Assured Guaranty Ltd (AGO) 2013 Q4 法說會逐字稿

Hello and welcome to the Assured Guaranty Limited fourth quarter 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, Head of Investor Relations. Mr. Tucker, please go ahead.

Thank you operator. Good morning and thank you for joining Assured Guaranty for our fourth-quarter 2013 financial results conference call. Today's presentation is 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're listening to the replay of this call, or if you're 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.

And turning to this presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited, and Rob Bailenson, our Chief Financial Officer. After their remarks we will open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you'd like to ask a question.

I will now turn the call over to Dominic.

Thank you Robert. Thank you all for joining us today for the fourth-quarter 2013 earnings call. I'm pleased to report that we ended 2013 with Assured Guaranty's strongest production quarter of the year, and increased our operating shareholders' equity per share to an all-time high of $33.83. Adjusted book value per share ended the year at $49.58, which reflects significant value to our shareholders. Our 2013 operating income of $609 million, was 14% higher than in 2012.

This was our fourth consecutive year with an operating income that exceeded $0.5 billion. During this four-year period of difficult economic times and turmoil in the financial guarantee industry, we generated $2.4 billion in operating income, despite paying $4 billion of insurance claims for RMBS and some other transactions, a truly remarkable result. Also during this timeframe we significantly deleveraged the Company, reducing our insured portfolio by $181 billion, of which $101 billion of this decrease was structured finance, taking the portfolio from $640 billion of net par outstanding at year end 2009, to $459 billion at year end 2013.

We also significantly changed the risk composition with public finance exposure now representing 84% of our insured portfolio. At the same time, our [strap straight] capital increased from $4.8 billion to $6.1 billion or 27%, and the ratio of our net par outstanding as statutory capital decreased 45%. It's important to note that since the beginning of the global financial crisis six years ago, we've paid a total of $6 billion in claims yet still added $1.4 billion to statutory capital, a further confirmation of our sound performance and our ability to handle adverse credit situations.

As an aside, if you told me at the end of 2007 that we would pay $6 billion in claims over the next six years, but still increase our capital by $1.4 billion, significantly deleverage our insured portfolio, and improve its risk profile, I would have concluded that our financial strength ratings today would be super AAA. But I'm sorry to say our financial guarantee ratings by some rating agencies no longer reflect the amount or consistency of operating results or our capital adequacy. What is undisputable is that we proved the financial resilience of our Company during one of the worst economic cycles of the last century.

Year after year we have accurately assessed the market, defined our strategies accordingly and executed those strategies effectively. Looking back, our assessment going into 2013 was that our short portfolio would experience a net decrease in par outstanding during the year due to scheduled run off as well as the low interest-rate environment would likely continue to limit the demand for new bond insurance. Therefore, we enhanced our capital management strategy by returning $264 million to our shareholders through the repurchase of 12.5 million common shares as part of our ongoing share buyback program.

These repurchases at an average price of $21.12 per share were accretive of earnings, operating book value, and adjusted book value per share. We also increased our quarterly dividend per share by 11% in February 2013, and further increased it by an additional 10% in February 2014. To strengthen our competitive position in the market last year we established a new municipal-only bond insurance Company that provides Assured Guaranty a response to the market desire for a US muni-only insurer and gives us a valuable strategic flexibility, as we assess market demand in the future.

We successfully launched MAC in July 2013 with $1.5 billion of claim paying resources and an initial statutory unearned premium reserve of $709 million. Unlike other startups, MAC started out in a strong competitive position because it does not have any of the key risk associated with many startups. From day one, MAC benefited from market acceptance, to assure Guaranty's ownership and from a highly granular and geographically diversified insurer's portfolio, that produces positive operating results.

We are pleased with the market's reception of MAC, which is rated in the AA category by both Kroll and S&P. Our Kroll rating of AA-plus stable, is the highest in the industry, despite what you might hear from some other financial guarantor. With regard to international business, during last year's fourth-quarter earning's call, I talked about the growing international infrastructure finance opportunities that we envision for 2013. Our prediction was on target. In the second half of the year, we insured approximately GBP240 million of UK infrastructure bonds across three separate transactions, to produce $18 million of PVP.

Our years of commitment to international infrastructure finance clearly began to pay off in 2013. And we are confident that our US structure finance business, will also benefit from the same level of strategic commitment. Company-wide, in all of our markets for 2013, we generated a present value of new business production totaling $141 million by writing $9.4 billion of financial guarantees. We achieved this in a market environment full of headwinds, as municipal issuance was down by 15%, interest rates generally remained low and credit spreads were relatively tight.

