Assured Guaranty Ltd (AGO) 2014 Q4 法說會逐字稿

Welcome to the Assured Guaranty Ltd. fourth-quarter 2014 earnings conference call and webcast.

(Operator Instructions)

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

Thank you, operator. Thank you all for joining Assured Guaranty for our 2014 fourth-quarter and year-end 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 effect 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.

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

Thank you, Robert. Welcome to everyone joining today's earnings call. I'm pleased to report that Assured Guaranty had another successful year in 2014. In the tenth full year since our initial public offering, our operating shareholders' equity per share reached $37.48, the highest level in our history. During the year, our adjusted book value per share increased 8.2%, ending the year at $53.66. We earned $491 million of operating income. Additionally, we accomplished the four strategic objectives I listed in our earnings call a year ago. Specifically, we further optimized our capital management primarily by continuing our share repurchases.

We increased new business production, with contributions from our US public finance, international infrastructure and global structured finance businesses. We reached an agreement to acquire a legacy insurer, Radian Asset Assurance Incorporated and further augmented our unearned premium reserve by reassuming previously ceded business. We extracted value from our own insured portfolio through loss mitigation and alternative strategies.

Let me describe how we have succeeded at each of these objectives. First, capital management. As I have said on previous calls, Assured Guaranty has been generating more capital than we can put to work in acceptable returns in the current low interest rate environment. To address this excess capital position during 2014, we repurchased 24.4 million common shares for $590 million for an average of $24.17 per share representing a substantial discount to both operating shareholders' equity per share and adjusted book value per share.

We also increased our quarterly dividend per share by 10% in February of 2014. Earlier this month, we increased it by an additional 9%. Over the two years from January 2013 through the end of 2014, we've returned $1 billion of excess capital through the repurchasing of 37 million shares or 19% of our January 1, 2013 share count and through our quarterly dividends. We took some additional steps during 2014 to further improve our capital flexibility and optimize our capital structure.

First, we were able to increase unencumbered assets by approximately $275 million at Bermuda-based AG Re by obtaining approvals for AGM and AGC to reassume certain contingency reserves from AG Re. Second, we requested, and in the fourth quarter received, regulatory approval to release more than $1.1 billion from contingency reserves in the policy holder surplus at AGM and AGC; therefore, increasing the dividend capacity of these two subsidiaries. Third, we issued $500 million of 10-year 5% senior notes in a powerful market endorsement. This issue was 8 times over-subscribed at its original target of $300 million with bids from 130 investors.

Our second objective for 2014 was to grow our new business activity. We recorded a present value of new business production or PVP of $168 million, 19% more than in 2013 with contributions from each business segment. In the US public finance market, industry insurance penetration of new issue par sold climbed to 5.9% from 3.9% the previous year. Assured Guaranty insured 43% more par volume of new issues sold in 2013. This is impressive progress considering the strong headwinds during 2014. 30-year municipal bond yields dropped 133 basis points over the course of the year. Credit spreads were cited at any time since 2008.

Additionally, there were no meaningful growth in the primary market volume. We continue to lead the market with a 58% share of primary market insured par sold even as we conceded numerous small and mid side issues that were insured by our competition at prices we found unacceptable. While small and mid side issues represented the majority of our 2014 municipal business, we also guaranteed 41 new issues sold with the insured par of more than $500 million each -- or $50 million each, of which 12 exceeded $100 million. The comparable figures in 2013 were 26 transactions over $50 million, of which 8 exceeded $100 million.

The growth in the number of larger transactions reflect improved demand for our insurance from institutional investors. We attributed the increased demand for our insurance as a proven value of our guarantees. Investors have seen us pay claims and relieve insured bondholders of the burden of prolonged restructuring negotiations and bankruptcy litigation. They've also seen the clear evidence that Assured Guaranty insured bonds hold their trading value much better than comparable uninsured bonds of a troubled issuer. With over $400 million of our insured bonds trading every day, investors can see that bonds with our Guaranty enjoy enhanced market liquidity.

In international infrastructure, where transactions can take a year or more to complete, we insured an innovative United Kingdom social housing project in 2014. In the last two years, we've demonstrated the viable of our capital market solutions for new infrastructure projects. But we also continue to pursue opportunities related to international transactions, previously wrapped by other legacy financial guaranty insurers.

