Assured Guaranty Ltd (AGO) 2022 Q3 法說會逐字稿

Good morning, and welcome to the Assured Guaranty Limited Third Quarter 2022 Earnings Conference Call. My name is Bailey, and I'll be the operator for today's call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to our host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and thank you all for joining Assured Guaranty for our third quarter 2022 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 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 a replay of this call or if you are reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors.

Turning to the presentation, this presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures in our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com. 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'll 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, and welcome to everyone joining today's call. We continue to build shareholder value of Assured Guaranty during the third quarter and first 9 months of 2022. As of September 30, 2022, Assured Guaranty's adjusted operating shareholders' equity per share of $91.82 and adjusted book value per share of $137.87 were both record highs.

Adjusted operating income per share of $2.11 for the third quarter and $3.88 for the first 9 months represented increases of 369% and 49%, respectively, compared with last year's periods. New business production continued to be strong in the third quarter with $95 million of PVP, substantially the same as in the third quarter of last year and our best quarter so far this year.

This year's third quarter was our best third quarter in international public finance and second best in U.S. public finance in more than a decade. We believe there's been a permanent shift in the market toward a greater appreciation of our value proposition as the pandemic, the volatility in the markets and the global economy, geopolitical unpredictability and climate-related natural disasters have reminded investors of the vulnerabilities of their investments.

Municipal bond yields, which had risen dramatically in the first half of this year, continued to climb in the third quarter with the benchmark yield for 30-year AAA GO bonds finishing at 3.9%. Credit spreads remain tighter than have been typical over the past decade, although they have widened somewhat over the course of the year. While interest rates increases and credit spreads widening are promising facts, U.S. municipal bond issuance volume has not kept pace with last year's.

There have been few refundings this year, where in past years refundings have helped drive high total new issue volumes during the year of ultra-low interest rates. Additionally, year-to-date demand has been curtailed by approximately $92 billion of net outflow from municipal bond funds and ETFs even with the reduced issuance volume, this was the third consecutive year in which insured volume in the primary market exceeded $21 billion during the first 9 months.

You'd have to go back to 2009 to see a higher insured volume. At 7.8% of par issued, the industry penetration rate was the second highest in over a decade for the first 3 quarters. For Assured Guaranty year-to-date, strong demand for our secondary market municipal bond insurance offset some of the impact of lower overall issuance.

In the secondary market, we wrote more insured par in the first 3 quarters of 2022 than in any first 9-month period of the last decade. Our $2.2 billion of secondary insured par totaled more than 11x that of last year's first 3 quarters. With fewer opportunities of purchased insured bonds in the primary market, investors have evident we've been seeking the security and other benefits of our guarantee through the secondary market, which we believe is a sign of fundamental demand that is likely to be reflected in the primary market as volume returns.

Holders of uninsured bonds may also want insurance because it has the potential to stabilize the market valuable position compared to the uninsured position should the credit come under financial stress. Our secondary market policies command comparatively higher premiums and have made an important contribution to our strong PVP this year. Assured Guaranty remains the market leader for bond insurance, ensuring approximately 56% of all primary market insured par sold during the first 9 months of 2022.

In total, our insured par sold in the primary and secondary market was $15.1 billion, the third largest amount we have insured during the first 9 months of any year in the last decade. This included $4.8 billion at par from 21 U.S. public finance transactions that each involved at least $100 million of insured par. During the third quarter of 2022, our insured par sold in the primary and secondary markets totaled $3.4 billion, of which $480 million was secondary market par. We are pleased -- we were pleased to continue to add value on AA credits, where we believe investors see our guarantee on high-quality credits as a mitigant of various risks.

During the third quarter, we insured $683 million of par on 24 primary and secondary transactions with AA underlying ratings. In aggregate, for the first 9 months of 2022, we insured more than $2.3 billion of par on 103 primary and secondary market transactions that either S&P or Moody's or both had assigned AA underlying ratings. Outside U.S. public finance, our international public finance business had its best third quarter since 2009, producing $37 million of PVP and bringing its year-to-date PVP to $67 million.

We guarantee the transactions in the transportation airport, water and other utility sectors. We have good prospects for a strong finish to the year, including local authority debt and other transactions. In Global Structured Finance, we are currently processing mandates in such areas of subscription finance, diversified payment rights, whole business securitizations and portfolio capital management for banks and insurance companies.