With financial guarantee opportunities constrained over the past few years, we have demonstrated that we can develop and execute alternative strategies for value creation. Specifically, in 2013 we repurchased $331 million of our wrapped bonds at 70% of their par value, generating a pretax adjusted book value benefit of $38 million. We terminated or agreed to terminate over $7 billion of net par outstanding on 84 policies, on which we accelerate the earnings of 100% of the expected premiums.

Total terminations including these 84 policies contributed $144 million to pretax operating earnings for the year. And we closed record warranty providers or other responsible parties, to pay or agree to pay over $700 million in RMBS recoveries. Our cumulative recovery today from RMBS putback [some] into litigation, has now reached $3.6 billion. On the subject of public finance loss mitigation, Assured Guaranty remains committed to working cooperatively with financially stressed municipalities, including those in default.

Jefferson County is an excellent example where we and other stakeholders devised an innovative solution to facilitate an exit for bankruptcy. As part of the county's restructuring plan, which involved the issuance of $1.8 billion in securities, our [assurance] an optimal sale of $600 million of senior sewer revenue warrants. We guaranteed the warrants based on the county's approved credit, and assured its participation in the county's bankruptcy exit plan underscores our unique ability to assist issuers in assessing the capital markets to help them achieve critical financial objectives.

Additionally, we reach final agreements with Harrisburg, Pennsylvania and intend a settlement with Stockton, California in connection with debt restructuring plans that should contribute to stabilizing these city's financial conditions. The direct insurance in force on approximately 10,000 municipal credits our credit track record is outstanding. We expect ultimate losses are fewer than 12 municipal credits, and during the fourth quarter of 2013 we made claim payments on only 5. Let's take a moment to address two of our credits that have been in the news lately.

Detroit, which is negotiating a bankruptcy plan of adjustment, and Puerto Rico which although recently downgraded, is still current on all of its debt service payments. In both cases of course, holders of bonds that we insure are fully protected by our unconditional guarantee that they will receive their principal and interest payments on time, and in full, in accordance with the terms of Assured Guaranty's insurance policies. Even now, holders of Assured Guaranty insured Puerto Rico and Detroit bonds, are benefiting from their insured bonds relative price stability, when compared with the same issuers uninsured obligations.

The city of Detroit has filed a plaintiff adjustment with a bankruptcy court, that we believe is not confirmable. Besides unfairly discriminating against bondholders, the plan failed to respect state law restrictions on voter approved special tax revenues, and bankruptcy code protections for secured creditors. In the case of Detroit's water and sewer revenue bonds, which account for 85% of our insured Detroit exposure, the plan disregards the protections of 42 holders of special revenue bonds, of solvent water and sewer systems. While our exposure to the unlimited tax general obligation bonds is limited to $146 million, the plan's proposed treatment of those bonds has serious implications for Detroit, and more generally for municipal finance in the state of Michigan.

The plan proposes that ULTGO bondholders effectively receive 20% of what they are owed. It proposes to divert special tax revenues, specifically approved by the voters, only to pay the debt service on the ULTGO bonds, to the city's general fund and to fund distribution to other unsecured creditors. Additionally, the secured ULTGO bonds ultimately may be treated less favorably than other unsecured general fund debt which challenges the fundamental principles underpinning the entire municipal bond market.

Further, there is no basis in the law or morality for the city to insulate selected assets to obtain additional funding from outside sources like foundations or the state, and then apply those funds preferentially to similarly situated or even lower ranking classes of creditors. There is a true bankruptcy in Detroit, and that is in the moral and ethical behavior of its state elected officials, and their appointees.

In the case of Puerto Rico, we recognize that its administration has shown it knows the importance of finding solutions that both improve its financial stability, and honor its obligations to creditors. However, based on our analysis of the economic conditions and the dynamics regarding Puerto Rico, including its access and potential costs for future financing, we internally downgraded these credits and established reserves which are reflected on our 2013 results.

Rob will address this further in his commentary. That said, S&P and Moody's have both made it clear that Assured's exposures to Puerto Rico and Detroit have not affected the ratings or stable outlooks of AGM or AGC. MAC by the way has no Puerto Rico or Detroit exposure. While we don't believe these credits reflect a systemic trend in public finance, it is important to note that headlines about municipal risk do generate interest in bond insurance, reinforcing the value that our bondholder protection provides in troubled situations and the relative price stability of our insured bonds.