In structured finance, we found opportunities for growth. We reopened the market for insured diversified payment rights transactions and found other opportunities in state-sponsored new market tax credits and private transactions to provide capital relief for large institutions such as life insurance companies. Our 2014 structured finance PVP of $33 million was more than 4 times that of the prior year. We also made progress on our third objective, to add to our results through the reassumptions and acquisitions.

In addition to reassuming previously ceded business totaling $1.2 billion of par in 2014, we agreed to purchase Radian Asset from the Radian Group for $810 million subject to certain closing adjustments. We expect to close the transaction in the first half of 2015 subject to regulatory approval. When the transaction is completed, Radian Asset will be merged into AGC and its book of business will become part of AGC's insured portfolio. As of December 31, 2014, Radian Asset's statutory capital was approximately $1.3 billion. Its insured statutory net par outstanding was $18 billion.

Since the beginning of this year, its structured finance net par outstanding has declined by $3.8 billion as a result of terminations of seven AAA pulled corporate transactions. We expect the rating transaction to be accretive to earnings, operating shareholders' equity and adjusted book value. It should also increase AGC's capital base and policy holder surplus and, therefore, AGC's dividend capabilities. The transaction will benefit not only from our -- not only our shareholders and policy holders, but also holders of bonds insured by Radian Asset which will gain enhanced valuation and increased market liquidity.

Finally, our fourth objective for 2014 was to create value through loss mitigation and other alternative strategies. We clearly succeeded. With a $30 million benefit in our total net economic loss development and a $2 billion or 27% reduction in our below investment grade RMBS exposure. These positive results were largely due to a number of agreements we reached during the year with providers of representations and warranties on RMBS we insure including one with Credit Suisse. Through these agreements, we called rep and warranty providers and other responsible parties to make or agree to make payments or to terminate certain insured transactions that have projected future losses.

Additionally in 2014, we purchased $355 million of our wrapped bonds for $309 million mitigating expected losses and contributing to adjusted book value. We also terminated over $4 billion of net par outstanding, including transactions terminated under certain agreements reached with rep and warranty counter parties; thereby, reducing rating agency capital charges and accelerating premiums earned. Another way we mitigate losses is by working with troubled credits to resolve their fiscal difficulties, preferably before a default occurs and by asserting our rights in distressed situations when necessary.

In 2014, the bankruptcies of Detroit and Stockton were resolved with outcomes considerably better for us than the original offers. In these and other cases, we have shown that by consolidating the interest of insured investors under our guarantors umbrella and by pursuing a constructive approach to developing solutions, we are in a position to reach a more favorable settlement in a shorter time than could investors negotiating independently. We have consistently defied early speculations of large losses. We have defended fundamental principles in municipal bond security as we did by requiring that the secured status of unlimited tax general obligation bonds be stipulated in our Detroit ULTGO settlement.

While we have successfully resolved a significant number of troubled exposures in our public finance insured portfolio, the Puerto Rico credits remain in the area of concern for which we established additional reserves in the fourth quarter. Earlier this month, the US District Court for Puerto Rico ruled that the legislation enacted by the Commonwealth to establish a restructuring procedure for certain public corporations is void, because it is pre-empted by the Federal Bankruptcy Code, which explicitly excludes Puerto Rico's public corporations and municipalities from Chapter 9 bankruptcy protection. The Commonwealth is appealing the decision.

Today, coincidentally, a subcommittee of the US House Judiciary Committee is scheduled to hold a hearing on proposed legislation that would extend to Puerto Rico the right to allow its public corporations and municipalities to reorganize under Chapter 9. Within our Puerto Rico exposure is the most vulnerable credit is the Puerto Rico Electric Power Authority, or PREPA, which is developing its own restructuring plan. Through a forbearance agreement, we and other creditors have agreed to allow PREPA time to develop a plan to restore its financial stability. Simultaneously, we are exploring possible ways to work with the Puerto Rico Highway and Transportation Authority.

As we have continued to meet our operating objectives and built financial strength, rating agencies have begun to take notice. S&P upgraded our operating subsidiary's ratings to AA from AA- and confirmed their stable outlook in March of 2014. Significantly, this was the first upgrade we have received since the start of the great recession. Additionally in November, Kroll Bond Rating Agency initiated its coverage of AGM with a rating of AA+ stable, giving both AGM and MAC the highest rating decided to any active bond insurer by a nationally recognized statistical rating organizations.

