Assured Guaranty Ltd (AGO) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Assured Guaranty Ltd. first-quarter 2011 earnings conference call. My name is Mary 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 this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Sabra Purtill, Managing Director Investor Relations.

Thank you, Mary. Good morning to you all. Thank you for joining us for Assured Guaranty's first-quarter 2011 financial results conference call 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 and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results, future representation and warranty settlement agreements or other items that may affect our future results.

These statements are subject to change due to new information or future events, 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 note that our statements made today may have been updated since the time of the call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings and also for our most current financial filings and risk factors. Please note that we plan to file our first-quarter 2011 10-Q by the end of the day today.

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 remarks we will open the call up for questions. Please dial into the call if you want to ask a question as the webcast is not enabled for Q&A. I will now turn the call over to Dominic.

Thank you, Sabra, and good morning. 2011 has already been an eventful year for Assured Guaranty. Today I'd like to cover some of the events, in particular the Bank of America agreement, the proposed S&P bond insurance criteria, our response and related capital strategies and new business production and future market opportunities and conditions.

The Bank of America agreement, which was announced on April 15, 2011, was a major accomplishment for the Company. This agreement, accomplished without litigation, generated an economic pre-tax gain of $411 million which is being recognized into income over several periods beginning in the first quarter of 2011. The agreement provides for cash payments totaling $1.1 billion and also covers 80% of our paid losses on 21 first lien deals until collateral losses in those deals reach $6.6 billion.

This feature protects the Company substantially from further economic or capital impairment on those transactions. The agreement validates our strategic loan-by-loan approach, confirms our views as to our contractual rights and supports future recoveries on paid losses on RMBS first lien transactions from the other rep and warranty providers where we have significant subordination and rights. But we still have a lot of work left to do.

This agreement covers less than 30% of the outstanding below investment grade RMBS par at March 31, 2011 and therefore we are reallocating our resources to pursue our rights against the others including Deutsche Bank, UBS, Credit Suisse, JPMorgan Chase and Flagstar Bank. And we are not the only ones.

There is no question that private-label RMBS investors and the federal government are now focused on this issue as well. I'm sure you saw the federal government's lawsuit last week against Deutsche Bank which is one of our remaining significant counterparties.

In addition, it appears that JPMorgan Chase and Credit Suisse have been subpoenaed by the SEC regarding their exposure to rep and warranty claims. These activities bring more attention to this critical issue and hopefully will lead the banks to a greater recognition of their liabilities and will lead to further rep and warranty reimbursement discussions.

Assured Guaranty will continue to pursue our rights including litigation for those who do not recognize their responsibilities. We would prefer to resolve these situations without litigation, but we will pursue our rights in the courts as well. In litigation situations the cost of the settlement to the rep and warranty provider will be significantly higher.

During the quarter we added Flagstar Bank to our list of rep and warranty providers and we had to sue for breach of contract. In all rep and warranty litigation we will pursue fraud claims where applicable and seek other compensatory damages in light of those parties refusal to cooperate.

As part of this continued process now focused on the other rep and warranty providers, we are now at a point where our visibility into the Deutsche Bank, UBS and Credit Suisse deals are much better. As of the end of the quarter we have identified about 13,500 second lien and 15,400 first lien loan files representing more than $5.4 billion of loans that breach one or more rep and warranty characteristics such as the misrepresentation of income, employment or occupancy, undisclosed debt or noncompliance with underwriting guidelines at loan origination.

This means two things for the other counterparties. First, we now expect more claims on their RMBS transactions, but second we expect more of these crimes will be put back to the provider.

Another major event in the quarter was the unexpected announcement by S&P of proposed new criteria for bond insurers. This announcement, which referenced a possible downgrade, affected the perception of the value of our guaranty and new business production in the early part of the quarter. We feel very strongly that these new criteria were not based on the fundamental analysis of the municipal market or of the quality of the risk in our portfolio.

We have been and continue to be very vocal on this issue posting several comment letters on our website, holding a conference call to explain some of our concerns we had with a proposal and literally talking to hundreds of investors. S&P recently announced that they expect to finalize their criteria and the related ratings applications for us some time in the third quarter.

S&P also announced they had gotten a lot of comments and produced a summary of the comments for the public that they receive. S&P's own summary of the comments they received contain significant feedback from the investor community and indicated that the proposed criteria contains many significant issues to which the market is taking great exception and therefore we believe that the proposal should receive substantial modification prior to its implementation.

