Assured Guaranty Ltd (AGO) 2014 Q3 法說會逐字稿

Hello and welcome to the Assured Guaranty third quarter 2014 earnings conference call. All participants will be in a 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. Now I would like to turn the conference over to Robert Tucker. Mr. Tucker, please go ahead.

Thank you, operator. Thank you all for joining Assured Guaranty for our third quarter 2014 financial results conference call. Today's presentation is made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

The presentation may contain forward-looking statement about our new business and credit outlook, 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 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 of our website for our recent presentations, SEC filings, most current financial filings and for the risk factors.

And 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. After their remarks, 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 welcome to everyone joining today's third quarter 2014 earnings call. Assured Guaranty, once again, produced strong results in the third quarter. Our operating income of $177 million was the highest in the past six quarters and adjusted book value per share reached $52.59, representing the largest quarterly increase in adjusted book value since 2009.

Further, we repurchased 9.6 million common shares for $226 million. Our share repurchases this year through September 30 have reduced the outstanding share count by 10%. Rob will speak in more detail about our financial results.

Today, I want to highlight the positive developments in our core US municipal bond insurance business, our progress in resolving our distressed credits, the value we continue to create through alternative strategies, and our outlook going forward.

Starting with public finance. During the third quarter, industrywide bond insurance was utilized on 7.9% of total new municipal parts sold. This is a 111% increase compared with last year's third quarter. You would have to go back to 2010 to find a similar penetration rate.

Assured Guaranty insured $3.8 billion of new issues sold in the third quarter, more par than any quarter over the last two years. Compared with third-quarter 2013, our par showed an increase of 157% even though market issuance rose just 6%.

Looking at the first nine months of 2014 while total municipal interest was down 10%, total insured par was up 59%. This translates into a year-to-date 6% insured penetration rate which is significant after two calendar years below 4%.

Focusing on our target market, that is issues with A and BBB underlying ratings, the year-to-date industry penetration was 21% of par issued in spite of these historically low interest rates. For Assured Guaranty, par insurance increased each quarter through the year and our year-to-date par insured is 50% higher than in the nine months of last year.

Our year-to-date PVP of $90 million is 64% higher than in last year's comparable period. One reason for the growth is par insured has been the greater use of Assured Guaranty insurance on large transactions. Year-to-date through September, we have guaranteed 27 transactions with the insured par of more than $50 million, which total over $100 million.

This compares to last year's results of 16 transactions, over $25 million of par and only two transactions over $100 million par on insured. Increased in our larger transaction represents a significant area of potential growth, as they make up approximately two-thirds of the total insurable volume.

We believe the increasing use of Assured Guaranty insurance while larger transactions reflect improved acceptance of our insurance by institutional investors. There are good reasons for these trends. Events over the past 18 months have helped to refocus investors, both retail and institutional, on the important benefits of Assured Guaranty bond insurance.

Those benefits include greater relative price stability and improved market liquidity in addition to the certainty of timely payment of debt service and our highly valued credit selection, underwriting and surveillance process. Specifically, investors have witnessed our insured bond's price stability firsthand as those bonds tend to hold their market value while for example, uninsured bonds of the same issuer traded steep discounts.

In July, for instance while some uninsured PREPA bonds were trading below 40% of their par value, comparable Assured Guaranty insured bonds remain above 90% of their par value. More recently, the same uninsured PREPA bonds were pricing of 50% of par in our equipment insured bonds at 99% of par.

Assured Guaranty continues to be the choice of investors as demonstrated by our quarterly results. In the third quarter of 2014, we captured 79% of the pre-PVP written and guaranteed 66% of the insured par sold and 57% of the transactions, a true reflection of our premier market position.

Touching on structured finance, during the quarter, we provided a secondary market wrap on an international diversified payment rights transaction. We continue to see potential structure finance opportunities and a range of asset types, including other DPRs, the life insurance sector and lease financing.

Our structured international finance activities currently form a relatively small part of our financial guarantee written premiums. There they are an important source of valuable opportunities and add a unique element of diversification to our business origination and portfolio risk management strategies.