Moody's continues to rate us at levels below our S&P and Kroll ratings, but their reasons have essentially nothing to do with our capital adequacy. Moody's recently moved the goal post again when it revised it bond insured rating criteria. While Moody's then published an article maintaining our existing ratings under new methodology, the revised criteria are clearly designed to cap the potential ratings of any bond insurer at a level below AA by relying, for example, on an unrealistic requirement of a $2 billion of -- for the industry's aggregate annual present value premiums. A measure that says little, if anything, about an insurer's ability to meet its obligations or about it's financial strength in general.

Before concluding, I want to thank two important individuals for their service to Assured Guaranty. First, we are grateful to Wilbur L Ross, Jr., who in the midst of the global financial crisis saw an opportunity to join with a premier financial guarantor and provided capital through his investment funds and valuable guidance. He recently left our Board to comply with regulations governing his new role as a Director of the European Bank. I am also very grateful to Bob Mills, our Chief Operating Officer. He will be leaving Assured Guaranty at the end of March. His counsel and leadership were essential to the success of our IPO, the acquisition of AGM, our RMBS recovery program and so many other initiatives.

At the end of our tenth full year since our initial public offering, we can look back with satisfaction on a decade that included some of the most difficult economic years in living memory. Through it all, Assured Guaranty has been profitable and one of the strongest financial companies with a proven record of reducing issuers borrowing costs and keeping investors whole in distressed situations while building value for our shareholders. In these ten years, we more than doubled adjusted book value, insured $358 billion par of new business, earned $3.7 billion of operating income and built the industry's leading franchise. I am confident about the future, because we continue to adhere to the core principals behind that success.

I do not know when interest rates will ultimately rise from their current near-record lows. But we are the best positioned guarantor to benefit from rising rates when they come. There is spent-up demand for capital to rebuild and expand governmental infrastructure. The asset-backed market continues to revive. We see many applications of our Guaranty for banks and insurance companies. With the challenges of many of our troubled exposures behind us and with our legacy structured finance portfolio amortizing rapidly, we will continue to focus on building our financial guaranty franchise, optimizing our capital structure and managing risk intelligently. As we pursue the opportunities the market provides, we will continue above all to be responsible stewards of capital on behalf of our policy holders and shareholders.

Now, I'll turn the call over to Rob.

Thank you, Dominic. Good morning to everyone on the call. Operating income was $81 million or $0.50 per share in the fourth quarter of 2014 bringing full-year operating income to $491 million or $2.83 per share. Compared to the fourth quarter of 2013, operating income was down due primarily to lower earned premiums and credit derivative revenues and a higher effective tax rate. Interest expense is higher than fourth quarter 2013 due to the $500 million debt issuance last June.

Operating are expenses were also up slightly due to severance accruals as a result of a workforce reduction that will cut annual compensation expenses by approximately $9 million beginning in the second quarter of 2015. Pre-tax economic loss development for the fourth quarter of 2014 was a benefit of $2 million. This included a $108 million R&W benefit primarily attributable to settlements, offset by loss developments on Puerto Rico, legacy Triple-X life insurance transactions and the effect of lower risk-free rates. The effect of changing discount rates in the fourth quarter of 2014 was a loss of approximately $60 million. However, this amount does not represent credit impairment.

I will now highlight the economic benefits of the strategic initiatives that Dominic just discussed. First, new business production and reassumptions of previously ceded books of business have added $137 million after tax to ABB, Adjusted Book Value, this year. Second, share repurchases over the past two years have resulted in an additional $2.78 of operating shareholders' equity per share and $5.84 of adjusted book value per share as of December 31, 2014. Share repurchases have also increased operating income by $0.32 per share for full year, 2014. Finally, we reached R&W settlements with the majority of the remaining counter-parties in 2014. We now have most of our R&W asset covered and collateralized under contractual agreements. As a result of the success of the RMBS loss mitigation efforts, the majority of the workforce reduction effected RMBS work cap professionals whose primary objective was to support the strategic initiative.