In the meantime, we have implemented a multi-pronged strategy to augment rating agency capital. These strategies are keenly focused on reducing risk in an economically favorable or capital accretive way including -- one, agreements to terminate existing contracts. There are three distinct types of transactions here; the first is where the counterparty wants to terminate insurance coverage to release itself from our contractual restrictions such as rep to hold.

Here we typically capture 100% if not more of all the economic benefit due us. In these cases the economic benefit is strong, but the capital relief is relatively small except when considering a leverage-based measurement.

The second example is where we target deals with similar contractual restrictions but have higher capital relief, and here we will share the future economic benefits.

Lastly, in some cases would agree to terminate transactions where we would incur some costs, but only in cases where the capital benefit far outweighs the cost of terminating the agreement.

Another strategy we continue to employ is capital accretive purchases of rep bonds. And finally, we continue to expand our resources dedicated to pursuing rep and warranty reimbursements and/or settlements which has the benefit of monetizing our receivable and potentially recovering already expensed losses. We are making good progress in all of these so far.

In terms of the capital impact for the above strategy, so far this year we have terminated about $7 billion of par for a capital benefit of between $200 million and $400 million depending on the rating agency. On rep and warranties we increased the value of future reimbursements from the other rep and warranty providers by about $375 million including payments received in the quarter. And on bond purchases we estimated that we have freed up more than $150 million of rating agency capital so far this year.

All of this is in addition to the capital benefit we derived from the Bank of America agreement which, when we total all benefits from all areas, equates to about $2 billion in rating agency capital relief. In addition, we believe the run-off from our structured finance portfolio generates an additional $250 million of capital relief per quarter. This progress, which we hope to continue for the balance of 2011, puts us in a better position to be able to address any capital revisions by the rating agencies via internally generated claim paying resources and not through a potentially dilutive debt or capital raise.

Before turning the call over to Bob I'd like to touch on our new business production which was lower than our goal for the quarter largely as a result of the 55% reduction in new issue market for US municipal bonds making it the lowest quarter for US municipal issuance since 2000. We think our production was reasonable given the reduction in municipal issuance and the uncertainty created by S&P's proposed new bond insurance criteria.

In fact, as a testament to the resiliency of our product, our insured penetration actually increased month-to-month during the quarter from 2.7% in January to 4.6% in February and 6.7% in March, and even hit 8.9% in April, a very strong result. Smaller and lower rated issuers continue to rely on our guarantee for market access. We guaranteed about 13% of par for transactions of $25 million or less and approximately 12% of par for all single A rated issuers.

Although municipal issuers are under budgetary pressure and the cost of financing has increased, critical investment in infrastructure, as well as continuing financing needs, will hopefully increase issuance through the remainder of the year. In addition, any stabilization of our ratings should increase the value of our insurance making it more beneficial for more issuers. We also see future opportunities of both the structured and international markets that we hope to execute in the remainder of 2011. I'll now press the call over to Bob who will talk about our financial results in more detail.

Thanks, Dominic, and good morning to everyone on the call. Our first-quarter 2011 operating income was up 121% from first quarter of 2010 to $248.9 million largely due to the Bank of America agreement. First-quarter 2011 operating income per diluted share was $1.33, up 125% from first-quarter 2010. Operating ROE was 20.4% for the quarter.

Although it was finalized after the end of the quarter, the Bank of America agreement provided us with certainty regarding R&W recoveries at March 31 for the BofA transactions. For transactions specifically covered by the Bank of America agreement we recognized a benefit in operating income of approximately $220 million pre-tax which equates to about $0.78 per diluted share.

I'll touch on a few highlights on the income statement and balance sheet before discussing the Bank of America agreement, economic losses and R&W in more detail. Our net earned premiums included in operating income were $273.1 million, down 16% from $325.6 million in the first quarter 2010. The decline in net earned premiums was consistent with our expectation giving the continuing run-off of the AGMH structured finance book of business and the associated unearned premiums.

Our net investment income totaled $96.4 million, an increase of 14% from the prior year quarter reflecting our redeployment of cash and short-term investments into longer duration fixed income assets, as well as a net increase in accretion and amortization year over year. As a result the yield on the investment portfolio available for sale was up 3.92% at March 31, 2011, this compared to 3.52% at March 31, 2010 and the duration is at 5 years versus 4.3 years last year.

