Assured Guaranty Ltd (AGO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Assured Guaranty earnings conference call. My name is Carisa and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions)

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

Thank you, Carisa. Good morning and thank you all for joining us for Assured Guaranty's full-year and fourth-quarter 2010 financial results conference call.

I would first like to apologize for our late release last night. We had some technical challenges on the release side that we will certainly strive to make sure don't happen again. But I would especially like to thank all our investors and analysts who were patient with us last night. We appreciate their effort and also their notes that they got out on time this morning.

Today's presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. It may contain forward-looking statements about our new business, credit outlook, market conditions, credit spreads, financial ratings, loss reserves, financial results, or other items that may affect our future results. These statements are subject to change due to new information, future events, or otherwise, so you should not place undue reliance on them, as we do not undertake any obligation to publicly update or revise them except as required by law.

If you are listening to a replay or reading the transcript of this call, please keep in mind that future presentations or SEC filings may update any forward-looking statements made today. You should refer to the investor information section of our website for our most recent presentations and SEC filings and our most recent updates for risk factors.

Please note that we plan to file our 2010 10-K as well as our investor presentation and Structured Finance and Public Finance list on Tuesday, March 1.

Turning to our presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited, and Bob Mills, Chief Financial Officer. After their comments we will have a Q&A period. Sean McCarthy, our Chief Operating Officer, is in Tokyo today and unavailable for the Q&A session; but if you have any specific questions for him we can certainly follow up with that when he is back in the country next week.

Present in the room as well are Jim Michener, General Counsel; Howard Albert, Chief Risk Officer; Rob Bailenson, Chief Accounting Officer; Russ Brewer, Chief Surveillance Officer; and Steve Donnarumma, Chief Credit Officer; as well as Bruce Stern, Executive Officer in charge of Government and Corporate Affairs. With those members of the management team in the room I would now like to turn the call over to Dominic.

Thank you, Sabra. Despite the challenging economic and market environment we experienced in 2010, Assured Guaranty reported record operating earnings for the second consecutive year. Our full-year 2010 operating earnings were $660.3 million, and that was after recording $692 million of pretax losses primarily related to our insured RMBS portfolio. Additionally, our operating revenues hit record levels as a result of benefiting from a full 12 months of earnings from the former FSA acquisition.

In addition to our recorded earnings, I would also like to note that in 2010, despite experiencing a shortfall in production and originating PVP of only $363 million, we were still able to add in excess of $1 billion of economic value to the Company by deploying additional strategies. Specifically, we recaptured $157 million in unearned premium reserve and commutation premium from reinsurers. We bought back insured securities for an ultimate value of $136 million, and generated rep and warranty putbacks of $368 million when added to our PVP total would create over $1 billion of total economic value for the firm.

I will now provide specific comments on three major areas -- our 2010 business production; our RMBS portfolio and recoveries from breached representations and warranties; and finally, the S&P proposed criteria for rating financial guarantee insurers.

Regarding business production, AGM and AGC originated a steady flow of PVP in the municipal market each quarter of the year for a total PVP of $328 million in 2010. For the full year we insured 1,697 new Public Finance issues aggregating to $27 billion of new issue par. This represents 8.4% of the tax-exempt market on a par basis and 14% on a transaction basis. This is the tax-exempt market only and does not include Build America Bonds, or BABs, in the denominator.

The 14% of all transactions insured equates to roughly one out of every seven tax-exempt deals done in 2010 carrying assured insurance -- a remarkable number.

A further breakdown of new business originated in 2010 provides a clearer picture of our role in the current market and the demand for our products. In 2010 we insured approximately 15% of the par amount issued in the single-A rating category, which is our target market. In addition, our guarantee was also used on more than 15% of all par for Public Finance deals $25 million or less in size, regardless of their underlying ratings. We estimate that in these smaller transactions we saved issuers approximately $75 million in interest costs on a present value basis.

As these statistics indicate, in 2010 we provided a critical service to small and lesser-known issuers. And that is primarily because investors, especially retail investors, value our analysis and surveillance. Without bond insurance there would be a significant decline in market demand for small issues.

