Assured Guaranty Ltd (AGO) 2010 Q2 法說會逐字稿

Good day, Ladies and gentlemen. Welcome to the second quarter 2010 Assured Guaranty Earnings Conference Call. My name is Anne and I will be your coordinator for today's call.

(Operator Instructions)

We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to your host for today, Sabra Purtill, Managing Director of Investor Relations. Please proceed.

Thank you, Anne. Good morning, and thank you all for joining us today for Assured Guaranty's second quarter 2010 Earnings Conference Call.

Our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Bob Mills, Chief Financial Officer. We will take questions after their prepared statements. Please be aware our Webcast is not enabled for questions, so if you are listening to the live webcast and have a question you would like to ask, please dial into the call at 866-578-5747.

Our presentation and comments today may contain forward-looking statements relating to our new business, credit outlook, market conditions, credit spreads, financial ratings, loss reserves, acquisitions, financial results or other items. Listeners should not place undue reliance on our forward-looking statements as our outlook is subject to change due to new information, future events or otherwise. If you are listening to replay of this webcast, please keep in mind future management presentations, press releases or financial filings may update any forward-looking statements made today. You should refer to the investor information section of our website and to our most recent SEC filings, including the 10-Q that we will file on Monday for the most current financial information and for more information on factors that could affect our future financial results and forward-looking statements. Also, just a warning, there's construction in our building on the floors below us in case you hear any interference on the call. We apologize in advance in case that happens . I'll now turn the call over to

Thank you, Sabra, and thanks to all of you on the call for your interest in Assured Guaranty.

First I'd like to say that I'm very pleased with our financial results and the advancement of our strategic priorities this quarter. Our second quarter performance demonstrates we are beginning to recover from the aftereffects of the recession and financial crisis. Additionally we are making good progress in building custom demand and product acceptance in our US municipal target markets.

Chief among the quarter's highlights are three important achievements. First, we gained considerable traction in the US municipal business. Second, we added significantly to the number of new opportunities in the global public infrastructure and structure finance markets, and third, we expand our loss mitigation capabilities and increased our recoveries in our assured RMBS portfolio. In addition to these key accomplishments, we also reported the highest level of operating earnings ever for Assured Guaranty. This increase of profitability was primarily driven by the acquisition of AGM, which has substantially increased our earnings power. The quarter results also reflect the improvement in early stage delinquencies in our RMBS insured portfolio and the continued run-off of this exposure.

Regarding our activity in the US municipal market where we currently have our best near term market opportunities, we have been highly focused on rebuilding investor confidence in the financial guarantee product among both institutional and retail investors. Over the past few quarters, we have been contacted with almost every major institution and fund that invest in US municipal bonds and with the majority of national and regional municipal sales and trading desks.

In the second quarter, we also launched a national radio campaign and a retail website, ThinkAssuredGuaranty. com, to further raise awareness of Assured Guaranty at the retail level. The feedback from the market and the sales and trading desks have been very positive. As a result of these efforts, we saw an improving trend in our market share of the new issue tax exempt municipal business in the second quarter. Our market share of all new tax exempt issues, which excludes BABs and other taxable bonds, was 9% in the second quarter and reached 10.8% in June.

We insured 526 municipal issues in the second quarter and generated $81.4 million of PVP. This was 10% ahead of the first quarter of this year. Importantly, despite tight credit spreads, our second quarter average returns were still above 15%. The strong momentum carried into July with insured penetration of all new tax exempt issues at 11%. During July, we insured 150 new issues with a total gross par of $2.5 billion and related PVP of over $32 million. This is a very good start for the third quarter.

In addition to the overall improvement in new business, we insured a greater number of large transactions in the second quarter. We executed 14 transactions of over $100 million and that is equal to the number of large transactions recorded in the two previous quarters combined. This is an important sign indicating that we are winning back the institutional investor, a key customer segment for our future growth.

As we go forward, we are steadfastly committed to maintaining credit and pricing discipline. That's why during the second quarter, we rejected over 16% of the deals reviewed because they did not meet our underwriting standards. The 14 largest of these transactions alone would have provided an additional $36 million of PVP to the quarterly results.

As to overall credit quality, the average underlying rating on new business insured in the quarter was single A based on our internal ratings. Further, 5% of this new business was double A rated by us. By contrast, S&P or Moody's rated 23% of these same deals we insured as double A, which demonstrates that investors value our insurance despite the municipal ratings inflation caused by the rating agencies.

Turning to the BABs sector, there have been some interesting developments that could be favorable for us. BABs have drawn headlines recently as issuers have become concerned about withheld subsidies. Additionally, taxable investors, who are non-traditional buyers of municipal bonds and bond insurance, have become concerned about municipal risk and we believe will benefit by our credit review, transaction structuring and surveillance. These are integral benefits of our value-added proposition that are received along with our guaranty of timely principal and interest. In addition to the positive outlook for the US municipal business, we are finding increasing opportunities in the structure finance sector. In the second quarter, we insured $1.4 billion of structure finance par which generated $7.8 million of PVP, our best quarter since the acquisition, and our foreign pipeline of transactions could lead to increased production in the second half of the year.

Turning to the similarly constrained global public infrastructure markets, we are now beginning to see far more opportunities than we have in past quarters, and we are making head way with investors who have expressed significantly higher interest in our guaranty and additional services that we offer in this complex market. Ultimately, the health of our structured finance at public infrastructure markets will attract the recovery of the global economy and we believe we are well positioned to play an important role in their re-emergence.