Our new business production benefits from our strong financial strength ratings. Last month, Kroll Bond Rating Agency affirmed the AA+ rating it applies to our U.S., U.K. and European insurance subsidiaries. In separate reports on AGM and AGC, KBRA highlighted the company's substantial claim paying resources, ability to withstand KBRA's conservative stress scenario losses and our skilled management team.

Also last month, the Puerto Rico Highway and Transportation Authority settlement and plan of adjustment was approved by the District Court in Puerto Rico, and the plan is expected to be implemented before year-end. Resolving HTA reduces our total remaining insured Puerto Rico net par exposure to about 0.5% of 1% of our total insured portfolio.

With regard to PREPA, after mediation of a recent impasse, the court had allowed certain litigation to proceed while directing further mediation to continue, resume concurrently. The PREPA bonds have robust credit protection and creditor protections. But as always, we prefer to resolve the matter consensually if possible as we have attempted to do for many years.

Overall, our insured portfolio has improved significantly in the last 5 years, with below investment-grade exposure diminishing from 4.8% and matured net pro outstanding in September of 2017 to 2.5% today as a result of our loss mitigation efforts. And it's important to remember that only a portion of the BIG exposure is ever likely to produce actual losses.

As many of you know, we acquired our asset management business in October 2019 with gains of, one, diversifying our revenue sources by adding a fee-based revenue stream; and two, getting an in-house platform to increase our investment returns through alternative investments. We [refurbished] the firm and have now almost fully wind down the legacy funds that we wish to exit. In terms of our key objectives as of September 30, our asset management business had more than $17.5 billion of assets under management substantially all of which is fee earning in comparison at the end of 2019 with a comparable amount of AUM, less than half was fee earning. We also made progress on the second objective. Since we've been investing in Assured IM funds, those investments have generated an annualized internal rate of return of over 10%, which is markedly higher than any other insurance segment investment.

Keep in mind these investments are mark-to-market on the income statement and will therefore show more volatility than our fixed income investments. However, the current marks do not change our expectation of our ultimate returns. Capital markets have continued to experience volatility. In October, the 10-year treasury yield went above 4% for the first time since 2008. And last week, the open market committee added another 75 basis points to the Fed funds rate.

In the municipal market, the benchmark yield on [tax exempt] AAA 30-year GOs also exceeded 4% last month, a level last seen in January of 2014. The muni market yields are roughly now 260 basis points higher than what they average in 2021. Given the current environment of higher interest rates and what appears to be a weakening economy, we would expect to benefit from further spread widening and a potential return of municipal insurance volume to higher levels.

If these occur, demand for municipal bond insurance should increase. And I can tell you that so far in October in the fourth quarter, the municipal markets saw greater insured penetration while Assured Guaranty increased its market share, found more frequent opportunities to ensure transactions with larger par amount. We also believe that in volatile global markets, many participants in infrastructure and structured finance are likely to have good reasons to employ the personal tools we offer to manage the risk. Our outlook is positive as we continue to focus on our core principles of disciplined risk management, excellent customer service, and prudent capital management that is optimized for the benefits of our policyholders, clients and shareholders. I'll now turn the call over to Rob.

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report strong adjusted operating income in third quarter 2022 of $133 million or $2.11 per share. This represents a 369% increase on a per share basis compared with the third quarter of 2021. As a reminder, in the third quarter of last year, we refinanced $600 million of long-term debt, which resulted in a $138 million loss on the extinguishment of higher coupon long-term debt.

Third quarter Insurance segment adjusted operating income was $159 million compared with $214 million in the prior year. These results include strong and relatively predictable scheduled earnings generated by our financial guarantee contracts and fixed maturity investment portfolio, offset by some fair value movements and other investments.

In terms of premiums, third quarter 2022 net earned premiums and credit derivative revenues were $92 million compared with $114 million in the same period of last year. The decrease relates primarily to $13 million of net earned premiums on certain transactions in the third quarter of 2021 that did not recur and lower accelerations and updates to debt service assumptions in the third quarter of 2022.