I would also like to highlight a few things that we did to improve our capital position and flexibility. We had two significant events in AG Re that resulted in releases of assets health and trust and therefore increase the unencumbered asset balance. First, AG Re released $275 million from the trust accounts when AGC and AGM reassumed contingency reserves that they had ceded. This represents the second of three contingency reserve reassumptions that were previously approved by the New York and Maryland insurance regulators.

In 2015, we expect AGC and AGM to reassume the third and final installment of contingency reserve of approximately $88 million. Second, AG Re released $104 million in connection with the commutation of our assumed Detroit exposure from a non-affiliated primary insurer. As of December 31, 2014, unencumbered assets at AG Re were $651 million, which substantially exceeds AG Re's 2015 maximum dividend capacity of $271 million and represent a significant improvement over December 31, 2013, balance of $238 million.

In the US subsidiaries, we received regulatory approval to release $1.1 billion in contingency reserves from AGC and AGM, which now brings their 2015 dividend capacity to a total of $317 million, comprised of $227 million from AGM and $90 million from AGC. As of December 31, 2014, we had a total of $377 million in cash and liquid assets at the holding companies. Since the beginning of 2015, we have spent $92 million to repurchase another 3.6 million shares. We still have $118 million in share authorization remaining as of today.

As we look at 2015, we are excited about closing the Radian acquisition, which will increase our future premium earnings and boost the statutory capital position of AGC. We are well-positioned to continue our share repurchase program under the current authorization, grow our future revenue stream whether it's for a new business, reassumptions, or further acquisitions, and pursue loss mitigation opportunities that arrive.

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

(Operator Instructions)

Sean Dargan, Macquarie.

If I look at slide 9 on the slide presentation in which you break out the dividend limitation calculations, which I think is very helpful. So, if I got this right, you're going to more than double stat surplus at AGC?

Yes.

With Radian? Okay.

No, no, not with Radian. I just said that we released our contingency reserve, $1.1 billion. $540 million of that was from AGC and $580 million was roughly from AGM. When you release the contingency reserve, it comes out of -- it's still in fact capital, but it goes right into surplus and increases your policy over the surplus.

Okay. But -- in other words, when Radian is layered in there, you'll have a lot more policy holder surplus than you're showing here though; right?

Yes.

Okay. Will a similar, I guess, pro forma adjustment be made to investment income?

Yes. Bringing in the Radian investment portfolio will actually increase investment income which will help in dividend capacity, that's correct.

Okay. Just a bigger picture question, you did reserve for expected Puerto Rico losses on certain exposures. Several quarters ago, Dominic gave a worst-case scenario impact to adjusted book value per share from Puerto Rico losses. Now, I assume current adjusted book reflects a higher level of expected losses. But I was wondering if you could give us an update to what you think that impact would be now?

That is a great question, Sean. I'm not prepared on that number.

But I can tell you whatever the number was then, it's less now because of, as you pointed out, we put up additional reserves. Number two, as you understand, the Puerto Rico situation is continuing to develop. We would say that over the last couple of months, I think developments have improved slightly in our benefit, especially with the voiding of the Recovery Act.

We have always been supportive of any negotiation that really represents and respects the rights of all parties and leads to a proper solution that really does assist Puerto Rico in getting its financial house in order. If you go back over the PREPA exposure, which is the most significant of the troubled credits, we had $770 million, round numbers, outstanding. The total debt service on an annual basis over 10 years, if I remember correctly, was in the $160 million range, which I would say is easily absorbed within our liquidity and current investment income.

There is strength in reserves, principally off of the restructuring officer's report that was released in the fourth quarter. So, in terms of total number impairment, I think from an adjusted book value on a new share count of what? 160 -- 150 million shares, maybe it's $4 at worst. So that's number I can remember.

That's pretax, of course, after tax it would be significantly less than that. So for us, we've got liquidity, the annual debt service is not overwhelming. You could look at 100% severity. Obviously, we continue to work very hard with the Puerto Rican officials to try to get to an amicable solution that recognizes all rights, and especially those of the bondholders.

Thank you.

Geoffrey Dunn, Dowling & Partners.

Rob, you went a little too quick for me, Rob. Could you just repeat the holding company cash and the -- I think you mentioned some subsequent share repurchase?