Additionally, many states depend on insurance to fund a significant portion of their borrowings. For example, in 2010 we insured 51% of all transactions issued in Pennsylvania; 41% in Alabama; 33% in Arizona; 24% in Louisiana and Utah; and 23% in New York and Texas. Again, this is clearly a significant achievement that demonstrates the need and demand for our products.

The result is even more notable when considered against a number of limiting factors. The strong headwinds caused by the fallout in our industry, our own continued ratings uncertainty and downgrade, and the significant reduction in the insurable tax-exempt market by ratings recalibration and the taxable Build America Bonds. One can only imagine what demand for our product could be in a recovered economy with high, stable ratings.

Turning to the Structured Finance market, we had modest originations in this sector in 2010, insuring $3 billion of transactions which generated PVP of $33.9 million. Transactions primarily included two public subprime auto loan deals; a public housing financing; a student loan transaction; modifications and restructurings of previously insured issues; and transactions that assisted financial institutions to manage risk and capital. There are some positive signs in the revival of the asset-backed market, and we believe we should have greater opportunity in this market in 2011.

Regarding the international public infrastructure business, 2010 was primarily a year of development. We were concerned about moving forward on a number of transactions without having a better grasp of how the credit crisis in Europe would impact the funding of projects mandated for our guarantee. We now have confirmed our credit views on a number of potential European and Australian transactions. These are primarily utilities, transportation, and hospital transactions; and we would expect to be more active in this market in 2011.

Another positive development in 2010 was the further migration of our portfolio to a higher concentration of US municipal business. Between January 2009 and the end of 2010, we ran off $68 billion of Structured Finance business including $10 billion of RMBS. This resulted in the percentage of Public Finance to our total exposure increasing from 67% to 76%. The runoff of Structured Finance business should also provide a benefit to our rating agency capital requirements, depending on the agency and the criteria used.

Now I would like to comment on our RMBS portfolio and loss mitigation efforts. During 2010 we saw early mortgage delinquencies -- one of the key indicators for the calculation of our reserves -- improve; but as the year developed there was a reduction in the rate of improvement, creating some uncertainty about the timing and strength of the recovery in the mortgage and housing market. We also saw an increase in loss severities, primarily in the subprime portfolio; and this led to our reserve increase.

Because of the continuing losses our loss mitigation efforts is a top priority. During 2010 we significantly expanded our team of dedicated workout specialists who, among other things, monitor and manage servicer operations. We evaluate all servicers and compare results, as the servicer has a significant influence on RMBS portfolio performance.

By the end of 2010 we had transferred or placed under special servicing contract 12 RMBS transactions with a gross par of approximately $1.6 billion. Further to improve results, an additional $1.5 billion is scheduled for servicing interventions over the next 90 days.

We have also made significant progress on repurchases of defective mortgage loans. At year-end 2010 our commitments to repurchase loans that breach reps and warranties grew to $528 million from $176 million at the end of 2009. In the fourth quarter of 2010 alone we increased repurchase commitments by $138 million.

As of year-end 2010, we had reviewed over 53,000 individual loan files, aggregating to $8.5 billion of loans, and identified breaches of rep and warranties on approximately 48,000 of those loans equal to $7.8 billion. To date, we have now obtained repurchase commitments from six counterparties across 23 transactions, a significant improvement.

Now I would like to turn to the draft S&P criteria for rating financial guarantors which S&P put out for comment on January 24. As most of you know we have been calling for a more transparent and consistent rating process for some time, and we fully support changes to rating agency criteria to accomplish this.

Now that we have been able to fully analyze the proposed S&P criteria, we believe significant improvements are necessary to establish a ratings framework that is clear and supportable. Our concerns are now focused on four major areas.

First, S&P's proposed bond insurance criteria contains significant increases in capital charges for US municipal exposures. S&P states that these new capital charges, which represent increases of as much as 500%, were designed to reflect the default experience of municipal bonds during the Great Depression, as described in the 1971 Hempel study.

However, in 2003 S&P referred to this same study and those same default statistics as having been used at that time to develop the capital charges and their capital adequacy model. How then can these same statistics that have not changed from the Hempel report now be used as a basis for increasing capital charges by as much as 500%?