Regarding our RMBS insured portfolio, we saw continued improvement in early stage delinquencies in the second quarter. In total dollars, HELOC early stage delinquency declined by approximately $44 million, or 20%, to $175 million at the end of June. Closed in second delinquencies declined $11 million, or 19%, to $48 million. As our loss-reserving models userly stage delinquencies as one of the critical variables, this improvement supported the stabilization of RMBS losses for the quarter.

I'm also pleased to report that we're making significant progress on loan putbacks. During the second quarter, we obtained commitments to repurchase $72 million of loans versus $32 million in the first quarter, increasing our total volume of recoveries to $278 million. This reflects our strong contractual position and methodical approach.

Today we have obtained 61,000 loan files up from 41,000 files in the first quarter. Based on our forensic review of 30,000 loans to date, we have processed repurchased demand letters for over $2.4 million of ineligible mortgage loans. Our primary focus has been on second lien loans where we have paid the most claims; however we are focusing on our first lien exposure now. Additionally, we are pursuing settlements with some sellers and originators of the breached loans. We've also commenced litigation against two originators of transactions we've insured as they were not cooperating with our review and put back process.

We are also encouraged by the increasing awareness of the defective loan liability issue among regulators and investors as well as the mortgage originators who have been increasing reserves and disclosures related to their liability in this area. In addition to pursuing putbacks, we are highly focused on improving the servicing of our RMBS portfolio. During the quarter, we significantly expanded our workout group by adding servicing specialists who were based in California where most of our west coast services are located. Their job is to improve the servicing of our RMBS portfolio, which will enhance our loss mitigation performance. They will also initiate servicing intervention strategies where necessary, including special servicing and servicing transfers.

Before closing I want to comment on the now one year old acquisition of FSA Holdings renamed Assured Guaranty Municipal Holdings. Clearly the addition of AGM to AGC and AGRe has significantly increased our talent pool, management debt, debt, and our size, as well as strengthen of our claims paying resources and enhanced our embedded earnings power. From the purely marketing perspective, the addition of AGM is a muni-only platform has enhanced its franchise value in the United States municipal market. It has also provided us with an important competitive resource, as any new bond insuring in the US municipal market will most likely be formed as a pure municipal insurer and AGM will represent formidable competition in this area if the market requires a muni only insurer.

To sum it up, we are making progress in rebuilding demand for our guaranty across our markets after the fallout caused by the economy and failure of our former industry competitors. We are also seeing improvement on the RMBS front. Additionally, we are confident that we have the correct strategic priorities and assembled the essential resources to accomplish our goals.

While the trajectory of our business will depend on factors both within and outside of our control, including how successful we are in achieving appropriate regulatory balance in Washington, I believe we have the talent, capabilities, relationships, and financial flexibility to achieve success on behalf of our shareholders. And now I'll turn the discussions over to Bob Mills, who will discuss our financial results in detail.

Thanks, Dominic and good morning to everyone on the call.

Our second quarter 2010 operating income of $172 million was a new record for Assured Guaranty since our IPO and marks a sixfold increase over the $27.3 million we earned in the second quarter of 2009. Our operating income was $173.5 million excluding AGMH acquisition related expenses, versus $42.9 million in the second quarter of 2009.

Operating income per diluted share was $0.91 versus $0.29 in the second quarter of 2009. Operating income per share excluding AGMH acquisition-related expenses was $0.92, double the $0.46 we earned in the second quarter of 2009. The AGMH acquisition and the addition of its large base of unearned premiums was a major driver of the significant increase in our operating income, but we also benefited from improving trends in our RMBS exposure compared to the past few quarters. Our strong results this quarter are reflected in our ROE as well. Our annualized ROE this quarter was 15.9%, and year-to-date we're running at 13.4%, significantly above the 4.1% and 7.0% we achieved in the second quarter of 2009 and the first half of 2009, respectively.

Turning to the income statement, our reported net premiums were $292.1 million, which excluded net premiums earned of $15.6 million related to consolidated VIEs. Earned premiums were up almost four times over the $78.6 million we recorded in the second quarter of 2009. Net earned premiums growth is largely due to the acquisition, although it also includes premiums on new business written over the last year.

Investment income was $90.9 million in the quarter, slightly more than two times last year's $43.3 million. The increase was largely due to the growth in the investment portfolio, which now totals $10.5 billion compared to $4.6 billion at June 30, 2009. The pre-tax book deal was flat with the first quarter of 2010 at 3.5%, but meaningfully lower than 4.3% a year ago. We expect that we'll continue to gradually lengthen the duration of the investment portfolio as market conditions permit and improve the yield on the portfolio.

Loss and loss adjustment expenses, including losses incurred on credit derivatives, totaled $99.3 million as reported, which excludes $24.3 million of losses related to consolidated VIEs. Slightly more then half of our losses incurred for financial guaranty and credit derivatives were related to our insured RMBS exposures this quarter, which totaled $68.7 million. The majority of the financial guaranty loss expense was expected due to the amortization of the financial guaranty unearned premium reserve into income, which was approximately $59 million this quarter.

This amortization is required according to the accounting rules for the AGMH acquisition as disclosed in the notes to the financial statements and the financial supplement. This means that we've had relatively little lost development in RMBS this quarter net of changes and representation in warranty benefits, largely as a result of our decision not to extend the loss curve for RMBS exposures based on the decline in early stage delinquencies. This resulted in relatively small changes in our RMBS loss reserves this quarter, excluding the expected amortization.