The fundings were $12 million in the third quarter of 2022 compared with $15 million in the third quarter of 2021, which is consistent with our expectations. Deferred premium revenue on the investment-grade exposures has been approximately $3.5 billion for each of the last 8 quarters as our new business production has replenished the normal amortization of the in-force book of business. As Dominic mentioned, financial guarantee new business production was strong in the third quarter of 2022 despite reduced primary market issuance.

Higher interest rates and a more active secondary market contributed to a stable level of deferred premium revenues. Net investment income from the available sale and short-term investment portfolio is also relatively predictable stream of income and was consistent on a quarter-over-quarter basis at (inaudible) million. As Dominic also mentioned, the economic environment characterized by market volatility and rising interest rates impacted several components of adjusted operating income, adjusted operating shareholders' equity and adjusted book value.

The largest component of the quarter-over-quarter variance for the Insurance segment's adjusted operating income is the fair value movement attributable to investments. Specifically, fair value losses related to alternative investments in the third quarter 2022 of $11 million compared with gains of $33 million in the third quarter of 2021. This includes investments in Assured IM funds whose inception to date mark is a pretax gain of $107 million, representing a 10.3% annualized return.

This is in line with our targeted return, demonstrating the value of our investment diversification strategy to enhance overall returns. With respect to the Puerto Rico contingent value instruments, the company received these instruments in the first and third quarters of 2022 under the GO, PBA plan and HTA support agreements, and we now manage these recoveries as trading securities.

In third quarter 2022, the related fair value loss was $8 million on a pretax basis, primarily due to rising interest rates. Economic loss development, which was a net benefit of $72 million in the third quarter of 2022, was also affected by the rising interest rate environment as it included a benefit of $25 million related to higher risk-free rates used to discount expected losses.

The economic benefit was mainly driven by a $95 million benefit in U.S RMBS, which has several components, including a benefit related to the purchase of a loss mitigation security; a benefit on assumed RMBS, where we share proportionally in a seating company's rapid monetary settlement; and additional benefits related to updated second lien default assumptions, higher recoveries on charged-off second lien loans and improved performance in certain other transactions.

The net effect of economic loss development and the amortization of related deferred premium revenue resulted in a benefit in loss expense of $75 million in the third quarter of 2022. The -- the Asset Management segment's adjusted operating loss was $3 million in the third quarter of 2022. -- an improvement over last year's adjusted operating loss of $7 million. The more favorable results were due to higher asset management fees compared with third quarter of 2021 as the increase in fee earning opportunity fund AUM more than offset the decline in AUM associated with the wind-down funds and lower segment operating expenses.

As of September 30, 2022, we have only about $200 million of AUM in our wind-down funds compared with $800 million of AUM as of September 30, 2021. AUM in opportunity funds as of September 30, 2022, was $2 billion, up from $1.6 billion as of September 30, 2021, due to fundraising in our healthcare strategy. Foreign exchange rates also moved significantly in the third quarter. And while the strengthening U.S. dollar relative to the British pound does not have a material effect on adjusted operating income, it can have a material effect on GAAP net income as well as all of our non-GAAP book value metrics.

The effective tax rate is a function of taxable income across tax jurisdictions and varies from period to period. In the third quarter of 2022, the tax provision included a $20 million benefit attributable to return to provision adjustment. With respect to our capital management objectives, we repurchased 1.8 million shares for $97 million in the third quarter of 2022. Subsequent to the quarter closed, we repurchased 785,000 shares for $42 million.

As of now, the remaining authorization to repurchase shares is $261 million. Continued share repurchases, along with our positive adjusted operating income, new business production and favorable loss development has increased operating shareholders' equity and adjusted book value per share to new records of over $91 and $137, respectively. While quarterly operating results vary from period to period, the consistent quarterly increases in these book value metrics reflect how the successful execution of our key strategic initiatives build shareholder value over the long term.

Since the beginning of our repurchase program in 2013, we have returned $4.6 billion to shareholders under this program, resulting in a 72% reduction in total shares outstanding. From a liquidity standpoint, the holding companies currently have cash and investments of approximately $127 million, of which $75 million resides in AGL. These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to either expand our business or repurchase shares to manage our capital.

2022 has been a year of great progress, particularly in terms of our Puerto Rico exposure. Aside from PREPA, our remaining exposure to defaulting Puerto Rico credits are covered under the HTA plan, for which we are waiting the effective date to be announced. In third quarter, we received $147 million in cash and $672 million in original notional contingent value instruments as part of the pending HTA settlement. Our exposure to Puerto Rico salvage assets in the form of recovery bonds and CVIs have also been declining as opportunities arise to sell those securities.