Before I discuss our insured portfolio, I think it is important to once again highlight Moody's proposed changes to its rating criteria for bond insurers, which was published on July 15. As I explained on our last call, Moody's is preparing yet again to move the goalposts.

Making it almost impossible for anybody insured to be rated above single A by Moody's. I won't repeat the specifics I gave you on the last call but I'll ask you again to read Moody's request for comment. Although the official deadline for comment has passed, the final criteria have not yet been published and so we encourage you to give Moody's your feedback, especially if you have not already done so.

Turning to our insured portfolio, as a participant in certain distressed public finance situations, we have clearly benefited from the depth of our human and financial capital, and the constructive approach we take to developing solutions. For example, we have taken concessions from the city of Detroit in our settlements that, realistically, investors acting separately would find it extremely difficult to achieve and particularly within the short timeframe in which these cases moved.

In August, we played an important role, resulting in the dispute over Detroit's attempt to repair its Water and Sewer Department's revenue bonds. While we did say the manner that removed the period payment on the bonds for the bankruptcy plan of adjustment, it upheld the sanctity of the special revenue pledge.

In the process, we reinsured approximately $841 million of the $1.8 billion in bonds issued to finance the department's voluntary tender offers for its outstanding water and sewer revenue bonds, including those we had previously insured. As a result, a strong market demand for our insured bonds, we were able not only to assist the issuer in accessing the market at a critical juncture but also to improve the transaction's economic efficiency for the issuer.

It's important to recognize that over the last two years, we have favorably resolved a number of distressed municipal credits in our insured portfolio, reflecting our position as one of the controlling parties entitled to direct revenues and our experienced negotiating ability.

And with Judge Rhodes due to issue his ruling later today on whether Detroit can exit bankruptcy and Judge Klein approving the Stockton, California exit player late last month, these two cities may soon join Harrisburg, Pennsylvania and Jefferson County, Alabama, as credits are largely in our rear view mirror.

Turning to Puerto Rico. In the case of the Puerto Rico Electric and Power Authority, we joined other creditors in our forbearance agreement that has given PREPA more time to craft a long-term solution. We were influential in shaping the terms of the agreement, including the condition of PREPA higher and experienced restructuring officer.

In looking more broadly at Puerto Rico, we see the news almost every day and frankly, we're going to be hearing about this credit for quite some time. On the topic of our other structured finance assured portfolio, we believe that the RMBS risk has been remediated to a great extent.

Today, there is very little potential to cause negative earnings volatility because the amount of exposure has been greatly reduced, the transactions are well-seasoned, but we have succeeded in reaching numerous loss mitigation agreements including some long-term loss sharing arrangements. In fact, our company-wide economic loss development in the third quarter was a benefit of $63 million primarily due to our RMBS loss mitigation efforts.

In the third quarter, we completed three additional RMBS agreements and reached another agreement in principle, which was signed just yesterday. These agreements included determination of an aggregate $1.5 billion of RMBS net par outstanding, which also contributed to a reduction in our below investment grade exposure.

Our RMBS-related insured exposures, which totaled over $30 billion at third quarter 2009, have now been reduced to $10.5 billion, or just 2.5% of our net par outstanding, with the below investment grade portion going from $16.7 billion to $5.9 billion.

After the close of the quarter, we finalized yet another RMBS agreement which further reduced our net par outstanding by terminating over $0.5 billion of exposure. We also continue to mitigate loss and manage risk by purchasing bonds we had previously insured.

In the third quarter, we purchased seven and a half bonds at an average price of 87% of par. Separately after removing our insurance, we sold two previously acquired positions which resulted a positive contribution to third-quarter income.

To wrap up, we may look at back and think of 2014 as a turning point for our industry. As the risk of loss caused by the housing collapse of 2008 subsides and investors increasingly appreciate the benefits of bond insurance in a public finance market where defaults are rare but painful when they do occur.

We do still face headwinds from low interest rates. We have demonstrated our discipline and resilience through more difficult times. Overall, I believe the trends are in our favor. I'm excited about our prospects and look forward to further increasing the value of our Company for our policy owners and shareholders.