Looking ahead, we are well positioned for 2014, with $12 billion in claims paying resources, close to $400 million of annual investment income, and $4.1 billion in consolidated net unearned premium reserves. Ultimately, the need to replace the aging US infrastructure and to fund new projects, will support the issuance of municipal bonds. And in the longer run we are confident that interest rates will rise as the economy continues to improve, and that credit spreads will in due course widen, creating improved conditions for new business origination.

What is our vision for 2014? We believe we can achieve growth in new business production, with contributions from all of our business areas. We expect opportunities to augment both our production results and our unearned premium reserve through the reassumption of previously seeded business, or acquisitions of insured portfolios from legacy insurers. We will continue to extract value where we find it, through our loss mitigation strategies. Finally, we intend to continue optimizing our capital management across the group, which would include utilizing when appropriate, our share repurchase authorization which now stands at $400 million.

For our success in achieving greater capital flexibility, continuing to leverage the Company, launching MAC, capturing more recoveries, and resolving troubled credits, Assured Guaranty is clearly in a very good position for the future. We have proven that we have strength, flexibility and human capital to deal with even the most challenging market conditions. I'd like to thank our shareholders and policyholders for their continued support. I look forward to updating you on our business developments and financial results as the year progresses. I will now turn the call over to Rob.

Thank you, Dominic, and good morning. The fourth quarter contributed $134 million to 2013 full year operating income of $609 million. Full-year 2013 operating income represents a 14% increase over 2012 operating income. On a per-share basis, operating income was $0.73 for the fourth quarter, bringing full year 2013 operating income to $3.25.

I would like to discuss a few highlights of our financial results which include the economic benefits of our strategic initiatives. First as part of our continued R&W recovery efforts in the fourth quarter we settled with two R&W providers. As a result realized $23 million of positive pre-tax economic development. In 2013, we had a total of seven separate R&W settlements, bringing the year-to-date positive pre-tax economic development from R&W settlements to $314 million. The after-tax effect on operating income was $9 million for the fourth quarter of 2013 and $154 million for the full year.

Second, we negotiated terminations of selected exposures which resulted in $38 million of pre-tax premium and CDS revenue accelerations in the fourth quarter. In addition to the immediate benefit to operating income, terminations, along with refundings, deleverage our portfolio and strengthen our capital position. Refundings were $32 million in the fourth quarter of 2013. For the full-year 2013 terminations and refundings contributed $284 million in pre-tax net earned premiums.

Third, we continue to purchase loss mitigation bonds for our investment portfolio. In the fourth quarter we purchased $85 million in par bringing the full-year 2013 purchases to $331 million. Purchase loss mitigation bonds offset expected losses, boost investment yields, and help offset the effects of lower reinvestment rates. As of December 31, 2013 we held $439 million in loss mitigation bonds at fair value in the investment portfolio having a 9.7% yield.

Finally, we negotiated consensual restructurings with Jefferson County, Alabama and Harrisburg, Pennsylvania in the fourth quarter which resulted in over $40 million of PVP or newly insured revenue bonds for both municipalities. As Dominic noted, Assured Guaranty's ability to help these municipalities restructure their debts and regain market access further demonstrates the value of our financial guarantee product. For the full year we wrote $141 million of PVP, including three UK infrastructure transactions that marked the re-emergence of wrapped capital market infrastructure financings in the UK.

In total, operating income for the fourth quarter of $134 million was down compared with $184 million of operating income in the fourth quarter of 2012, due primary to lower terminations and refundings and the scheduled amortization of unearned premiums. This was offset in part by lower loss expense, primarily in the US RMBS sector. Pre-tax economic loss development was $89 million in the fourth quarter of 2013, which was primarily due to developments in US public finance exposures including Puerto Rico and Detroit.

Full year 2013 economic loss development was $56 million. The US public finance sector was the primary driver of economic loss development. These losses were largely offset by R&W recoveries on RMBS. Turning to Puerto Rico I would like to start by noting that all of our obligors have made all their debt service payments and we believe that the Commonwealth is taking appropriate steps to address its budget issues.

