Assured Guaranty Ltd (AGO) 2013 Q3 法說會逐字稿

Good day and welcome to the Assured Guaranty Limited third-quarter 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Tucker, Managing Director, Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and thank you for joining Assured Guaranty for our third-quarter 2013 financial results conference call.

Today's presentation is being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation 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 Limited, and Rob Bailenson, our Chief Financial Officer.

(Caller Instructions)

I will now turn the call over to Dominic.

Thank you, Robert, and thank you, everyone, for joining today's call. I am pleased to say that we've concluded another quarter of successful execution of our strategic objectives.

One of those objectives has been more efficient capital management, and in connection with that today, I can announce that we completed an important step to improve our ability to manage capital and risk within the Assured Guaranty Group. Last week, our Board of Directors held its first quarterly meeting ever in the United Kingdom. We have a long-standing business presence dating back to the 1980s.

This events signifies that while AGL will continue to be a Bermuda Company with its administrative and head office functions remaining in Bermuda, it is now, as evidenced by our recent Board meeting, tax resident in the United Kingdom, and will be subject to applicable UK tax rules, including the benefits afforded by UK tax treaties. This is clearly an important step in our strategic planning and recognizes the continued development and evolution of Assured Guaranty in addressing its future opportunities.

Turning to our other objectives, we completed another profitable quarter. Since our 2004 IPO, we have consistently produce positive operating earnings each quarter, a record that has held up through the worst of the financial crisis and through this quarter in 2013. We have achieved our solid results by consistently focusing on our strategic priorities, which include the alternative strategies we have used to offset the impact of the challenging market conditions for the last few years.

Regarding our capital improvement and loss mitigation strategies, during the quarter we agreed to terminate $1 billion of net par outstanding on policies related to seven transactions, and we purchased over $125 million of wrapped bonds at 60% of par. Both of these activities serve to reduce risk, increase capital adequacy, and mitigate future losses in the portfolio.

Our third-quarter results also reflected two fourth-quarter rep and warranty settlements. The total pre-tax economic value, not accounting, of these two transactions was $105 million and brings our total rep and warranty agreements to six for the year, including our Flagstar settlement. This is clearly a remarkable achievement and reflects once again our strategy and ongoing commitment to this critical area of loss mitigation.

Another positive development in our RMBS loss mitigation is that delinquency trends continue to improve in most of our second lien RMBS transactions. Some of the improvement is a result of our proactive servicing transfer activities and related specialized servicing strategy.

Regarding our core financial guaranty business, our broadly-based financial guaranty strategy paid off in the third quarter, as international infrastructure finance, structured finance, and US public finance all made simultaneous contributions to new business production for the first time this year. In our international business, we executed two important transactions, the first new wrapped UK public-private partnership issues in the capital market since the financial crisis began.

These were a GBP102 million transaction to finance urban redevelopment in the vicinity of Leeds and a GBP63 million issue to finance the construction of student accommodations and associated facilities for the University of Edinburgh. These breakthroughs generated $13 million in PVP and demonstrate the value of our guaranty in reviving the market for UK infrastructure bonds. We have a pipeline of similar transactions that we are hopeful will lead to the reemergence of this important area in future quarters.

In structured finance during the quarter, we guaranteed $273 million of notes backed by small equipment lease and loan contracts originated and serviced by LEAF Commercial Capital. Moody's assigned the insured portion of the transaction at highest ratings, P1 for the short-term notes, and AAA for the medium-term notes. Moody's based these ratings in part on our financial guaranty and specifically cited the importance of our strong oversight capabilities to mitigate certain operational risks of the servicer.

During the quarter, our US public finance PVP was significantly higher than in either of the first two quarters of this year, partially due to an increase in market yields during the quarter. As we have said on prior calls, as interest rates increase and credit spreads widen, demand for insurance generally improves, and that contributed to increased bond insurance penetration in the third quarter of 2013 compared to the third quarter of 2012. Our profitable municipal secondary markets business also made a significant contribution, as we executed 289 secondary market transactions, aggregating $522 million in par insured during the quarter, the highest volume this year.

