Assured Guaranty Ltd (AGO) 2011 Q4 法說會逐字稿

Good morning and welcome to the Assured Guaranty Ltd. fourth-quarter 2011 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Tucker, Managing Director of Investor Relations and Corporate Communications. Mr. Tucker, please go ahead.

Thank you. Good morning and thank you for joining Assured Guaranty for our fourth-quarter 2011 financial results conference call. 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 rep 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. Therefore, 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 of this call, or if you are reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our recent presentations, SEC filings, most current financial filings and for the risk factors.

In turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd. and Rob Bailenson, our Chief Financial Officer. At the end of their presentation, we will open up the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you would like to ask a question. I will now turn the call over to Dominic.

Thank you, Robert and thanks to all of you for your interest in and support of Assured Guaranty. In 2011, we earned near record full-year operating income of $604 million and continued our steady growth in adjusted book value per share, which reached a new year-end high of $49.32. We successfully addressed new rating criteria from S&P by focusing on capital-enhancement strategies that did not include raising common equity. Overall, we are very pleased with the results we achieved during a year filled with challenges from the housing market, the US economy, euro zone troubles and rating agency pressures.

We also continued to benefit from the success of our RMBS rep and warranty loss mitigation efforts. And finally, we took steps to further enhance shareholder value, including buying back 2 million shares at an average price of $11.66 per share and in the first quarter of 2012, we doubled our quarterly dividend to $0.09 per common share starting in March of 2012.

In terms of business production, our full-year PVP was $243 million and while this fell short of what we thought we could achieve at the beginning of the year when we were rated AA+ stable by S&P, we view our origination results as encouraging in light of the significant obstacles we encountered, which also included the lowest US municipal issuance in 10 years and the slow pace of recovery for the international infrastructured and structured finance markets.

In addition to our $243 million of PVP, we created additional economic shareholder value by executing well-planned alternative strategies. By purchasing $856 million of par of our own insured securities at an average price of 49% of the par, we eliminated $320 million of expected loss and embedded future earnings of $103.2 million, which we will receive as the collateral pays down.

We also collected over $1 billion of previously paid losses through our rep and warranty recovery process from originators of faulty mortgage loans. And finally, we added $34.5 million of unearned premium and commutation gains from the recapture of previously reinsured business.

One further note on earnings is that our operating income of $604 million was negatively impacted by a change of approximately $130 million due solely to a decline in the risk-free interest rate that are used in GAAP to calculate the present value of future losses. The change in that rate and the corresponding impact on income does not relate to any credit deterioration in the performance of our insured portfolio.

Our 2011 business production did demonstrate a fundamental demand for municipal bond insurance where we guaranteed 1,228 new municipal bond issues or over 12% or one out of almost every eight municipal issues sold during the year. Our total par insured amount was $15.2 billion. We believe this is a strong showing considering the uncertainty surrounding our ratings during much of 2011 and the 34% decline in new issuance volume. Even at these levels of production, we estimate that our insurance saved issuers as much as $150 million in present value financing costs.

Looking closer at new business, in 2011, almost 80% of the US public finance par we insured came from transactions in our principal target market, which is issues of single A underlying credit quality where we guaranteed 38% of the transactions sold and 16% of the par issued in this rating category.

While most of our recent new business originations have been in the US municipal market, we saw increasing opportunities in the international and structured finance areas. We are pleased that our US municipal, international infrastructure and structured finance businesses all made meaningful contributions to our productions in the fourth quarter.

In structured finance globally, we insured $1.7 billion of par, which generated $67 million of PVP, twice the amount we produced in 2010 with $30.2 million of that PVP in the fourth quarter alone. We continue to work with large finance institutions on transactions that provide credit protection for selected assets and enable more efficient capital management.

In the international market, we introduced a solution that should aid in our international production for infrastructure financing. In the first such transaction, which we closed in December, we replaced Ambac, the original guarantor, with Assured Guaranty on a UK hospital transaction. Investors are interested in our replacement guaranty because of our strong ratings and comprehensive surveillance, both providing critical benefits to investors.

Turning to our insured risk portfolio at year-end, apart from RMBS and a limited number of one-off transactions, our portfolio is performing well. In public finance, our overall US municipal portfolio continues to maintain an average underlying internal credit rating of A+ and has experienced only modest loss development on a few isolated transactions. And while we anticipate some ongoing fiscal pressure for states and municipalities, we believe municipal bond defaults will remain rare. Nonetheless, many investors are sensitive to headline risk in this environment, which should increase the demand for bond insurance going forward.

For municipal defaults in 2011, we did provide uninterrupted payments for bondholders, most notably to holders of our insured sewer system warrants of Jefferson County, Alabama and of our Resource Recovery Facility bonds for a project in Harrisburg, Pennsylvania. This relieved our insured investors of the need to participate in what is turning out to be a prolonged and politicized process. This is exactly what bond insurance is for and clearly reinforces the value of our product.