The size of our total investment portfolio decreased slightly to $10.5 billion versus $10.6 billion at March 31, 2010, but will increase during the second quarter reflecting the $850 million cash payment we received from Bank of America. First-quarter 2011 operating expenses were $56.8 million, down 9% from the prior year quarter due primarily to a decline in incentive compensation. For the balance of 2011 I expect that operating expenses will continue to be in the $50 million to $55 million range each quarter.

Our effective tax rate on operating income was 28% this quarter, within our expected range of 24% to 28%, but down from 32.2% in first quarter 2010. The tax rate fluctuates due to loss expenses or benefits booked in taxable versus nontaxable jurisdictions. This quarter's improvement in tax rate reflects operating income in our Bermuda operations. I expect the effective tax rate on operating income still to be within our expected range of 24% to 28% for 2011, but it will fluctuate from quarter to quarter.

Our book value per share was $21.16 at March 31, 2011, up 2% from year end and up 8% from March 31, 2010. Our operating shareholders equity per share was $27.18, up 5% from year end while our adjusted book value per share was $49.55, up 1%.

I'd now like to turn to losses and the impact of the Bank of America agreement. I will first talk about changes in expected losses, which we refer to as economic loss development, and reflects changes in assumptions and accretion of discount and which does not contemplate the deferred loss recognition requirements of Generally Accepted Accounting Principles for financial guaranty insurance.

Second, I will relate the economic loss development to the amounts reported on our operating income statement. All of the following information relates to the entire insured portfolio regardless of whether it is in financial guaranty insurance or derivative form and assumes the VIEs were not consolidated, but instead treated like any other financial guaranty policy.

As I said, economic loss development is the increase or decrease in the Company's expected future claims after considering claim payments made in the period on a discounted basis. You should refer to the roll forward of expected losses to be paid that is included in the financial supplement and press release, which shows the economic loss development by sector.

In the first quarter of 2011, there are essentially two main drivers of economic loss development. The most significant sector and the one that I will focus my comments on is the US RMBS sector. We increased our gross economic loss expectations based on observable trends in the mortgage market. The mortgage market recovery continues to lag.

In addition, we've observed increases in loss severities on liquidations of first lien transactions. In our reserving models, we have increased the time period over which we expect the conditional default rate to return to a normalized historical rate on second liens and increased severity assumptions on first lien transactions. As a result, the change in expected loss before consideration of R&W benefits was $635.4 million pretax.

We've also experienced improvements in our estimated R&W benefit. The primary driver of the benefit in the first quarter was the Bank of America agreement which we executed in April. Although this was a subsequent event to the balance sheet dated March 31, the BofA agreement provided us with certainty about our actual recoveries on Bank of America transactions.

Because we had not issued our first-quarter 2011 results at the time that the BofA agreement was executed, Generally Accepted Accounting Principles required us to incorporate this information into our March 31, 2011 assumptions. R&W benefits related to other counterparties were also increased during the quarter reflecting continued loan file reviews, additional transactions, continued high breach rates in the BofA agreement. As a result we recorded an increase in R&W benefits. The economic increase in reps and warranties in the first quarter 2011 was $784 million.

The two areas I just discussed were the primary contributing factors that resulted in the net positive change in economic development of $148.6 million in the first quarter of 2011. This benefit should be viewed as the most reflective of the actual loss experience of our below investment grade portfolio in the quarter.

As you know, all losses must be calculated on a transaction-by-transaction basis and each transaction's expected loss estimate net of rep and warranty estimated recoveries is compared to the unearned premium reserve of that transaction. When the expected loss exceeds the UPR the loss is recognized in the income statement for the amount of such excess.

This is a very simplified explanation of the GAAP accounting model prescribed for financial guaranty insurance and I refer you to our loss accounting policy in the 10-K for further information describing some of the other complexities involved in the timing of loss recognition. We also provide a table in the financial supplement and 10-Q scheduling the expected timing of loss recognition based on our current estimates.

Because of this loss recognition model, the amounts reported in the financial statements may only reflect a portion of the current period's economic development and may also include a portion of prior period economic development as UPR amortizes. For the first quarter 2011 economic loss development was a benefit of $148.6 million while operating income had a loss expense of $25 million.

The difference is essentially loss development that is absorbed in unearned premium reserve that is not currently recognized in the income statement. We provide you with loss expense by sector in the financial supplement so that you can see the components of loss expense. The transactions covered by the BofA agreement had a significant effect on both economic loss development and on loss expense included in operating income.