On our last call, I spoke about Municipal Insurance Corporation, or MAC, our new muni-only subsidiary, which opened for business in late July. We are pleased with the market reception of MAC, which offers investors a new option for making insured investments in selected sectors of the US municipal bond market. The first MAC insured issue came to market just 10 days after MAC's launch, and by September 30, nine transactions had sold, with MAC insurance representing issuers in five different states.

MAC has been making good progress in acquiring the state insurance licenses it did not have when we began operations. As of today, MAC is licensed in 41 states and the District of Columbia, with applications for all the remaining states under review by state regulators. MAC is rated AA+ stable by Kroll, which is the highest rating in the industry and AA- by S&P, stable.

Now I want to bring you up-to-date on some of the troubled credits in our portfolio. An important thing to remember about troubled municipal credits is that our liability is limited to payment of scheduled principal and interest as it comes due and our policies do not permit acceleration of the bonds without our consent.

With $12 billion of consolidated claim paying resources and the roughly $400 million of annual income from our investment portfolio, we have ample resources and liquidity to meet payment obligations if and when they arise. As always, investors who hold in bonds insured by Assured Guaranty can be certain that they will continue to receive uninterrupted full and timely payment of scheduled principal and interest and the payments we make clearly demonstrate the value of our insurance, which should help to support future demand for our guaranty.

In looking at the specific credits in our insured portfolio that have been in the news over the last few years, we are pleased with the recent progress towards the resolution. We have reached conditional settlements related to our insured exposures in Harrisburg, Pennsylvania; Jefferson County, Alabama; and Stockton, California.

In each case, there are still some moving parts that need to fall into place, such as successful execution of refundings or bankruptcy court approval. As an example, last week voters in Stockton, California approved the tax measure that fulfills a critical condition of the Stockton agreement.

If these settlements occur, as we expect they will, we do not expect them to result in any additional losses beyond the reserves we have already booked as of September 30. Further, Assured Guaranty's participation in the debt restructuring plans of Jefferson County and Harrisburg by agreeing to guarantee a portion of their prospective debt issues underscores our unique ability to assist issuers in accessing the capital markets to help them achieve their financial objectives.

Now I'd like to discuss two issuers that have become more prominent recently, Detroit and Puerto Rico. As Detroit bankruptcy case moves ahead, we remain willing to work with the emergency manager, public officials, and other creditors to achieve a fair and equitable resolution. However, to protect our rights and enforce the city's statutory duties relating to the voter-approved GOULT bonds, we were compelled to file a complaint in the US Bankruptcy Court last Friday.

As we said in a statement on our website in July, 85% of our Detroit exposure is secured by liens on special revenues of water and sewer systems that serve communities extending well beyond the city limits of Detroit and both systems are cash flow positive. We also believe that GOULT bonds are secured obligations of Detroit and the express terms of the bond resolution and the voter approval of the bonds tax revenue support this position. Our remaining exposure is in our reinsurance segment and our liability there should parallel the settlement of the primary companies.

As for Puerto Rico, all credits we insure are presently current on their debt payments and none are eligible to file Chapter 11 bankruptcy. Further, we believe recent measures announced and actions taken by the current governor and his administration reflect a strong commitment to honor the debt obligations of the Commonwealth and its authorities and to improve their financial stability.

We continue following the situation closely and understand the market's need for a high level of transparency. I encourage you to read our Company statement on Puerto Rico, which is posted on our website and provides extensive disclosure about our Puerto Rico exposures.

While we do not anticipate additional losses on any of these credits I just mentioned, it is important to realize that our financial strength has proven resilient in absorbing losses. Since the beginning of 2010, we have earned $2.3 billion of operating income, in spite of the challenging economic environment in both the housing market and municipal finance. These results clearly demonstrate the resiliency of our strong capital and earnings base and its ability to absorb credit losses while maintaining high profitability.

In closing, I would like to discuss another strategic objective -- the efficient management of capital. And to that end, we continue to pursue our share repurchase plan. As of today, we have repurchased approximately $264 million of the $315 million total authorization.