We will continue to monitor this portfolio carefully and our ultimate losses on RMBS will depend on the actual performance of the transactions, including future early stage delinquencies, cure rate, loss severity, and representation and warranty recoveries. In addition, we will incur RMB losses in the future quarters with the amortization of the expected loss embedded in our unearned premium reserve, which is principally for RMBS. As noted on Page 18 of the financial supplement, on the schedule for present value of losses to be expensed, we expect to incur about $157 million in losses due to the amortization for the second half of 2010.

Outside of the RMBS category, we incurred $54.9 million of loss and loss adjustment expenses consisting of $72 million in our non-RMBS structured finance book and favorable development of $17.1 million on public finance exposures. Our structured finance losses were principally on a handful of second-to-pay contracts where we only have to pay investors the primary financial guarantor fails to make a missed principal or interest payment and in our reinsurance segment. Our favorable loss experience in the public finance sector reflects changes in the current market discount rate used to calculate loss reserves as well as improved operating results for several exposures on our below-investment grade list including some healthcare exposures.

Our expected loss to be expensed included in our unearned premium reserve and which we include in our calculation of adjusted book value, declined this quarter to $1.235 billion from $1.307 billion at March 31, 2010, reflecting expected amortization, revisions to expected losses on RMBS transactions because of the improved early stage delinquencies, as well as additional credit for representation and warranty putbacks based on further progress and loan file reviews and putback agreements.

Operating expenses were $47.4 million in the quarter, up significantly from $26.5 million in the second quarter of 2009 due to the acquisition. Looking forward for the rest of 2010, I expect a quarterly expense operating run rate of $50 million to $55 million as we hire selectively for new positions such as the eight member team of mortgage servicing specialists that we recently hired as well as other selected staff additions.

One last note on our income statement. Our effective tax rate on operating income was 30.4%, higher than the Company's pre-acquisition tax rate due to the accounting effects of the acquisition as well as the greater percentage of the Company's income that is generated in the US. The tax rate has and will continue to fluctuate with the level of loss expenses booked in taxable versus non-taxable jurisdictions.

Based on our expected losses to be expensed for the second half of 2010, I estimate that our effective tax rate on operating income will be in the range of 28% to 30% but could be higher or lower depending upon losses in Bermuda, which is where the majority of our reinsurance book is domiciled. As noted in our press release and financial supplement, our book value per share was $21.05 at June 30, 2010, up 10% from $19 and 12% at December 31, 2009. Our operating shareholders equity per share was $23.87 at June 30, 2010, up 6% from $22.49 at December 31, 2009 reflecting our earnings this quarter. Our adjusted book value per share was $48.41, flat compared to $48.40 at December 31, 2009.

Finally, just a few accounting notes. New accounting requirements in 2010 mandate that we consolidate certain structured transactions referred to as Variable Interest Entities or VIEs. Each quarter, we monitor these transactions to determine if they meet the consolidation requirement. At June 30, 2010, we consolidated 20 separate VIEs. The consolidation affects both the balance sheet and the income statement, including shareholders equity, total assets, and liabilities, net earned premiums and loss and loss adjustment expenses, even though there is no change in transaction economics. We provided a new schedule in our supplement on page eight so that you can more clearly see VIEs on a consistent basis with other financial guaranty insurance contracts and the impacts of their consolidation on the income statement. For instance, this quarter our consolidated net income is $6 million higher due to the consolidation of the VIEs, but had no impact on our operating income. Secondly, we revised our definition of operating income and non-GAAP financial measure to exclude the foreign exchange effects of the revaluation of our net premium receivable balance, which is accounted for as other income. Under the applicable accounting rules, the associated unearned premium reserve is not revalued. Our non-US dollar premiums receivable are long dated contracts and the current quarter foreign exchange effect is not necessarily indicative of our ultimate foreign exchange gain or loss. We believe that excluding these gains and losses from our calculation of operating income provides better clarity on our current quarters results and is also consistent with how the analysts model our earnings.

That concludes my comments on the key financial items in the quarter. The operator will now give you the instructions for submitting your questions.

Thank you. (Operator Instructions)

Our first question comes from the line of Mike Grasher with Piper Jaffrey. Please proceed.

Thank you, good morning everyone, and congratulations on the quarter.

Thank you, Mike.

Dominic, a couple of questions, I guess one in reaching a decision on the loss curve or not to extend it. What factors did you take into consideration, I guess, or what do you look at beyond just the delinquencies and the pool of delinquencies and their trends?

Well as you know, Mike, you know there's some critical variables in the reserve calculation. Total delinquencies are one of the calculation that really sets a historic default rate for us that's used in the model.

The early stage delinquencies are really the development of the default rate then going forward and as you know, depending on first lien or second lien, we keep that consistent for a period of time, I'd say anywhere between 4 months and 27 months depending on the exposure. Obviously we look at severity as another critical factor and the role rate, meaning what percentage of say 60 to 89 delinquencies rolled to 90 to 119 in the next quarter. The other variables stayed pretty much constant so that the early stage delinquency decrease lead us to conclude at this point not to extend the curve and therefore kind of stabilized the losses in the RMBS portfolio.