However, we recognize that the rating agency's announcement that Puerto Rico had been put on watch due to budget deficits and a weak economy could hurt the Commonwealth's prospects for [accepting] the capital markets. As a result the Company downgraded most of its Puerto Rico credits to below investment grade and the rating agencies subsequently announced they had also downgraded Puerto Rico. After the downgrade of Puerto Rico Moody's reaffirmed our ratings and S&P stated that the incremental capital charge to Assured Guaranty for all our Puerto Rico exposure would be approximately $65 million. Under our loss estimation process which takes into account estimates of both the probability and severity of default of each issuer, we established a loss reserve for our below investment grade Puerto Rico exposures.

The effective tax rate on operating income was 25.2% for the fourth quarter. On a year-to-date basis it was 26.7% which is slightly higher than 25% for 2012. The primary driver of effective tax rates in recent years has been the allocation of loss expense between taxable and non-taxable jurisdictions. In 2013 economic loss development was relatively higher in non-taxable jurisdictions which increased the full-year effective tax rate. Adjusted book value per share increased to $49.58 from $47.17 at December 31, 2012, primarily due to share repurchases.

Operating shareholders' equity per share increased to a record $33.83 from $30.05 at December 31, 2012, primarily as a result of share repurchases and year-to-date operating income. On a per-share basis 2013 share buybacks added $1.84 to adjusted book value, $0.83 to operating book value. Seeing that we would benefit from greater capital flexibility within our corporate structure we took two further important steps during 2013. First we obtained regulatory permission from Maryland and New York insurance regulators and increased unencumbered assets at AG Re, a key source of funding for our share repurchase program.

Second, we became a tax revenue of the United Kingdom. Both of these actions will make it easier to manage capital efficiently across our group as we continue to evaluate and respond to business opportunities and market conditions. While we have not repurchased any shares since the third quarter of 2013 under our $400 million authorization, we have move funds in place, in order to be able to efficiently buy shares in 2014, depending on market conditions. As of December 31, 2013, we had unencumbered assets of $238 million at AG Re, $228 million of liquid assets at the US holding companies, and $33 million at AGL.

Looking forward, I would like to point you to our financial supplement detail on some of our expectations for 2014 where we provide you with estimates for net premiums earned and loss expense. Premium estimates do not include refunding determinations. We expect 2014 net [earned] premiums and CDS revenues to be less than prior years based on scheduled amortization, [sub] par, and the fact that we terminated $24 billion in par over the past three years. With respect to loss expense we have fewer R&W providers left to pursue and therefore expect that the benefit to operating income and economic loss development in 2014 to be less than the amounts we have recognized in the past several years.

I expect 2014 net investment income and operating expenses to be relatively flat compared with prior years, with the first quarter operating expenses being slightly higher than the rest of the year due to accelerations of compensation expense for retirement eligible employees. I will now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

(Operator Instructions)

Our first question comes from Sean Dargan of Macquarie.

Thanks and good morning.

I just have a question about share repurchase or lack of it in the fourth quarter. You had dividend capacity in most of the statutory entities. Why did you choose not to repurchase shares in the quarter?

Hi Sean.

We have been making plans and moving money to the right legal vehicles, and we plan on exercising and moving forward with our share repurchase plan.

We just wanted to make sure we had all of the regulatory approvals and moving money into the right places. So we've had to deal with regulators and making sure we have the right liquidity in place, making sure that we were cognizant of all of our responsibilities with respect to our insurance collateral posting requirements.

But as you can see, I have just disclosed exactly what we have available at all the holding companies. And we are fully expecting to utilize our Share Repurchase Program in the coming months.

Sean just so you understand, there is not really an official waiting period. But on the advice of our tax counsels, they had preferred that we have several months of operations for a period of time relative to the UK residency qualification. And we wanted to honor that.

At the same time, we still had to look at year end, where typically you'll see a lot of activity from our reinsurers in terms of posting new reserves for the year-end financials. So obviously, that would increase the encumbered assets at AG Re. We had to be cognizant of that as well.

So it's just us being cautious as to provide what I'll call a cure period for the restructuring.

All right. Thank you.

And then a question on Puerto Rico. I recognize that the Commonwealth is doing the hard things just making the right decisions. In thinking of the possibility that at some point down the road there may be a restructuring, what might that entail?

Would that be Puerto Rico going to the bondholders and saying -- You have to accept $0.60 on the dollar or you get $0. Or what might be some possible options if Puerto Rico at some point had to restructure its debt?

Sean, your guess is as good as mine. And I'm sure both of us have read thousands of pages of various conjecture on Puerto Rico. What can we say?

