we currently have the strongest new business pipeline in the history of the company with more than three times as much par and nearly four times as much PVP in the pipeline as we had a year ago which was also a record at that time. As always, we continue remain exceptionally vigilant about credit and capital management. We have been consistent about this since our IPO, and you should have confidence we will continue to be so. We analyze each deal based on current economic projections and not simply past performance. We also continue to analyze our portfolio looking for any potential areas of weakness and run sensitivities for different economic and market scenarios. We are look-- constantly looking to provide investors with greater transparency on areas where we do get questions. For instance, in this quarter we not only added information about the performance of our overall U.S. RMBS book, but gave you more performance data on our pooled corporate business which is the largest asset class we have written since our IPO.

Our pooled corporate book consists of corporate obligations that are well diversified by industry, region and size and have low correlation to each other. Our exposure is protected by significant over collateralization levels averaging 34.8% as of December 31, 2007, based on the most recent trusty reports. Delinquencies or defaults to date remain benign, although we expect them to increase in a recessionary environment and we remain very comfortable with their performance to date and projections for the future. Similarly we have our surveilled our CMBS exposure including the CDOs and mezzanine CMBS exposure that we wrote back in 2001 to 2003. There have been some stress in this asset class although mostly due to liquidity and the dependence on short term borrowings by some developers, rather than the deterioration of lending standards or terms and conditions that we have seen in residential RMBS. To date the over collateralization in these deals and our high attachment points are more than sufficient to protect our exposures.

Before turning the call to Bob Mills, I would like toe discuss briefly the long-term outlook for our industry. Clearly the headlines are pretty dramatic right now and could easily cause you to question the long-term demand for our product. However, we think the uncertainty is really focused on the mistakes that have been made on one asset class not the overall need or demand for our product. Credit derivatives are not the problem. They just help support the headlines. Structured finance isn't the problem but the CDOs of ABS are. If it weren't for the CDOs of ABS written in credit derivative form, the overall industry would not be as debated as it is today. In times of credit turmoil, investors typically want more credit insurance not less.

Today we see significant demand for our product. The infrastructure needs of this country in the world are not going away and most financial institutions have long avoided 20 and 30 year uninsured credit exposures. The financings of mortgages, credit cards, auto loans have been secured attached more than 20 years without significant losses. The losses arising from the current crisis are not due to the securitization structures and techniques themselves, but to the abysmal deterioration in underwriting standards for residential debt that has caused delinquencies and foreclosures far in excess of any real estate downturn since the great depression. In this environment, we believe investor demand for credit protection from Assured will continue to be strong supported by our continuing commitment to strict underwriting standards, the maintenance of our financial strength ratings and the highest standards of disclosure and transparency. I'd like to now turn the call over to our CFO, Bob Mills who will discuss the financial results for the quarter in more detail.

Thanks Dominic and good morning to everyone on the call. 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. Turning now to our performance for the quarter. Operating income 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 for the fourth quarter 2007 was $37 million or $0.53 per diluted share compared to $41.5 million or $0.56 per diluted share for the fourth quarter of 2006. Assured had a net loss for the fourth quarter of 2007 of $260.1 million, or $3.77 per diluted share compared to net income of $42.4 million or $0.58 per diluted share for the fourth quarter of 2006.

Let's look at the results for the quarter in some further detail. PVP, or present value of gross written premiums, totaled $477 million for the quarter, a company record. And up 311% compared to $116 million for the fourth quarter of 2006. PVP for the direct segment was $156.4 million for the quarter, which was also a record for the company. This is an increase of 121% from the fourth quarter of 2006 reflecting the company's strong increase in market share in the U.S. public finance market and significant transaction levels in both the U.S. mortgage backed securities and structured finance markets. PVP for the reinsurance segment totaled another record amount of $320.7 million, an increase of 610% from the fourth quarter 2006 amount of $45.2 million. This was principally due to the facultative reinsurance transaction with Amback Assurance Corporation that was announced in December of 2007. Net earned premium for the quarter totaled $67.6 million, up 16% from the fourth quarter 2006 amount of $58.5 million. For the full year of 2007 earned premium grew at the rate of 12%.

For 2008 I expect this growth rate to increase to 25% to 30%, reflecting the growth of our direct business and the impact of the December reinsurance transaction. The financial guarantee segment net earned premiums totaled $36.7 million for the quarter compared to $26 million for the fourth quarter of 2006. An increase of 41% from the prior year which is reflective of the continued expansion of our direct book of business. Net earned premiums for the reinsurance segment were $21.7 million, a decrease of 4% from the fourth quarter 2006 amount of $22.6 million. The decrease was the result of limited growth in the segments net par outstanding, since year end 2006, prior to the fourth quarter 2007 facultative reinsurance transaction with Amback. This transaction included $29.1 billion of net par outstanding, but contributed only. $1 million of earned premium in the quarter due to the closing of the transaction on December 13th of 2007.