Interesting against that, we have the consideration of the contrast to the reserve development which is obviously the rep and warranty asset. And as you see that that's further validated itself in the quarter, we take a very steep discount in looking at our assets so, as we look at both kind of combined, we felt that for the quarter it made the most sense to keep everything in the same relationship as we had in previous quarters. And obviously, as the last factor, we tend to look towards the macroeconomic developments which have been fairly stable or slight improving over the quarter, so a lot of factors in there but the early stages do have a rather critical component because that is the future defaults.

And then I guess just to focus on that last piece, the macro environment, the severity aspect in terms of the real estate market may be going lower or not going lower, what kind of assumptions are behind your analysis there?

Well, severity is a tough one because it's two portions, right? It's the housing value position, whether it's increasing or decreasing, and then you got to look at the critical markets but against that it is the time to foreclose, right? Because the expenses that come out of the ultimate settlements have a tremendous impact on severity and you'll find that a major contributor severity today is expenses towards foreclosure. That's why we're really spending more money in our mitigation efforts, and specifically in the current quarter, hiring this team of servicing professionals so that we insure that we get timely foreclosure, timely liquidation, utilize all relevant tools like short sales and those type of things. So, we look at that very, very closely and as I said, we're at least comfortable today that things have at least stabilized and in our pool, in our portfolio, with the benefit of run-off as well, as I said, the build-up of kind of the representation or the validation of our rep and warranty asset we're comfortable with where we're at today for current reserving.

Okay, fair enough. And then, your comments around the BABs program, if you were to sort of I guess think about what or the degree of the amount of the business that the BABs program maybe took away initially, and compare it to where it is today given your comments about some pushback from various states, where does that stand?

BABs is very interesting. So, if you think about it representing about 25% of the issued market and in the typical tax exempt market using a round number of a 10% penetration, right, if you're not able to look at 25% of the market because on that 25%, and try to stay with me on the numbers--we get about a 2% to 3% penetration in BABs, 10% penetration in the tax exempt. So, if you didn't have BABS, theoretically you could have a 7% pick up on that 25% piece of the market.

Interesting enough, as you know, the IRS has made some noise about auditing BAB issuers as well as an overall negation of the subsidy based on other balances owed by the issuer to the government so it takes away the benefit of the interest subsidy. Alongside that, we also had legislation that, early in the quarter was proposed to extend the BAB program and obviously didn't get out of committee.

There's a new proposal for the extension, which obviously looks to reduce the subsidy which we think is a benefit because remember, economically, because the insurance wasn't considered part of the subsidy, we became uneconomical to a certain segment of those insurers. So, as that subsidy goes down our economics get a little bit better. And then last, obviously, there's been enough in the market about the threat of municipal credit going forward, although the taxable buyer takes more credit risk for our higher yield and therefore is not traditionally been a buyer of insurance, this is a market that they don't know, right? Because they haven't really bought municipal bonds in any size, so the benefit of our credit review-transaction structuring which is critical in terms of covenants as well as the continued surveillance would be a benefit that we think we can sell into the market.

Also, the BAB extension should lower the threshold for issuers which were, as Sean will tell you, we're the king of the small deals these days, so as smaller issuers get into the BAB market, theoretically, they are less known not as liquid and therefore should give us more insurance opportunity as well going forward.

So whose benefited more, the government or investors from you educating them about what exactly you do?

Well, hopefully the investors, because they're our clients. We don't do a whole lot of business with the US government except for paying taxes.

Understood. Thanks.

You're welcome.

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

Hi, good morning.

Good morning, Darin.

It looks like you're getting traction again in the muni market where we had $88 million of PVP in the second quarter on public finance in the US. Where do we think this PVP can get back to?

Wow. Let's see if I step on that question, I think I will fall off the cliff. Obviously we set a target of $100 million this year in a period of what we think is rebuilding and reconstruction. We would like to achieve that. We're off to a very good start in the third quarter so we're optimistic, but you never know how things will ultimately play out.

The one thing that is troubling is issuance is down so the overall issuable or insurable market has shrunk on us as well, so a good year in the municipal world for a single provider would be in the $400 million to $600 million range of PVP.

Obviously, that's our midterm target and as a single-single provider, theoretically, you could do better than that and where we ultimately get to the total production level we would like to achieve to keep the inning model as robust as it is, is you need some compliment of the structured and the international public infrastructure market. So, we still like to see a goal longer term of that billion, billion four of total production per year of which the municipal US market should represent anywhere between 50% and 60% or 65% of it.

Okay, that's helpful, and turning towards the percent of deals that were rejected. Do you have that number for what it was in the first quarter?

25% in the first quarter.

25%, okay. And what sort of returns were we getting on the new business in the first quarter and also if we look back a year ago?

The returns are consistently above our target of 15%. We track it obviously deal by deal and for the portfolio in general, so we're pleased with where returns are. They're very positive. They are obviously in excess of the target which in today's world of tight credit spreads and the continued concern over the stability in the marketplace including our ratings are still under pressure, we think that's a great, great outcome.

It hasn't changed dramatically from the first quarter. If you go back to 2009 you really got to talk about which quarter. So the highest returns ever, Darin, were probably in that late first, early second quarter of 2008 when the whole market kind of dislocated and spreads were blown out very, very wide.

Beyond that, I'd say 2009 and 2010, other than when we've had rating pressures of year-end when Moody's made their action last May when they first put us on another negative watch, we always go through about a 30 to 60 day period of pressure on pricing and then it recovers. We've seen the recovery through 2010, but what I was trying to point out is that the 2009-2010 are still going to be substantially in excess of the returns that were available and produced in the market in '05, '06 and '07. So, historically, we're in a very strong return model that's including or taking into consideration the current pressures that we're under from a variety of factors, including the narrowing of spreads in the tax exempt market as the supply of tax exempt have dried up, the demand for tax exempts have increased, therefore it's driven the spreads down. But even in spite of that, with the uncertainty continued kind of concern over the direction of municipal financing, it still represents a very good market opportunity for us.