In most cases, about 50% of our exposure is in our obligation; 50% of our exposure is revenue. Both have had historically very, very low levels of both defaults, as well as severity in the default, based on the revenue streams that are attached to both.

Number two, Puerto Rico does not have a Chapter 9 option or opportunity. Therefore, settlements have to be negotiated, as opposed to as in Detroit's case, kind of blustering rhetoric through ridiculous plans being aired.

So you would think there would be a consensual kind of view to it, much like Jefferson County, where things get worked out in the market. So hopefully, a fairness and equitable settlement with all stakeholders.

And as we've always looked at in Puerto Rico, debt service in total is roughly about 10% of the budget. So if the budget has a structural deficit of, say, 2% to 3%, there would appear to be more than enough funds to be able to fully satisfy the debt.

And because the event is critical to the continued development of any recovery, and I don't care what municipality or organization you look at, the access to funds is as critical to stimulating economic growth going forward as anything else.

And at least Puerto Rico, of most creditors, obviously fully understands that, have made every proper statement and in the full support of that.

I look at our track record -- and you can't ever come up with any concrete answer here -- but, A, we've done very, very well even where the troubled credits are truly troubled and they really don't want to respect the bondholders. And therefore, I'm pretty optimistic we've got a troubled credit that really does respect bondholders, appreciates the value of the access to the markets, and is trying to work cooperatively with all stakeholders.

We're very optimistic on Puerto Rico, and obviously stand there in full support to help them accomplish their goals. And if that means a restructuring where we expand terms, lower rates as you typically do in a lot of municipal workouts, then so be it.

Obviously, we look to preserve our economic integrity. And that's the goal we've always looked at as we look at any of these things. But at the same time, try to help the municipality achieve some level of balance or at least support for the current years if they need that. And obviously push the obligation out of their future.

Thank you.

Our next question comes from Geoffrey Dunn of Dowling & Partners. Please go ahead.

Dominic, can you or Rob maybe too, can you talk about how you think about going about reserving for such uncertain exposures like Detroit and Puerto Rico? I know it's probability and scenario weighted.

And I look back on the example of Greece, where you were doing that same thing, and all of a sudden at the end you had this big true up because the loss exposure just changed with the reality of the settlement.

How do people get comfortable that each quarter that goes by, you have more information. You update your probabilities, maybe you bleed more into reserves or a little less.

But how do you get comfortable that all of a sudden things just don't change, like they did in Greece, and we have a big loss sitting in front of us? How does the world you're facing now influence how you think about reserving and the practice of reserving?

Jeff, I want to thank you for opening up an old wound.

As we have said repeatedly, I think we've done a fairly good job in assessing trouble credits and credit impairment. I do not think we did a very good job in Greece. We gave a value to the substitute bonds that weren't there, and we misread that situation entirely. And we will take the beating, and we will give you our apologies repeatedly.

In the municipal world, Rob will work through the mechanics, but you do start off with some premise here. You've got a type of security that you are familiar with.

You've got all sorts of published both default and severity probabilities by every rating agency, including our own experience, that gives you kind of a guideline as you try to assess the various scenarios that you want to evaluate as possible outcomes in developing your reserve calculation.

That's always been the premise. And you're right, we update it based on new facts that we see. And obviously, we also assess. ¶

Remember, in a lot of cases, we will always tell you that the first thing we start off with is -- What is the issuer's attitude? Is he looking to cooperatively work this thing out? Is it an antagonistic or confrontational situation? Because that can obviously dictate a lot of things.

LAE, how much money we are going to have to spend in litigation if it comes to that, as well as the potential size of the settlement? So I'll give it to Rob.

But I think you have to -- Greece was Greece. And we will continue to take the appropriate amount of lashes from you and our shareholders for the missed estimate on our part. But this is muni.

Jeff, just to add a little color. Like Dominic said, we look at new available information in the market. With respect to Puerto Rico, we went through a risk management process where we downgraded all of the Puerto Rico credits.

You look at our process, when you downgrade something to below investment grade, you look at the probability and severity of default for each individual credit. These probability and severity factors are based on a number of factors. We look at statistics that are out there in the market. We look at rating in statistics, and we evaluate that information.

As Dominic said, it's very important to look at the willingness of that issuer to pay its obligation. And with respect to all municipal credits and all credits, we look at new information. And we go through a robust reserving process, where we evaluate. And we come up with -- it's not an exact science -- we come up with a probability weight of what we think is ultimately going to happen.