With respect to economic loss development, the impact was an increase in R&W benefit of $411 million pre-tax which equates to $276.3 million after tax or $1.50 per diluted share and represents the largest portion of the $784 million improvement in rep and warranty benefit in the first quarter 2011. The effect on loss expense recognized in operating income was a benefit of approximately $220 million pre-tax which equates to approximately $0.78 per diluted share after tax.

I'll now turn the call over to the operator to give you the instructions for the Q&A period.

(Operator Instructions). Sean Dargan, Wells Fargo Securities.

Thank you and good morning. My question relates to the US RMBS first lien losses. Does it give you more bargaining leverage in the rep and warranty negotiations to recognize economic loss up front? I mean, is that a prerequisite to getting (multiple speakers)?

No, because you've got to remember the rep and warranty position begins with any files or loans that were made that were ineligible based on the conditions contained in the representations. So you start off in our case with principally seriously delinquent loans or loans that have already been liquidated, and that we will beneficially call collateral losses or the things we expect to become collateral losses which might not relate to our actual economic loss.

Because understand, in a lot of this, especially in the first lien deals, you have subordination that sits below you in the structure that would absorb the first level of losses up to some pre-described amount. Although there are losses that you don't recognize as an economic loss, you would still get the benefit of those in terms of a put back as a rep and warranty recovery. So you don't need to proceed in an economic loss to create a rep and warranty condition.

Okay. Can you just describe what happened in the first quarter that made you rethink your estimates about severity or -- can you just describe the market conditions maybe in a little more detail?

I guess as we look at the residential market -- and remember, this is no exact science. So we've got models, the models are very sensitive to change in certain parameters. One of the main parameters is severity, obviously that is the amount of money we lose on each loan that forecloses. And if you look, and we just look at actual published statistics in our actual results that get reported on our deals which are available to anyone that wants to look through our website that has the deals on it and used as (inaudible). Severities, especially in first liens, have been going up.

Now, we think some of it could be how they're processing modifications and we're trying to dig back through there. But we respond to changes in observed results and the reserve of the observed results and we see show severity going up.

Okay, thank you.

No problem.

Mike Grasher, Piper Jaffray.

Thank you, good morning. Just the follow-up to that would be the increase in severity and the problems that you've had with servicers in terms of some fraudulent behavior, is that included in such assumptions here?

Good morning, Mike. Obviously the increase in severity is -- as you know, we've implemented many strategies to address residential mortgage backed security issues. We focused on the rep and warranty providers as one of those strategies and, as you're aware, we've always also focused on servicer activity, servicer behavior and servicer adherence to the contract.

In the quarter we've noticed severities going up. We've noticed that the slope of the improvement is more gradual or is becoming very gradual in terms of reflecting a long recovery period for US residential mortgage market and the US residential market in total. Both of those were adjusted.

Now you have to also think about as now we're switching more to a first lien exposure versus second lien which is by and large -- it's either fully reserved or has runoff significantly. Once you go through your subordination any further change in assumptions or perceived results has a more dramatic impact in terms of losses incurred.

When you have subordination out there, any say 5% movement in severity, some of that would have been absorbed in your existing subordination -- that would reflect true losses or economic losses as how we count loss development. Now as you've gone through most of the subordination on some of those deals you're going to see more loss activity created by changes in assumptions relative to the slope of the curve in terms of how fast are the improvements as well as the increase in severities.

Number two, Mike, none of those reflect our servicer activity. Right now we've made some servicer interventions on certain deals. We're seeing significantly improved results in the early months, but they're in the early months in terms of what's happening to early stage delinquencies, what's the severity total upon foreclosure, how fast loans are being foreclosed. So those things are still benefits that we've got strategies to try to mind or cultivate yet are not reflected in our reserving numbers.

Okay. And is there a dollar number behind those efforts?

Not the one I'd give you right now.

Okay, fair enough. And then, when you -- Bob, I guess a question around these -- the economic loss estimates, with the BofA agreement, the reinsurance portion of it, is there -- you still have to take that estimated loss on that because it is sort of a reinsurance agreement still, is that correct?

It covers -- for first liens the agreement covers 80% of our incurred losses up to the maximum, it's certainly well below that from our estimate standpoint. But yes, all of our estimates have to contemplate that we will still be paying (multiple speakers) those losses, yes, and they do.

Yes, they put the loss up gross and you take the offset as a recovery asset which will then get re-classed into a reinsurance asset or say a recovery asset, depending on how the agreement is ultimately interpreted.