Net earned premium for the mortgage segment were $9.2 million compared to $9.9 million in the fourth quarter of 2006 with both quarters reflecting communtations. Decrease reflects the reduction of enforce business in this segment which has not underwritten a new contract since the first quarter of 2005. As the mortgage guarantee segment business continues to run off, earned premium will decrease significantly in 2008. Loss and loss adjustment expenses incurred total $18.1 million for the quarter compared to a $.7 million benefit for the fourth quarter of 2006. This increase was primarily the result of portfolio reserve increases on direct segment heloc exposures due to internal rating downgrades on $1.8 billion of heloc exposures. These losses were previously announced on January 24th of 2008. Loss and loss adjustment expenses attributable to U.S. helocs totaled $20.1 million in the fourth quarter 2007 and consisted of $17.6 million in portfolio loss reserves primarily due to internal ratings downgrades in the direct segment and $2.5 million in case loss reserves associated with reinsurance heloc exposures.

The investment portfolio increased $674.8 million from the balance as of December 31, 2006, which was largely the result of strong operating cash flow, the proceeds received from the aforementioned Amback reinsurance transaction and proceeds from the issuance of common shares in December, 2007. Yields were down slightly comparing the fourth quarters of 2007 and 2006 with a pre-tax book yield of 5.0% at the end of the current quarter while the duration remain flat at 3.9 years and the average credit quality for the portfolio remained at the AAA level. Please note that while our portfolio does include municipal exposures that are wrapped by other mono lines, the underlying ratings of those exposures are A-plus and would still meet our investing guidelines without the benefit of the wraps. In addition our portfolio does not contain any CDOs of ABS or any meaningful exposures in the U.S. sub prime RMBS Most of our U.S. RMBS exposures in the portfolio are agency securities [Tinnies] and Fannies specifically. Quarterly operating expenses increased by $1.7 million or 9% compared with the fourth quarter 2006. This increase was attributable to a number of factors including higher head count since the year end 2006 as well as the expenses related to share grants vesting over a four year cycle and share base grants to retirement eligible employees which are recorded upon an accelerated basis. The level of other operating expenses remain relatively flat in the fourth quarter of 2007 and continues to be in line with expectations. Looking to 2008, I expect operating expenses to increase by approximately 7% as we continue to increase resources to meet market demand. For the full year 2007, our affective tax rate on operating results was 9.6%. For 2008 I expect the rate to be more in line with the effective rate in the fourth quarter or approximately 12.5%. As many of you are aware, financial guarantee contracts are written in credit derivative form and must be mark to market under existing accounting rules and provide protection against payment default on the underlying security, not a change in market value. The after tax unrealized mark to market loss on derivatives included a loss of $302.9 million on financial guarantees written in credit default swap contract form that was previously announced on January 24th of 2008. And, a $5.4 million after tax unrealized gain on Assured Guaranty Corps committed capital securities which is a financial instrument that is required to be measured at fair value also. The mark to market loss in the fourth quarter 2007 was due to the decline in market value of the securities reverence by the credit default slot and was not due to rating agency downgrade of the securities or credit losses. The derivative business is an extension of our financial guarantee business and these financial guarantees and derivative form are not traded nor have we been required to post collateral based on changes in market value. As these instruments approach maturity, market fluctuations gains or losses will revert to zero absent a specific credit event. Changes in the mark to market also have no impact on statutory capital or rating agency models. Approximately 60% of this unrealized mark to market loss resulted from lower market values in the U.S. residential mortgage backed and commercial mortgage backed securities markets. And, the balance was due largely to the decline in market values for collateralized loan obligations and other pooled corporate securities. The net position on the balance sheet related to the mark to market derivatives as of December 31, 2007 is now a liability of $612.6 million before tax. With considerable volatility continuing in the market, this amount will fluctuate in future periods.

As of the end of January, there have been some additional slight deterioration in the market pricing of corporate CLOs and sub prime RMBS and more significant deterioration in the pricing of CMBS. As of the end of January, our book of CDS exposures would have an estimated additional unrealized loss of approximately $70 million after tax. The actual number for the first quarter will, of course, depend upon market values as of March 31, 2008. You should note that last years -- excuse me-- last quarter's 10Q and our soon to be filed 10K includes sensitivity tables for our mark to market valuations which hopefully should provide some clarity into our mark to market valuation levels. Our book value per share was $20.85, a decrease of 15% from the $24.44 book value per share at the end of 2006. Our book value per share number includes $5.58 per share for the net unrealized loss on derivative contracts as of December 31, 2007. Excluding the after tax unrealized mark to market loss on derivatives at both year end 2006 and 2007, book value per share December 31, 2007 had risen 10% compared to the prior year end.