Further, in an affirmation of our commitment to manage capital efficiently, a new $400 million share repurchase program was authorized yesterday to replace our existing program. All of our share repurchases are made from AGL, the parent Company, as funds become available to it. Our financial guaranty subsidiaries will pay dividends as funds become available and while remaining capitalized at levels consistent with their insured obligations and regulatory capital requirements and while also maintaining strong rating agency capital levels.

As we look towards 2014, we are confident that we can continue to manage our capital efficiently while generating profits and protecting the financial strength behind our guarantee. With MAC gaining traction and AGM as the leading municipal bond insurer, with the outlook for our international business much improved, and our strong capabilities and structure of finance, we believe we are well-positioned for future success. I will now turn the call over to Rob.

Thank you, Dominic. And good morning to everyone on the call.

I'd like to begin with the new $400 million share repurchase authorization that Dominic just mentioned. We expect the repurchases to be made over time at Management's discretion and subject to the amount of free cash flow available at the holding company, market conditions, the Company's capital position, legal requirements, and other factors.

The Company's current business plan calls for capital being available at AGL over the course of 2014. As of September 30, 2013, we had approximately $255 million of unencumbered assets at AG Re, which has historically been the primary source of cash for the holding company. And cash and liquid investments at AGL and the US holding companies totaling $217 million.

Turning to operating income, in the third quarter of 2013, operating income was $117 million. This brings our year-to-date operating income to $475 million, a 35% increase over the nine-month period ended September 30, 2012. On a per-share basis, operating income was $0.64 for the third quarter of 2013 and $2.51 on a year-to-date basis.

While net earned premiums declined, we continued to recognize the positive effects of our loss mitigation efforts. This was reflected in our favorable economic loss development of $22 million, which was due principally to improved delinquency trends in the second lien exposures in RMBS portfolio, where we transferred servicing, and a higher R&W benefit, attributable to recent developments with some of our counterparties. However, some of this benefit was offset by loss development on certain first lien transactions and developments with respect to municipal bankruptcies.

The decline in third quarter 2013 net earned premium was due both to the scheduled amortization of net par outstanding and lower accelerations from refundings and terminations. These vary from period-to-period and are a function of the interest rate environment and timing of negotiated terminations with counterparties.

Total accelerations in the third quarter of 2013 were $40 million. This consisted of $28 million for refundings of public finance transactions and $12 million attributable to negotiated terminations. This compares to total accelerations of $73 million in t he third quarter of 2012.

This brings our year-to-date refundings and terminations to $214 million, which represents a 20% increase over the comparable period in 2012. Refunding and termination activity continues to deleverage the portfolio and strengthen our capital position.

The effective tax rate on operating income was 28.1% for the third quarter of 2013 compared with 22.5% for the third quarter of 2012. The increase was due to lower operating income at Assured Guaranty Re compared with third quarter 2012. On a year-to-date basis, the effective tax rate on operating income was 27.2% compared with 24.2% in 2012.

Adjusted book value per share increased to $49.55 from $47.17 at December 31, 2012, primarily due to share repurchases. Operating shareholders' equity per share increased to a record $33.15 from $30.05 at December 31, 2012, which also reflects the impact of share repurchases, as well as year-to-date operating income.

On a per-share basis, our 2013 share buybacks added $1.79 to adjusted book value, $0.76 to operating book value, and $0.35 to GAAP book value. As of today, we repurchased 12.5 million shares for $264 million.

I will now provide some additional detail on the UK tax residency. After reviewing several options for improving the efficiency of our capital management, we decided that AGL would become tax resident in the United Kingdom while still maintaining its head office in Bermuda.

This action will not have an effect on AGL's effective tax rate on operating income from its subsidiaries. Those subsidiaries will continue to pay tax on all profits in either the US or UK, except for AG Re, which remains a Bermuda reinsurance Company. Also the UK tax residency will not have a material effect on operating expenses because we already have operations in the UK with a fully functioning office.