Great. And just one last question. I think in the first quarter call you'd given RMBS delinquency trends for March and April. Do you have what it was in June and July?

June was a continued decline. July, early statistics are kind of flat to June. And remember, our curve kind of, our loss curves assume no improvement for a period of time depending on the type of loan, it's either from 4 months to 27 months. So, we're kind of thinking that we're on our loss curve as we currently speak with the flattening in July.

And Darin, just to note the equity investor presentation that we posted on our website last night does give the details for through June, obviously the reports off of the July numbers haven't all come in because we're early in August.

And I will caution you, Darin, make sure you look at the aggregate dollars as opposed to percentages, right? As you continue to increase outstanding balances, even if the delinquencies declined a bit, if they declined in the same percentage of the outstanding balance, you'd see no improvement. But in true dollars terms in other words what losses we actually theoretically will have because of the faulted loans, that is shrinking.

Great. Thank you.

You're welcome.

Our next question comes from the line of Brian Meredith with UBS. Please proceed.

Hi, good morning, everybody.

Good morning, Brian.

A couple things here. First, Bob, you mentioned that I think you put up some additional R&W offsets. What was that number in the quarter?

The increase in R&W for the quarter was $85 million, and about half of it came from putting up a benefit relative to two specific first lien deals where we've gotten further into the examination of loan files and we believe we have a basis to establish a benefit and the remaining half of it comes from improvement in our success rate relative to loans that we've had in process.

Okay, great, and then second question. Can you talk a little bit about the public finance market, kind of trend you're seeing from a credit perspective? I notice there was a couple of new public finance exposures on your below-investment grade list this quarter?

Well, obviously, we're encouraged by some of the information that's available, where it's showing overall municipal receipts actually improved in the current quarter. And if you really break it down between the states and the municipalities, you'll find that the states have suffered a more significant revenue shortfall because of their high dependence on sales tax and income taxes where the municipalities rely on real estate and other taxes that have been a little bit more resilient in the current economy.

As you look at the credit risk side, as you know, states cannot file for Chapter 9 and in most cases states have significantly more assets available to them if they really wind up into significant financial crisis. And in one of the papers over the last month there was a great article on California, that if we can find it we'll put it on the website, that really talks about California specifically. So, our issue on municipality is because of our rejection rate shows that we're sticking to the credit discipline and it's typically around covenants.

We had a healthcare deal recently that we required a mortgage, we required a debt reserve fund, we had a springing trigger on some other terms and conditions, and we thought it was absolutely necessary, obviously we didn't get it, the deal went out on insured. So, that is how we look at it. We think we're in a recovering marketplace relative to overall municipal funding. We do appreciate the long-term embedded exposure we have to their long-term obligations like pensions, and we watch that very closely.

Obviously we're looking for the SEC with their kind of new rule making and they are requiring or they are at least considering additional disclosure by municipalities. That would be very beneficial to us.

In terms of BIG, or Below Investment Grade, we actually think we reduced our public finance below investment grade in the quarter from $3.16 billion to roughly $3 billion on average, so I don't think of any new credits that I can remember that we put on the list this quarter, but we'll go back and check it for you Brian.

That would be great. I think I saw one in Orlando, and a couple other ones.

Orlando has been on for a while.

It has for a while?

Yes. That's not new. It's a deal that's backed hotel revenue.

Got you, okay. And then that's good. And then, I guess, could you talk a little bit about some of the student loan losses that are coming through, should we expect more of that to come?

Well, we think we have adequately reserved and student loans came through reinsurance. And it's not the issue so much with the performance of the loans themselves as the collateral. These are failed auction rates, or available rate deals done by one of our competitors that have been severely downgraded, and it's the performance of the penalty interest against the underlying performance of the collateral where you got negative spread or negative carry right now. The interest on the securities is greater than the interest on the loans, so we're kind of chasing a target that we can't catch up to.

Those deals do have a mandatory liquidation in the number of years, typically it's five, but we actually from the auction rate put back the collateral so that would certain the loss at that point in time, and we think we're adequately reserved.

Obviously, we're trying to put some pressure on the ceding company and their regulator to allow restructuring of these deals because it's just about the penalty interest rate. So, a restructuring, especially with us as the provider of the guaranty would help significantly in getting rid of this negative carry. So, it's a story that's continuing to unfold because these are deals that came to us from one of the current downgraded carriers. There's a potential that they are going to look to commute this liability, and as the reinsurer we would follow their fortune, so to a certain extent that turns out to be good news for us, in kind of a strange way.

So, it's an area that--it's arrived through reinsurance, It's arrived through the penalty rates and the variable rate on the debt. It's exhausting or exceeding collateral value because of the return on the loans, yet we think we're adequately reserved based on an ultimate expectation, and we see some opportunities where we could theoretically shorten that loss if we can get to the restructuring or we can get to the closing out by the purchasing of the collateral. So, it's something that's not great but I think we've got a pretty good handle on it.

And just last question here and I know to come up after people look at the presentation. If you do look at the June results, second liens, actually second lien delinquencies, and it looks like HELOCs did actually spike up in June. Anything I should read into that?