Again in the new criteria, S&P uses a 16% estimate of missed debt service between the years 1929 and 1937 to compute proposed municipal capital charges. However, according to the study, the actual loss rate was 5%.

The logic of increased capital charges is further contradicted by S&P's recent actions in the municipal market, where their upgrades exceeded downgrades by 6 to 1; and current S&P publications refer to a low loss expectation from the current economic crisis.

Our second concern is that the S&P draft criteria introduces an arbitrary leverage ratio test of par exposure to capital that acts as a cap on the insurer's ratings. As proposed, this test would not distinguish insured risk by quality or tenor, nor would it reflect where an insured risk lies in the capital structure of a particular issuer. Given the simplicity of the proposed test it would be impossible for it to reflect important differences among companies.

Additionally, S&P proposes to exclude unearned premium reserve from the calculation of its proposed leverage ratio test because regulators do not include UPR when determining an insurance company's solvency. However, the primary regulatory motivation for excluding UPR from statutory capital is to limit dividend capacity of insurance companies in order to increase their ability to pay claims. In our case, UPR represents about 33% of total funds available for claims and adds very significantly to our financial strength.

The last major issue we have with the criteria as proposed is the lowering of single risk limits. Single risk limits should be tied to a stronger quantitative model correlated with loss frequency and loss severity by type of issuer and revenue stream. While the proposed criteria are somewhat vague, in the event that a specific risk exceeds the single risk tolerance, S&P suggests that the capital be reduced by the par amount of the overage. Given the substantial recovery experience of the municipal bond market, it would only seem reasonable to limit the capital reduction to the expected or stressed loss associated with the overage.

Finally, if adopted the proposed criteria would have significant repercussions for the market. Numerous municipal issuers who depend on bond insurance, as demonstrated earlier in our market statistics, would find their access to the market substantially impaired, if not eliminated. The criteria as proposed would also discourage new entrants to the financial guarantee market and would increase the cost of financing for a significant portion of municipal issuers due to the competition for investor dollars in a crowded, uninsured market.

Additionally, if applied to other financial institutions, it would have the effect of making it more capital-intensive to hold municipal securities in their portfolios and in turn limit market investment as a whole.

Lastly, it is also unimaginable that a successful company like Assured that has maintained earnings, capital, and a stable portfolio could fail to achieve the high ratings necessary for market access under this model unless the model was seriously flawed. Early next week we will post a detailed comment letter on our website which we hope will help market participants to evaluate S&P's proposed criteria.

We encourage you to make comments to S&P by March 25. As stated in our last call to discuss the S&P criteria, we have reached out to many market participants, regulators, and legislators who are also concerned about these proposed changes.

Finally, I want to close with a snapshot of where Assured Guaranty stands today. We are a Company that has achieved strong financial performance throughout the financial crisis. We have been able to double shareholders equity through the difficult period that began in 2008, and we have demonstrated our market acceptance in our target municipal market.

We also have the capabilities to rebuild our business in international Public Finance and Structured Finance as those markets rebound. Our primary challenges relate to the concern about the financial guaranty industry as a whole and ratings uncertainty. With a more reasonable approach from the rating agencies, I believe we can achieve our goals and continue to create value for investors, in our insured bonds, and for our shareholders. Now I will turn the call over to Bob Mills.

Thanks, Dominic, and good morning to everyone on the call. Our 2010 operating income of $660.3 million was a new record for Assured Guaranty, exceeding our previous 2009 record by 125%. Our 2010 operating income per diluted share was $3.49, also the highest in our history, up 54% from 2009.

Our strong results in 2010 are reflected in our operating ROE as well. Our annualized operating ROE this year was 14.8%, significantly above the 9.1% we achieved in 2009. This year included a full 12 months of income from AGMH, which was the principal driver of our earnings growth this year.

Fourth-quarter 2010 operating income was $152.9 million or $0.81 per diluted share, down slightly from the fourth quarter of 2009. The principal reason for the decline in our operating results was the decline in net earned premium and higher incurred losses in US RMBS.