As a result of the tax residency in the UK, AGL will now be subject to the US-UK tax treaty, which provides a withholding tax rate for dividends from AGL's US holding company of between 0% and 5%. We expect any dividends to AGL from its US holding company will not be subject to any withholding tax. I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

(Operator Instructions)

Sean Dargan, Macquarie.

Just as we think about modeling out potential extraordinary dividends out of the operating companies, when I look at slide 31 on the equity presentation, as RMBS exposure runs off, where will we see the impact of that? In other words, there should be more capital, I assume, on your statutory balance sheet? Does that show up in policyholder surplus or contingency reserve?

Well, remember as RMBS capital runs off, you won't see more capital per se. You'll see more excess capital as we look at our requirements coming principally out the rating agency.

So line capital doesn't go up but the fact that we should have greater capital adequacy because those exposures either run off or become subject to settlements should reduce the capital charges that we see from Moody's and S&P. Therefore that would create additional excess capital.

Our dividend is always going to be limited to the statutory rules regarding the amount of dividends that could be paid from the operating companies to the holding company and therefore then from the holding company to the parent Company. That's excluding any extraordinary dividends and, as Rob said, we'll look at our dividends based on a lot of things at the moment, including market conditions, capital adequacy as it respects both bondholders and rating agencies, so that's going to be a fluid process.

All right. Got it. Thank you.

And as you, I presume, will ask for extraordinary dividends at some point, can you walk us through how that conversation goes? I assume Benjamin Lawsky reads the reports about Puerto Rico and perhaps the regulators are nervous about allowing capital to leave their regulated entities when there might be claims to be paid further down the line. Can you just tell us how you're approaching those negotiations?

Well, any anything where you go in and ask for something that's not a part of the normal operations. I'll give you an example.

Last year we went in and asked for the release of contingency reserves. So as a part of that, we make an application relative to the subject matter.

We sent it to the applicable people at the department that handle it Assured Guaranty. They typically come back with a host of questions.

They normally call for a meeting. We go in, make the presentation at the meeting. They follow with a few more questions and then they ultimately make the decision based on the merit of the fact and all the information that was provided to them.

So anything that would regard in any capacity further contingency reserve releases, excess extraordinary dividends, you'll go to that same process.

All right. Thank you.

Bill Clark, KBW.

Just one question. You successfully mitigated some of the tax impact on the US subs to the Bermuda holding company. Did that cause any impact on the tax that would be applicable to dividends from the Bermuda reinsurance company up to the holding company, which used to be at 0%, or is that still expected to be at 0%?

That has no impact on Bermuda's dividends up to AGL. It will be 0%.

Okay. Thank you.

Geoffrey Dunn, Dowling and Partners.

Dominic, I'm going to be more specific here. Based on how things stand today and the runoff in rating agency assessments, in 2014 do you think you can maximize your regular dividends and do think it's warranted to request a special?

Geoff, as you know, part of our challenge of strategic management is we have two areas that we have to look to relative to our capital adequacy. Obviously, that which is available to us relative to capital returns from our existing statutory rules and regulations. And then two, what is required to be held relative to us maintaining the highest ratings that are available to us, which is still the goal of the Company.

You know the second or the latter part is a moving target. And as we get very comfortable in where that target exists, and as we see the benefits of what we believe has been significant improvement in the portfolio, and I will point you to our below investment-grade credits that are now sub-$20 billion.

In the old days, BIG credits were anywhere between 1% and 3% of the portfolio. We're getting closer to almost normalcy and we hope in 2014, with further improvement in RMBS and a few more of our loss sharing deals, as well as continued runoff of the structure, we'll get to that level.

And there are some big credit changes in BIG that we see happening in the fourth quarter. Obviously, you have Stockton, Harrisburg, Jeffco, all come out of BIG, and there's some other terminations that we've done that we haven't announced -- [we can] have a material impact once again, that to me is the more relevant factor. We've got to really be able to tell the market and convince the market that we are absolutely strong, financially stable, can maintain ratings, can be available to provide additional guarantees, and then use that as the assessment of the capital when and where we see fit.