Adjusted book value, which reflects the book value and adds the imbedded value from after tax net present value of estimated future installments premiums enforce, and after tax net unearned premium reserves, net of that was $36.85 per share at year end compared to $36.57 per share year end 2006. The growth and adjusted book value reflects strong new business production over the last 12 months. It was partially offset by the mark to market unrealized loss on derivatives. Excluding the net unrealized mark to market gain or loss on derivatives in both periods, the adjusted book value per share grew 18% reflecting a 20% increase on the net unearned premium reserve after tax, and 34% increase in the net present value of estimated future installment premiums enforce after tax. The company's operating ROE which is calculated by dividing our annualized quarterly operating income by average share holders equity, excluding accumulated other comprehensive income in the effect of the unrealized mark to market loss with 7.8% in the quarter compared to 10.2% for the fourth quarter 2006. The lower operating ROE reported in the quarter was primarily due to lower operating income resulting from higher loss and loss adjustment expenses associated with heloc exposures in the financial guarantee direct segment. With that I would like to turn the call over to the operator to poll for questions.

Thank you (OPERATOR INSTRUCTIONS) Our first question comes from Andrew Wessel from JP Morgan. Please proceed.

Hey Guys, good morning.

Good morning.

I just had a couple questions. One, (inaudible) the Buffet news or not so news about his willingness to benevolently insure municipal bonds for all the troubled competitors of yours. Could you put some color on that? From my perspective it seems like reinsuring municipal bonds would be a great deal for you or for him or for anybody in this environment. But from a capital perspective does that really help anyone? Is that anything that's been on the table in any of the discussions you had with any of your competitors about reinsurance?

The first answer I would say is I would be more than happy to stand by Mr. Buffet and take whatever percentage of that deal he will be willing to share. I think that will give you an idea of the value of that opportunity. Obviously you've got to look very closely at the public finance and you can kind of gauge from his comments in terms of the capital that he thought was necessary to support that, which was obviously less than 100 to one leverage, versus then the capital that would be required for the remaining part of the portfolio.

None of the issues or exposures that we talk about today, in terms of trouble, deal in the public finance environment as of yet. Obviously a recessionary time could have an impact on that. But, by and large, his comment relative to premium pricing is probably pretty accurate in today's marketplace. However, the value that that would be to an existing mono line in terms of support, I think it would take away more capital than it actually would provide benefit and then obviously would remain a portfolio that would be highly leveraged in the structured credit marketplace and therefore be even greater exposed to any deterioration in not only sub prime RBS but any other potential credit exposure you would have. So I mean, I think it's a offer that stabilizes one in the market but I think it creates as a significant problem at the other end as it would solve on one end.

Thanks. And then in terms of your position in the municipal market, can you comment on where you currently lie in the competitive landscaping? Obviously yourself and FSA would be-- it seems like from (inaudible) the biggest two insurers, can you put number around where you think you fall in the market? What your market share is at the beginning of the year?

I think as you point out today in most cases there are only two guaranters that are being sought after to provide wraps on municipal exposures. That being FSA ourselves. Obviously FSA has had a pretty good lead on us relative to their position and we're more than happy to chase them around to a certain extent. Right now, if you look at January on an overall total basis, I would say FSA-- i think we've got a comment in my statement this morning they were 60-plus percent in the market. You can assume we are the remainder of that market and we believe that as our paper gets issued more frequently, we get more liquidity out there, we will be able to continue to increase market share throughout the year as well as just based on our overall kind of philosophy of diversification. If there are only two, we would hope there is going to be a greater sharing as the year progresses, just because of single risk exposures by certain fixed income investors.

Great. And the last question-- I will jump back in. In terms of that kind of market share growth, even if you see -- even if the insured market shrinks to some extent, given your pass side in the business and now that kind of market share that we were talking about now which would be in the range of 30 to 40%, what do you feel like the needs are going to be for potentially new capital, should you start hitting some capacity issues with certain of the big issuers?

Well, first and foremost on capital -- remember, the public finance business is very beneficial to capital. Obviously creates a lot of capital because of the (inaudible) premium reserve and the low level of expected tail loss that create the capital need. So from a Moody's and a Fitch point of view, public finances actually capital accretive. It is not for S&P, but then you have a jigger S&P's other requirements for the other lines of businesses. So. by and large, that in and of itself does not create a capital issue per se.

We; however, will continue to gauge our opportunities in the marketplace where capital does come into play single risk limits. So, as we see the size of the opportunities, the depth of it, the spread of it, we will continue to evaluate capital. We do it on a three year forward basis. We reconcile every quarter as we complete it to see where the capital position was. And obviously in today's opportunistic times we believe are one of the few companies that can raise capital, we will take advantage where we see it fit and move capital as necessary. But the principal driver in terms of the public finance growth would not be a major move other than single risk movements.

Thank you very much.

You're welcome.

Our next question comes from Mike Grasher from Piper Jaffray. Please proceed.

Good morning, everyone.

Good morning.

I guess, Bob, you give us any more details on the trends that you would be seeing with regard to the helocs which created the provisioning in the quarter.