During the third quarter, we sold approximately 20% of par or notional value of the amounts received under settlement agreements for a total reduction of 48% on a year-to-date basis. In addition, $87 million of the CVIs paid down subsequent to quarter end. As we look forward to the fourth quarter and beyond, we remain optimistic that the interest rate environment will benefit new issuance -- new insurance business production and asset management and alternative asset strategies will continue to contribute to the company's progress towards its long-term strategic goals.

I'll now turn the call over to our operator to give the instructions for the Q&A period.

(Operator Instructions)

The first question today comes from the line of Brian Meredith from UBS.

A couple of questions here first. I'm just curious, Dominic, there was a disclosure by MBIA that they're undergoing some strategic evaluation of Barclays. I'm just curious your kind of thoughts on whether that would make a good strategic fit with AGO, any opportunities there?

Well, Brian, thanks for the question. We heard that same comment in the market as well. Obviously, we've been continued -- as one of our strategic objectives is always to consolidate the other remaining monolines. And like any other opportunity, we'll look at it given the opportunity and see if it makes sense and whether we can meet the credit terms of our credit underwriting standards, and we'll put [ourselves] in the portfolio.

Great. And then second question, I'm just curious, if I look at the dividend capacity out of the [insurance top] right now, it's relatively low. Maybe give us kind of the views of maybe a special dividend, particularly, could you get one when HTA ultimately comes through and everything finally gets done?

Well, I'll let Rob answer the specifics. But yes, we, obviously, look at other -- all means in terms of meeting our cash flow requirements to the holding company to allow us to operate or execute our strategic objectives, one of them which is capital management. Obviously, as Puerto Rico continues to wind down, we get down to basically one exposure which is PREPA. And remember, the regulators were giving a special dividends even with Puerto Rico back in the day and then, obviously, COVID had changed things dramatically. So we think the environment is getting in the right structure for us to go back to the market or go back to the regulators and have the discussion about special dividends, obviously, if we want to achieve further strategic objectives, that's important for us to be able to accelerate or increase our cash flow to the holding company.

And then, Brian, as you look at Page 12 of the equity investment presentation, you can see the remaining capacity at AGM and AGC, but that's just for this year. So that will be replenished in the next year. So remember, it's either 10% of policy surplus or your net investment income. So that will be replenished. In addition to which AG Re will have more capacity going into next year as well. So -- and obviously, we're always looking to increase that dividend capacity through possible dividends from our U.K. operations. And so we continue to try to maximize our dividend capacity with our operating subsidiaries.

Got you. And then Dom, I want to go just quickly back to my first question. Just curious from your perspective, is there the ability for AGO to do a transaction for all of MBIA? Or would you be purely focused on national if something was possible?

Well, that's pretty speculative, Brian. So at the end of the day, we really -- at this point, we look at the portfolio from a reinsurance perspective over time. But obviously, we'd have to do a complete update of our understanding of what's in each of the organizations and see what makes sense. And if there's something that makes sense, then, obviously, we would consider it.

(Operator Instructions) The next question today comes from the line of Tommy McJoynt from KBW.

Yes. I won't ask to say specifically about your interest in [NBI,] but just perhaps from your seat, kind of a unique standpoint, do you think that other multiline insurance companies might have interest in an asset like that. I guess said another way, is it possible that other insurers could aim to enter the bond guarantee market, I guess with the positive outlook of higher rates and wider spreads? Or is the stigma of Puerto Rico really likely to keep some entrants away from this market?

Well, speaking from a third-party perspective, I don't think this stigma of Puerto Rico makes any difference at all at this point in time. I think it's a credit that's getting its way to resolving. Obviously, based on the creditworthiness on the government and the activities and its actions would make it difficult for them going forward to get further bond insurance applied to any of the debt but that's for another day.

So I don't think Puerto Rico matters at all. I think it really looks at the regulatory environment. So remember, when you get into this business, you not only have regulators, you have rating agencies, which are two very high hurdles. And if the company is willing to climb those hurdles, then they would take a look at it. But for us to try to speculate on whether a [P&C] company or a title company or a life company wants to get in the financial guarantee business. And we welcome the competition.