You can see the divergence in our financials between economic loss development and accounting losses because of the requirements of FASB Statement 163. I will explain this more in a few minutes, but the difference is substantial.

Incurred losses on financial guarantee contracts and incurred credit losses on credit derivatives included in operating income were $215.5 million in the fourth quarter of 2010, while economic loss development was $76.6 million, substantially less.

Turning to the income statement, our net earned premiums included in operating income were $299.5 million, down 20% from $373.3 million in the fourth quarter of 2009. The decline in net earned premiums was consistent with our expectations given the continuing runoff of the AGMH Structured Finance book of business and the associated unearned premiums. In addition, refundings were down compared to the prior-year period at $38 million as compared to $46.1 million in the fourth quarter of 2009.

Even though the total investment portfolio was $10.7 billion at December 31, 2010, slightly down from $11 billion at December 31, 2009, our net investment income increased to $93.9 million, up 7% compared to the prior-year period. We have made some investment allocation and duration lengthening changes that will help increase the portfolio yield. But we also received the benefit from lower amortization of the premium on the AGMH portfolio compared to last year.

The pretax book yield on the portfolio was 3.73% at December 31, 2010, compared to 3.52% at December 31, 2009.

As many of you are aware, financial guaranty accounting has made it more difficult to understand the economics of our loss development. First, losses are recognized only to the extent and at the time they exceed the amount of deferred premium revenue on the contract.

Second, because of the bargain purchase of AGMH and the increase in our unearned premium reserve to reflect that purchase, the effect has been magnified, resulting in the recognition of losses in the future that we expect (technical difficulty). Third, credit impairment on derivatives is not included in the loss on LAE amounts that we record on our GAAP income statement. In short, very complicated accounting.

While management and our Board obviously pay close attention to the amount of loss and loss adjustment expense reported in our income statement, we focus specifically on the economic loss development from period to period. Economic losses reflect the total change in losses we expect to pay on our insured portfolio that results from changes in experience, assumptions, and discount rates regardless of the current level of unearned premium or the applicable accounting model, whether the contract is accounted for as a financial guarantee or credit derivative contract.

In order to you to be able to see and monitor this loss development, I refer you to our financial supplement on page 39, which shows the economic loss development.

So while our loss and loss adjustment expenses on financial guaranty insurance and credit derivative contracts that are included in operating income totaled $215.5 million this quarter, compared to $187 million the prior year, our actual economic loss development in the quarter was $76.6 million compared to $346.5 million in the fourth quarter of 2009. In other words, a significant amount of the losses you are seeing in our income statement this quarter reflect the recognition of losses previously expected to be expensed and not a material net change in our expectation of future losses to be paid. Going forward we will continue to provide you with both the economic loss and the accounting loss development, so that you can evaluate our loss experience.

Turning to the source of our loss development, the majority of the net $215.5 million fourth-quarter 2010 incurred losses were for US RMBS, largely for losses that we expected to expense from unearned premiums. Beyond that there were a number of factors that impact both expected losses and losses recorded in the income statement.

We adjusted our loss models this quarter and also adjusted our excess spread expectation impacting certain option ARM exposures. The model changes reflect actual early-stage delinquency trends, which show a reduction in the rate of improvement, as well as changes in discount rate, subprime loss severities, and an adjustment in the weighting of the various scenarios in our modeling to reflect our concerns about the timing and strength of the recovery in the mortgage and housing markets. The model changes resulted in gross loss increases of approximately $270 million. The excess spread adjustment approximated $140 million.

The impact of these changes was reduced by an increase in our expected recoveries on representation and warranty putbacks of approximately $330 million, the majority of which resulted from conforming the recovery rates on AGMH HELOCs to those originated by Assured, as we have now completed sufficient loan-by-loan examination and putbacks on these exposures. AGMH prior to the acquisition had utilized a difference strategy which resulted in a lower success rate.

Our net expected loss to be expensed before VIE consolidation that is included in our unearned premium reserve, and which we include in our calculation of adjusted book value, declined this quarter to $1.04 billion. A schedule of the expected loss to be expensed is included in our financial supplement on page 41.

