Assured Guaranty Ltd.

good morning and welcome to the assured currency limited third quarter 2023 earnings conference call my name is elliot and i'll be your operator for today's call all participants will be in listening mode should you need assistance please signal a conference specialist by pressing star then zero on your telephone keyboard after today's presentation there will be an opportunity to ask questions to ask a question you may press star then one on your telephone key to withdraw your question please press star then two Please note that this event is being recorded, and I would now like to turn the conference over to our host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator, and thank you all for joining Assured Guarantee for our third quarter 2023 Financial Results Conference Call. Today's presentation is made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results, 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 are listening to a replay of this call, or if you're reading the transcript of the call, please note that the statements made today may have been updated since this call. Please refer to the investor information section of our website for our most recent presentations and SEC filings, most current financial filings, and for the risk factors. This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures in our current financial supplement and equity investor presentation, which are on our website at assuredguaranteed.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guarantee Limited, and Rob Balanson, our Chief Financial Officer. After their remarks, we will open the call to your 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.

Thank you, Robert, and welcome to everyone joining today's call. We continue to build value for Assured Guarantee shareholders and policyholders during the third quarter and first nine months of 2023. Adjusted book value per share of $148.03 and adjusted operating shareholders' equity per share of $99.18, both reached record highs at the end of the third quarter. New business production has been strong this year with significant contributions from U.S. public finance, international infrastructure finance, and global structured finance. For the fourth consecutive year, our PVP for the first three quarters reached or exceeded $240 million, coming in at $249 million for 2023. In July, we completed our transaction with SoundPoint Capital Management and Assured Healthcare Partners, which resulted in a $241 million pre-tax gain net of expenses. We now continue our asset management diversification strategy to our 30% ownership interest in SoundPoint. The earnings from that stake will be reflected for the first time in our fourth quarter reporting, furthering our strategy of generating fee-based earnings to complement our risk-based financial guarantee earnings. We also expect enhanced returns on our investment portfolio based on a broader range of alternative investment options with SoundPoint. More generally, these changes will also result in streamlining some of our financial disclosures. Rob will expand on this in a few minutes. In capital management, during the third quarter, we completed our current debt restructuring efforts by refinancing $330 million of our senior obligations due next year. We also picked up the pace of our share repurchases, buying $64 million worth of shares in the quarter, and last week our Board of Directors increased our repurchase authorization by $300 million. Before I go into greater detail about the quarter and year-to-date results, I want to tell you about two important management promotions. I'm pleased to announce that CFO Rob Bailenson will become Assured Guaranty's Chief Operating Officer as of January 1, 2024. Rob will assume responsibility over our financial guarantee underwriting and origination strategies worldwide, as well as other initiatives to grow our financial guarantee business and increase returns. We will also be working with Mayo on setting the company's strategic direction and in assisting in executing other corporate priorities. Additionally, we are fortunate to have an outstanding person to fill Rob's role as CFO, Ben Rosenblum. Ben is currently our chief actuary. Ben has managed under Rob many critical financial functions, including accounting and financial reporting, As CFO, he will add treasury, tax, and investment management to his portfolio of responsibilities. Ben's quantitative and management skills have helped us accomplish many business objectives since he joined us in 2004. Most recently, he was instrumental in completing the SoundPoint transaction. Rob and Ben have earned these promotions by making numerous significant contributions over their many years at Assured Guarantee. With their extensive understanding of our strategies, markets, business practices, and unique characteristics of the Financial Guarantee business, I am confident they will provide great leadership in the years to come. Turning to U.S. public finance, where total year-to-date municipal bond par insurance was down 9% year-over-year, we nonetheless achieved a nearly 10% increase in the par amount of bonds sold with our insurance, guaranteeing $14.1 billion for a 62% insured market share. This includes $7.2 billion of par from 27 large transactions that each involved at least 100 million of insured par. up from $4.8 billion of PAR from 21 such transactions in the first three quarters of 2022. Importantly, the industry has maintained relatively steady high insured penetration rates this year, with a rate of 8.5% of new issue PAR sold for the first nine months of 2023, compared with 7.8% for the first nine months of 2022. The nine-month 2023 penetration rate is the highest in a decade. And in the