I will take that, Mike. The heloc trend is where is losses going to peak and when will they start to revert to a normalized curve. We keep looking at the monthly trustee reports and expecting to see some pullback of charge losses or even delinquencies. As of this point in time and neither the two specific trouble transactions '05 "J" and '07 "D", are we seeing that. We were riding out the proverbial storm here.

We do still have excess or over collaterization left in the '07, but not significant and that should evaporate if losses do not abate later on this year and obviously we're paying current shortfalls in the '05 "J" transaction. As we said in '05 "J", we get 250 basis points of excess spread. '07 "D" 290 points. The pool factor on '07 is in the 80s. Pool factor in '05 is in the 50s. So we will continue to see if the excess spread starts the cover losses which it's not doing now and then we will evaluate where we are relative to the rapid M trigger which once that kicks and that's 1.8% for the '05 "J", 1% for the '07 "D". When they kick, it's kind of a different story. Then it gets to be a calculation of what are drawls that will then be the responsibility of the issuer and how that affects our previously paid loss position.

So long story short, there's a tremendous amount of uncertainty. We were looking to see when and if the loss curve abates. When it does it will give us a better fix on where we think this thing rolls out, 'cause then we can start providing projections in terms of what excess spread et cetera is worth to us. If it doesn't abate, then we'e obviously going to hit the rapid M-triggers and if we do that then that's another different calculation on how we ultimately can get taken out of a loss position. A lot of uncertainties still out there. We've also begun file audits of each of those deals at it this specific offices of the issuer. And we were looking at those loan files relative to reps and warranties. So, there's even that potential issue that's going to arise as we go through this current year.

Okay. Couple follow-ups to clarify. I think you said in your opening remarks that a significant loss which you define as $100 million or more remains a very remote occurrence. Is that fair?

Yes, it is. You know, we run more models than I want to even talk about. But the one thing about these deals and specifically in the Countrywide deals, the rapid M-trigger which is a very interesting clause, really requires the issuer to find future drawls on the loans that are included in the heloc structure. When they fund those drawls, those loans become subordinated to us and, to the extent that we aren't at our OC position-- our over collateralized percentage, we get to build it back up, ergo you also get the reimbursed losses.

Under the majority of our models, if that OC trigger, if that rapid M- trigger materializes we will be taken out of our loss. So, to that extent, and that is based on a lot of factors, is line still available. Will people continue to drawl on their loans, et cetera? Will the issuer be solvent enough to fund those drawls. But in most cases if that happens, there is a very low probability of us having any loss let alone a loss significant.

And then could you remind us what the landscape, I guess, looks like in terms of your heloc portfolio and specifically I guess the "D" and the "J" issue in terms of LTVs, FICAs, et cetera.

Well, we are kind of reraking the ground here. Both of those deals were prime deals. One had a 7/10 average FICA which is the '05. The '07, I think, was in the 720 range. Loan to values were in the 70% , combined loan to values when you put in the seconds-- so, that would be the first lien combined loan to value with the second lien would be in the 80-85 range. So, they were well written at the time.

But obviously as we look at market value declines, that's going to put those things back to 100% if not basically negative equity, and whenever you get to a negative equity. situation, kind of all bets are off based on historical experience. In all of those cases we assume 100% loss. We assume no recovery, no salvage, and no subrogation. So we take a very conservative view. And as I said in our portfolio reserving process we have downgraded these exposures well below where the rating agencies are currently rating them, and I know that's not going to be considered much of a comfort, but it does show you that we are trying to be as pro active and in front of this thing as we possibly can

Okay. Final question then. You mentioned the agencies, any additional concerns coming from them in terms of your own portfolio, what does seem to be their greatest concern, if any.

Well, we thank God ,don't have that much in-depth conversations with them at this point in time. If anything we talk to them about positive things and some of the other things we are trying to do and accomplish in the industry. Their concerns are strictly around today, the residential asset exposure. Thank God, our portfolio other than the heloc is very, very well protected and even under their current models of new loss projections for, say '06 sub prime, we do not believe and have not been communicated from them there are any issues relative to our capital base, capital adequacy, et cetera.

Thank you.

You're welcome.

Our next question comes from Tamara Kravec from Banc of America Securities. Please proceed.

Thank you. Good morning.

Good morning.

Just some more specific questions on reinsurance of your competitors books and whether or not you can tell us if your discussions are bearing fruit. It seems the Buffet news is more-- one of them rejected Buffet's proposal and I'm not sure how-- if you can give us a sense how actively your troubled competitors are pursuing avenues of reinsurance through the industry or through you. And what may be the rating agency's views are of you taking on more deals like the Amback deal.

Well, we are in dialogue with some of our competitors for the type of portfolio transfer that we accomplished for Amback at the end of the year. Obviously, our way of thinking, especially based on where equity values are today, that is going to be one of the most efficient capital relief mechanisms or capital creation mechanisms that anyone can use, and therefore, we are in dialogue with a number of those competitors looking at on the same basis we did the Amback transaction. In terms of rating agency reaction, obviously they were positive on the Amback transaction both for Amback and what it did for us. They obviously looked at the portfolio.

