Assured Guaranty Ltd. (AGO)

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Assured Guaranty Ltd. (AGO)

Q1 2008 Earnings Call

May 9, 2008 7:30 am ET


Sabra Purtill - Managing Director, Investor Relations and Strategic Planning

Dominic J. Frederico - President, Chief Executive Officer and Director

Robert B. Mills - Chief Financial Officer


Andrew Wessel – JP Morgan

Mark Lane – William Blair & Company, L.L.C.

Mike Grasher – Piper Jaffray

Darin Arita – Deutsche Bank Securities

Tamara Kravec – Banc of America Securities

[Ryan Zacharia] – JM Partners

Ken Zuckerberg – Fontana Capital

William James – Lazard Capital Markets

Alex Goldman – Castlerock Management

[Analyst for Bev Dijinson] – Pine Capital

[Tejal Sharma] – Pilot Rock Capital



Welcome to the first quarter 2008 Assured Guaranty earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Sabra Purtill, Managing Director of Investor Relations.

Sabra Purtill

Thank you all for joining us for Assured Guaranty’s first quarter 2008 earnings conference call. Our earnings press release and financial supplement were released yesterday evening after the market close and these materials and other information on Assured are posted in the Investor Information section of our website. I would note that this call is being webcast and is also available for replay on our website or by telephone dial in. The details for the telephone replay are available in our earnings press release.

Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Bob Mills, Chief Financial Officer, will provide a brief overview of Assured’s first quarter on the call today after which the operator will ask the audience to poll for questions. Our call is not web enabled for Q&A so please dial into the telephone connection of this call if you would like to ask a question. Also please note that this call is being held for the benefit of analysts and investors in Assured Guaranty. Members of the media are welcome to listen but are kindly requested to please call Ashweeta Durani of Assured Guaranty at 212-408-6042 or Dawn Dover at Kekst and Company at 212-521-4817 to confirm any quotations or to request clarifications on comments made in this call prior to publishing details from this call in the media.

I would also like to remind listeners on this call that management’s comments or responses to questions may contain forward-looking statements such as statements relating to our business outlook, growth prospects, market conditions, credit spreads, credit performance, pricing and other items where our outlook is subject to change. Our future results may differ materially from these statements. For those listening to the webcast, please keep in mind that more recent information on Assured may be available in future webcasts, press releases or SEC filings. We ask you to refer to the Investor Information section of our website for the most current financial information on Assured. You can also refer to our most recent SEC filings for more information on factors that could affect our forward-looking statements.

I’d now like to turn the call over to Dominic for his commentary.

Dominic J. Frederico

Thanks to all of you on the call and webcast for your interest in Assured. First quarter 2008 was a very strong quarter for new business at Assured as we continue to build our financial guaranty direct franchise particularly in the public finance sector. However mortgage markets continue to be troubled with losses experienced at levels beyond anyone’s expectations. Our operating results this quarter were heavily impacted by our decision to lower our internal ratings for our direct HELOCS and by some additional loss reserves established on select close end seconds and reinsured HELOC exposures. Of the $52.9 million in loss expenses associated with our US RMBS portfolio $44 million was for HELOCs.

As we have previously stated we have been concerned about the performance of residential assets for quite some time and consequently we were very cautious in the US RMBS market in the 2005 to 2007 timeframe underwriting only triple-A deals in the prime and subprime first lien markets. However we did underwrite some triple-B rated HELOCs the largest of which were the two Countrywide transactions in the direct segment which comprised 90% of our direct HELOC exposure. HELOC experience today is an uncharted territory. The credit performance of these deals has never been worse and several of the seller’s servicers including Countrywide are under significant financial stress as ell. The extraordinarily high default rates on these deals far above any prior year was well known and was the principal factor behind our downgrade of those two transactions last quarter. This quarter’s downgrade of the two Countrywide HELOC transactions is not because of revised assumptions on delinquencies or loss severities but results from our growing concern about the availability of undrawn lines to HELOC borrowers, the rate at which these lines are drawn down and the ability of the servicers to execute their contractual responsibilities.

Available lines for draw downs have not changed but recent draw rates have declined. Because the draw down credits in our deals are a major factor in evaluating the performance of a transaction once a rapid amortization trigger has been breached the potential outcomes due to the uncertainty of performance for this variable has a wide variability than the originally projected loss figures. Therefore we elected to internally lower our ratings on these deals. This resulting downgrade of our internal ratings for our HELOC exposures resulted in additional portfolio reserves this quarter under our portfolio loss reserving methodology. With respect to the two Countrywide deals we stated in our 10-K filed a little more than two months ago that we think the range of potential after-tax loss of those two transactions is between $0 and $100 million. Based on current available information we continue to believe that range is still reasonable.

The estimate incorporates many factors including our roll rate assumptions, future principal payments, excess spread, draws and future foreclosures. Lastly the financial viability of the servicer is also considered. These factors are subject to change as well and if significant would impact our current evaluations. We will continue to update our analysis of these two exposures as new transaction perform statistics and market information become available. It is interesting to note however that the April report for the 2005 J transaction delinquencies actually decreased for the first time. It is too soon to draw any conclusions but this could be the first indication that the loss curve is flagging.

Aside from our HELOC exposures a very modest exposure to the close end second lien transactions we still remain very comfortable with our US and UK RMBS exposure. Most of that exposure has been underwritten in the last 12 months utilizing significantly stressed underwriting assumptions and was also underwritten at triple-A and super triple-A attachment points providing us with ample over-collateralization and credit enhancement to protect against losses.

Turning to our business pipeline and outlook we continue to be very pleased with the progress that we are making in building our financial guaranty franchise during very difficult market conditions. Demand by investors for credit protection from insured has remained very strong which we think is driven by our strict underwriting standards, our triple-A financial strength ratings and our continued commitment to the highest standards of disclosure and transparency. We are being offered a wide variety of business opportunities resulting in a very strong pipeline multiple of the deals and potential PVP of our pipeline a year ago but that was before we got our third triple-A stable rating. We expect the public finance business to remain very strong compared to last year. Our US public finance team generated a record new business production this quarter attaining about a 30% market share on new issue transactions.

We continue to see a very strong demand for our name on new issue and secondary market transactions as we estimate that our April 2008 new issue market share in US public finance was up to about 37%. Our PVP in the first quarter of 2008 was two times the total amount that we wrote for the full year 2007 a very impressive statistic. The structured finance and asset backed security markets which have been the most affected by the market turmoil remained very difficult to predict. We underwrote a broad range of transactions in this quarter including commercial ABS, US and UK RMBS, CLOs and structured credit deals. Most of the deals however were secondary market deals which totaled $4.3 billion in the quarter. We had only three new issue transactions in the quarter of which two were public deals a $250 million Brazilian future flow transaction and a $250 million CLO deal.

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