Okay, so that number then is net -- the number that you provided this morning is net of the impact of that reinsurance deal?

Yes.

Okay, thank you. And then the final question. Just -- I missed the number, 13,500 on second lien breaches, 15,400 with other servicers. What was the total dollar amount of par outstanding around that?

We didn't give you par outstanding, we just gave you the amount of the loan file balances which was $5.4 billion I think. $5.4 billion.

Okay.

So that's the theoretical aggregate put back amount.

Okay. Thank you very much.

(Operator Instructions). Matthew Howlett, Macquarie.

Good morning. And thanks, guys, for taking my question. Dominic, you mentioned you'd like to negotiate a settlement with some of the other counterparties -- UBS, Deutsche Bank. Without obviously going into detail, and I know you can't, but what are the conversations like? Are they friendly, are they contentious? What are the sticking points? Assuming you have access to the loan files, is it just proving causality or fraud that they're arguing against?

I'll answer the first part. So typically conversations start out friendly, become awfully contentious and then ultimately hopefully result in a settlement or an agreement. Where we're at is first you've got to prove, and we believe we've done that in terms of causation to generate the conversation around an agreement.

And obviously it starts off with where we identify -- well, A, get access to loan files; B, identify breaches based on our contractual rights and then pursue those breaches in terms of recovery so that we can look at either recovering a significant amount of our paid loss or, as in other cases, trying to deal with any potential further reserve development.

Why are these (multiple speakers)?

(multiple speakers) counterparties (inaudible).

Why are they pushing back more than BofA? Is it just BofA set a precedent for the industry or is it just they look at it differently?

Well, you've got to understand relative to Bank of America we've had a very long negotiated, discussed process. This started back when we started paying losses on second liens and therefore it became -- the primary objective was looking at the second lien losses because they were costing the Company both cash and incurred.

And that happened to lead to who at the time was the largest single counterparty on second liens. But the process, which started out very rudimentary, became a reasonably sophisticated, got further, made administratively beneficial to both parties between ourselves and Bank of America, gave a lot of data, a lot of exchange, a lot of information, a lot of conversation between the two parties over that roughly two-year period.

So you kind of need, A, do we have a problem? Let's recognize the problem. B, how do we start to get our hands around the problem or at least be able to quantify it? C, you start to exchange that information in data. D, you get into individual discussions when it has to get down to a loan-by-loan type of review which we are agreeable to, we obviously did that because we think that's the way that the transaction ultimately gets executed and the easiest way to get considerable agreement in terms of what are the specific problems.

And then you ultimately get into A, okay, is there a better way to accomplish this task than sitting here tying up a ton of people on both sides of the relationship and going through each file by file once you get to a consensus? In their case they followed a process; we agreed to follow the process. And now it's getting the other rep and warranty providers, some of which at least appear to be beginning to want to start a process, others still have been very uncooperative and in those cases we will seek litigation and litigation for us has a significant cost that we're going to want to get significantly reimbursed for.

So really any -- the timeframe for this, could it -- are we talking it would be years or do you think that after post the settlement with BofA things could really pick up here in terms of either litigation or settlements?

It's hard to really look at a time frame. The one thing we'll tell you is there appears to be significantly a lot more attention being paid not only from us but from tangentially regulators, investors, other counterparties, the treasury, the Fed, the SEC. This has become a very, very significant area of concern.

If you think about it, two years ago when we were talking about this we might have been the only person out there that were noticing the fact and believing that we had some opportunities for recoveries. I think now it's kind of prevalent everywhere, there's a lot of litigation out there and obviously some of that litigation will begin to go through discovery, have refiled motions which you saw in the EMC AMVAC case.

You're going to see some things actually get to trial we would hope in say the next six to 12 months which would also further clarify rights. I think all of those lead to a more conducive environment to settlement, because if you see potentially large award exposure out there or you've got to start to recognize the liability anyway because of the attention being paid by regulators, accountants, etc., that's going to also foster a more conducive environment to discussions or agreements.

Great, thanks. Just last question -- on the remaining below investment grade exposure on the resi, how much is there to entities that are bankrupt that you no longer can pursue like [EG] Ameriquest or [maybe] Century? Or is it the majority to the UBS's and the Deutsch's of the world?

Yes, the majority is still to the solvent providers of rep and warranties. Obviously we don't take any credit for any of the nonexistent or defunct or bankrupt providers. We only look at viable counterparties. And as we look at the next group of potential candidates, as we said, BofA in our press release accounted for less than 30% of what we believe was the universe of rep and warranty opportunity; the next three accounts for the same kind of just under 30% of future benefits. Between four of them that's 60% of our total.

