Assured Guaranty Ltd. (AGO)

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Assured Guaranty Ltd. (AGO)

Q2 2011 Earnings Call

August 9, 2011, 7:30 a.m. ET


Robert Tucker – Managing Director IR

Dominic J. Frederico – President, CEO, Assured Guaranty Ltd.

Robert Bailenson - CFO


Michael Grasher - Piper Jaffray

John Palmer – Sweet Water Capital

Brian Meredith – UBS

Sean Dargan – Wells Fargo Securities

Nathaniel Otis – Keefe, Bruyette & Woods

Larry Vitale – Moore Capital

Andrew [Goth] – [Goth] Capital

Scott Frost – Bank of America/Merrill Lynch

Randy Rasman – Chatham



Good day, ladies and gentlemen, and welcome to the second quarter 2011 Assured Guaranty, Limited earnings conference call. My name is Gina and will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference, Mr. Robert Tucker, Managing Director of Investor Relations. Please go ahead.

Robert Tucker

Good morning, and thank you for joining Assured Guaranty for our second quarter financial results conference call. Today’s presentation is made pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. It may contain forward-looking statements about our new business and credit outlook, market conditions, credit spreads, financial ratings, loss reserves, financial results, future reps and warranty settlement agreements, or other items that may affect our future results.

These statements are subject to change due to new information or future events, therefore you should not place undue reliance on them as we do not undertake any obligation to publically update or revise them except as required by law.

If you’re listening to this replay, or reading a transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the financial – please refer to the inventor information section of our website for our most recent presentations, SEC filings, most current financial filings or for risk factors.

Please note that we plan to release our second quarter 2Q – second quarter 10-Q at the end of the call today.

Turning to our presentation, our speakers today ar Dominic Frederico, President and Chief Executive Officer of Assured Guaranty, Limited, and Rob Bailenson, our Chief Financial Officer.

After their remarks, we will open up the call to questions. I will now turn the call over to Dominic.

Dominic Frederico

Thank you, Robert. And thanks to all of you for your interest in and support of Assured Guaranty.

Before I begin a discussion of our recent quarter, I want to assure you that today, Assured Guaranty is the same company with a solid capital base, good business prospects, and many strategic alternatives that existed prior to the past few months and before the U.S. downgrade.

Now, I like to review our quarterly results, the performance of our Assured portfolio, our new business activity and future opportunities, and the status of our S&P and Moody’s ratings reviews.

We reported operating income of $136 million, or $0.73 per share, a strong result. Our reported income would have been higher except that there was a charge of $60 million related to the discount rate required by GAAP to calculate our present value of future losses to be paid.

For new business, I was pleased that municipal originations, the PVP, were 32% higher in the second quarter than in the first quarter as issuance volume increased in the municipal market.

Our total economic loss development was $71 million for the quarter, with the single biggest – single biggest contributing factor, as mentioned previously, being the decrease in the risk-free discount rates used to calculate the present value of future expected losses.

This change is not reflected of any credit impairment in our insured portfolio. In fact, if the accounting rules allowed us to use our own portfolio invested rates of return as the discount factor instead of the risk-free rates, we would have recorded very little economic loss development this quarter.

And in reality, it is our investment portfolio and it’s returns that are the exact resources we use to fund these discounts for future loss payments.

In terms of other loss developments, for the municipal market, massive defaults had been predicted. But as expected and previously communicated, there’s been no sign of that, not in the market as a whole, and certainly not in our insured portfolio.

Of course, state and local governments are facing budget challenges, but fiscal stress does not necessarily mean that a large number of defaults will occur. And equally important, a default does not necessarily result in an ultimate economic loss to our insured portfolio.

Interestingly, for the market as a whole, the level of municipal defaults that carry in the first half of 2011 is actually much lower than the 2009 and 2010 levels.

First half 2011 results reflect $746 million of default versus 2009 and 2010 full-year levels at $8 billion and $3 billion respectfully.

Additionally, it’s important to recognize that some of those defaulted credits were not investment grade and some would not have met our strict underwriting standards, and therefore would not affect the performance of our insured municipal portfolio.

Further, Assured Guaranty typically has conveyance and our contractual rights in our insured transactions that afford us remedies not readily available to uninsured bondholders further impacting the potential for economic loss.

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