Yes. The holding company cash, one second. The holding company cash is -- wait, hold on. It's $250 million -- $251 million at AGM and AG withholdings. So the total of the US holding companies is $250 million. At AGL, we have $125 million bringing the total to about $376 million.

All right, perfect. Then was there subsequent share repurchase?

Yes, there were. We did subsequent share repurchases of --

The brains behind the Company is writing 3.6 million shares for $92 million.

3.6 million and we paid $92 million.

All right, great.

Then I wanted to ask about the reserve and development this quarter. I think when you originally put up reserves a year ago, it was rating agency motivated linked to liquidity concerns for Puerto Rico. What was the incremental development this quarter that the drove the Puerto Rico reserve? Is it PREPA specific? Or is it island specific? Or -- what is going on?

It's PREPA specific, Geof. As we looked at the restructure report, we were concerned that there was really not much addressing the inefficiency of certain of the operations. There was not much addressing -- but we'll consider the issue relative to both staff count and potential benefits. So it was really PREPA specific. It really looked through the restructuring report that was put out in fourth quarter.

Okay. Then same question on Triple-X. What's changing there that is creating the additions? I don't know if you can specify if it's over their development?

There are two things, Geof.

The Triple-X, we had a change in assumptions based on lapse rates on life insurance policies, in addition to which a significant portion of that adjustment was related to risk-free rates because the loss reserve is very long dated. So as you change that loss reserve, the related risk-free rate has a significant impact. So I would say $20 million to $25 million of that $60 million was related to the risk-free rate on the Triple-X securitization.

Geof, just remember when we were talking about the Triple-X, these were the legacy life insurance reinsurance deals we did. They are subject to a litigation, as you may remember, on the asset management side over those two deals, where the assets were put way back when into residential mortgage back securities almost entirely, which we think violated the underlying asset management agreement.

So we still have to put reserves up as we see fit, regards of whether the entire economic valuation of these two exposures resulted in a net payment by us, ultimately based on the current litigation. Number two, as Rob points out, the change in the discount rate effected incurred losses this quarter by $60 million. So when you look at our losses incurred, there is no change in real underlying credit experience or economic impairments in the underlying assets, but the change in the discount rate cost us $60 million.

Okay, great. Thank you.

You're welcome.

Brian Meredith, UBS.

Just a couple quick questions here. First, possibilities here that you take a special dividend once you get the Radian transaction closed?

I have got about 18 people shaking their heads, so let me answer this my way. I've got my General Counsel throwing crap at me. (laughter) For the most, we actually anticipate a special dividend at some point in time. Being realistic though, we don't believe a special dividend request would garner much attention until Puerto Rico is resolved.

The size of the exposure, if I'm the New York State insurance department or the Maryland State insurance department, I'd be very conservative, as they should be and are. Therefore, I think they're going to look for resolution in Puerto Rico which I believe hopefully happens in 2015. So as we kind of prep ourselves, continue the capital management strategy that we have, that is something that is on our radar. As you know, we keep a lot of things on radars for periods of time.

We work very hard to execute them in the timeframe that we think is applicable and that's there. As I said, as we work through 2015, we have got liquidity now. We've enhanced capital on the organic basis through the release of the contingency reserve, recapturing of the contingency reinsurance reserves, purchasing of Radian Asset.

So I think we're in good shape. Then as we clear Puerto Rico, that will then clear the decks, I think, as we continue to run off our exposures for us to be able to think about and therefore request the special dividend.

Got you. Thanks.

Then the second question, Dominic. Last quarter, we chatted a little bit about the affect of the client on oil prices on Puerto Rico and the credit there. I am just curious, as you look across your portfolio, are there any other areas or any other credits that you -- raise heightened concerns given the drop in oil prices?

Not really.

I mean the crazy thing is we always believe the drop in oil prices is a positive for the economy. Yet it's been treated very differently. Specifically in Puerto Rico, it should be a huge benefit that we hope that the government takes advantage of in providing additional opportunity for them to increase revenue and therefore be able to further meet the debt service requirements of PREPA specifically.

It could have an impact in our Texas exposure, which is a large exposure for the Company, but not at the level that we play at in the credits that we're currently exposed to. We take a hard look at every economic macro change in the marketplace. This one hasn't really caused us any concerns whatsoever.