Okay. And then just a couple points of clarification. Rob, did you indicate $217 million at the hold co as of third quarter?

That was the combination of the US hold co and the Bermuda holding company as well, Geoff.

What is specifically in Bermuda?

$255 million in Bermuda and the difference is in the holding company.

Okay. So $255 million is what is in AG Re, right? That's available?

Oh, I'm sorry, $255 million in AG Re. You were talking about that -- hold on one second.

What is at Limited right now?

It's $130 million at AG US holdings and about $32 million at AGL.

Okay and then the last question. For the muni development in the quarter, was that a true-up related to the Stockton settlement or can you give us any detail on what specific credits drove the addition?

The addition to expected losses to be paid?

Correct?

Well, this took me a while, so let me see if I can take a stab at it and I'll give it to Rob. Remember, we book reserves as we see credits experience trouble and there's a probability of loss which goes into our loss reserve model. Those reserves that are held, and because of the way GAAP works, and we're trying to give you these economic schedules that really give you a good indication of where loss activity is, we then post subrogation in certain areas like we did it in a residential mortgage area, so we take the benefit of what we think are our proceeds are going to be received back from us.

The increase in the expected losses to be paid has nothing to do with increased losses. It had everything to do with the subrogation that we had carried as a credit. We actually received bonds so that now [we're over] in our investment portfolio.

So it's really the removal of the credit or the negative loss reserve in the total expected losses to be paid that caused the increase. There were some additions to reserves related to the bankruptcies as we look at our LAE and some other issues to make sure we believe those things are booked at an ultimate level, based on current circumstances, but the big number is the fact that the subrogation actually got realized in the form of the bonds.

All right. I'm going to have to follow-up on this one (laughter). Thanks.

(Laughter) it's not easy. It's not intuitive. It's really the fact that the negative subrogation [we] actually receive the bonds.

It's as you receive the bonds, you have more expected losses.

So you debit assets, credit the credit in reserve, right? And that's why the reserve goes up?

All right. Thanks.

(Operator Instructions)

Brian Meredith, UBS.

Couple questions here for you all. The first one, just curious, of the $217 million of liquidity that you got at the holding companies, how much do you want to keep at the holding companies for liquidity purposes? Like interest and that stuff -- is there a general rule that you think about, Rob and Dominic?

We generally keep a six-month cushion for our interest costs at the US holding company and about two quarters of equity dividends at the [ultimate or] parent holding company.

The [fact that] the holding company -- remember then, that the operating subs, we have to, for the sake of argument in AG Re, keep a further cushion because of mark-to-market movements that would affect the collateralization of their -- or the assets in the collateral counts. So remember, as interest rates move, we either have to post more or have some relief of, so there's another cushion in there to protect that as well as any posting notices we get on the reinsurance in the Bermuda company from the [ceding] companies as they post reserves. So Bermuda, the AG Re has to hold a higher -- another level of redundancy of free assets just in light of the fact of market movements and collateral posting requirements.

Okay. And then second one, Dominic, I'm just curious, now that most of this RMBS is behind you, you've got maybe some more putbacks and stuff. As you look forward here, operating return on equity, what you think the run rate operating ROE of the Company is at this point?

Well, that's a multi-pronged question -- right Brian? Obviously, with new regulation being posted around the world and the related increase in capital requirements, the paradigm for returns in the financial services business is different. And I would say the benchmark today might be 10%, no longer 15%, and especially when we open up the portfolio, putting further pressure on that.

Our goal is to achieve that, but obviously, we've got to look at it over a longer horizon, because as you know, we know, we've talked about it a lot of times, we are in this excess capital position and we've always said, as an efficient manager of capital to the extent that we can't justify a return on it, then it has to be used in the best way to benefit our shareholders. So it's not going to be solved overnight but obviously, we've made a lot of improvement or a lot of advancement in being able to further realize exactly what we have to do from a process point of view, from a strategic point of view, in delivering that level of return to our shareholders.