Now I'll turn the call over to Rob.

Thank you, Dominic, and good morning to everyone on the call. As Dominic mentioned, we had strong operating income this quarter of $177 million, which represents a 51% increase over the third quarter of 2013. On a per share basis, operating income was $1.05 per share, which is a 64% increase over the third quarter of 2013.

The 30.5 million shares that we repurchased between March 2013 and September 30, 2014 had a total cost of $702 million, contributed $0.14 per share to third-quarter 2014 operating income. Since October 1, we have repurchased an additional 2.8 million shares for a total of $61 million, leaving our remaining share authorization at $301 million.

This brings our total repurchases to date to 33.3 million shares at a total cost of $763 million, or an average cost per share of $22.96. As always stock buybacks are contingent on our available free cash flow, capital position, maintenance of our ratings and other factors.

Net premiums earned were $149 million in the third quarter of 2014 compared to $173 million in the third quarter of 2013, which is consistent with the scheduled par amortization. Accelerations included in net earned premiums were $36 million, which were relatively flat compared to the third quarter of 2013.

Net positive loss development was the single largest driver of the increase in operating income in the third quarter of 2014, compared with the third quarter of 2013, and more than offset the decline in net premiums earned. In the third quarter of 2014, economic loss development was a benefit of $63 million and loss expense recognized in operating income was a benefit of $51 million.

Both measures were driven primarily by our R&W settlements reached during the quarter that resulted in positive economic loss development of $93 million offset in part by development in the underlying HELOC portfolio of $25 million. HELOC default assumptions were increased to reflect borrower reaction to the larger monthly payments they experience at the end of their interest-only period, which was offset in part by lower severity assumptions.

On the public finance front, Dominic mentioned the positive developments in both the Detroit and Stockton bankruptcy proceedings since last quarter. Our loss estimates reflected the likelihood of these outcomes.

Operating shareholders' equity per share have been steadily increasing over the last several years and is at $36.65 as of September 30, 2014, while adjusted book value per share rose to $52.59. New business production and R&W settlements positively impacted operating shareholders' equity and adjusted book value this quarter. On a per share basis, the cumulative share repurchases since the beginning of 2013 contributed $2.16 to operating shareholders' equity per share and $4.66 to adjusted book value per share.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we will pause momentarily to assemble our roster. Sean Dargan, Macquarie.

Thank you and good morning. I have a question for Dominic. Good morning.

It's my perception that perhaps a headwind to your share price performance is a notion in the market that you may buy a run-off block of financial guaranty business and that would come at the expense of share repurchase. So in other words, you would use free cash available at the holding company to purchase something.

I guess on a related matter, a CEO of the company who has a reason to sell its financial guaranty block was talking about reinsuring that block on a conference call last week. I'm just wondering if you could just give us further color on how if you were to make a bid on a block, if you would structure it as a reinsurance transaction and what would be the implications to share repurchase?

I think that's a good question, and it probably part of some of the misunderstanding in relative to the performance of the stock.

First and foremost, you understand that as we look at share repurchases, as you point out, we use holding company capital. There is a methodology and process as to how you get capital to the holding company.

Any acquisition that we would consider would not interfere or affect at all the holding company, cash, cash position or ability to continue the repurchasing of our share activity. What we're looking to do and to the extent that we have that opportunity is to utilize the trapped surplus in our operating company as the acquirer of any portfolio, reinsurance or company such that it doesn't have any impact whatsoever on our share repurchase activity.

If anything to be -- we're successful in buying any of these portfolios, companies or reinsurance at any sort of a discount it theoretically will create additional capacity for share buyback because it will increase the operating surplus of the subsidiary companies where there is a limitation on dividend activity based on operating surplus and income.

So if anything, this is a move that would positively impact share repurchases, not negatively. It will utilize trapped capital that are subject to a process and procedures and timing in terms of how that surplus can exit the subsidiary. So if you really think about it, if I do nothing with the trapped capital and based on the amount of new business, that capital is being unused I'll earn the portfolio rate of return period.