We've gotten a lot of transparency to them relative to the assets included within that and it's a very good portfolio, very strong portfolio. Obviously, further opportunities on the reinsurance side are going to be dependent on obviously the rating agency's finalization of their existing outlooks or watches and what impact that has on the other mono lines. Obviously the worse it gets, the more opportunities it creates, and we're poised and positioned to take advantage of that. The second thing is we can be twice blessed in that when the agencies conclude their review of the other reinsurers that are currently on outlook, that could create further opportunities as direct companies would have the option of clawing back those securities that are not now giving them the capital relief that they had envisioned and that would give us more opportunities in our reinsurance company.

Okay. And then also curious, Dominic, your view on Buffet -- if you've been able to see anything at all yet, in terms of his bidding out business. Is there any trend in pricing in terms of his strategy and what he is doing or any thoughts about the potential for business gained or lost based on any trends you are seeing here?

Well, first thing I would say is that the trend in pricing that he had mentioned this morning, we feel the exact same way. And remember, you are looking at transactions on a isolated basis. We can point to transactions where we were paid twice as much as well, so that's not uncommon in today's situation as the demand to have a security wrap that has an underlying rating say below AA. Obviously it's (inaudible) depending on who holds that security.. So, in relative terms, pricing is as he had pointed out and that we see in the lot of opportunities. Overall, I think we look at them that there is still kind of in the secondary market. We don't see them a lot, but that doesn't mean that they aren't active.

Right now the amount of business that we have coming in is at such an overwhelming level that we are not -- it doesn't appear that we were missing out on opportunities. Let me put it that way. We're getting, literally, I guess I have a statistic I will give you relative to pipeline and give me a second to pull it out. For instance, in public finance today in our pipeline we have 193 deals for 14-plus billion of par. And that would compare to last year end of 16 deals for 880 million of par. So, 880 million goes to 14.4 billion 16 deals go up to 193, so--.

You are busy.

Yeah. I guess my view there is is enough out there for everybody. Remember, the industry used to be seven wide. It's now two or three wide. And you are dividing that opportunity among the market as it is and we see no drop off in that whatsoever.

Okay. And final question is, what is your view on what the -- I will take short term or long term, you want ROE of the business. Just given the profitability of what you are writing now versus what you wrote in the past and where you think longer term this ROE should play out for the industry as a whole and for you?

Remember, ROE got two calculations in it, right. The "R" and the "E" side.

If you could use the "E" on an operating basis without the marks I think that would be more helpful.

Yeah, so obviously ROE is trending up. And, depending on what we do and what the rating agencies do with capital requirements, it would trend up rather quickly because of the level of the achieved pricing that we're seeing. Remember, earnings do trail production. So '08's contribution of '08 business and the business we wrote in the fourth quarter of '07 might only account for about 10% of total earned premium or 15% of total earned premium. It's not going to immediately be reflected in first quarter. But, you'll see a gradual continuing increase.

Also remember that in the fourth quarter we did what was comparable to three years production in the reinsurance company. So its earnings will really start to generate higher returns just based on the fact that a greater leveraging of the portfolio and although we did take on some additional capital obviously it's an average rating on an average calculation on the "E" side of that denominator. So, you'll still get some benefits of that as it spreads through the year. So not trying to give you an absolute number. All I can tell you, ROE goes up pretty strongly and then it's just a matter of whether "E" will still be the "E" it is or do the rating agencies come back and reassess it.

As I had said during my comments and I really expect to earned premium to increase 25 to 30%. Where the operating expense side was only looking to go up about 7%. Effecting-- or considering a normal loss circumstance, you can see the growth in ROE coming through quite well.

The law of circumstances is a tough one for us. But, remember, through most of our history post IPO, we've had the benefit of favorable loss development. So, we really have never in our ROE to date have to put in really normalized loss provisions. So, excluding extraordinary loss provisions , you're going to still see a little bit higher overall expense load because of a normalized loss

Okay. Thank you.

Our next question comes from Ryan [Zacharias from Jacobs Asset Management.] Please proceed.

Good morning.

Good morning.

So just as a follow-up question to Tamara's question about the earnings lag. Is it safe to say that the Amback transaction is diluted in the short-term because of this earnings lag.

No, not at all. It will be highly accretive to be honest with you.

Could you explain that? Kind of-- given than net earned premium over the 18 days associated with the transaction was a million dollars. Can you kind of walk us through the economics?

Well in total, we've $260 million of PVP which includes about 160 giving you round numbers, 140 of municipal and 120 of installment for the round number 260. The municipal has the added feature, obviously and creates investment income as well. So, the earnings on that were twice blessed. If we look at the average duration of the portfolio instead of being ten years, you can start to calculate what is going to be the beneficial pickup in earned premium.

