Assured Guaranty Ltd. (AGO)

AGO 
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Assured Guaranty Ltd. (AGO)

Q4 2008 Earnings Call

February 26, 2009 08:30 AM ET

Executives

Sabra Purtill - CFA, Managing Director, Global Communications and Investor Relations

Dominic J. Frederico - President and Chief Executive Officer, Assured Guaranty Ltd.

Robert B. Mills - Chief Financial Officer

Analysts

Darin Arita - Deutsche Bank Securities

Mark Lane - William Blair & Company

Michael Grasher - Piper Jaffray

Brian Meredith - UBS

James Shanahan - Wachovia Capital Markets

Jay Leopold - Legg Mason

Jim Bond - JPMorgan Asset Management

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2008 Assured Guaranty Earnings Conference Call. My name is Josh and I'll be your coordinator for today. At this time all participants are only in listen-only mode. We'll be facilitating a question answering session towards the end of the conference. (Operator Instructions)

I would now like to turn the presentation over to our host for today's call, managing director of Investor Relations Sabra Purtill. You may proceed.

Sabra Purtill

Thank you, Josh. And thank you all for joining us this morning for Assured Guaranty's fourth quarter 2008 earnings conference call.

Our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Bob Mills, Chief Financial Officer. After their prepared remarks, we will take questions from the audience.

Please note that our call is not -- our webcast is not enabled for Q&A, so if you would like to ask a question, please dial into the telephone conference call at 1800-561-2731 and join the call live, if you have any questions.

I would like to remind you today that Management's comments or responses to questions may contain forward-looking statements such as statements relating to our business outlook, market conditions, credit spreads and market credit conditions, ratings, loss reserves, acquisitions and other items where our outlook is subject to change. Listeners are cautioned not to place undue reliance on the forward-looking statements made on this conference call today, as Management does not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

You should refer to the Investor Information section of our website and to our most recent SEC filings for the most current financial information on our company and also for more information on factors that could affect our future financial results and our forward-looking statements.

Thank you and I'll now turn the call over to Dominic.

Dominic J. Frederico

Thank you Sabra and thanks to all of you on the call for your interest in Assured Guaranty.

Without a doubt 2008 was the most challenging year that Assured and the financial markets have ever faced. Our step based (ph) commitment to strict underwriting discipline protected us from some of the worst of the damage done by poor mortgage underwriting and from the continued economic deterioration. But we nonetheless had to recognize some large losses on our portfolio.

In particular we have had to absorb losses on our HELOCs and closed-end second lien exposures. Unlike many other financial institutions, the growth of our earnings base since our IPO, enabled us to absorb almost $300 million in pre-tax losses incurred on our Assured exposures and still report operating earnings of 74.5 million for 2008 and 3.5 million for the fourth quarter.

Aside from the losses in our RMBS book, the vast majority of our other credit exposures have continued to perform well in this economically stressed environment. After extensive downgrades of corporate credits and CLOs, our pooled corporate portfolio continues to be highly rated with 87% of it still being rated AAA, and remember that's based on our internal ratings. Commercial MBS and consumer ABS portfolios are also holding up well with average ratings of AAA and AA respectively.

In the municipal market, which is experiencing revenue shortfalls and budgetary concerns, we've experienced only minor downgrades and have only one major troubled credit, that being the Jefferson County, Alabama Sewer System.

I would also note that aside from two life insurance securitizations that are having stress associated with their RMBS investment portfolios, our structured credit book is performing consistent with our underwriting expectations for this kind of economic environment which we plan for in our underwriting approach. As a result, our credit challenges still continue to be concentrated on our RMBS portfolio, which did experience additional deterioration in the quarter consistent with the continued following of real estate values and the rise in unemployment in delinquency trends. RMBS comprised about two thirds of our loss expenses in the quarter and 88% of our losses for the entire year.

Bob will go over the reconciliation of these losses in his part of the call, however I want to touch on our outlook for RMBS losses. We continue to believe that our RMBS losses are containable, given the limited amount of exposure that we underwrote and our also generally high attachment points. This not to say that all of our losses are behind us, we continue to increase our loss estimates, our second lien exposures and expect that we could have some future claim recognition on our alt-A risk, given the continued erosion of credit enhancement. However, there is a significant degree of uncertainty about if and when these losses could be incurred depending on the success of the economic stimulus program, the home foreclosure and loan modification plans, and at what level in time the U.S. housing and employment markets stabilize.

As our financial supplement discloses, average credit enhancement on our subprime and alt-A portfolios is still adequate for current delinquency trends. Additionally, our risk management team proactively reviews our portfolio and pursues any and all means of redress on troubled credits, including litigation if deemed appropriate. With respect to the two direct countrywide HELOC deals for instance, we aggressively pursue put backs under the terms of those deals and have submitted a significant amount of loans for repurchases. Repurchases began in October and have occurred in every month since. The continued success of this process alone could have a significant impact on the level of ultimate loss to be realized.

We expect that the credit environment will remain difficult in the near term, and we also hope that the various programs proposed and still to be considered by the Obama administration will help alleviate some of the fallout in the credit markets. Some of the administration's proposals maybe better for Assured than others, but we are and will remain very active on Capitol Hill making sure that our views our heard. It will probably take several months before we have greater certainty about the impact that these programs have on our portfolio, but we think that many aspects of the programs could help the housing market in some capacity.

Aside from mortgages, we're also still active in Washington on a variety of other fronts as well, including the various proposals in discussions concerning municipal bond insurance. You may have heard about the proposal of either starting a federal or state funded bond insurer for the municipal market or providing reinsurance capacity to the existing bond insurance companies. There is no question that the municipal market is facing numerous challenges, such as the cost of financing, investor demand, falling municipal revenues, and the overall economic outlook.

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