Both economic and incurred loss development benefited from our continued progress on representation and warranty putbacks. As of December 31, 2010, we expect a net benefit totaling $1.7 billion, which includes a $649.1 million increase in our expected benefit for the year. Through January 31 of 2011, we have reached agreement on $555.5 million of mortgage repurchases including $138.1 million in the fourth quarter of 2010. Clearly we continue to make progress in converting mortgage putbacks into cash since we began our R&W review process more than two years ago.

Fourth-quarter 2010 operating expenses were $49.3 million, down from $51 million in the prior-year quarter. I expect our operating expenses, excluding first-quarter 2011 stock and performance retention plan compensation expenses for retirement-eligible employees, to be in the $50 million to $55 million range each quarter. First quarter's stock and retention plan compensation expenses are higher than in other quarters due to the accounting requirement that we immediately expense those amounts awarded to retirement-eligible employees in the quarter when they are granted.

First-quarter 2010 stock-based and performance retention expenses for retirement-eligible employees totaled $10.6 million pretax and are expected to be $8.5 million pretax for the first-quarter 2011.

Our tax rate on operating income continues to be volatile due to the recognition of income or losses in different tax jurisdictions. Our effective tax rate on operating income was 17.8% this quarter, below our expected range of 24% to 28% due to a $7 million release of a deferred tax asset valuation reserve.

Our full-year operating tax rate of 19.1% was also lower than our expected rate as it included a $55.8 million tax benefit due to the filing of an amended tax return for AGMH for a period prior to the acquisition. The tax rate has and will continue to fluctuate with the level of losses booked in taxable versus nontaxable jurisdictions.

I expect our effective rate on operating income will be in the 24% to 28% range for 2011. But that will fluctuate from period to period.

Our book value per share was $20.67 at December 31, 2010, up 8%. Our operating shareholders equity per share was $25.92 per share, up 15%. Our adjusted book value per share was $48.98, up 1%.

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

(Operator Instructions) Brian Meredith, UBS.

Yes, good morning. A couple of questions here. Bob, I was wondering if you could just walk through a little more detail again the increase that we saw in the RMBS losses. Just want to be clear exactly what happened. Did you start to see delinquencies increase in certain areas?

As we said on the call, Brian, what we did see was a decline or reduction in improvement. If you look at our models, obviously we try to track early-stage delinquencies basically over the next five years. It is critical as to what shape that curve takes.

In our scenarios -- right? We have four different scenarios that we evaluate relative to reserves. So the first thing we did was put a higher weighting in the reserve process to the worst-case scenario, because as we try to fit actual experience to the curve it is more moving to that level of curve. So that was the first thing.

The second thing we did was we upped severities. As we looked at our subprime book first-lien, severities are scary, to be very honest with you. And one of the things we have talked about on the call was the servicer intervention.

We have looked at a number of deals over the last few months where we are seeing severities on individual loans in excess of 100%. You might ask -- well, how do you get there? Well obviously you get there if there is some pretty sloppy advance work on behalf of the servicer, some additional charges that are being charged to the loan file that we don't believe are supportable.

Therefore we recognize the severity increase, yet we are now in the process of going out and doing servicer audits. I think at last I looked we had about 200 loans where we saw severities somewhere between say 130% and 150%.

One loan, I will give you a quick example, was a $187,000 loan that we got charged $293,000 of loss. You'd scratch your head and say -- boy, how did you get there? Well, they sold the property for nothing. They said it was vandalized. Yet they did by force place property insurance on the property. Yet we put no claim in to recover the damages to the house.

So it is issues like that that we recognize reserves, because we look at data and put it into our reserve model, and we do believe that there are remedies, but we don't reflect remedies until we can prove performance. So you had severity.

Then the last thing that really kind of hit us hard this quarter was we do get the benefit of excess spreads. Spread being what we pay on the insured securities versus what does the underlying mortgages pay as interest charges.

As the interest rate has gone up, and we are paying basically a LIBOR-based interest cost on securities, yet we are getting paid on a prime base on the individual mortgage loans, we now have this difference of interest rates which caused the spread to contract. And that by itself was over $100 million of detriment into the reserve number on the option ARM program.

