Assured Guaranty Ltd. (AGO)

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Assured Guaranty Ltd. (AGO)

Q3 2011 Earnings Call

November 15, 2011 7:30 AM ET


Robert Tucker – Managing Director, IR

Dominic Frederico – President and CEO

Rob Bailenson – COO


Michael Grasher – Piper Jaffray

Brian Meredith – UBS

Andrew Kleinberg – Glickenhaus

Robert Chapman – Chapman Cap



Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Assured Guaranty Earnings Conference Call. My name is Latasha and I’ll be your coordinator for today.

(Operator Instructions)

I would now like to turn the call over to Mr. Robert Tucker, Managing Director of Investor Relations. Please proceed.

Robert Tucker

Good morning and thank you for joining Assured Guaranty for our Third Quarter 2011 Financial Results Conference Call. Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. It may contain forward-looking statements about our new business and credit outlooks, 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 publicly update or revise them, except as required by law.

If you’re listening to the call by the replay 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 Web site for our recent presentations, SEC filings and 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 Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open up the call to 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.

Dominic Frederico

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

On today’s call, I’d like to review our quarterly results, our new business activity and future opportunities, the performance of our insured portfolio, and the status of our S&P and Moody’s rating reviews. We reported third-quarter operating income of $38 million or $0.21 per share. Our operating income would have been significantly higher if not for the effect of the change in the discount rate required by GAAP to calculate our present value of future losses.

While Rob will provide the details, one important takeaway is that our incurred losses were theoretically increased by $120 million because of this rate movement and this does not represent economic losses related to credit deterioration in the performance of our portfolio.

A similar impact, although in the opposite direction, was realized in our net income figure for the quarter, which ballooned to a profit of $761.2 million, due to the widening of our credit spreads.

Measurements like these need to be eliminated from our GAAP accounting so that results present a more realistic economic picture.

Regarding new business activities in the quarter, we insured $4.3 billion of municipal par. For the first nine months, we insured an aggregate of $9.3 billion in par on 883 new issued transactions. These insured transactions resulted in an estimated $100 million in present value financing savings to municipal issuers.

The par insured transaction count and cost savings shows that our product continues to occupy a vital role in the municipal market. For September, our U.S. municipal insured penetration by transaction count increased to 15.3%, a high for the year, while our par penetration also increased to its highest level of the year, at 7.3%. For the third quarter, these figures were 13.3% and 5.7%, respectively, and continue to show a quarter-over-quarter improvement since the fourth quarter of 2010. These increases reflect good demand for our product. Further, for bonds rated A, our insurance was utilized on 40% of transactions and 17% of the par sold during the first nine months of this year, which is an encouraging result when considering the overall market and our ratings uncertainty.

Taking a macro look at the U.S. municipal market, while financial pressures remain, states and municipalities are generally finding ways to manage within their new fiscal realities. And although many local governments continue to experience declines in property tax revenues, according to a recent study by the Rockefeller Institute of Government, state tax revenues grew by 10.8% in the second quarter of 2011 and by 8.4% annually for the period that ended June 30, 2011, representing good recoveries from the lows of the financial crisis. If we look at defaults for the U.S. municipal market as a whole, the level of defaults occurring this year has actually been much lower than in 2009 and 2010.

2011 statistics through September 30 showed $949 million of defaults versus 2009 and 2010 full-year levels at $8.5 billion and $3.4 billion, respectively. Interestingly, defaults in the third quarter were only $126 million. Separately, S&P said in a recent report, that municipal bond par defaults through October of 2011 were down by 69% from the same period in 2010.

In terms of Assured Guaranty’s municipal loss development, our insured municipal portfolio continues to perform well. However, there are some disturbing trends in the market, which may impact our future appetite for this business.

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