Great. Thanks, Dominic.

You're welcome.

Marie Lunackova, UBS.

Good morning. I just had a question on the capital relief for the rating agency. I know you mentioned, Dominic, in your prepared remarks, was it about $2 billion -- you mentioned the number?

Yes.

Now, is it just adding together the impact from the terminations and bonds for purchases of insured bonds and then R&W?

It's terminations, bond repurchases, it's the rep and warranty recognition both on a cash and on an affect and accrued side, it's run-off, it's paid losses because obviously if you pay the loss it comes out of your capital need -- theoretically comes out of capital as well. But we continue to generate, as you notice from our book value or adjusted book value, even in spite of our lower production we're still able to maintain continued increases in book which I think is a very positive fact. So it's a combination of all of those above.

Okay. And then if I look at the RMBS only, the fact that there are additional offers, would that hurt -- would that cost some additional capital from the rating agencies or not? How we should look at that?

Well, when you put up the loss reserve you get credit for the reserve in the capital models. You take it through income, since the income statement shows positive you really haven't depleted capital, you've added to capital.

Okay.

While at the same time adding to reserves, so you're basically getting the benefit.

Okay. And then if we look at the R&W put backs as a percentage of losses on those loans, can you give us a number how much you were actually able to recover on those loans that were settled or that you are still (multiple speakers)?

You're looking at the rep and warranty as a percent of the ineligible mortgages or as a percent of the cumulative losses?

Well, either or both.

Okay, so if you look at it from our book point of view, we're booking today around a 30% recovery on first lien losses incurred. But remember, on those deals we have subordination that pays the loss prior to us recognizing incurred. So the percentage of recovery on total collateral losses would be substantially less.

Okay. And then on the second lien?

And once again, we believe we've taken a very conservative view of this. We try to provide for all circumstances including elongated settlements, potential litigation, costs involved in getting to a conclusion as to benefits and recoveries. So it's a very ground up approach, but it is very conservative as well as kind of demonstrated by the BofA agreement.

And on the second -- this was the 30% for first lien. Do have a number for the second lien?

Second lien has been a little slightly higher because of the fact of activity to date. I think it might be in the low forties.

Okay. And then I had a question on the Muni Center, what is the acceptance in the market so far, how successful it was? Can you give us color on that? Or is it still impacted by the S&P -- you know, (multiple speakers)?

Well, everything is impacted by ratings, right. And as we said in my comments, if we get stabilized ratings sometimes through the year, we think that would significantly increase the value or the perceived value of the insurance. We're seeing activity on the Muni Center. The neat thing about it is it's also causing a lot of cut conversation about the availability of secondary market insurance.

So we either execute it through the Muni Center or lease generates a call into our desk, our second market's desk, they think it's an opportunity. We've done roughly about 20 trades of the 100,000 or more area. Obviously we're going to continue to support that with advertising and other targeted market awareness for the availability.

But at this point in time we're pleased with the activity and the conversations that it's generating. And as I said, as we look to hopefully brighter periods ahead of stabilized ratings, that should tremendously add more value and more opportunity.

Okay, thank you very much. That's all for me.

You're welcome.

Kevin Maloney, BlackRock.

Hello, guys. Two quick questions, one on structured finance. You obviously had some momentum there and I was wondering if you could discuss the deals. I know you put the whole -- everything you've done on your website, but if you could discuss the deals you did during the quarter that would be great, and whether you think there are legs. I mean, Dominic, you had mentioned that there would be further deals coming through the year. Any discussion on that regard would be great.

And then secondly, could you tell us whether you have any put back reserves for like say IndyMac or Lehman or Taylor Bean? Those guys in some regards are still around. There are actual physical assets that are being negotiated out. So I was wondering if you have any reserves against those guys or if you just counted it all together?

Okay, so on the first question, on structured finance, the deals we're doing today are typically around capital relief, right. They're on balance sheet; they're not new cash investments. And we see still significant opportunities, especially as various financial markets are increasing kind of capital calculations in how they do assets on financial institutions' books and that includes both insurance companies and banks. So one of the big deals we did was a closed block reinsurance deal for capital relief and we still see those opportunities.

What will really drive the structured finance market for us in terms of opportunity is the continuing growing in of our credit default swap spreads. Obviously we had a significant improvement in April. Hopefully as the year progresses once again still critically aligned to rating agency activity, those spreads will come in further, that will also affect then the ability to write more structured finance business.