The June data was a spike off from a pretty low May, though. Yes.

You got to look at the overall trend as opposed to any month. So, if you look at where June is against March and December and you look at the overall direction of the curve, number one. Number two is you know in the second lien side, we think we've been reasonably conservative and there's not a whole lot of money left in those exposures, I think around $3 billion in total, so it's a very rundown portfolio. And, lastly, that's been the current poster boy for the rep and warranty activity. As I said, we've built--and Steve told me I quoted the wrong number. It's $2.4 billion of rep and warranty recoveries, billion, not million against our assets. So, and we've still got a tremendous amount of files to review and we're in the process of drafting putback requests for another billion dollars of rep and warranty claims. So, by and large, as I look at any tic up of delinquencies, I think it's a further indication of what we consider the abandonment of underwriting standards by the originators and therefore feeds very nicely into our rep and warranty claim.

Thank you.

You're welcome.

Our next question comes from the line of Larry Batali with Moore Capital. Please proceed.

Hi. Can you guys hear me okay?

Yes.

I have a few questions. Dominic, you, in your prepared comments, gave us some dollar amounts on the early stage delinquencies. Can you just go over those again?

Sure. Let me grab my comments. As I said, we try to track these on dollar as opposed to percentage, because of the problem with percentage. So in our overall HELOC book, the early stage declined $44 million to $175 million today. In the closed end second book, it declined $11 million down to $48 million. So, as you can see, there's not a lot of money really left in those categories relative to the size of our reserves and obviously to the size of what we think is our putback opportunity.

Okay. And it looked like the overall portfolio ran off by--I'm focused on the RMBS portfolio now, ran off by about a $1.2 billion in the quarter? Is that about right?

Yes, about a $1 billion. But we've been averaging about $1 billion per quarter, I'd say, over the last two years.

Right, okay, and then, with all of the loan mods out there, both lender mode programs and also HAMP, can you give us some sense of the extent to which mods affect the duration of delinquencies and the timing of the realization of losses and liquidations and all that? How much does that get in the way of you guys doing your job in paying a loss or getting your money back if there's a rep and warranty violation?

Well the mode will have no affect on the rep and warranty, right? If there was a improper representation on the origination of the loan whether it's current, defaulted or modified, doesn't matter.

You won't to qualify for the mode to begin with?

Right and realistically, you make a good case, and one of the things we're trying to bring action or at least appraise the service of their responsibility, is they do a mode if they uncover rep and warranty violation they are supposed to have the loan refunded. Of course in most cases the servicer is the originator so they haven't been quite blowing the whistle on themselves, which I think will help our case against them if these things do proceed to litigation in terms of a more general fraud as opposed to more specifically borrower fraud. So, the mod doesn't affect us there.

Number two, the mods historically or to date have been done more on bank owned product as opposed to product securitizing and sold in the marketplace. So, we haven't seen a whole lot of benefit from it.

Number three, that's why we've gone out and brought in this new servicing team in California. Because issues like modifications, are they being looked at or are they being done properly, are we making sure we're modifying something that really does long term benefit the borrowers ability to repay--becomes an issue for us. And we look at this as good news, not bad news, because in most cases these guys were seriously delinquent, so in our reserving model, by and large, we do default them which means we start cash flowing immediately.

Any modification, even if it holds for 18 months, still provides us some further benefit of cash flow in terms of our structure and our ultimate liability.

So mods typically benefit you guys?

Yes, mods are good.

Okay, and then my last question is just about any conversations you may have had recently with the insurance commissioner in Wisconsin. Anything at all you can bring us up-to-date on that would be appreciated. Thanks.

Sure. We have repeated, frequent, very in-depth conversations with both the insurance commissioners of New York and Wisconsin and during the quarter we continue to meet with them.

Obviously, in Wisconsin's case, we're trying to help them achieve their goals, which hopefully is a protection of the policyholders and a potential orderly administration of what is obviously a very concerning financial condition. That dialogue continues. As you know Wisconsin just brought in an advisory committee to also assist in developing a strategy and a plan going forward and we continue to try to be helpful in that regard and we continue to dialogue. And this becomes one of our key strategic objectives for 2010, and we're still working as hard as we can to see if we can get some resolution of this. Because it has a lot more implications than just the fact whether we do a portfolio or not, right?

It's obviously our concern--is the validation of our product and protection of the policyholder, which is critical to continue to show value for the product in the market. And the dialogue continues. If I had something really concrete to tell you I would, but all I can tell you is we're very active in that discussion.

Okay, we'll we keep watching. Thanks very much.

You're welcome.

Thanks, Larry.

Our next question comes from the line of Mike Grasher with Piper Jaffrey.

Thank you. Just a couple of follow-up comments or questions. On the secondary market, can you talk about your efforts in that area, and the effects you've had with your distribution particularly with the retail investor?

Sure. The secondary market, because so much of the market has been going out on insured, really does have a tremendous opportunity as we see it. And there have been a number of deals we've quoted on the origination of the banker and issuer deciding to go uninsured and then we did one-third to two-thirds of the issues in the secondary market, which is fine with us. We don't get to count the statistics on new issue but it's still a good premium, good value for the Company.

As you do know, our relationship with the Muni center, which we hope to go live technologically in the third quarter ,where you would have the ability to do secondary trades on their platform with our insurance as an option--we think is a tremendous opportunity, an accomplishment of one of our key strategic objectives in terms of broadening our distribution in the marketplace in 2010. And obviously are going to 2011, and especially with the high percentage of the marketplace that it's been uninsured over the last two years.