Having first made sure investors were protected, we attempted to work constructively with local authorities on both cases and negotiations had produced reasonable settlement proposals with concessions from all parties. Unfortunately, elected officials lacked the political will to accept them. Instead, they are attempting aggressive uses of will Chapter 9 of the federal bankruptcy code to avoid their debt obligations. We are closely monitoring this new development and it is weighing more heavily in our analysis of the legal framework for bankruptcy in every state where we insure municipal securities.

We believe that local governments must recognize their responsibility to honor commitments established by current and former duly elected officials and follow through on them. Some local officials seem to believe that threatening bond defaults and not utilizing all means available to honor contractual commitments will help their constituents. Such short-term thinking is a breach of trust with creditors and ultimately will hurt local communities through higher expenses and limited access to debt markets.

We also believe that by defending investors' rights and challenging abuses of the bankruptcy code, we are supporting the integrity of the municipal bond market, which is long-term beneficial for all parties.

Moving on to our structured refinance portfolio, in 2011, we ran off $33.5 billion or 22% of the par in that portfolio. US RMBS portfolio decreased by $3.6 billion to bring its balance at year-end to $21.6 billion of which only $14.7 billion is not investment grade and of this, $4.4 billion, or 30%, is covered by loss mitigation agreements as further runoff of these exposures will continue to enhance our rating agency capital hearing.

Loss mitigation continues to be a central part of our management focus. In 2011, in the RMBS area, we concentrated on exercising recovery rights and improving performance and transactions where we'd paid claims or expect losses. To do this, we continue to examine loan files for rep and warranty breaches. By year-end, for RMBS transactions with unsettled R&W claims, we had reviewed more than 37,000 nonperforming loan files representing $7.3 billion of par in our outstanding financial guaranty and CDS transactions. We are among the first companies to substantiate to pervasive extent of misbehavior in this market and since we began to focus on this process in 2008, our efforts have produced a cumulative total of $2.4 billion in settlement receipts and commitments from rep and warranty providers in our transactions, an outstanding result that sets Assured apart from others in the market.

As we've said in previous presentations, because of our confidence in our rep and warranty rights, we anticipate that the bulk of our RMBS losses will ultimately be paid by third parties. In 2011, this is exactly what happened as further reserve increases due to the slow recovery of the RMBS market were offset by rep and warranty recoveries. We are hopeful that we will see further improvement in this performance during 2012 as we move closer to trial dates regarding the merits of the rep and warranty disputes. Further, we believe if these cases are litigated that the outcomes will be favorable to the monoline industry.

Our RMBS loss mitigation activities also involve servicing intervention where we continue to move more aggressively to reduce delinquencies and collateral losses in our outstanding RMBS transactions. By year-end, we had made arrangements to replace the servicer or impose special servicing contracts on 23 transactions with an aggregate outstanding collateral balance of $3.6 billion. Our goal for 2012 is to transfer or to place under special servicing contracts approximately $4 billion of additional collateral.

We are already seeing improvement in collateral performance that may ultimately reduce future claims. For example, in our first lien book under special servicing, we have seen significantly better performance when compared with industry statistics, including improvements of a size 12% of loss severities, [15]% in redefault rates on loan modifications and 71% in the average days delinquent in the 90 plus bucket. This effort could lead to reduced loss costs in 2012 and beyond.

Turning to our international exposures, we are closely monitoring several countries most affected by Europe's economic, fiscal and political strains. In these countries, our exposure to purely sovereign bonds is limited to Greece where we have $282 million of net exposure to the Greek government. This exposure consists of bilateral guaranties of $214 million due in 2037 and $68 million due in 2057. Both exposures are bullet maturities and our guaranty does not cover accelerated principle or voluntary exchange.

To this point in time, Greece has been paying interest on this debt on a timely basis. We have considered a variety of scenarios in looking at the potential loss on these transactions and as of the fourth quarter, we have posted a $43 million net reserve.

While we guarantee certain international infrastructure and receivable financings, some of which depend on payments from sources which could include government entities or agencies in such European countries, we do not guarantee any sovereign debt of those countries other than the Greek debt previously mentioned. We are publishing more detail on our European exposure in our 10-K.

I want to close by thanking our shareholders and policyholders for their patience and support during a year that presented significant challenges. I am pleased to say that, in my view, we have come through in excellent shape. We clearly demonstrated the value of our product in 2011, we prevented payment interruptions for our insured investors while providing capital market access and improved execution for a wide range of public finance issuers helping them save an estimated $150 million in financing costs.

Our guaranty also enabled institutions outside the public finance sector to achieve more efficient capital management. We are well-positioned to expand our direct financial guaranty business based on the proven strength of our value proposition. We honor our financial guaranties whenever an issuer fails to pay no matter the reason whether due to a lack of funds, fraud or a lack of political will. In our recent experience, fraud and politics have driven most of our losses and we have fought hard for recoveries and vigorously defended the investor protections built into our transactions.

At the same time, we have insulated insured bondholders from the long and arduous recovery process by making timely payments. These benefits provide investors with greater confidence so issuers can more efficiently fund their communities or businesses.

As for 2012, we have already made a good start. We received a payment of $108 million for a reassumption and reinsurance transaction that added $15 billion of net par to our insured portfolio, which is almost entirely public finance exposure and nearly as much par as our full-year 2011 public finance originations.