Okay. So basically you said -- your point is -- if you can get to the optimal capital levels, it's 10%?

(Multiple speakers) capital base -- we've got to get to the right leverage base and [then] capital base.

Got you. Okay, excellent. Thanks.

Parker Lewis, Hayman Capital.

This is actually Brandon Osmon from Hayman Capital. We were just hoping to get a little more detail on how a potential downgrade of Puerto Rico might impact the timing of share repurchases, if at all?

Good question. If you go back, I don't know how many weeks, time tends to fly in this place, but S&P put out a little blurb on Puerto Rico, basically saying that they believed it was a non-event for the financial guarantors.

And they actually worked through some numbers, for both us and the other guarantors in the industry to say, if it is downgraded, what is the capital cost? And therefore the capital cost was not going to be significant, therefore it shouldn't have any impact on the ratings. So following that same logic, it shouldn't have any impact on our share buyback.

Okay.

I would refer you to the S&P article because it does a pretty good job of laying it out for each of us.

Okay. Thank you.

Larry Vitale, Moore Capital.

I have a few questions. The unencumbered assets fell from, what was it, $280 million at July 31 to $255 million now at the end of September. Can you walk us through why those would have gone down?

Remember Larry, it's a function of what's required to be held from AGC and AGM and also for other reinsurers like Ambac and FGIC. In addition to which, we've also paid dividends from that Company up to the holding company to pay for our equity dividend so those are the primary drivers of why it would go down.

Okay. And the last quarter, I believe it was, you talked about the agreement you reached with both Maryland and New York to take back contingency reserves. And presumably that was going to free up or unencumber assets at AG Re, if I understood it correctly? Can you just bring us up-to-date on where all that stands?

Well, it did free up the unencumbered assets at AG Re. It did that last quarter.

And we expect in July or the end of June of this year, to have another -- around $250 million freed up as the second part of that recapture. And in the last part of that recapture, we'll be freed up in the next June, in 2015.

So June of 2014, $250 million gets freed up and then June of 2015 another $250 million?

No. June of 2015 is going to be at AG Re -- first of all, another thing that you should know is that AG Re is no longer required to post additional contingency reserves. And in 2015, the amount that we'd recapture is approximately $81 million.

Okay. So that's just the stub?

Yes and all of that is hardwired. It's just -- and it's been approved by the regulator. They just want to relook at it every June.

Right. Okay.

Larry, remember, when they gave us the agreement, the conceptually -- they agreed with the release, conceptually, and they also agreed to no longer constitute the contingency reserves in Bermuda. They set the release schedule on a three-year schedule. They released 50% of it up front, another--

No.

No? What was it -- 2/6 and then 1/6?

No, it was one-third, one-half, and 1/6.

Okay, I had the right percentage of the wrong order. One-third, one-half, 1/6, over the three years, but we have to go to them and request the previously agreed amount released in, as Rob said, July of next year and the July after the July of next year is the big one. And we believe without anything extraordinary happening, that approval should be given and then in 2015 you get the remaining 1/6.

Okay. All right. That's all helpful.

One other question, did the changes to the way you guys defined below investment grade this quarter -- and you lay out, it's pretty clear, and it resulted in, what was it, about $1.5 billion in below investment grade exposure investment grade exposure. Did that free up capital on the S&P model?

No because remember that's our rating, not their rating. Their rating is going to be based exactly, as we said, on their depression model and whatever the ratings at S&P have. Obviously, what's more important to their rating is the run-off of the structure and the continued rep and warranty settlements.

And the terminations have a significant impact.

Right. Okay. And then finally, and this is just a formality, but I want to hear you guys say it, presumably the IRS and Inland Revenue in the UK and all of those -- and the tax authority in Bermuda, all those tax authorities are okay with your re-domiciling of your tax residency?

Larry, we've gone through a very, very complete process. We've talked to the regulators in all jurisdictions to get agreement. We've spent a lot of time with the HMRC in the UK -- obviously, we feel very comfortable with the position with that we've taken.

Okay. All right, great. Thank you very much.