I think Assured is very well positioned relative to the marketplace, to our standing with our clients and the performance that we've done and the track record that we have been met which is not easy to duplicate at this point in time. Plus, as we have said in this business, you need a track record, you need earnings and use deferred revenue source to really make a sense for the capital in play. So you say these companies that have left big enough to establish that benchmark or that foothold to allow you to go forward in the business.

Like you said, it's not for us to determine us to just to determine whether it's attractive to us or not. And then if we see competition, then we see competition.

Got it. I guess on that topic of thinking about regulators and rating agencies and dealing with both, I guess, on the topic of a special dividend and the potential size of it, do rating agencies look at it really differently than regulators might? I know you guys were trying to work on coming up with an updated figure of the -- I think it was an S&P report kind of estimating how much excess capital you had in excess of a AAA rating that was, I think, lasted out in 2019. So just any update on that and really just kind of thinking about how regulators look at it from the perspective versus rating agencies.

Well, I think the regulator rating agencies do have different perspectives, right? Obviously, the rating agencies are more based on a special scenario. Regulators have a lot more criteria. They have a different capital model than the rating agencies do and yet as a financial guarantor you are probably responsible for both. In terms of the excess capital, so we anticipated the question.

So the numbers come down over the last 2 years due to our -- I'm reading our prepared remarks, so bear with me on this. So the numbers come down over the past 2 years due to our successful capital management program. Basically resolutions related to Puerto Rico, and we're very comfortable that we have substantial excess capital. The last time we gave you this information was for the year-end 2019, where we had approximately $2.6 billion of S&P AAA excess capital, very important to note, it's on a AAA basis.

However, between then and the year-end 2021, we repurchased $1 billion of our common shares, $1 billion worth of common shares, paid approximately $140 million in dividends, paid over $700 million of par, debt service, excluding settlements, invested over $500 million through AGS and other high cap charge investments. And despite using this $2.14 billion of capital, our S&P excess AAA capital is still $1.8 billion as of year-end 2021. So hopefully, that gives you your answer.

Yes, that's what we're looking for. Thanks for having that prepared for us.

No problem.

And then just last question and I think it looked like in the slides that the industry's U.S. public bond insurance penetration actually looks like it dipped a little bit in the third quarter, just if I base see the penetration in the first half and compare it to what it was for the first 9 months. So looks like it declined a bit sequentially, which is a bit surprising given the backdrop. Any sense of what drove that?

Yes. I mean remember, that's very relative to who's in the marketplace at any given period of time. And of course, the market volume is way, way down. So the issuers that are in the market are probably the more liquid issuers that are probably going to lease bond insurance lease. I think as you see the statistics for the complete year, we'll get a very different answer relative to the penetration rate. It's still kind of flat with the prior year, which is still way above years 4 to 5 years ago. So we're making progress in penetration. We think with the rising interest rates, the widening of credit spreads, the economic uncertainty, we think demand is now positioned to really start to increase substantially. And we'll hopefully see that in the fourth quarter when we give you our fourth quarter and year-end statistics.

The next question today comes from the line of Jacquelyne Cavanaugh from Putnam.

Can you hear me, okay?

Yes, we can [Jack].

I guess just a follow-up to the prior question, and thanks for going through the different capital sources. But does the regulator or the rating agencies care at all about the AOCI marks? And does that impact their analysis or the way they might think about a special or the capital excess just given the magnitude of the marks?

The market doesn't affect our statutory capital and it doesn't have an effect on rating agency capital. Obviously, it will be a discussion that we talk about with rating agencies, but it doesn't go -- it doesn't affect surplus or rating agency capital.

Okay. Great. So they're sort of agnostic to it, just like the Street kind of looks through it?

They will look through which is not part of their model. So one looks at claims paying reserves. One looks at statutory capital which just doesn't count. Statutory capital does not (inaudible) statutory capital.

(inaudible) starts with our surplus in stock capital and then rating agencies just -- obviously -- I mean the regulators will look at surplus. And as Dominic said earlier, there are other regulatory tests that we need to talk about them and deal with them when it comes to getting special dividends.

Got it. Okay. I know you've told me that before, but I just wanted to confirm, given the magnitude of the mark.