As we have said in the past, we will continue to seek out opportunities to make strategic acquisitions of existing financial guaranty portfolios. Further, as part of that transaction and subject to regulatory approval, we agreed to acquire MIAC from Radian Asset Assurance. MIAC is licensed to provide financial guaranty insurance in 38 US jurisdictions. This acquisition enhances our flexibility to respond to future demands of the financial guaranty industry.

I look forward to reporting to you on our 2012 business activities and financial results over the coming year. I will now turn the call over to Rob Bailenson for more details on full-year and fourth-quarter financial results.

Thank you, Dominic and good morning to everyone on the call. Today, I will briefly review the financial highlights before providing more detail on the individual components of operating income and economic loss development in the insured portfolio. I refer you to our press release and financial supplement for explanations and reconciliations of our non-GAAP financial measures. In my commentary, all comparisons are to comparable prior-year periods.

Overall, I am very pleased with the 2011 financial results, particularly considering today's global market challenges. Our fourth-quarter 2011 operating income increased 13.6% to $173.5 million or $0.95 per share. This brings our full-year 2011 operating income to $604.4 million or $3.26 per share.

The largest driver of the increase in fourth quarter 2011 operating income is a 62% decrease in loss expense. Operating income was the primary driver of the 11.7% increase in operating shareholders' equity per share, which reached $28.91 per share. This resulted in annualized operating ROE of 12.1% in 2011. Adjusted book value edged upwards to $49.32 per share from $48.92 per share at year-end 2010.

Before I begin my operating income summary, I would like to highlight the financial impact of some of our strategic initiatives (inaudible), the full-year 2011 financial results and also update you on some 2012 developments.

New business development increased our adjusted book value and added to our future earnings stream by $242.7 million on a pretax basis. In addition, the Company recognized $32.2 million in commutation gains related to the cancellations of several reinsurance contracts. As Dominic noted earlier, we continue to generate future earnings in 2012 with the Radian transaction, which increases net par outstanding by $14.7 billion and future net earned premiums by approximately $110 million.

Loss mitigation efforts had a direct benefit on the financial condition of the Company, particularly our pursuit of recoveries for breaches of reps and warranties. In 2011, we closed the Bank of America agreement, which resolved claims with our largest rep and warranty provider and we made significant progress with other counterparties. The resulting increase in the rep and warranty benefit almost entirely offset loss development caused by the slow recovery of the US mortgage market.

As part of our approach to increase rating agency capital, we terminated contracts for the total of $12.8 billion in net par in 2011. Additionally, in January 2012, we entered into an excess of loss reinsurance facility that provides up to $435 million of claims-paying resources. The facility covers investment grade US public finance credits insured or reassured by AGM or AGC. This facility is a cost-efficient source of rating agency capital at an annual cost of 5% of the $435 million in covered losses.

These are just a few of the many approaches employed to achieve our goals. In addition to the obvious financial benefits I just described, the normal run-up of our legacy structured finance book of business provides us capital flexibility. This enables us to take advantage of new business opportunities and enhance shareholder value through stock buybacks and increased dividends. As such, we recently doubled our quarterly dividend to $0.09 per share.

I will now discuss the components of operating, income which is one of the most significant measures that management uses to evaluate our results. Net earned premiums and credit derivative revenues were in line with expectations and totaled $280.2 million for the fourth quarter of 2011. Fourth-quarter 2010 net earned premiums and credit derivative revenues of $352.7 million were higher due primarily to a larger portfolio of structured finance in force business at that time.

Decline in net earned premiums and credit derivative revenues reflects scheduled amortization of par and the related unearned premium revenue. This was partially offset by higher refundings and accelerations in the public finance portfolio.

Full-year comparisons show a consistent pattern. Full-year 2011 net investment income was up 9.4% due primarily to the investment of a larger portion of our cash and short-term liquid assets in longer-term maturities and higher average invested assets. The average size of the investment portfolio increased to $10.5 billion in 2011 from $10.3 billion in 2010 predominantly as a result of cash collected from rep and warranty providers. The pretax book yield on the investment portfolio was 4% at December 31, 2011 compared with 3.72% at December 31, 2010.

Our operating expenses decreased 7.1% to $45.8 million in the fourth quarter of 2011. For the full year 2011, operating expenses declined 8.7%. Lower compensation expenses were the primary drivers of the decline. The effective tax rate on operating income varies from quarter to quarter due to the amount of income in different jurisdictions and was 19.7% for the fourth quarter of 2011. Year-to-date, the effective tax on operating income was 24.5%, which is in line with our expectations of 24% to 28%. I will now turn to losses.

Total economic loss development was $28.5 million during the fourth quarter of 2011. US RMBS contributed $16.5 million to the total economic loss development in the fourth quarter of 2011 representing the continuation of higher-than-projected early-stage delinquencies and the addition of a new scenario for first-lien transactions whereby loss severities improved more slowly than had previously been modeled. These increases were largely offset by improvements in liquidation rates for first-lien transactions and the effects of ongoing loss mitigation.