Josh Bederman, Pyrrho Capital.

Just one quick one. Any update on anything with Credit Suisse?

As hard as it is to believe, Josh, and thanks for answering the call with -- as we now say, we're up to six settlements this year in rep and warranties. As you can imagine, it's getting a lot easier conversation to have. Our phone has still not rung from our friends at Credit Suisse. And especially relative to the refiling our complaint to include fraud now, and if you have noticed, the nature of the beast -- the monolines have done a lot of work in terms of the research investigation and following the litigation, and the government comes in and basically reads our litigation complaints and then files the same one, except they're the government, so they get a lot faster answer.

We think this surprises us that we're still not engaged in an active negotiation. The fraud refiling of the complaint that was made would get my attention because these things are going in a very one-way and obviously it's in our favor but to the extent where we have six done this year, which even surprises me, from the standpoint and objective we set at the beginning of the year, they're not one of them.

So what's the next step in this process? Is it the government reading your complaints? What do we expect to happen next?

Well, we've gone to [Deb Com Four], so we're ready to fire. We've fired the fraud complaint. Obviously, that's going to take its course through the court system -- it's New York State Court, so we can expect a couple of birthdays before we finally get into the courtroom.

But obviously, we're in great position vis-a-vis the financial strength of the Company, capital adequacy, continued settlements, improvement in the RMBS experience, and I want to point out, a lot of that is based on our whole strategy around special servicing and special servicing agreements, had a tremendous impact in the current quarter as we see real improvements on the second lien risk that we transferred to our special servicer. So once again, give us some credit for being able to pick ways that we can continue to benefit this Company while the market still stays pretty cold relative to financial guaranty related more to interest rates and economic activity. So we're seeing all sorts of benefits coming out of this thing.

With that said, I don't what that says, Bob, sorry -- (laughter) -- I have got a notepad that I couldn't read, scribbled -- anyway, so we're looking at other things that are also very positive in that regard. And we think that these things are resolving themselves and as you can seem, even in the general market, there has been more cases brought, more settlements achieved, so I think this is an area that will continue to provide benefit to us.

Okay. Thank you.

Larry Vitale, Moore Capital.

I just wanted to ask you guys to comment on your exposure and what you think might happen in Chicago. They got downgraded the other day by Fitch, I think it was, and also Illinois more broadly. And then if you could just comment even more broadly than that on how you see muni risks developing over the next of couple years, because that seems to be what the market is focused on, right or wrong?

The way you put the right or wrong out there, Larry. By the way, you pay for your second set of questions so we'll be sending you a bill (laughter).

As we look at Chicago, Chicago is very different than Detroit. You look at the economic activity in the city and one of the things that we look at very closely is population. And if you look at the population in Chicago, it continues to increase not decrease so the taxable base continues to improve.

Obviously, Chicago, much like a lot of other municipalities, still have that one big issue that needs to be addressed, which is the ongoing burden that defined benefit and retirement-type program -- defined benefit pensions and retirement programs [where] vis-a-vis medical, continue to create a huge responsibility relative to the municipality and that has to be addressed. It has to be addressed in Chicago; it has to be addressed in Illinois. And obviously, it's more of a political not an economic problem and therefore it's got to be solved through that process.

We can only take comfort in the things that we see. Number one, the majority of our Chicago exposures are to individual entities and not specifically related to the general obligations of the city. Number two, as we looked at both Stockton, Harrisburg, and Jefferson County -- and Stockton is probably the best case relative to pension obligations -- there is a way forward, there is a way to work through these things.

The nice thing is these are long-term problems and therefore have the ability to be addressed if you have rational minds sitting at a table that are looking to create a solution. So we're more bullish on Chicago economically. Obviously, a very big concern relative to pension obligations and we think that's part of the problem that exists not only there but in other places and we believe that those things ultimately get solved.

I hope you're right. Thanks.

This will conclude our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Thank you, operator. I'd like to thank everyone for joining us on today's call.

If you have additional questions, please feel free to give us a call. Thank you very much.

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