So it was a slowdown in the improvement of delinquencies that could easily reverse in the current year; but we are trying to monitor as best we can the activity. It was severity which was something that we look at and have strategies to address, but we don't reflect benefit until we can prove performance.

And thirdly it was the discount rate -- or not discount rate; it is the spread value, which is significant in all these deals. If you think about how long these loans pay out and we get the benefit of that excess spread to mitigate loss and in some cases build back up a subordination -- those are the three critical pieces.

Okay. Then secondly, do you have an update as far as what your capital position looks like relative to the new S&P proposals posts fourth-quarter?

No different than what we gave you back in the call on S&P that we did a couple of weeks ago. You know, (technical difficulty).

Now it would come down a little bit because we used 9/30 data when we did that first analysis of the $1.9 billion on the leverage test and like the $1 billion to $1.5 billion on the cap charge test.

Obviously we have run off more of the Structured Finance, but it has not changed since that point in time significantly.

Okay. Then last question, Dominic. Can you comment on some of the discussions about revitalizing here the Build America Bond program and what's your thoughts? Whether that could potentially go through and ultimate impact.

Well, much like we did a couple years back when we had the potential of the Countrywide transaction closing with BofA -- and we all said our prayers, lit our candles, did the Stations of the Cross and the nine first Fridays of the month -- we are back in the same prayer mode relative to the Build America Bonds.

We don't think it has got a lot of mobility or support behind it in the current bill. But none of us can say with any certainty; you get surprises all the time. It continues to be our expectation that it will not be resurrected, but that is a guess.

We had to suffer through it in 2009. We do know that if there is any revision in 2010 or revitalization, it would have a lower subsidy; it would have a broader application to issuers. So we would hope that we would have better insured penetration statistics under the new program than we had on the old.

However we still believe it is to our better benefit not to have a program whatsoever. But it is uncertain at this time.

Great. Thank you.

Darin Arita, Deutsche Bank.

Good morning. This is [Derala Rezi] in for Darin. With respect to S&P's bond insurance criteria, to what extent has S&P shown a willingness to relax the criteria and allow for a longer implementation period?

I have no idea, to be very honest with you. We have obviously asked for some clarifications. We have talked to them about some of the issues, but on a very summary basis.

Obviously they are looking forward to our letter as well as other letters from other participants in the market. I think they will then base their decision based on their own views and those letters. At this point in time I don't have any comment as to where that goes.

Okay, the next question is -- through February what has been the par insured of muni bonds by AGO?

Through February? We have some information; let me grab it real quick. Thank you, Sabra. I had it in my little book.

So it's a very aberrational market. If you look at -- our statistics are through February 18. So overall market issuance is down 54%, so it is not representative. We have had aberrational months where we're going to have low penetration, but it is not indicative of what the full year is.

So we had a pretty bad January when the results were even more horrific in terms of penetration down. Right now on a year-to-date basis our market penetration on par insured -- and remember, we do better on transactions -- is 3.9%, of which 5.5% of that is in the February to date number. So we had a horrible March; building up better -- I mean a horrible January. Building up a better February.

And first quarter for us has always been historically slow both from an issuance and in insurance. So although the numbers are low, it's not the first time we have had penetration in the 5% or below 5% range. I think we noted there were four months in the previous two years that that has happened.

I don't think it is indicative of the year. But obviously with the ratings uncertainty that really needs to be determined before we will actually be able to see valid statistics that we can then use to gauge market opportunity and market penetration.

Okay, thank you.

Mike Grasher, Piper Jaffray.

Thanks very much. I guess first of all, a follow-up from Brian's question earlier. You went through an example on severity in terms of one loan. What sort of timing in terms of a potential reversal could you see on some of those?

Well, as I said, Mike, we have moved servicing on a number of deals or brought in additional servicing to support the servicer. Obviously we would expect to see results from that over about a six-month period.

We are moving more servicing in the first quarter to move up a significant number. There are obviously some other deals that we have begun to pretty much get aggressive with the current servicer in terms of issues and throwing these statistics back at them.

We actually did an analysis by servicer and just looked at things like delinquencies. What is the percentage of 30s? Which is the percentage of over 180s? What is the percentage of -- what is the severity for all foreclosed properties?