During the quarter, we increased net expected losses related to Greek sovereign debt exposures by $36.3 million, bringing the total net expected loss to $42.6 million. In accordance with our accounting policy, we probability-weighted various scenarios, which take into account the nature of our obligation and possible outcomes in Greece. Total economic loss development for the full year 2011 was $123.8 million. Economic loss development on US RMBS before consideration of rep and warranty benefit was due mainly to an increase in projected defaults and first-lien loss severities.

However, due to our success in negotiating rep and warranty recoveries, the increase in benefit for reps and warranties offset substantially all of the adverse development on the underlying collateral. Remaining economic loss development is primarily due to the decline in risk-free rates due to discount expected losses and the development of our Greek exposures. However, these were partially offset by improvements in certain other structured finance transactions. Development attributable to changes in the risk-free rates used to discount losses is not indicative of additional credit impairment, nor is it reflective of our own investment yield.

I will now turn the call over to our operator to give you the instructions for the question-and-answer period. Thank you.

(Operator Instructions). Mark Palmer, BTIG.

Good morning. Particularly in light of your recent dividend increase, could you comment on your thinking about the balance between capital return and the concerns of the rating agencies regarding capital levels, particularly with your goal of achieving a more solid AA rating?

Well, I think you have hit the nail on the head. Basically, we continue to await a final review that we expect sometime in the first half of the year from Moody's, which I think will further allow us to then measure not only capital adequacy, but obviously look at capital opportunities in terms of further capital management strategies like we have done in the past in terms of stock buybacks and increase in dividends. That number hopefully we should have, we would believe, in the first half of the year.

Also it gives us a better chance through half of 2012 in sizing up business opportunities both from the standpoint of the normal markets, plus other opportunities we see to acquire portfolios of risk and therefore we can kind of work that into our overall capital model. But we are very focused on capital management. We are very focused on rating agency capital adequacy and shareholder return. And as you can imagine, it is kind of a delicate balancing point that we go through as we look to see what is the best decisions we can make relative to what we believe is excess capital in the Company.

Thank you.

Brian Meredith, UBS.

Hey, good morning. A couple questions for you guys. First one, Skyway Concessions, could you tell us a little bit what is that? It popped up on your list.

Yes, that is a toll road around Chicago that we have exposure on. We don't believe there is an economic loss potential in this thing as we have concessions from the road that go into the 2105 or '04 year, something like that. But there is a refinancing bullet that is due in I think 2017. So it really will look at the ability of accomplishing a full refinancing. It could leave us with a short-term cash payment position that we believe is recoverable because of the extended concessions to the tolls on the road that go out over a significant period of time that will allow us to fully recover our exposure.

Okay, great. And then next question, anything happen with R&W? Did you have to actually take down your R&W balance? Because it appeared like that you actually had additional losses in some of your second liens, but the R&Ws actually went down. Am I looking at that right?

Well, you're looking at it right, but for a couple of wrong reasons. So (inaudible) went down because, in some cases, deals to which we had calculated a R&W benefit actually reduced their ultimate lost cost. Therefore, we would then give the credit back to the R&W provider, right, so (inaudible) kind of work out. Two, we continue to receive payments. Therefore, that is going to reduce the balance.

In terms of the activity in rep and warranty, we have talked about the advances we made with another counterparty. They have continued, but I guess as of this point in time as we look to who is left in our queue for rep and warranty, it would appear that litigation is going to be -- or the near-term threat of going to trial on certain of these deals will be the only way we are going to get further agreements at this point in time.

If you look at the disclosure, and I think in our K we will be a little bit more specific, but certain of the counterparties that you are well aware of, if you read their disclosure as of year-end, some of them continue to recognize liability and have increased their reserves. Therefore, we expect they will still be open to negotiation and settlement. Others have continued to bury their head in the sand like Credit Suisse for a good example that have virtually no reserves up, do not seem to admit to any liability.

So those type of situations are going to ultimately get settled and we do still think we are optimistic that it is this year because there are three trials that theoretically will be heard this year. We are one of them, Ambac is another, and BIA is the third. And obviously we believe very optimistically that if any of these actually do get into a courtroom, it will be a very good day for the monoline industry and the bond insurers.

Great. And lastly, any thoughts on Moody's and when we are going to hear from them?

If I had a thought, Brian, I would tell you, but it has been a little bit of a surprise. Obviously, as you well know, the last time they gave us a review was in '09 on our portfolio as of June 30 of '09. You can think of the dramatic changes, as I said. Just look in the current year, we ran off a significant amount of the structure just in 2011, let alone going all the way back to 2009.

So I think we have got a more risk-adverse portfolio, some of the troubled exposures have run down. Obviously, our reserve position is different. The excess of loss programs that Rob Bailenson had put into place, the rep and warranty settlements that we have made. We, obviously, would believe that they would have a positive impact, but it is still a process that we have not been given a whole lot of information that would lead us to a conclusion that both says the timing and/or the result is imminent.

Thanks.

You're welcome.

Geoffrey Dunn, Dowling Partners.

Thank you, good morning. This is the first chance I've had to ask you kind of in an open forum, what do you think the implications are on the capital changes from the S&P model? How much has it narrowed the market, if at all, versus the historical market and how have the charges generally affected the returns on new business prospects?