Secondarily, as we talked about we've done this add campaign to really reach out to consultants and the regional buyer to create greater awareness of the Assured name and the product. We've got this Think Assured Guaranty. com website, which is really key to the regional and retail buyer. So, we look at secondary as a great opportunity.

We've done some things relative to awareness and broadening out the knowledge and familiarity. And then, lastly, which will go live in the third quarter, we will now have a Internet-based or technologically-based way of reaching those customers and giving them the opportunity to buy Assured insurance on bonds that are being basically sold in the retail market.

And do you have a goal or a target amount budgeted for 2011 on this?

Well, we haven't, it's funny you bring up 2011. We've started to talk about the critical issues for 2011 and how we view the market. And as we go through the rest of the summer and early fall, we will actually finalize those plans. And we typically go one in three, right, to figure out what other things we needed in one and three years for the longer term. We have a very small goal for the third and fourth quarter which I don't feel I should release, but obviously we will look at this as a more critical part of the plan in 2011.

Okay, and then just a final topic around rating agencies, and you came out with the news on the share repurchase authorization and then obviously the loss curve or not extending it. Any discussion with them around these very issues, or were these decisions made with the Board of Directors and management solely?

No. We obviously have a ongoing dialogue with the rating agencies. We typically give them a preview of all of our activity and especially things like shareholder repurchasing, the results, the whole reserving situation, so that dialogue continues. And obviously, we're trying to figure out what's going to be the relationship for the rating agencies, going forward. There's a lot of things up in the air relative to the financial reform, and we'll see how that all plays out, but they are pre-notified on everything we do to make sure it doesn't create any reserving issues or any rating issues.

Okay, thanks very much.

You're welcome.

Our next question comes from the line of [Lawrence Kamp] with Sonic Capital.

Hi, good morning.

Hi, how are you?

Great. Great quarter.

Thank you.

Just had a question on the posture on reps and warranty that Bank of America has been taking. In the last quarter they booked an incremental $700 million accrual in addition to their normal amount with respect to kind of their conversations with Monolines and I'm just wondering how your negotiations on global settlement with them are going?

I would describe our negotiations like Chinese water torture. They are very painful, have taken in a long time. I will say on the positive side, we're probably in the most constructive dialogue with Banc of America as opposed to any other originator or group that has liability in this area. Obviously, we've worked with them for a fairly long time. We've developed a process of loan review and rebuttal. We would like the process to work a lot better because it's still on a loan by loan basis which they've been very public about in terms of how they wanted to address the liability.

We're encouraged by the improvement in their disclosure. We're encouraged by the fact that they put up additional reserves and they did specifically mention in the Monoline they are in constructive dialogue with, so since we have not sued them and have the continued dialogue, we're assuming that's us. And as you see in the quarter, we had a pretty good quarter relative to increase in the recognition on their part of the liability. However, it's still a long way to go. We're trying to push for a higher amount of quarterly settlement relative to the size of the asset and the asset is not getting smaller.

As we get more files to review the breach rates have been absolutely consistent throughout all review periods in the mid-80% and think about that, mid-80% of all files we look at contain a significant breach and the breaches are typically the big three. Income, employment and purpose of loan continue to be our biggest issue so it's not like we're out on the edge of some periphery of the rep. These are the big ones and our success rate continues to track with the breach rate, so we're optimistic.

And as we move to first lien, remember the first lien loans have bigger balances than the second liens and our putbacks and billing have been principally second lien so far. So we're optimistic that we can increase the flow of cash, as well, and help to further reduce the asset. And the last thing I'll say is there was an article recently about the New York Fed talking about the banks having to come to the table and start to settle these liabilities. We've been pushing for regulatory intervention both in the insurance level and in the banking level.

We do believe from an insurance perspective this was fraud and the insurance commissioner does have some strong legal rights to deal with insurance fraud that we're obviously encouraging that they begin to look at on that basis. So, there's a lot of positive development in the quarter and we've been very conservative in how we've looked at the asset.

We just recently had a meeting with the New York commissioner and his department. They definitely said and indicated to us they would provide strong support and we've been dealing in this issue and specifically looking at their legal rights, our legal rights and the overall kind of emotion in the market that seems to be very supportive of getting this thing settled.

Dominic, a quick follow-up. If you do kind of reach kind of a settlement, are you looking for purely monetary compensation or are you looking for also some sort of deifiesment of their troubled exposure or some other mechanism where you can kind of clip off with the tail risk of the remaining exposure?

Well any settlement that we would consider has to ultimately resolve fully the liability of both what's in the house plus any future development. I mean, when you're looking at an 85% breach rate there's a strong argument that we shouldn't have had incurred any losses in this area. Now, whether you can get to that final of a point but you can understand we wouldn't accept anything that leaves us with continuing liability. I'd rather litigate at that point in time.

I see. Great. Thank you so much.

You're welcome.

Our next question comes from the line of James Shanahan with Wells Fargo. Please proceed.

Good morning. Thank you for taking my question.

Hi, James.

My question is related to some news that we're hearing about a potential federal bail out of troubled states, the states that are still having trouble balancing their budgets. California, New York, Michigan. What do you think the likelihood is of this happening some time in the next few weeks, and what are your thoughts on such a bail out and how it might impact your business?