Got you. Then just a last question looking at your reps and warranties potential here going forward. You gave some numbers. Is there anything else that we should look at as potential for R&W recoveries here aside from the number in the hand-out -- supplement?

Well, Mr Mills has done such a great job that I think we've only got two left. The unencumbered asset now is what? $61 million or $71 million?

Yes.

So we have -- so if you think about what our asset was back in the day. What is it Bob?

$68 million.

$68 million? $68 million is what we have got left in rep and warranty. I understand, we've always had a conservative estimate of the asset. So, as we look to get these last two deals done and hopefully we'll get done in the current year, that will be once again, for us, puts to bed the residential mortgage-backed security issue exposure, volatility, all those nasty things. More importantly, we continue to really focus on the below investment grade exposure that is out there. In these cases, you're really talking more about future losses as opposed to paying us back for past losses. So it's more of a capital play than it is an economic loss play.

Got you. Thank you. Appreciate it.

No problem. Thanks.

(Operator Instructions)

Brett Gibson, JPMorgan.

I was wondering if you could discuss some of the exposures you will be assuming from Radian? How that affects risk at Assured Guaranty Corp? Specifically, if you could address thoughts on the risks from the Zohar CLO? Any other risks you think are notable to call out?

That was a nice question. Thank you very much.

So as we looked at the Radian book, we were very familiar with the book. If you remember, we provided about a third of the book ourselves through our reinsurance. So it's a book we were very comfortable with. We have done two transactions with them to recover our reinsurance and then looked at other business they had. So we have been through their portfolio; this is our third time through. So I think we know the risk pretty well.

I think you have identified one of the risks that are a concern. There are two others. They have Puerto Rico. But some of it's from us, not a lot and very little to PREPA. They have a commercial real estate deal that has got a little hair on it, but we don't think it has an economic loss. So, basically there are three exposures out there, Zohar being the one of probably the most significance. As you know, per their disclosure, they have a hedge out there for a significant part, not a major, but material, that would provide them some relief to be fit in the attempt that transaction's trigger.

Obviously, they're in negotiations. There's litigation around that. So there's not a lot we can say other than we look at the protections that they have -- the fundamental of the deal, which you know is a second to pay deal.

So the other primary insurer has to not pay it which I think has consequences for their primary insurer before the Radian exposure would be then affected. As I said, the hedges, the discount in the purchase in our review of the risk itself, we were comfortable overall as including it into the portfolio we purchased.

Great. Thank you, gentlemen.

No problem.

Josh Bederman, Pyrrho.

There have been some rumors out there of potentially wrapping Puerto Rico issuance. I wanted to get your comments on what you would think about increasing exposure to Puerto Rico, potentially for the good and obviously get some returns out of it?

Once again, appreciate the question. We're involved in some pretty confidential negotiations.

All I will tell you is we at Assured, and I would assume the other creditors as well, are working towards what we think is the best solution for Puerto Rico to stabilize their finances and get them on a period of growth and improvement as opposed to the current of deterioration and financial distress. Therefore, anything we can do that improves the totality of our Puerto Rico exposures, we would consider.

So read between the lines. To the extent that we think we can make us better, we obviously move very positively in addressing their concerns and their needs, but with the requirement that it's got to help the Assured, the Assured bondholders and the Assured stockholders.

Great, thank you.

You're welcome.

Larry Vitale, Moore Capital.

I've got three or four of them.

In the commentary in the press release on the quarter, you mentioned lower premium accelerations. Can you quantify the effect that had on the top line?

Once again, the brains in the organization is getting the number for us.

Well, we had fourth quarter premium accelerations, Larry, were about $57 million in refunding. So, when you say top line, it's just -- you're talking about, what was the effect on our premium; correct?

Yes.

Last year, we had -- year-to-date from 2014, it was $147 million.

Okay. All right. That's helpful.

Now remember, the accelerations are two things; right? Their refundings and they're also related to terminations. So we terminate a deal, typically, we're able to negotiate the retention of the premium, either paid or some payment for the representation with the future installment premiums due.

Fourth quarter this year was not a large termination quarter relative to premium. We terminated some CDS. But remember, the CDS is not upfront, it's present value over time. So the effect of terminations has a huge impact on that. Because our expectation for refundings is actually positive, looking at 2015.

Okay.