Geoff, as you know, we have to manage ourselves relative to three capital models, right -- our own view of risk in the equity capital that we hold, the S&P risk model and then the Moody's risk model. And we do not leave ourselves a slave to one, we don't take the lowest common denominator as we assess risk.

So, for instance, you would point out or I could point out to you that if we wrote a certain healthcare deal, if you look at the S&P model, that would have a very low single digit return. But remember, the S&P model counts things beyond equity capital as part of a capital base to which we can write against. So if we did a reinsurance program at a 5% cost, obviously, that allows us more flexibility in writing a lower ROE quote program relative to an S&P capital base when, at the same time, that same deal might be a plus 20% return under the Moody's model and a 15% return under our own equity model. So we don't leave ourselves a slave to any one model as the way we look at returns. We look at returns overall and since we can create rating agency capital that is not equity capital, the cost of that capital, obviously, varies and therefore, it allows us more flexibility in terms of permissible writings relative to a return scenario.

Okay. And then just revisiting the capital management question, I think historically it has been a battle for you guys to get copies of the rating agency capital models. So going forward, is capital management going to be completely an interactive experience with the rating agencies? Are you going to have a decent way of judging what your excess capital truly is against their models?

Well, it has been a little bit interactive and challenging I think as they have been trying to assess where is the bottom of the market in this freefall economy and through the financial crisis that we have gone through. I don't think they knew, so, therefore, they were going to react without a whole lot of advance notice and very conservatively. I think as more stability comes to the market, you are going to see more certainty around capital benefits or capital requirements. And one of the things I will tell you is I think internally, and we won't release it, but we have a very good comfort level in terms of what our excess capital is under the S&P model and therefore, we can react accordingly to that.

We would hope that, coming out of the Moody's review, we get that same kind of confirmation and therefore, I think capital management for the Company as you look at 2012. 2012 is still a bad benchmark. We always hope to look for normalcy in the markets, but with a zero interest rate environment, there is no normalcy. You're not going to see penetration at any level of real normalcy at that level of interest rates because people are going to be fighting for yields and returns and therefore, insurance becomes kind of the last thing you want to think about.

So it is not an easy market for us to gauge business opportunities. However, we are working hard in other areas to create other business opportunities and specifically in the portfolio and servicing side that we continue to spend a lot of time and strategic manpower to address and to try to cultivate those opportunities.

So, obviously, we would like to get a good capital base, a good capital requirement, understand where our capital flexibility is, look at our business opportunities and gauge that capital need against that. And then to the balance, obviously, do aggressive capital management to benefit the shareholders. That is kind of the game plan, that is the formula we have and we see some of the pieces falling in place except for, as I said, it is hard to judge business opportunities in a zero interest rate environment. It just won't give us a good proper reading on what demand will be in that market, so you have got to be a little cautious. But I think we are willing to be as aggressive as we can be once we get the Moody's review finished and done and get a good feeling for what that capital position is.

And then last question, obviously, it has only been a couple months, but can you qualitatively discuss the reaction of issuers to the S&P stable rating? It looked like maybe you probably had some recovery in the fourth quarter from a penetration level. Have you seen continued either true penetration increasing in January, February or at least on a qualitative level acceptance reemerging with that rating now stable?

Well, the statistics would support that, Geoff. Obviously, penetration rates in the fourth quarter were better than the previous quarter's, first quarter, if you look at January. I don't know if it is public or not, but the numbers are up there again and significantly over January of last year. But that is not meaningful because that is the time when S&P came out with their new rating criteria proposal, so we are seeing that.

We are seeing ourselves being used on bigger deals, we are seeing some institutional buying, but it is still sporadic. And as I said, in a zero interest rate environment, it is just hard to really say that this is a good measuring pole and therefore we should then base all of our forecasts on something that is artificial. And until we get real interest rates and real spreads back in the market, it is going to be harder to really say here it is victory or it is defeat, but we are encouraged by the results we see today.

We continue to work very hard on the calendar to make sure that we are getting a good look at every deal that comes to the market in the US municipal marketplace and obviously, based on this guarantor replacement deal we did in the UK, we are somewhat optimistic. Although we still think that activity will be sporadic in 2012. At least we are on the map. We have got a clear direction on how we think we could add value and therefore create opportunities in a market that has been basically dormant for two years for us.

We are seeing kind of snippets here and there that show a positive value and if you say, geez, is some of that related to S&P? I can tell you yes because when they came out in January, we got a whole lot of negative feedback from the market saying we are not sure where you guys are going to wind up. It is going to be hard for us to support using your guaranty when we are unsure of what your ultimate future looks like from an S&P criteria point of view.

So I think it has been helpful that they came to a conclusion that we are able, because of strategies that we put into place, to generate rating agency capital that we were able to maintain that in the AA category. Yes, you're right, it is at the AA- level, but if you read their pronouncement, there is a chance for upgrade if we get some further capital-enhancement things done. And remember, they give us no credit for rep and warranty asset on the books, so we are optimistic that we are going to be able to achieve something in that line in 2012 as well.