And we do see opportunities even in new money issued like in the subprime auto area. Other esoteric assets like timeshares, leased equipment, etc., there's a lot of what I'll call discussions going on, but obviously discussions are still a fairly decent distance away from execution.

Okay, great. And on the second question?

The second question, I'm sorry. On the -- (multiple speakers)?

Whether you have any put backs to lien or --?

Yes, we take no benefit in our financial statements. We obviously have litigation and at least want to get in line for any potential liquidation of their assets. But we take no benefit through the financial statements for that.

Okay, great. Thanks.

And we also have an initiative on those to improve the quality of servicing. So while those books of business may not have rep and warranty credit up for them, we're still focused on the quality of the servicing for those transactions.

Can you force a change in servicing?

Yes.

It depends on the (multiple speakers).

Okay, so you have that right?

We've moved a few billion dollars of loans today and obviously we've got a few more billion that we target to move. As I said, we've been tracking the experience post transferring of service and so far in the early months it's been beneficial. That's kind of what Sabra refers to. We can still have an impact on those deals even when we don't have a viable counterparty to collect rep and warranties from.

If we improve performance that would also help us in terms of future losses. And we're using special servicing on deals where you don't change the servicer but we hire in outfits or companies that are specifically targeted to either pursue things like mortgage insurance claims, our experts in dealing with foreclosed properties. So we also avail ourselves of special servicers as part of our total strategy in improving R&W experience through servicer intervention.

Okay, great. Thanks.

You're welcome.

Thanks, Kevin.

Arun Kumar, JPMorgan.

Thank you. A couple of questions following along the lines of some of the answers you've given already; I just want to tie some of these things in. Of the $5.4 billion of potential recoveries or put-backs to the institutions you named, UBS, Credit Suisse, JPMorgan, in terms of the recoveries that you --?

Don't forget Deutsche Bank.

And Deutsche Bank, yes. Given the additional recoveries you booked this quarter, I think it was $300-million-plus, is that all the amount of recoveries you're going to book against that $5.4 billion, is that obviously tied into the settlement you received from BofA?

And a related question is -- does that tie your hands in any way as to the amount that you could potentially recover from these counterparties? And a follow-up question is in terms of the trends you're seeing in April heading into May in terms of your potential losses for all of these issues?

I'll answer it my way because you asked a lot of different things there. But our hands are not tied at all. The $5.4 billion only represents files that we reviewed that we feel contain significant breaches. So to give you an idea, against the three remaining large counterparties, of the three next targets which are UBS, Deutsche Bank and Credit Suisse, we have targeted for those three $15 billion of loan files. $15 billion.

So, so far we've reviewed -- and my numbers might be a little off -- about $6 billion of the $15 billion and identified $5.4 billion of breaches. So we still have $9 billion of loan files to review.

Okay.

Does that answer -- does that help you with the question? Is there something I'm missing?

No, you answered most of it. Just a quick one. If you apply the BofA recovery rates to that, let's say the $15 billion, given that out of $6 billion you already come up with $5.4 billion of problem loans. So that's almost a 90% hit rate of problem loans. So if you apply the BofA recovery to that $15 billion, what number would you come up with in terms of actual recoveries?

A number that would spin your head. Obviously we don't look at it that way, each deal is unique. Obviously it's part of a process that we have to go through in terms of getting the data, beginning the exchange of information, getting to some agreed-upon process and ultimately getting to a room where we sit down and either go file by file or start to negotiate an agreement.

But you cannot equate the two because obviously if you did that you'd come up with a very high number. Not being too glib about it, but that's why we say, what's going to be the timeframe of that recovery? What are the potential avenues that we'd have to pursue including legal, how long could a potential legal activity take relative to motions, hearings, appeals, etc., all those things get worked into the whole analysis.

Arun, the thing to remember is that on the first lien transactions we have attachment points and subordination, but we have the rights to review all of the mortgages in the loan files. So through a normal rep and warranty process we wouldn't be eligible to be reimbursed for more than our losses and penalty interest. Whereas in, obviously as Dominic has mentioned, in a litigation settlement then you would be looking at damages and other factors. But we wouldn't be reimbursed on a rep and warranty process for mortgages that were in excess of our losses.