That was actually my next question, so I'll thank you in advance for answering that one, Dominic. So I don't have to ask it. Your RMBS book, looked to have declined by about $1 billion par outstanding. I'm wondering if there were any tear-ups or anything like that?

Yes.

I am just looking at it -- I'm looking at it relative to Q3.

Yes. Well, we had some terminations. We also had R&W recoveries, which reduced the amount of our RMBS exposure.

If you remember, Larry, we talked about back in the day, when we had the rep and warranty challenge, we first looked at the insured policies, because that's where we had, we thought, better rights over the rep and warranties that were imbedded in those deals. Obviously we were the bondholder -- the super bondholder from the insurance. We worked to get those done first. They were the focus of our efforts in the earlier years. Those are by and large gone.

So now everything we were working on is in derivative form. So derivative form, the relief is going to take one of two forms. It's either going to pay us for back losses, or it's going to tear up the deal, because we are dealing with the counter-party who, obviously, could possibly be the rep and warranty provider as well. In that case, as you know, we have been working very hard with Deutsche Bank to eliminate the remainder of the swap portfolio book we have with them on RMBS.

They have been fantastic. They set out to first cure the problem with the direct business, which they did at the insurance business. Then committed to dealing with the derivatives on a quarter-to-quarter basis because they're a little bit complicated to say the least. Bob and his team had to work diligently with them. So in the quarter, what you're seeing is a benefit of one of those tear-ups on the Deutsche Bank derivative side.

Okay. All right. That's helpful.

Then my last question is, you're paying what? $810 million for the Radian portfolio. It's got a stat book of $1.3 billion. Are we going to see on the order of a $500 million purchase accounting game when this deal closes? Is that how the accounting is going to work?

Well, on a GAAP basis, you're going to fair value both, all the assets and had liabilities. Obviously, there's going to be a fair value adjustment for some of the exposures, which would increase your UPR. So, you are going to see that benefit, but some of it will come in over time in the form of earned premium as that UPR runs off. You will fair value that UPR, which increases the UPR and lowers your purchase discount, which lowers your negative goodwill.

But you eventually do earn that premium over time. So that's correct. There was a roughly $500 million benefit, but you might not see it immediately. You could see it over time. It will be increase to adjust to book value, as well.

It's very similar to when we bought FSA at the discount, Larry, where we went back and under the purchase accounting you've got to fair value asset liability. So if you think of it, your asset's mostly marketable securities, they seem to be fairly fair valued anyway under the current rule. So then you go to the liability section, there's two major liabilities there: UPR on a permanent reserve and loss reserves. If you're comfortable with the loss reserves, then the theory of the discount is because you winded up getting these exposures or policies to which were under-priced based on the current marketplace.

So going back to a thing like Zohar, you could assume that ZOHAR is under-priced in the current marketplace. If you understand what's going on today and therefore you might then say, part of its purchase discount relates to the under payment of premium relative to that exposure on what we know and if we had to go out and buy protection today: right?

That's a second to pay behind MBIA. You know where the MBIA credit default swap spread are today. So that's kind of how it works. So you basically allocate the negative goodwill principally in to -- on our premium reserve. Then you earn it over the exposures that you now apply to.

Okay. All right. That's all very helpful. Thank you.

You're welcome.

Thanks, Larry.

Bose George, KBW.

You turned to the legal ruling on the Recovery Act. Since it happened after the end of the year, does that potentially impact economic loss development in any way?

I don't believe it does. As I said, most of our economic loss development was really predicated to PREPA and really predicated to the work done by the restructuring officer and really looked at the fundamental economics of that. The Recovery Act being voided really talks to the process of how ultimately relief can be sought on behalf of the Puerto Rican corporations.

As we have said, anything that promotes an orderly process and recognizes the rights of all constituents, we're very happy and supportive of. We believe that this is a step in the right direction. Whether it's Chapter 9 or a continued litigation within the Puerto Rican courts, it at least allows a process that has a little bit more structure to it.

Thanks. That's helpful.

Then -- actually just going back to the question about the accretion from Radian. So the roughly $500 million difference, I mean, most of that goes into adjusted book value. In terms of the benefit on the other side -- or operating book, is it divided where some of it goes -- will come in through earnings but some of it will come in through operating book as well?

Yes, that's correct.