And as you go servicer by servicer, the numbers are significantly different -- going from something that would not cause us significant loss to something that is causing us significant loss, ant yet it is the same product, same basic loan type, same basic borrower.

So we're getting aggressive much like we got aggressive last year on reps and warranties, and you can see the benefit of what we are now starting to achieve there. The new target for this year is servicer and servicer behavior and servicer results. And I would expect by the end of the year we are going to start to see some quantifiable results that we can talk about.

Okay. Can you talk a little bit about the TruPS? Specifically I guess the mortgage and REITs, it seemed to have some falloff in terms of the credit enhancement.

You know, the TruPS have actually kind of held their own. We have not had significant increases in reserves over the last couple of quarters.

As we look at the REITs today we still have credit enhancement of roughly 32%. I don't know what that means -- 32% on roughly $2.3 billion of outstanding par.

We are still monitoring that, but it has not deteriorated whatsoever. If anything, it has slightly improved. We are seeing kind of a recovery in the market to some extent, especially around homebuilders and other related real estate service companies.

On the banks and the insurance side, we still maintain a subordination of 31%. We think that that is reasonable. And as I said, don't really at this point in time project a worsening of that situation in the current period.

Mike, one thing that we did this quarter was we standardized how we were calculating current credit enhancement across different transactions within the bank and insurance and the mortgage and REIT buckets.

Okay.

Previously we had calculated based on the information provided to us by the trustee, whereas now we are basically using the same standard haircut for defaulted or deferring securities within each of those buckets. So there is a slight movement in those ratios, but it is basically reflecting a more consistent methodology for calculating that ratio than just relying on the trustee reports.

Okay, so it is more change in the process than it is --?

Right, the shift you are seeing in the numbers reflects more that than deterioration per se in the underlying collateral performance.

Okay. Then I guess just one final question. Any commentary you can provide or perspective that you have been able to gain from Moody's as it relates to S&P's approach to this? Have they compared notes? Are you comparing notes with Moody's? Are they thinking anything?

Well, we are trying to the best job we can in comparing notes, but they seem to not really -- Moody's has not really concerned themselves with S&P. Obviously, Moody's has its own process and methodology, and we are working with them on that.

They have not given us any issues relative to change in their underlying view, calculation, etc. Obviously, Moody's continues to make noise about demand in the marketplace, and that seems to be their focus.

As we said we do expect the Moody's review sometime in the early part of this year. As we talked the last time Moody's did a review was in '09. It used June 30, '09, data. So just thinking about the improvement in our portfolio over the last 18 months, would hope to put us in a reasonable position relative to any new criteria that they would determine -- which they have not communicated anything to us as of this time.

Okay, thank you.

Douglas Ott, Banyan Capital.

Good morning. My first question is -- pertains to an article on February 16 in The Wall Street Journal about how municipalities are going to banks instead of to the bond market for money. Does Assured see this as a new trend, or is just a temporary anomaly? Just talk about how this might affect Assured's business going forward.

I think the market is going to look for other forms of financing, so that is expected. You go back two years ago, it was the letter of credit market which is now not much of a competitor in our industry.

The bank loans are a way of securing financing, and it seems to have an increase in interest and appetite on behalf of the banks. But much like the LOCs, it is an imperfect hedge or an imperfect solution. And therefore we typically will wind up seeing opportunities in terms of when those deals have to refinance.

It is hard to match term against our term in the way we bill it. They are not willing to go out to 30 years on a fixed basis.

So we see it as a temporary support mechanism, but not a long-term stable competitor against the bond insurance industry. You have got to remember -- you have got to look at what the covenants would be from both the issuer side as well as the banking side in those type of deals, and the restrictions that they would place on both sides. What's the limits of their bank borrowings? What's the ability of the bank to provide financing in their limits?

So we see it as a further support for municipal issuers, which we are very comfortable with. We see it as a short-term competitor, but we don't believe it has got long-term competitive value, much like the letters of credit.

Okay. Finally, can you comment on your pricing power and how insurance rates have trended in the Public Finance market for you guys?