That's what we constantly refer to as leverage, right. That we have so much potential put backs relative to the ultimate incurred loss that it really benefits the counterparty to agree to some sort of agreement or get into some sort of a negotiation. Because if we really had to sit back here and put back individual loan files the amount of the potential recovery, as Sabra points out, is only for us up to the amount of our losses. Beyond that it goes back and pays other layers below us in securitizations.

Fair enough. Just a quick thought on trends you're seeing in April getting into May -- loss trends.

Trends for residential mortgages or for the market in general?

Yes.

Well, if you're looking at RMBS, typically this becomes the time when you typically see positive seasonal development. So normally if you go back over the last few years the period of April, May and June represents a decline in some of the parameters like early stage delinquencies. But as we had last year we had a great start on April, May, June and then it basically flattened out significantly over the rest of the year.

Although there were improvements month-to-month, the improvements were not significant and it kind of kept at a high level. If you look at the current year and if you go say year-end to March 31 and look at early stage delinquencies, they're down, they're just down slightly as opposed to something reflecting a more robust recovery in the real estate market.

Obviously we're going to see what happens in these next three months because these are typically the positive months relative to seasonal activity and does this set a new kind of low watermark for delinquencies which will help our reserving models, but we respond to data, the models are very precise, they use information and we'll see how that turns out in the quarter.

Okay, great. Thank you.

You're welcome.

Thanks, Arun.

(Operator Instructions). Mike Grasher, Piper Jaffray.

Thanks. Just a couple of follow-ups. First of all, around the, I guess the change in psychology on the production front. Since S&P came out with their proposal and the new criteria, what have you seen as far as ebb and flow on that front?

Well, as we said -- at least as I said in my remarks, typically what happens, we have a rating agency action, the market reacts very severely, our penetration suffers immediately, and then there's a gradual build back as either, A, people get more comfortable and especially looking in light of the quarter, here's another quarter of significant earnings. Obviously it puts us on track for another record earnings year.

We had a huge ROE in the quarter, obviously not sustainable because of a single transaction. But obviously we believe that transaction is repeatable and should be repeatable and will reflect our ultimate liability for RMBS not only for us but for the industry in general.

So as we've seen in the quarter, we started off with roughly 2-point-something in January, got up into the 6% in March, got over 8% in April. So it is kind of sporadic and volatile, but typically we recover because there is a definite need by the smaller issuers, by the single A and lower rated issuers that require enhancements to be able to get to the market.

Obviously we're seeing less of them come to the market so far this year because of budgetary pressures, but the one thing we all believe in is there is a crying need for infrastructure investment within the United States, there are continued financing needs that typically get supported through borrowing or debt. And obviously we believe we still have the product that is the most responsive and effective for municipal debt.

Okay. So overall though the psychology seems to be improving since that S&P were talking about strictly on the market share numbers of 2% to 6% to 8%?

Well, yes, if you look at purely market share it would indicate that, but obviously we monitor it month by month, Mike.

Okay. And then if you want to go back to comments about the -- maybe it was Bob's comments -- the amount of capital being -- rating agency capital being released here of $2 billion. And then I think you're talking about $250 million per quarter throughout 2011. Is the $250 million --?

That's normal structured finance runoff.

That's just structured finance runoff? Okay.

Correct.

And is there any way to strip out what the R&W put back portion might be of that?

Well, I think we said in the $2 billion it's all inclusive of all strategies including the settlement structure.

Okay. But the $250 million is in addition to the $2 billion?

Yes, yes, that's totally separate. And of course obviously we look at further potential agreements to terminate that would have further capital benefits throughout the year.

Beyond the $250 million?

Right, it would just be (multiple speakers).

So you're looking at --?

(Multiple speakers) in addition to the $250 million.

Okay, so you're looking at in excess of $3 billion potential capital being freed up by the end of 2011?

Yes, on a run rate basis, yes.

Okay, thank you.

Mike, the number to note is the structured finance portfolio. If you look at the runoff in the financial supplement, runs off at about $25 billion a year for the next four years. So it goes from about $148 [billion] right now to $43 billion by the end of 2015.

Okay, I'll have to take a look at that. Thank you.

Thank you. I would now like to hand the call to Sabra Purtill for closing remarks.

Thank you, Mary, and thank you all for joining us for our call today. We appreciate your interest in Assured Guaranty and if you have any additional questions or require further information, please don't hesitate to contact us. Again, we will be filing the 10-Q by the end of the day which has a lot more details on our numbers, so please take a look at that and feel free to give us a call with questions. Thank you and have a good day.

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