As Bob said, we expect a substantial increase in earned premium which is reflective of the Amback transaction plus the higher level of business written in the fourth quarter. That to which reflects the fact that it's going to be accretive and not dilutive. It's a mature book to business. So we were able to immediately leverage the capital that we raised. Remember the capital is done on an average basis so it will be a creative not dilutive.

Okay. Thanks a lot.

No problem.

Our next question comes from Darin Arita from Deutsche Banc. Please proceed.

Good morning. It certainly sounds like the pipeline of your deals has increased significantly. Can you talk about the actual execution of deals since the startup of this year. How that compares to the execution of deals in the fourth quarter?

Well, if you are referring specifically to January. Typically the quarter is always weighted to the end of the quarter, not the beginning. And we are seeing a tremendous amount of activity and actually closed deals as of the January cut off. Apparently we closed in excess of $50 million of PVP so far to date in the January month and obviously strong percentage of that U.S. public finance around 40% and the remainder spread out over the structured credit.

Most of the structured credit are broken deals or deals that were previously mandated to another mono line that are obviously moved to us as those mono lines fall out of favor. And that's especially true in the international environment where international pipeline has grown substantially as well. So in overall terms, I think we were seeing executions at a higher rate than we've had in the past. We've got a really good amount of already closed business through January that I think will benefit and show how strong the quarter can ultimately become. And we've got a lot of proposals out there today that we believe will be taken up and executed. So, we are very optimistic about first quarter executions.

Great. That's helpful. And then turning to the commercial mortgage backed securities markets. Can you talk about what you are seeing is happening there? It looks like Assured Guaranty participated in some deals in the fourth quarter or has it been quiet throughout the year in that sector.

We are being given some unique opportunities to look at restructured deals or reconstituted deals that we believe today match our view of what we believe is proper underwriting protection based on the new kind of economic circumstances that we look at today. They are highly rated. They are very, very well protected, in terms of where we would ultimately be exposed.

For instance, on the deal you are referring to, and not that this will mean much to you but to give you some statistics, we were three times the normal AAA attachment in that deal. We also have a cross collateral subordination that sits even below the three times AAA attachment point on those deals. So, they are highly protected and we don't see the same issues relative in the commercial market as you do in the residential market. In other words, there's been no speculation investor-- hidden investor properties. There have been no doc, no verification.

The capitalization rates may be got up a little bit in most recent vintages but our book is older book except for the '07 transaction. So you don't have the same kind of a liar loans. You don't have the same kind of inflationary movement. The market has not been overbuilt by any stretch of the imagination in terms of the commercial side. So we don't see the same trends at all. Our experience in terms of current losses to date has been virtually nothing so it's been a really well performing book and we are still highly confident in its performance.

Thank you.

Thank you.

We have a follow-up question from Andrew Wessel - please proceed.

Thanks. My questions have been answered. Appreciate it.

Our next question comes from Heather Hunt from Citi Please proceed.

Thank you and good morning and nice quarter.

Thanks, Heather. Nice to hear that every now and then.

Yeah. I'm sure a lot of people (inaudible) that. There is a lot of headline noise also around the CLO market. You have some exposure there are. I wonder if you could just walk us through what types of businesses underlie the loan? Are you watching corporate credit risk measures. Just generally what are you watching and what's your comfort level there?

Okay. In the CLO market, remember the underlying risk is corporate. It is very well diversified both by industry, by geography, and even the mix of the investment grade within it. Our CLO book is very, very well protected. If you look at the overall food corporates (inaudible) as I talked about we have an average current enhancement level of 34.8%. Everything is rated AAA.. It still holds its AAA rating.

The amount of delinquencies in those books on specific issues are really based on liquidity more than anything and it does revolve around the real estate market either be they realtors, construction companies, et cetera. But the amount of losses in any one given security is insignificant relative to the total protection that we have. I think in the worst case that we have in one of them, Heather, it might have been a 6% loss and we got a 39% attachment. There is not the correlation issue, right? So this is not where everything can go bust at the same time. You've got very diverse industries within the structures that really do-- under the typical CDO structures that when we talk about diversifications these are truly diversified. So, we are seeing spikes and anything related to real estate or construction. But, they are insignificant as a percentage of the total pool and therefore, we don't see any issues relative to threatening our attachment point or getting to the level of us having to think about CMC list or portfolio reserves.

Great. And then if I could just jump back over to the CMBS real quick. I wander if you could highlight the types of properties. Are they hotel, are they multi-family? Are they fixed versus floating?

that's the magic of CMBS. In there is everything you can think of. Multi-family, commercial, retail, there are very highly diversified pool within themselves which also lends us better protection in that it's not exposed to a single type of asset class. Very, very well spread throughout the portfolio.

And mostly fixed or fixed and floating?

I guess it would be more of a combination of the two.

Okay. Thank you.

If your question was reset risks, that's not a major exposure that we have in those deals.

Okay. Great. None -- there is like $84 billion that will be reset this year --

No no. That doesn't run by the residential side at all.