Yes, I would say we set a target return on every deal that we write. We assess capital on each and every deal. And today we are still able to achieve our targeted returns.

We set them typically at a minimum of 15%. Through part of the crisis we were able to get returns reasonably in excess of that, in the mid to lower 20%s. Now we are back into more of that target range of 15% to 17%.

We still are able to trap around 50% of the spread. Spreads have widened out, which has helped obviously. You go back a year ago, spreads were tighter.

So we are comfortable with the pricing today. We still believe it maintains our core objectives and ideals, meets the standards that we set. But to say that it is not under pressure would not be giving you the full view of it.

Obviously it is under pressure because of the uncertainty with things like the S&P ratings. But we are still able to achieve a number that meets our target and we are comfortable with relative to long-term use of the capital.

All right. That's good. Thank you very much.

(Operator Instructions) [Steve Winslow, BOA]. Sean Dargan, Wells Fargo Securities.

Good morning. I was just wondering about your thoughts on putting new structured product PVP on the books, given I guess what S&P is viewing as the capital charge related to that product.

That's a very good question. Obviously we have taken a kind of wait and see approach till we get further clarity on what S&P is going to do. As we said, right now the limiting factor is more the leverage test. If they make slight modifications to the leverage test, just as simply as including the UPR, we are fine with the leverage test. We pass it at the triple-A level, not the double-A level.

So that seems to be the biggest constraint because of the 20 to 1. We see that there is a strong opportunity in Structured Finance. It has high returns -- returns higher than in the municipal market. So when you fit it within the capital model it makes sense.

We have a dedicated company that would do or provide that type of insurance policy. But you point out -- your point is relevant. We've got to see where this ultimately comes out.

If you are just going to use the blind everything gets a 100 basis points charge, you'd have to question that, because the ability to do a triple-A deal with a 100 basis points capital charge makes no sense.

So you will still find opportunities, but the opportunities will be less, and they still have to fit into whatever the final requirements will be under the S&P criteria.

Okay. If you are back into the 15% to 17% return range on new municipal business, what kind of returns do you think you can achieve there?

In what, the Structured?

The Structured, yes.

Yes, typically it is north of 25%.

Okay. All right. Thank you.

Tim Bond, JPMorgan.

Getting past this S&P methodology change, it seems like they are going to -- at least my base case is there is going to have to be some type of capital raise. Don't know what size that would be; you could debate that. But if that were to occur, to keep a double-A rating, what would be your preference?

Would you raise equity? Would you go to the surplus note market? Would you do something in the reinsurance?

Then also in that I guess proposed methodology change, if there was a chance that you could regain a triple-A rating, is there a limit of what you would do to raise capital to get back to that level? Thank you.

I think you ask a good question that is probably on a lot of people's minds. So first and foremost we have to see what the criteria is and understand what that means relative to maintaining ratings.

Our first preference will be to reduce risk. We have reasonable opportunities in the markets to commute or amend certain deals that we look for that are high-cap charge deals. So for instance, we have international infrastructure business; it is held in either swap form with a dedicated counterparty or in very tight investor hands. These are strong financial deals that we do not expect losses from, yet do contain high cap charges. So we would look to commute those.

We have other exposures like CMBS exposures that once again have no economic loss content, that we would look to resolve those in a commutation or tariff or whatever you want to call. So our first and foremost goal would be to reduce risk.

Second, we do have debt capacity. We would have to test the debt markets to see whether that is an economic or efficient way of providing capital if there is a capital shortfall.

Three, we have got other assets that we would look to see if we can do some early monetization. And it'd specifically be rep and warranties, as to whether we can accelerate settlements or collections on that asset to get a higher credit quality or capital credit in the analysis.

So we go through the process of looking at all of the potential opportunities if there is defined a capital shortfall, what it is, and how best to accomplish it. Our last preference would be to raise common equity.

There are no further questions at this time. I would like to turn the call back over to Ms. Sabra Purtill for closing remarks.

Thank you, Carisa, and thanks to you all for joining our call today. We appreciate your interest in Assured Guaranty; and if you have any additional questions or require further information please do not hesitate to contact us. Thanks again and have a great day.

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Good day.