Well, [the marks are the marks] and at the end of day, it doesn't change our economic outlook and returns on those assets. Obviously, some adjustments will affect certain parts of the balance sheet. But over time, we would -- we believe that things will return to basically normal, and the mark should start to reverse.

The next question today comes from the line of Geoffrey Dunn from Dowling & Partners.

Dominic, I don't remember the years where you discussed this, but in the aftermath of the Great Recession, you speculated at where the municipal bond market could ultimately recover to under kind of the new model of being a AA, et cetera. I want to say we're like 25% penetration, but part of that recovery was based on rates going up and spreads going out. So obviously, that's happening now and who knows it will be sustained. But in your vision of where the muni bond market for FG goes or even the global market for financial guarantee goes, what else do you think needs to happen other than what we've been seeing on rates and spreads to reach what you think could be a fully recovered sustainable financial guaranty business model going forward?

One word, Geoff, one word, stability. So rates are getting to an area where we're very comfortable, it's going to really further increase demand for municipal insurance. But it's got to stay over time, right? We can't get the rates go up like a balloon and then down like a pop balloon. If these rates will hold and if the Fed and the treasury stay constant, then I think it creates that absolutely conducive market for growth for us. And we started to do some analysis, right? So a couple of cute little tidbits of information, (inaudible) so the one I'll tell you is the 1% rise in interest rates is worth 10% on PVP. So think about it, 1% rise in interest rates, 10% on PVP. So that's just keeping everything else constant. Thank you, Robert.

To give you an idea, we look at debt service on the same amount of par. Remember, we get paid based on rate times debt service. So 2021 debt service resulted in 135% of par. 2022's debt service resulted in 193% of par because of the change in the interest rates. We get paid based on debt service. So things about that impact will have on future premium, not only will we calculate as PVP, but we get to earn over the future periods. And in a rising interest rate environment, you're not have been refunding. So we're not going to get this acceleration that Rob's future periods of earnings. Now the earnings will be stable over time, will grow according to the PVP growth year-over-year, and add to that earning things year-over-year. So we are very optimistic as we look at the market today and not only we hope for stability that is stable at this rate -- rating and stays that way for a period of time, a few years at least before there is panic in the streets and they start lowering rates again.

Just saying, Geoff, on the second -- as you saw, we -- the secondary was very strong over the last couple of quarters and is generally a leading indicator to the primary as well. And so if you get stability and less volatility, the issuance will pick up in the primary market.

Yes. So a little fact that we look at the secondary market activity, and that's typically a forerunner of primary market activity. And to give you an idea of secondary market activity in the current year 9 months today, we have written $60 million of PVP in the secondary market compared to $4 million last year, $60 million versus $4 million. And that's typically a precursor indicator where the primary market is going.

Okay. And then it's been -- it might be probably 1.5 decades since financial guarantee companies really talked about the different hurdle rates across -- return hurdle rates across muni, structured in international. But as you weigh potential M&A, I'm just curious if you could share some sort of range on hurdle rates on new business, so we can get a gauge of what type of return on an M&A opportunity might be compelling enough for you to look at versus to retain a capital for buyback and growth.

When you look at it on that basis, Geoff, you have to say the return on an M&A basis got to be north of 15 because we think the capital return on the buyback of stock is in the 11% to 13% range. We're writing new business anywhere between, say, 8% and 11% depending on the transaction. And depending on the service of business. So international would have a higher than that, great. But obviously, international is not the major part of our business, U.S. public finance. We look at returns on a transaction-by-transaction basis plus for the quarter. But remember, that's also on regulated capital, not being capital [base] to absorb the company. So the excess capital is not that calculated. So the real returns are less than that, but I can't fault the profit center for writing business and regulatory capital enhanced returns, and they're not responsible for the excess capital in the company. So as we look at that hurdle rate for the M&A, it's got to be north of 15%. (inaudible) credit wise and everything else (inaudible) relative to the organization. I'm sorry, Geoff, right.

And then just financially, is there any kind of return leverage preference between reinsurance versus now like acquisition?

In the old days, [the older] acquisition had a lot of benefits, right? It got us the portfolio rerated, board in the investor base, which we really don't need anymore, but that would report to us back in the day like the FSA transaction. And then we got a huge discount in the capital and the capital was substantial to get a discount on. Now the capital basis are a lot smaller, so the discount, if any, is not going to be the same value to us as it used to be. So for us, we're agnostic from reinsurance through acquisitions, both of them will provide the portfolio we want at the risk rating we want, at the premium level that we want.

