Assured Guaranty Ltd. (AGO)

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Assured Guaranty Ltd. (AGO)

Q3 2012 Earnings Call

November 9, 2012 7:00 AM ET


Robert Tucker – Managing Director, IR and Corporate Communications

Dominic Frederico – President and CEO

Rob Bailenson – COO


Mark Palmer – BTIG

Bill Clark – KBW

Larry Vitale – Moore Capital

Brian Meredith – UBS

Raffi Tokatlian – Bridger Capital



Good morning and welcome to the Assured Guaranty’s Third Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Robert Tucker. Please go ahead.

Robert Tucker

Thank you, operator. Good morning and thank you for joining Assured Guaranty for our third quarter 2012 financial results conference call.

Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results, future rep 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 a replay of this call 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 website for our recent presentations, SEC filings, most current financial filings or for the risk factors.

And, 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 the remarks, we’ll open the call to your questions. As a 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 thank you, all, for joining Assured Guaranty for our third quarter 2012 earnings call. During the third quarter, we continued to deal with the challenging business environment by pursuing our core strategies that have allowed us to achieve positive operating earnings every quarter through the financial crisis.

These include discipline new business origination within the constraints of our rigorous underwriting and pricing standards, the recapture of business previously ceded to reinsurers, the purchase of our uninsured bonds in order to mitigate loss, improve rating agency capital, and acquire assets with attractive yields, the pursuits of recoveries for breaches of reps and warranties and residential mortgage securitizations and agreeing to the termination of selected transactions to reduce rating agency capital charges while retaining our premium income.

Our operating income in the third quarter was $166 million, up dramatically from the $38 million in the third quarter of 2011 due primarily to higher net earned premiums, lower loss expense, and a lower effective tax rate on operating income.

As most of you are aware, we’re now in the eight month of Moody’s review of our financial strength rating. Moody’s has stated that it anticipates resolving its review during the first half of this month. After publishing a scorecard in March, showing us solidly in the AA category, we cannot comprehend how Moody’s could consider it downgrade when we have only grown stronger since March through the $38 billion of exposure runoff, $85 million of present value new business production, and a greater certainty about the performance of our insured portfolio as it matures and amortizes.

We believe that Moody’s arguments suggesting a possible downgrade are mainly subjective and unsupported by the facts. We are still in discussions with Moody’s and believe that there would be no justification for a downgrade. I know that many policyholders and shareholders have expressed the same view to Moody’s.

Turning to third quarter production, Moody’s was ever due to finish its review every day of the third quarter and the market believes that announcement was imminent. This had a negative impact on our business production because many issuers and their advisers did not want to risk rating change between the pricing and the closing of a transaction.

However, even with the Moody’s uncertainty and historically low interest rates, we continue to offer meaningful value to the market. This was evident in our strong third quarter performance in the secondary market where we have increasingly been asked to ensure substantial portions of bonds that were previously issued without insurance.

Of our $35 million of total U.S. public finance PVP more than $7 million was gained through the secondary market, which is more secondary business than we did in the entire first half of this year. The quarter’s $500 million of secondary market par written was more than in any quarter since 2008.

Our third quarter U.S. public finance gross par written totaled $3 billion and our target market of underlying single A transactions we had a very good year so far guaranteeing 31% of the transaction sold and 12% of the par.

In September, we have made several strategic staff additions to support new business growth in our U.S. municipal group. We’ve hired three seasoned managing directors to lead our national new business efforts, drive our outreach programs to sales, trading, and syndicate desks and manage our western region public finance group in San Francisco. We also recruited another Director, accounted bond insurance underwriter to further strengthen our efforts in the west. These new contributors bring many years of experience in strong industry relationships to Assured Guaranty and we look forward to them helping us build on our leadership position.

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