Because I'm able to take some of that trapped surplus or trapped capital and go out and engineer a higher return and returns that we believe are acceptable in our target market then that really does benefit earnings. It benefits surplus. It benefits the capacity for future dividends. It will ultimately enhance the share repurchasing program.

All right. Thank you. That's very helpful. One follow-up question related to Puerto Rico.

We've seen the dramatic decrease in the price of oil. PREPA is heavily dependent on oil and firing the power plants. I think there was some commentary out of Puerto Rican banks that lower oil prices were beneficial to GDP of the Commonwealth overall. I was just wondering if you had any thoughts on that?

Well, two things. Lower oil prices will result in lower fuel adjustments, which is -- we've tied into the rates that the PREPA charges the customer. So you're going to lose some revenue but at the same token, you should also gain some benefit to cost of goods sold theoretically on the price of oil so net-net-net, it's a positive but I don't think it's a significant positive.

Got it. Thanks.

Geoffrey Dunn, Dowling & Partners.

Thank you. Good morning. I actually have a quick number question. Rob, can you give us the updated balances for the Holdco and the intermediate Holdco, please?

Sure, in total depth, we have $475 million as of September 30 at both Holdcos. Doing the breakdown was about $179 million in the US holding company and about $298 million at the parent AGL.

Perfect. That's all I've got. Thank you.

Josh Bederman, Pyrrho Capital.

Thanks. I think the last question actually answered a lot of what I was getting at. But I just wanted to see -- you guys have obviously bought back $0.5 billion of your stock this year. Just kind of get a sense of how you're thinking about whether that can continue, whether the resource for that to continue looking into 2015. Thanks.

Well, obviously, we believe that capital management and really, stating the truth, the return of capital is still needed to be a critical part of our long-term and short-term strategy as to how we manage our Company. As we look at the volume of new business and the new business demand and the intervening periods, we're still going to be impacted significantly by the level of interest rates and the run-off of our portfolio. So we continue to not only generate strong earnings but also run-off significant exposure.

Rob and I gave you some statistics on below investment grade, which is a big capital user, RMBS which is a big capital user. As those decline and at the same time, you're making earnings regardless of what the new business market turns into, you're still creating significant excess capital and therefore, we will still be in a very aggressive capital management strategy for a lot of the future term.

Obviously, we have dividend capacity which we're very clear in how we disclose. Any increases or enhancements to the buyback policies will be determined by our Board of Directors. So that's something we have to consider.

But we tell you the amount of cash. We tell you what is available for dividends activity out of the operating companies.

Obviously, based on our change in tax residency, we've now created the facility to allow the free flow of capital up into the holding company. So I think you can kind of project, along with most people, that we will be in this significant capital management program for quite a long time.

Thank you.

Larry Vitale, Moore Capital.

Hi, good morning. Looks like your -- the encumbered assets at AG RE went up by $256 million, if I'm doing the math right. And I'm just wondering what that resulted from.

Larry, as we told you last quarter, we were just about getting the regulatory approval for the recapture of the contingency reserve back from AG RE back to our subsidiaries in the US. That freed up unencumbered assets by about $244 million. So that's the majority of the difference. And we said at September 30, I had $483 million.

Okay. All right. That's helpful. (multiple speakers) All right, thanks. I had one more. Can I give you one more?

Sure. You've got to pay for it.

You talk about the dividend capacity out of New York on a forward 12-month basis but you talk about the dividend capacity out of Maryland only with respect to 2014. Do we assume that dividend capacity in 2015 out of AGC is going to also be about $69 million?

I think that's fair, Larry; it's around 10% of surplus.

Okay. All right. Thank you, Rob.

(Operator Instructions)

Bose George, KBW.

Good morning. Just on the $500 million of RMBS exposure, you mentioned was terminated after quarter end. Could there be a loss reversals on that piece?

Typically there is. It really depends on the specific transactions. Rob, you want to --

We already -- the accounting rules require us to book that actually as a Type 1 subsequent event, so we've taken the benefit of that TARP in this quarter but as because it was in derivative form, you'll see the actual exposure come down in the next quarter.

Okay great. Thanks.

Thank you. As there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

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.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.