Okay. And my last question, do you recall the discount, the statutory capital that you paid for FSA?

Wow, the statutory capital, I can tell you the book value, right, we paid 37% (inaudible). And then as we went through the transaction, we got into the [50s] and then the later transaction was probably in the [20s and 30s.] So as the portfolios get smaller, they got less volatile, there was less capital to be discounted. So they were bigger back in 2009. I guess (inaudible) was like 2011 or '12, which might have been 50% and then the ones in 2013 and '15, if they were the years if I remember correctly. We're probably in the 20% to 25% range.

Yes. So that was -- so discount was like 63% for us to take -- just to make sure we're clear. If we pay like 37% of (inaudible)

The next question today comes from the line of Giuliano Bologna from Compass Point.

Another great quarter of performance. But what I would be curious is actually following up a little bit on the kind of pricing and returning question. When I think about the spread environment, obviously, spreads have widened, so you're going to generate (inaudible) customers have increased. I'm curious where returns have gone from a return on capital perspective on where business was before rates in the prior versus kind of where it is now and where that could go? Is that I'm curious how much improvement potential there is from kind of a return on capital perspective for new business in this kind of better operating environment?

Yes. I think the improvement is reasonably lower. So if you think about it, Giuliano, so public finance is the largest book of the business, right? And obviously, the most competitive end of the business, more susceptible to competition in the marketplace more for uninsured versus insured. And if you look at it, we do it on a transaction-by-transaction basis, I'm trying to [run] from the top of my head. So in most quarters, we're trying to achieve 10% minimum return.

And I think we get that most of the time, but there probably were some quarters, say, 1 year ago or 2 years ago, they might have dipped below 10 to like 8% or 9%. And then with some transactions that were competitive, you might even go lower and then other transactions where we really added value, you're able to go higher. I'm giving the average. As we look at the book today, I'd say -- and remember, we're just at the beginning of seeing this enhanced flow of business and rates and premium and spreads.

This could, I think every business line was over 10%. International is always over 10% and really be a high that it wouldn't be. But even in the domestic U.S. public finance, if I remember the number correctly, it was north of 10%. And like I said, that's at the very beginning stages of what we're seeing is a return of reasonable rate spreads to the marketplace. We think spreads have a lot more widening to experience as the economy rolls forward to potentially a recession.

And then -- did you just think of the basic math, Giuliano, as Dominic said, it will get paid on debt service or financing for all of our clients business, the higher the interest rate and the wide it spreads again paid more dollars, but the denominator of that capital charge it stays the same. So by definition, your returns must go up.

So I guess kind of going back to another question on the kind of consolidation trends in the industry or the desire to consolidate the rest of the industry. I'd be curious, obviously, reinsurance can achieve effectively the same thing. But as the remaining entities that are out there are running off. The opportunity to do large reinsurance, [you are likely to get] smaller and smaller. I'm curious if there was any preference for acquiring the legal entities, you can expect to acquire capital at a discount of capital and also get the benefit of higher investment income but obviously will boost the dividend capacity.

Giuliano, you hit it right on the head, right? So reinsurance gets you a very highly rated well premium risk exposure that fits into your risk model and exceeds accepted by your credit underwriting standards. That's reinsurance. What's missing when you get to the acquisition of the entire company, two pieces: One, breadth of customer, we've already got that. So we don't need that anymore. But back in 2009, that was important to us, an acceptance of the paper in the marketplace. And then the third thing, as you just pointed out, the discount on capital. But these capital bases have shrunk substantially because of, obviously, refundings runoff, et cetera. So the value of the discount even if you say I can get a 30% discount, it's on a very small capital base. So for us, the reinsurance gets us to pick the risk that we want, meets our underwriting standards. It gets a premium level that gives us [separate] level of return that we targeted. So one is better than the other to a certain extent unless you get a really good value on the discounted capital.

This concludes the question-and-answer session. I would now like to return the conference back over to our host, Robert Tucker for closing remarks.

Thank you, operator, and 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.

This concludes today's conference call. Thank you all for attending. You may now disconnect your lines. Have a great day.