With Greece, it's obvious that we missed it. But we were looking at information that we thought was appropriate. Ultimately the estimate -- I would not say it was incorrect. We gathered new information that showed that we were not correct at the time.

That's how we look at this. And we continue to evaluate it, and we look at this available data to come up with our reserving process.

Just two follow-ups then. And just being -- trying to understand it and being a little bit devil's advocate.

In Puerto Rico, what changed this quarter versus last quarter that prompted a downgrade now versus a quarter or two ago? It doesn't seem like too many things are different, other than a lot of positive talking out of the government.

And on Detroit, how do you gauge the probabilities when kind of all of the old guidelines are thrown out the window by the officials, who don't seem to really care about the full faith that's supposed to be behind GOs?

Well, with Puerto Rico, we looked at what all rating agencies were putting them on watch. Once I think it was S&P, Moody's, and Fitch all put them on watch, we thought it was a high likelihood that they were going to be downgraded.

So we looked at that analysis; and we looked at our exposures; and we felt it was necessary, as we do in our risk management committee meetings, to evaluate the likelihood they should be below investment grade. And because they put them on watch and because we believed that one was going to eventually downgrade them, it does affect -- it could affected their access to the capital markets.

If some issuer will have a problem accessing the capital markets based upon all you've read in Puerto Rico, we think most of those credits deserve to have a below-investment-grade rating. That's what happened this quarter, which caused us to downgrade Puerto Rico's credits.

I want to interject. You said, what would change in the quarter? Obviously all three rating agencies putting them on a negative outlook or negative watch was one of the key factors.

Yet, to be very honest with you, it was still a high level of discussion in the Company for us to make a move. And one of the things that led us, believe it or not, to further evaluate it was S&P's was the last one to move.

And we had all three rating agencies then put them on a negative watch. We believed the impact that would have on their ability to access the market if they choose to do so would create a bigger structural deficit because of the higher cost of financing.

So that was for us the big kicker. And we are probably still trying to hold this at investment grade as we look at the quarter and the clear results, try to prepare the final yearend and 10-K, as you are well aware what kind of production that is for any company in light of everything you've got to put in these things.

It was really a close call. But that last straw on the camel's back was S&P, on the Friday as we were looking to finalize the results, that also then put them on negative watch led us to conclude that there was a high probability to downgrade.

This downgrade would definitely increase at a minimum cost of financing. Therefore, we really had to take a hard look at the credit and make the determination we did.

In Detroit's case, I can tell you we are going to get paid 100%. And that has as much basis as that point of adjustment that was just filed last week. This thing will ultimately be determined in the courts. We're very comfortable with our position.

Vis-à-vis how we view our protections that are provided within the specific documents to support the bond issuance including the City Council's vote and authorization; the citizens vote and approval; the fact that some of the projects that were financed with those bond operating actually doubled the art museum. And now they claim that that's not even an asset of the city.

I think they've not done this the right way. As I said, I always look at the moral and ethical behavior of these people, is to be absolutely deplorable. And we're very confident that as this thing plays out in the courts, there will be some justice served; and things will be righted as they should be.

Okay, thank you.

Our next question comes from Brian Meredith of UBS. Please go ahead.

Good morning. A couple questions for you here, Dominic.

The first one, I'm just curious. When you go through a restructuring, like you did with Jefferson County and Harrisburg, and wrap some debt, what do the terms of that debt look like? Is it any different than you typically do? Do you get more money there? Do you have any other protections that you get?

Each of them are kind of unique. You used a few that really took very divergent paths.

I will tell you that the flavor of the day appears to be -- and it kind of came out of Stockton, and we think it will ultimately be included in a lot of other restructurings as they are necessary -- is that you wind up taking some fixed and absolute payment of some reasonable value against the obligation.

And there's typically some contingency payment that really looks to the future development and expansion of the revenue base of the specific municipality. So if you think about the old fashion banks; you've got the equity in the company.

In municipal bankruptcy, you don't have an equity opportunity here. But you can structure contingent-type securities that participate in the recovery and growth of the specific municipality. So Stockton is a perfect example of that.

Jeff Co, these are just senior sewer warrants that we would've insured every day of the week, every month of the year. Because they were really highly-preferred, highly-structured, based on the new rate structure that was agreed as part of the bankruptcy.