Great.

Remember, a lot of that portfolio is older. The cap rates or the valuation of properties were reasonable. It's a mature book in most cases. So we don't have that same level of stretching of cash flow to meet underlying debt service. In most cases we have significant protection even on the individual side.

Okay. Great. Thank you so much.

You're welcome.

Our next question comes from [Ron Bobbin from Capital Returns]. Please proceed.

Hi, I have a couple of questions, no particular order. I was curious to know whether you're-- on the hiring front weather you're attracting any people from your competitors. Whether it be sort of noteworthy, sort of relatively senior positions, or any meaningful amounts and numbers.

We're obviously seeing a lot of interest from some of the personnel at our competitors in terms of wanting to join Assured and we are selectively filling out our teams as we continue to gauge the amount of volume of opportunity that we are seeing and therefore stepping up accordingly in those areas. Obviously at the senior level we were very comfortable with the team that we have. Obviously we built from the top down as we started up the company back in '04.

So, by and large the people that were here then are still here now and they are just running larger teams, thank God. To the extend that we look for specific expertise now. Like in the public finance world, we're obviously bringing in more expertise at the various sub categories such as utilities or private higher ed. Therefore, we are being benefited by a significant amount of really well qualified candidates that walk in the door with a rolodex, with a market presence and we are taking advantage of that where it's necessary.

Thanks. And then a question. Dominic, you mentioned mortgage file audit that you commenced on the two heloc deals and I guess-- sounded like you said you were on site at Countrywide. Could you talk about what you -- I know it rips and warrantys are. In effect there is a standard of care or standard of underwriting that is assumed to be practiced and certain processes pursued and you are, in effect, auditing that. If I'm right , could you confirm that and be more

I don't want to be too specific because obviously that could create -- we need ultimately to take a position and see what the reaction of that position is going to be by the issuer. But, you're exactly right. We're going file by file and pulling all of the information and making sure that what is actually coveted to us by the reps and warrantys in terms of the borrower or type of borrower, the type of loan. What was the loan's purpose, location, use of proceeds, et cetera, are documented and supported by the file. And we are just exercising our right as the credit enhancer to do those file reviews to the extent that we come up with a list of loans that we believe do not reflect accurately the covenance that were provided to us and obviously we're going to ask for reimbursement.

How many mortgages or helocs make up-- approximately make up those two transactions?

I would say thousands but somebody -- yeah, 10 to 12,000.

Each? And then I had a question-- sort of-- a bit of a primer here. You talked pretty quickly about the rapid AMP triggers in each of those deals. Could you educate me a little bit more about what you mean by that and those protections?

Yeah, it's not the easiest thing to explain, but I'll give it a shot. So, in both deals and in the '05 "J" it's 1.8% of the original pool balance of charged losses or losses we would have to pay. That's roughly a $27 million round number. And in the '07 deal, it's a 1% trigger which for us is $9 million of loss. So very different thresholds. Once you hit the threshold, your res-- typically in any structure, the structure performs over its life and in that , because these are lines of credit, you have repayment but you also have future drawls or current drawls. If a guy signs up for $50,000 line and takes out $10,000 initially, and ultimately pays that back, he doesn't specifically but as long as there is repayments back in the structure if that fella wants to take out another 20 or (inaudible) maybe 20,000, two years out obviously they can draw 20,000 and it's the structure's responsibility to fund those drawls.

So, basically when you look at your payments in a given month, it's net payments. It's receipts minus drawls going back out. Once you hit the rapid AMP trigger, which we defined as that 1.8 and 1% of full losses charged-- getting told it's 1.85, excuse me, on the '05. Once you hit that trigger, the future drawls are no longer the responsibility of the securitization, but have to be funded by the issuer into the securitization. So that we, in effect, get reimbursed for that drawl, that reimbursement comes into the structure because the drawl going out is subordinated to our position. It, in effect, builds up our overcollaterization or subordinated position where it it should have been in the deal. So say in the '07 "J", I think it's like 3.85% is what was required that we hold. Obviously we are below that level now. So that would start to build back up our collateralization or subordination protection. In the '05 deal, since we've already paid losses, so we are at negative over collateralization, it pays back our loss and then builds back up the subordination or collateralization back to where it should have been per the original deal docs.

So it's a very nice risk mitigation feature that's engineered into those structures, which is the typical performance of our industry where you always kind of taken out of an Armageddon situation. And, remember, we are given no credit to any file put-backs. We're given no credit to any potential recoveries because once you foreclose on the property you own the asset. And for however long it takes to sell that and whatever real estate market exists going forward in the typical world, home equities have yielded anywhere between a 10 and a 15% recovery rate of which we were take no credit for any of that. So, the rapid M-triggers are very good loss mitigating condition. We were continuing to watch specifically '05 "J" as to when we would hit that trigger. Then obviously, it's going to be a function of how much drawals, withdrawals the condition of issuance in terms of funding those drawals as to whether that fully pays us back, partially pays us back, pays us back and then creates our original over collateral protection and therefore, the deal runs off. And, remember, at the same time you are getting paid back you are also turboing down, or ratcheting down the outstanding securities as well, because all cash gets the birth of the repayment of the principal. So, you can move out of the deal very, very quickly under that scenario as

Thanks. And just a little bit more understanding. Has the trigger, I thought you said the trigger was already-- since you've already paid some losses on '05 "J" the trigger is in effect there? Or no.