So I think all in, yes, I think there is a more positive view of us of our insurance. I think S&P helped tremendously in getting rid of some of the uncertainty. It is just a hard market to gauge relative to a zero interest rate environment, but we are still reasonably optimistic that we are making inroads and starting to build back demand in this marketplace.

Okay. Thanks for the color.

You're welcome.

Larry Vitale, Moore Capital.

Great, great. Thank you. Good morning. I have a few questions. First is on the reinsurance transaction. I just want to make sure, Dominic, I understand what you said. It was a $435 million limit or you seeded away $435 million of par outstanding? How did that work?

I will let Rob talk to you about it.

It is an excess of loss agreement whereby the reinsurers will attach excess of a certain amount and it is within the S&P capital model, within their seven-year depression test, and it will be $435 million excess of that amount. So we get full capital credit for the purchase of that cover.

Okay. Did you consider buying more? Was it a matter of price? Was it a matter of how much cover they were willing to provide? Can you give us any color on that at all?

We were very sensitive to price and at some point, we were just not going to do it because, as you know, we have been saying all along that we are not going to pay for something that is not going to be a good source of capital, a good cost-efficient source of capital. Raising equity in this market would have been very expensive, so cost of debt in this market would have been expensive. A 5% cost on an excess of loss muni portfolio provides a rating agency benefit for S&P. A 100% benefit within their depression model was -- we were very sensitive on price. We felt the price was appropriate, we felt it was cost-efficient and we have a very good syndicate. It is five highly rated reinsurers in the property casualty market, so we are very pleased with it.

I think, Larry, kind of looking at it from the top, A, it creates a new source of capital for not only Assured, but for the industry. It brings in new players into our market. Obviously, the first one is always the most difficult to get done. Obviously, we believe in the integrity of our underwriting and therefore the results and therefore we don't expect the cover to be used. But, obviously, it does create the rating agency relief that we needed to continue to manage the Company to the highest ratings possible and yet balancing what is the component of that rating agency capital. We continue to look for the most efficient kind of capital mix. Bringing in something like this, obviously, creates more efficiency, lowers the overall cost of capital, very effective from a rating agency.

And after we finally -- and I give Rob Bailenson all the credit since he ran with this solely -- once we actually got the cover in place, got through all the agreements and how this thing was structured and where it participates, we then started to get offers of additional capacity, which we did turn down because, obviously, we could buy as much as we want, but if it is not beneficial that would make no sense. We weren't looking to create headlines here, we were looking to create rating agency capital. And we are optimistic that this will become a future part of our capital strategy and we do believe that the costs will lower upon subsequent renewals.

Yes, no, it all seems to make sense. My second question, Dominic, I just want to make sure I heard you correctly. You said you have comfort that you have excess capital on the S&P model. You are not going to tell us how much, but you do in fact have excess relative to S&P?

Yes.

Okay. And my third question is you talked about actually what appeared to be a pickup in the yield on the investment portfolio. And I am just wondering how you are thinking about new money reinvestment rates or reinvesting coupons as maturities in this environment. You talked a lot about the zero interest rate environment and that's one place where I would think it is going to bite. So if you could just talk about that a bit, that would be great. Thanks.

You are right. Reinvestment rates are a problem, but what we have done is we have strategically taken some of our short-term portfolio and gone a bit longer on the curve. We have not gone down the credit curve, but we have gone a bit longer, so put more money to work from the short-term portfolio.

And another -- what you are saying in the investment yield going up is these loss mit bonds that Dominic and I have talked about, the purchase of those bonds, once you buy those for loss mitigation, they become an investment in your investment portfolio and the accretion that you have on those bonds goes through your investment yield. So we have seen a big pickup by the loss mit bonds in the investment portfolio.

If you are paying $0.49 for those, I would imagine you'd try to get your hands on as many as you could.

And that is right, so you have loss mitigation on the loss side, as well as a pickup in yield on the investment side.

Okay, all right, great. Thank you, guys.

(Operator Instructions) Matthew Howlett, Macquarie.

Hey, guys. Thanks for taking my question. Just on a high sort of level analysis, when you look at the tax-exempt municipal market, Dominic, you said it is at a 10-year low. What do we need to see change in that market? I know there has been some tax proposal with Obama lowering maybe the exemption. And then, of course, when you see the credit card steepen, do we see states, municipalities get their budgets in line? What do we need to see before that market begins to pick up again? Do you expect that going forward?

Well, I think, first and foremost, you need economic growth. These guys rely on revenue and obviously, in good years, the revenue base expands and they go and authorize new projects or go back and correct some things they needed to correct be it bridges, roads, etc. So economic expansion is the biggest key.

We have been in a declining revenue environment through most of the crisis now in recent periods. State revenues have started to pick up, but local revenues are still under a lot of pressure because remember they are dominated by real estate taxes. And the real estate market, for a lot of reasons and may e some failed governmental policies as well, just has not shown any signs of real stabilization, let alone improvement. And until that changes, you are not going to see, I think, a real pickup in municipal originations and therefore, the market is going to stay relatively mute for the near term.

Great, got you. And then you said you acquired the MIAC from Radian. Could you just go over what was the strategy behind that again? That was sort of a shell municipal insurer.