These things had great cash flow protection. And yet they needed us to effect that solution, which once again validated the product, validates Assured Guaranty's value in the market place.

Jefferson County is very different than Stockton, very different from Harrisburg. Harrisburg has the same public contingency plan. In its case, it is on a specific asset, the parking garages, versus in Stockton's case it's really on the entire city revenue source.

They're starting to take a flavor of kind of a quasi-equity type participation, but what are you providing? You are providing some relief in the current periods to allow them the opportunity to restructure and make some investment, to grow. And then you participate in the growth going out into the future.

And just be clear, with Jefferson County, we provided a significant amount of savings with that issuance in wrapping a delevered sewer authority that we were very comfortable with the credit, and provide savings and get paid a very nice premium. So we were very pleased with that execution.

Thanks, and then a follow up.

Looking at kind of what's going on in Detroit right now, is their anything that you can do or are thinking about or contemplating doing with your contract wording to maybe alleviate a situation like that occurring again?

Yes, we like this contract; so we'll see how this plays out in court. Thank god, when you get to the senior levels of court, they tend to read the documents.

When you look at our documents and how they specifically state that tax will only be used to repay the debt, that the tax was both City Council and voter approved, and only specifically to repay the debt -- yes.

Can you make the wording tighter? I guess we can make them all put their hands on their chests. But since they don't believe in pledges, I'm not really sure that gets us anything. Of course we will look at, at this thing plays out, whether there's going to be a need. We try to learn from every credit situation there is.

Obviously, we're learning a lot about pension obligation bonds, as you can well appreciate; no pun intended. So we look at that as an ongoing part of how we view the underwriting process.

And Steve Donnarumma, who is the Chef Underwriter in the Company, this year we went through a major revision of limits, kind of aggregate exposures. We redefined what businesses where we look to insure.

So we constantly upgrade it. If we think that there's an ability to upgrade the contract, we will definitely research and make those changes as we see fit.

Great. And then last question. Any update on any progress with Credit Suisse?

We haven't heard anything yet. (Laughter)

I think that answers it.

We thought we had a very good year in the rep and warranties phase. I count seven different settlements of either whole or part of transactions with seven different providers.

You can see there's a lot more press now. They seem to be in a rather large settlement right now as I remember reading the other day about them.

So when they turn to us, it is going to be very expensive for them. The longer they wait, the more expensive it's going to become. We have the luxury of being able to wait. I think we believe the case will go to trial somewhere in 2015; so, hey, we're more than happy to play.

Great. Thanks.

(Operator Instructions)

Our next question comes from Larry Vitale of Moore Capital. Please go ahead.

I just wanted to go into a little bit of detail on the way the reserve ceded to Bermuda and the posting of collateral works.

Can you give us some flavor or quantify the amount of losses ceded to Bermuda and how much collateral you had to post? My understanding is it's dollar for dollar, and that this would have taken up at least some of the cash that might have gone to share repurchase in Q4?

Larry, as we have said, everything that we cede to Bermuda -- not just us, but anybody that is a third party that ceded to AG Re -- you have to collateralize a GPR losses and contingency reserve.

We, as I said in my script, we have stated that we made great efforts this year with our regulators to recapture for our own account contingent reserve that was ceded to AG Re. That freed up about $160 million in 2013.

We do have a scheduled release in 2014, based on a regulatory approval, that hopefully would be another $240 million. That's how that process works.

Hopefully $240 million. Rob, what could make it less than that?

Well, you know it's always at their discretion. So they have to evaluate AG Re's credit. They have agreed to the schedule, but they've also asked to have it reviewed before they give us final approval. They will evaluate AG Re as a credit, and they will let us know by July.

In addition to which, I just want to make sure it's clear that we don't, with this agreement with the regulators, we will not be posting additional contingency reserves on ceded business from our affiliates to AG Re as well. So the problem won't exacerbate.

There are three things, Larry, you have to consider when you're looking at the unencumbered assets with AG Re. Rob is right. We have reassurance that we have both reserves, UPR and contingency reserves, except now for the internals.

But you have both internal reinsurance and external reinsurance. So in the fourth quarter, we got advised of a very large reserve related to our friends in Detroit by a ceding company that we had to post dollar for dollar. And it was significant; I don't know if we've ever released the number, but a large number.

Number two, in addition to having to post the reserves, because your reserve posting is considered in assets or marketable securities, to be [said] the valuation of the portfolio goes down because of a rise in interest rates, you have to top up the shortfall.