No, no., no, no, no We've only taken 3-plus million and we've got to pay $27 million before we hit the trigger. (talking over each other) And the '07 deal we paid zero so far but the trigger is $9 million.

Okay, okay. And then, my last question was on the subject, once this trigger is breeched, is it forever breeched? There is not-- whereby the funding from the originator to fund additional drawdowns on individual loans sort of remedies the situation and drops you down below?

No. You still do the term (inaudible) amortization. So we will still get out of the deal obviously prior to when we would normally expect that deal to run its natural course. We get the build back up our production but the amortization still continues.

And the originator funds all future drawdowns of remaining borrowing availability.

Yeah. There is no cure of that.

Okay. Thanks a ton. And best of luck. Hope it continues.

Thank you.

Our next question comes from Mike Grasher from Piper Jaffray. Please proceed.

Hi, just a follow up. Ron had asked the people question, but a follow up to that would be to Bob and whether or not the potential for new additions in terms of human capital that's already in the budget or is that something that would be added and how significant would it be?

Not in the budget at this point. Give me the question once more. Oh the new people, are they in the budget, I'm sorry. They are absolutely in the budget. One of the things that is difficult with the budget this year is the market and the opportunities and trying to gauge exactly what they will be. We have geared in head count increase into the budget that's no doubt about that. If the opportunities are greater than we expect, we may alter that. There is no doubt about it. That they are geared into the budget and included in my estimate of operating expenses for next year that I get.

I think we were on our fourth version of the budget. And it's kind of been fluid Our board is also very interested in our budget as well. And we've actually told them we were going to give them a little bit greater clarity as we look through to March. We will actually convene probably our third official board meeting on the budget. Our own internally fit version of the budget, to try to figure out where we think '08 going to be relative to where we see this kind of market opportunity as reflected in our pipeline.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from [Jonathan Adams from Oppenheim Capital]. Plead proceed.

Good morning. I was wondering how much flexibility do you have in the form in which you write your guaranteed contracts? In other words, are you able to move away from the CDS form for certain products, or is it pretty much locked in once you decide you're going to guarantee a particular type of product?

That's a good question and we have historically tried to avoid CDS where possible. But in some cases that is a specific requirement of the person seeking the insurance, right? In some cases we used to actually charge less to convert the execution over to FG, just to get around issues like mark to market. Which in the old days used to be the biggest concern we had relative to TDS execution. So we typically target FG. We try to execute in FG. But in some cases for the benefit to be realized be it accounting or capital, it has to be in swap form.

All the public finance is FG.

Yeah, but, as Bob points out, because of the preponderance of our opportunities there in public finance, obviously they are all in FG form.

Right, just to get one flavor of how severe some of these marks are, I know you have CDO that is maturing in April of '08?

Yes.

Do you have a negative mark against that today?

Yes.

Okay.

It's not considerable.

I would realize it would be minor, but I just wondered--

That one still held its rating and it's mostly CMBS and not RMBS therefore, it's only taken the CMBS --

As it approaches maturity like that, the impact of a negative mark is really not significant.

Thanks very much.

You're welcome.

We have a follow-up question from Ron Bobbin. Please proceed.

Hi (inaudible) curious to know when the claims review commence and how many bodies you have there?

We actually hired an outside firm that actually has expertise in it. So it's supervised by us but we have a lot more bodies on the street than we could possibly provide and we started it about three weeks ago.

Yeah.

About three weeks ago. We tried to get in for awhile, so you've got to understand this is by appointment only. You don't ring the doorbell and walk in, and say hi, have I my army of auditors here ready to overwhelm your file.

Sorry, we have (inaudible) also.

I'm sure they are there as well. We aren't by ourselves.

All right. Thank again.

Time to create a data room.

Data building.

Yeah bye-bye. Thanks.

(OPERATOR INSTRUCTIONS) I will now like to turn the call back to Sabra Purtill for closing remarks. Please proceed.

Thank you, Lisa and thanks to all for joining us today. We certainly appreciate your interest in Assured and the many questions you have asked. I will note that a replay of the call will be available on our website as well as by telephone numbers. Those numbers were in our original press release for the call. Furthermore if members of the media have questions or inquiries to follow up with me, I may be reached in Bermuda today at 441-278-6665 or via e-mail at spurtill@assuredguaranty.com Thank you again and have a good day.

Thank you for participating in today's conference. This includes a presentation, you may disconnect. Have a great day. Thank you.