Well--A, we've not obviously heard of the bail out. Obviously there's been a request for some funding, but I would look at that in the form of there's an issue relative to Medicaid reimbursement that's been argued about and that's been cut back and I think some of the states have been asking for kind of returning to the normal reimbursement, so that might be specific to the issue.

As I said, especially in California, we've looked at California very, very hard. And there's a state that owns utilities, hospitals, schools, and a tremendous amount of other natural assets that theoretically, if privatized, would resolve any debt issues. And we are seeing a turn in overall municipal receipts.

Obviously, the states are a little bit further behind than the municipalities, but we don't think any bail out, if necessary--any time you improve cash flow, and since debt services typically at the high priority of cash availability, that helps. But in the same token, I don't think we see that as a necessary requirement because as we've looked at, and you've seen some micro examples, like, sa,y our issues with Harrisburg, typically there's a tremendous amount of assets or they can make further tough decisions in terms of dealing with the disbursement side of the receipt versus the disbursement ledger that all states and municipalities face.

So, A, they can monetize their assets, they can cut their expenses and last but not least, talk about the raising of taxes. They have mostly done things like furloughing people, reducing salaries, I mean, I think they are all getting the joke. I think a lot of people are making the right movements so government bail out at this point in time I think would be unnecessary and it's not something that we've considered but if one did exist, it wouldn't hurt, that's for sure.

Okay, thank you.

You're welcome, Jim.

Our next question comes from the line of Chris Owens with Trafelet Please proceed.

Good morning.

Chris, how are you?

I am well. How are you?

Hanging in there.

Good. Nice quarter.

Thank you.

Just in regards to that $2.4 billion number you mentioned and then the additional $1.1 billion, how much of that relates to delinquent loans and how much of that relates to claims already paid?

The majority is claims paid. We obviously start with charged off files and work our way backwards. Just approve our breach rate, we did do some statistical sampling a couple of quarters ago of current borrowers just to see if the breach rates would hold and they did, so that, predominantly almost 100% is charged off loans so that's stuff we've already paid or has been paid out of the securitization. So, it's not our cash necessarily but it's cash that would improve our overall credit position within a given deal.

Do you know how much of it is cash you've actually paid as opposed to out of the security?

I think we paid roughly $2 billion to $2.5 billion of losses cash so that would be that portion of it as well. And you're thinking 80% of that, I guess in relation to the 80% of that may be fraudulent? Well, we're running retrades of 85% on every file we've looked at, which includes files that have been charged off that are seriously delinquent,as well as the files that have been charged off. So, if you think of it we've looked at 30,000, part of 60,000 files, we think ultimately we might get as many as 90,000 files as kind of our universe, and the 30,000 generated about $3.5 billion of chargebacks.

Big number. Thank you.

Absolutely. You're welcome.

Thanks, Chris.

Our next question comes from the line of Renee Toft with Cairn Capital.

Hi. Thank you for the call. Could we go back to the topic of credit quality and could you please comment upon credit migration within your investment grade category over the quarter? I can see that on your equity presentation a large portion of the below investment grade exposures are triple C. What proportion in total are triple C, and have you seen an increase in triple C or movement from, I'd say, double B to the C or D category in the quarter?

Yes, so first remember these are based on our internal ratings, not the rating agency ratings and I would say off the top of my head, below investment grade, was reasonably stable in the quarter and therefore, I don't think there's been any significant migration relative to both the size as well as any migration between our own internal ratings.

I mean these are not the most exact science so we obviously look at it based on probabilities and ultimate losses but it does generate our reserve model for at least the new accounting requirement that you have to basically test every risk you've got in the portfolio. So, long answer to a short question, I don't think we've had significant change at all in the quarter.

Okay, and second question, you commented earlier on the call about your discussions with Wisconsin and New York regulators in respect of orderly administration activity. Could you just clarify, is that discussions with such regulators in relationship to Amback and St. Clair portfolios or what is the nature of those discussions?

Yes, I'd say the discussions relate around three topics. So part of the discussions are the portfolios as you point out for Wisconsin, we've got Amback, for New York we've got [Sincora], [Fijik], and our friends MBIA.

We've also discussed with New York any proposed changes to Article 69, which is a regulation that basically authorizes governance and financial guaranty. We also talked to them very, very detail about this whole issue of rep and warranty and what is the role of the insurance commissioner relative to other regulators and especially, looking at the bank regulation as a critical component to how this will ultimately get resolved. So, the three areas are regulation, rep and warranty support and assistance, and portfolio, but not only just portfolio but product defense.

We're very concerned that in a lot of cases, the commissioners have been focused on restructuring as opposed to protection of the policyholder and if our policy is going to continue to provide value, it's important that the policyholders feel they're being protected by the regulators, so they are the critical issues we talked to the state insurance commissioners about.

Okay, but just to be clear, there's no discussions at present about assumption of portfolios from other (inaudible) like Monolines?

There's no current submission but there's discussions all the time about portfolios because that's part of the protection of the policyholder.

Okay, thank you.

You're welcome.

Ladies and Gentlemen, with no further questions, this concludes today's question and answer session. I would now like to turn the call back over to Ms. Sabra Purtill for closing remarks.

Thank you, Ann and thanks to you all for joining us today for the call. We appreciate your interest in Assured Guaranty and we also appreciate your doing the call a little earlier this quarter because of the flight schedule in Bermuda. If you have any additional questions or require any further information, please don't hesitate to contact either me or Ross Aaron and we thank you again and hope you have a great day.

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