So you have ceded reserves, both internal and external, that post dollar for dollar. And in the fourth quarter, we've got a large seat of reserve.

Number two, you then have to top up the value of those collateralized assets based on any change in interest rates and interest on the carrying value of the securities. And understand, we can't go too far because the ability to recover money at AG Re is not something that's available to us day to day.

Now, we do and have put in plans to make the capital a lot more flexible. So the UK tax residency will be big and allowing us, once we go through the cure period of time or whatever you want to call it, to start to move funds out of the US holding companies. And therefore, it gives us protection.

But if we do have a shortfall somewhere, we can easily make it up, based on a significant rise in interest rates or a new advised posting of a launch reserve.

As Rob said, we do have a scheduled release further in 2014 of contingency reserves from both the state of New York and the state of Maryland that will add significantly to free assets. As we look down the pipe, it appears to be we will have a lot more flexibility and freedom in terms of how we can apply excess funds that are in the current structure in the Company.

And, Larry, we would like -- as Dominic just noted -- we would like to keep a cushion at AG Re.

We have $238 million at year end free at AG Re. And this UK tax residency is going to allow us to use other funds and not consistently hit a subsidiary, which I think is a very good rating agency pact as well.

We don't want to constantly hit AG Re to be the sole source of our equity in share repurchase.

Okay, so to be clear, the $240 million that you're hoping to be released in July, or by July, is in addition to the $238 million at AG Re; the $228 million at the US hold co's; and the $33 million at AGO? Is that correct?

That's correct.

Okay and then last question. Your willingness and ability to use these funds to repurchase your shares at deep discounts to however you want to look at it -- adjusted book or operating book -- is a timing issue and in no way reflects a change in your attitude as to your willingness to do so or your view of the attractiveness of your shares at these prices?

I will continue to restate, one of our critical strategic objectives is capital management in 2014. And there is nothing that has changed that strategic view to date, nor do I see it as I look out to the future.

All right. Very good. Thank you.

Our next question is a follow-up question from Geoffrey Dunn of Dowling and Partners. Please go ahead.

Thanks. Dominic, I wanted to ask you in terms of a mid- to long-term capital management effort, I've asked you about the prospect of special dividends in the past.

I'm curious. How do you think maybe the two- to three-year capital management plan might have been altered by the downgrade of Puerto Rico and the moving of your BIG list to close to 5% of par now?

Well, between really BIG for us is really cautionary. It's how we want to survey all the credits more than anything else. We have a lot of things on BIG that never resulted in ultimate economic loss. So it's more of a management tool than anything else.

And it's obviously something that we do track. And our surveillance team is very religious in providing detail and discussion, almost on a weekly basis if you're Detroit or Puerto Rico, and maybe monthly on some other things.

We are getting to do less meetings on RBS, I am happy to report. For us, it really is a placeholder as opposed to an economic. So it hasn't changed at all my view or attitude as to the amount and the timing of the share repurchases.

So I don't think has any long-term implication. Hopefully if Puerto Rico can achieve this financing, we think that will relive a significant amount of pressure, as well as it will have everybody take a real look at ratings.

We will take a look a relook at our own internal ratings as to how we manage it. But as I said, our below-investment grade is more like a placeholder than anything else for us to manage it internally within the Company.

Do you think that that attitude holds for the regulators and how they might view a request?

We don't believe as we look at the amount and the volume of share repurchasing, we don't believe we have a need at this point in time to access a special dividend.

We think there's going to be enough available funds flowing through the operating companies. And now with the timing of the structure that we've been able to achieve in terms of UK residency, we should be able to move enough funds on a reasonable basis rather to keep a good momentum around share repurchasing without the need for a special dividend.

Obviously, we're looking to potentially do some raising of debt, which will further relieve the pressure on special dividends.

So I think we have a lot of tools in the toolbox before we go to the special dividend. But obviously we're not concerned by that. If the need arises, we have no issue with going to the regulators and asking for that.

We think just with the size of the portfolio run off and the amount of capital we're still holding relative to a lot smaller portfolio, I think there's more than enough justification. But at this point in time, Geoff, we think we have enough throughput from the operating subsidiaries to continue to fund a rather reasonably-aggressive share repurchase program.

That's great. Thank you.

This concludes our question and answer session. I would like to now turn the conference back over to Mr. Tucker 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.