But in terms of figuring out that difference. I guess we have to you wait for you --

Well, you've got to figure out what you think you're going to allocate to and then frame reserve, as Dominic and I just mentioned. You're going to reallocate some of that $500 million difference to the unearned premium reserve for different credits. They have exposures to Puerto Rico. Obviously, there's going to be an adjustment to the unearned premium reserve.

Over time, that unearned premium will come down. You'll see that benefit coming through operating income as you earn that premium. But your adjusted book value -- obviously, the minute you put that up in premium that goes -- that's a benefit to your adjusted book net of any losses that you expect.

Okay, great. Thanks.

You're welcome.

Harry Fong, MKM Partners.

I've got a quick question for Rob. Rob, how much did the discount rate move this quarter? When Janet Yellen begins to raise rates again, will the $60 million interest rate charge this quarter be reversed in total?

It depends on where in the curve, Harry, but if you look at where it affects us significantly between say, 10 and 20 years, it's been down about 50 basis points, 50 to 60 basis points. So -- I don't expect, even if Janet Yellen changes rates, it's going to affect that part of the curve. It's probably going to be flattening -- it's going to either be on the shorter end of the curve. I'm not expecting it to -- rates to move out that significantly when she does it. But just to give you an answer about if in fact, it does move out significantly. It moves out 50 basis points, then yes, that $60 million would be -- would just come back the other direction.

Well, hopefully, it will come back before too long. Thanks.

Yes. I hope it comes back a hell of a lot more than that, yes.

Hopefully. Well, at least you know if it goes to zero, you're at the nominal number, so you don't have any more to go. (laughter) Okay, thanks, Harry.

Geoffrey Dunn, Dowling & Partners.

Dominic, this is a crystal ball question, but Puerto Rico, at the end of the day, they have problems regardless of what they can and can't do legally right now. Is this one of those situations going forward? I think you've said in the past, when it becomes everybody's problem, it gets solved?

You could see a scenario where under a Recovery Act, leasing are segmented. I am just wondering if there is a risk that the lack of Chapter 9, which probably doesn't get past the Republicans or the lack of Recovery Act creates a bigger issue here. So just curious of your high level thoughts?

Let me turn on my crystal ball for you, Geof. So, my high level thoughts are, number one, is it contagent to the rest of the Puerto Rican exposures losing the Recovery Act? I don't believe so.

As we look at Puerto Rico as much as I thought they looked at it, the general obligation related credits are ultimately repayable. If you look at the numbers, the numbers stayed relative to debt per capita, the taxes per individual. So the numbers work on the general obligation side, I think.

One of Puerto Rico's biggest disappointment is they felt by segregating they weren't going to be able to preserve market access in the ratings for the general obligation side, which obviously didn't happen from our friends at the rating agencies. But by and large, those credits to me are still ultimately payable and therefore should be looked at differently. As you look at the public corporations, obviously the oil tax has a huge potential benefit relative to transportation, which for Assured that's our largest exposure.

So we applaud very loudly the efforts that they have made in that regard and therefore very hopeful of anticipating the ultimate issuing of the debt off the tax and therefore the repayment of the GDB loan out of the transportation, which for us improves transportation significantly, plus we're taking that trolley exposure out which saves us another fairly large amount of cash within transportation. So we think that is all positive.

As I have always said, if it's your problem, it's a big problem; if it's everybody's problem, it's not really a big problem or it's really nobody's problem.

Puerto Rico still stands in that regard in my mind. Understand, that we're really talking about the survivability of Puerto Rico in its current government and social form. So I think it's critically important for all parties, including for Puerto Rico itself, that these things get resolved in some amicable way relative to the totality of the marketplace. We, as we always have been, we're pretty honest with ourselves and take a very strict view of how we look at the exposures.

As I said, we took a hard look at the restructuring officer report in the fourth quarter and because of the lack of closing down plants, et cetera, I felt we needed to increase our reserve. But we're very comfortable relative to the exposure of the reserves we now currently have. Obviously we work very hard with the Puerto Rico authorities to try to continue to improve the situation and move the ball forward. We're optimistic that in 2015, we're going to start to see some real headway being made.

Okay. I appreciate the thoughts. Thanks.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Tucker for any closing remarks.

Thank you, operator. I would 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.