Yes, what we are looking for is we try to build flexibility into our capital, we try to build flexibility into our business model. This builds a tremendous amount of flexibility into our business model. As we look forward and we're trying to anticipate the demands in the market, one of the things we continue to consider is is there a need to be or does there need to be a pure municipal type of insurer out there.

Although we have AGM that we consider a pure municipal (inaudible) it only does municipal risk going forward, it still has a component of structured finance in its portfolio. Obviously, MIAC gives us the ability to focus strictly on a pure municipal basis if and when we decide to do that.

Number two, as we look at the markets, there are certain segments of the market that still haven't come back or have had the same level of participation or opportunity and can we focus that as kind of a strategic weapon aimed at that specific segment of the market to generate new business originations, new penetrations to help the overall recovery of the totally municipal market.

So for us, it is very strategic. Obviously, gives us a third capital base, gives us a third licensed carrier. So when you think about spread of risk and how you meet the individual risk limits of any individual company, it gives us another company to put risk in.

So it is a very flexible vehicle for us. It was one of the critical things that we looked for when we negotiated the reassumption transaction with Radian because of this perception of ours as to what does the future market look like, what are going to be the demands of that market, how can we best continue to improve this Company to meet those demands, whatever they be and give us this flexible platform that allows us to move in those directions.

Got you, great. Thanks. Just last question. Dominic, you mentioned Jefferson County, sort of following the developments down there. Can you just kind of go over where you see things eventually settling out? From what I understand, the bankruptcy filing has the potential to move the revenue away from the sewer bond to pay expenses and do other things. I know there is all kinds of developments down there. I know that could sort of shake the market's confidence in those type of transactions. I mean how do you see it all playing out down there and what do you think the implications are?

If I had the answer to that question, I would be way ahead of the curve. I have got my General Counsel scribbling furiously. Obviously, there was a negotiated settlement that took in consideration from all parties and basically came up with a formula where everyone took some level of responsibility at an acceptable level, each individual. That was agreed to by the creditors and the authority and then got kind of voted down by the governmental folks. We would hope that they would go back and relook at that negotiated settlement.

I am constantly amused and obviously, very concerned that we have got these municipalities that believe somehow the bondholders are responsible for their own actions. And remember, the bondholders have really been a huge source for local municipalities, states, etc. in allowing them to accomplish their own plans of growth expansion, improvement, save them costs, provide them access.

And yet now they are supposed to be punished when they didn't make the decisions, they didn't create these contracts that provide lifetime benefits that no normal commercial enterprise provides anymore. And yet we believe they have this [enablement] right to do that. It makes no sense and then we are almost painted as a bad guy and yet last time I checked, we saved you money, got you access, helped you accomplish various goals and objectives, including needed investments in infrastructure, etc.

Here, we have had deals both in Harrisburg and in Jefferson County that were negotiated, that would have resolved by and large the majority of the issues and yet we now have politicians sit there and say, oh no, there has got to be more pain suffered by the bondholders. I don't know what their thinking is, where their long-term view of how they think they ultimately emerge from this. It's going to have to -- once you go to this junk status, well, how are you going to get financing and at what cost and therefore, what is the value of that municipality, etc. as it is looked to from the outside as well?

The long term in damage can't be anywhere near compensated by what you think you accomplished in the front. Now, in Jefferson County, you have got a water authority, so it is a stand-alone. But in some of these other municipalities that are talking about not making bond payments, the bond debt is a small percentage of their annual budget. So if you look at say Stockton, California, debt is 6% of their budget. Killing 6% does not solve your lifetime medical benefits problem, does not solve that 80% of the costs that are related to compensation and benefits. You're looking at the wrong end of the telescope. Things are going to look awfully small when you are looking at the back end of it.

And what are you going to do to the future of that municipality? How are they going to borrow, who is going to have any confidence in them when they go to the market because they are going to need to do that to find anything on a go-forward basis let alone their own operations? I am still just absolutely amazed when I see this happen every day like this is a get out of jail free card. It is like Monopoly. I have no idea what these people are thinking and yet we will continue to make payments to our bondholders because that is our contract and thank God we are in an incredibly strong financial position; it is not an issue for us.

Number two, we will defend our rights and we will defend them vigorously and whether that makes us a bad guy or a good guy, it really doesn't matter. It is the right thing for us to do and it is the right thing that should be done in the market and what is the long-term implications? The good news about insurance is if you pay claims, it increases demand. If you make this an issue of credit that people don't honor their commitments, then therefore more people should seek insurance.

So we kind of sit here at that corner or that intersection and say, well, I am either going to get it from one side or the other, so we are going to be pretty well-positioned to go forward. And I hope the market recognizes that this type of behavior should have a long-term chilling effect on people's views.

Great. Thanks for that. Thanks.

[Shabon Fry], Putnam Investments.

Hi. Dominic, I had two questions. One, I think in your last call you had talked about another potential settlement. Is that still progressing?

Yes, it is. Nice to hear from you.

Yes, nice to hear from you too. Okay, I guess that is all you can say.

We have made very good progress. There is still some things we would like to get accomplished with that counterparty. I think that will, for us, be significant, as I said. To date, about 30% of our below investment grade RMBS is now subject to loss-sharing agreements. We hope to move that percentage up a little higher. But in order to make the quantum leap to say 80%, you're going to have to see some of these things getting ready to go to trial. We have got one case that is supposed to be heard in the short term and we are very much looking forward to that. We are still amused by the fact that it doesn't seem like regulators in certain jurisdictions are paying attention to their own regulated entities in those jurisdictions as to how they are addressing this liability and it is not like this liability is going away. Every time you pick up the press, there is another case being investigated, there is another level of charges being leveled against the banks and the originators.

So we are extremely bullish on this, obviously. We are optimistic. We have been incredibly successful. We continue to make success in that one counterparty and just finalizing some things and hope to expand that program a little further in the current year. And then the rest, as I said, we are willing to dig into the trenches and go to our neutral corners and come out fighting.

Okay, great. So I assume the one that you are negotiating with is not listed as one you are litigating against, right?

No, no, no. We are not at liberty to release their name. Obviously, we have to get comfortable with the disclosure they are willing to have us make, etc. So that is for future periods.

Okay. My second question is I guess if you can give a little color in terms of the RMBS severities that you saw protected in first liens and also the offsets. Should we look at these offsets in RMBS and TruPS as some sort of stabilization in losses in your portfolio or is it just something that was a 4Q phenomenon or last year's phenomenon?

Yes, I don't think it is 4Q, Shabon. I think it is -- and I wouldn't call it stabilization either. If you go back to our discussions and we have been pretty direct about this, at some point in time a few years back or maybe a couple years back, we had made the comment that as we looked at this RMBS issue that we thought that ultimately liability, once either litigated or negotiated, would pass from us the substantial parts obviously we think are some of the responsible parties and that goes around originators principally at this point in time. So that is the future, that is the path, that's what we always believed. In the current year, that is exactly what happened.

Now we have continued to still look at a bad real estate market that, although deteriorates more slowly or improves at an even slower pace, it is not to a level that we can get confidence that you have hit bottom yet. Therefore, we have got to look very closely at the reserves that we are holding and making sure that they are reasonable and based on our view of how we look at information. We continue to up the severity charge because that is what we see coming through the statistics, but if you think about it, that severity charge is meant -- it's based on two things.

One, the servicer did a bad foreclosure process, therefore extended the amount of time and therefore incurred additional cost. We would hope someday to go back and recover that and what you were seeing is a lot of the litigation in the market today is around the servicer, not the originator. Remember, we are kind of unique in that we went after originators. We have got the servicer out there as kind of the next target in line. We have not taken any credit for that. Therefore, our reserves are gross on that basis, but we do have enough originator benefit that it has been offsetting that continued increase in reserves relative to what we have seen statistical data.

Like I said, we don't take credit for the things that we think will benefit us. We did this servicer transferring that we talked about and we started transferring back in first quarter of last year, so we had about nine months of data there. For the deals that we did transfer, we saw significant improvement in delinquencies and modifications that have held beyond six and nine months, as well as in the amount of time it has taken to foreclose. We have not changed our assumptions in any of our reserve models to reflect that. Obviously, 2012, we want to move another $4 billion of RMBS transactions in that basis and I think we will now say, with 18 months of data, we are going to take a hard look at what does that mean relative to reserves.

So we have got some good guys out there that we don't recognize until we can actually prove the data. But, as we said, originator liability in our recovery under the rep and warranties has been enough that it has been able to negate what we continue to see as statistical kind of deterioration in RMBS performance.

Okay. And just all these policy issues that are being kind of proposed, foreclosure settlements, sort of stabilized housing, do you actually benefit from any of that in terms of the bank's foreclosure settlements that are kind of discussed, talked about?

Yes, we believe we do. We either are benefiting to the extent that it deals with loans in our own portfolios that helps, obviously, tremendously to get a mandatory writedown that is paid for by somebody else but us. That will put cash back into the securitizations. Even if it is not our deal, it will still help the overall stability of the real estate market because if you prevent a number of loans in going to foreclosure, obviously, that keeps the inventory of houses that are under distressed sales down, which makes the market start to act more normally. And therefore, you'll see more stability in pricing, which will help our severity numbers, whether it is our deal or not our deal. So anything that is done in this regard to help the real estate or the residential marketplace will ultimately benefit us either directly or indirectly, but still be a positive.

All right. Thanks very much, Dominic.

You are welcome, Shabon.

Andrew Kleinberg, Glickenhaus.

Hi, good morning. I have just a couple of data points. Shares outstanding from the third quarter to the fourth quarter went from 184 million to 185.5 million. Was that mostly employee compensation?

Yes.

Yes.

And were any shares bought back in the fourth quarter?

Not that I am aware of.

No, no, they were bought back in the third quarter.

So nothing in the fourth quarter?

No.

Got you. Thank you very much.

You are welcome.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Robert Tucker for any closing comments.

Thank you, operator. I would like to thank everyone for joining us on the call today. If you have additional questions, please feel free to give us a call. My number is listed on the press release. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.