third quarter of 2023, with overall part volume issued up only 3% year-over-year, we insured almost 50% more primary market parts sold than we did in the third quarter last year. Our insured parts sold in the primary and guaranteed in the secondary markets totaled $4.4 billion, up from $3.4 billion in the third quarter of 2022. We are also pleased with the increased activity we are seeing on bonds with underlying AA ratings from S&P or Moody's. In that category, we insured approximately $2.8 billion of FAR during the first nine months of 2023, up from $2.3 billion of FAR for the first nine months of last year. We wrote 64 policies on such AA transactions during the nine-month period, 55 of which were for new issues. We believe investors see our guarantee on high-quality credits as a mitigant to downgrade and market value risks. And looking forward to the fourth quarter activity, we're off to a strong start. In the month of October, three U.S. public finance transactions between $350 million and $750 million sold or closed with our insurance, two airport transactions, and a green bond transaction in the power sector. Outside of U.S. public finance, our international public finance business produced $38 million of PVP year-to-date. We also have a promising pipeline of additional infrastructure business, closing five transactions in the airport, water utility, higher education, and student accommodation sectors, with bar totaling almost $600 million. In global structured finance, we produce $82 million of PVP year-to-date, assuring that 2023 will be our best year for direct structured finance production since 2009. We have a number of future mandates expected to close this year. The growth of our structured finance business further validates the three-pronged approach we take to writing financial guarantee business. By diversifying across U.S. public finance, global structured finance, and international infrastructure markets, we can reduce production volatility over time. as weird conditions in one market can be offset by a more favorable environment in another. Our last remaining non-paying Puerto Rico exposure is the Power Authority PREPA, for which we continue our loss mitigation efforts. After mediation reach and impasse, proposed PREPA plan of adjustment appears headed towards a contested plan confirmation hearing. We remain committed to resolving PREPA consensually, if possible, but will protect our bond claims and enforce our credit or legal rights through litigation in the Title III plan confirmation and appeals process as necessary. Meanwhile, our outstanding private insured exposure continues to reduce. Overall, the strength of our insured portfolio has improved significantly in the last several years, largely because of our loss mitigation efforts. We now classify only 2.1% of our $242 billion insured portfolio as below investment grade, compared with 4.6% of the portfolio in 2017. As I mentioned on our last call, during the third quarter, S&P reaffirmed its AA financial strength rating with stable outlooks of our insurance companies. citing both our very strong financial risk profile and very strong business risk profile in its annual review of us. Its report describes many strengths supporting our AA rating, including S&P's view that we have excellent capital and earnings with a meaningful capital adequacy buffer. Additionally, in October, KBRA reaffirmed its AA plus insured financial strength rating with stable outlook of our financial guarantee operating subsidiaries in its annual surveillance reports on AGM and AGC. It also commented that investor demand for our product may be further enhanced by economic conditions such as tightening credit cycle, an economic environment of higher interest rates, volatile or widening credit spreads, and economic uncertainty. Our product is designed to provide value in a matter of the market environment, including when credit or market conditions are particularly uncertain. We believe the market disruptions during the pandemic, and more recently, volatility in the markets and global economies, geopolitical unpredictability, and climate-related natural disasters have resulted in a broader recognition of the protection and value our guarantee provides. against unforeseen circumstances, and a greater appreciation for the capital and liquidity supporting our insurance policies. We believe that concerns in the market can increase the demand for financial guarantee insurance because it can help support price stability and provide greater certainty of execution for new issues in the volatile pricing environments. Our outlook is positive as we continue to focus on our core principles of prudent capital management that is optimized for the benefit of our policyholders and shareholders, disciplined risk management, and clear and well executed strategies for new business production. I will now turn the call over to Ron.

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report third quarter 2023 adjusted operating income increased to $206 million, or $3.42 per share. This represents an increase of 55% and 62% respectively, compared with the third quarter of last year. The increase was primarily driven by the gain on the sound point in AHP transactions of $190 million, which is net of transaction expenses and deferred taxes. The sound point in AHP transactions were strategic milestones towards our goal of increasing fee-based and alternative investment earnings in order to grow the returns of the company while diversifying sources of income. With the SoundPoint transaction, we will own a 30% interest in an asset manager with historically strong AUM growth that provides an array of alternative investment options. In keeping with our commitment to invest a total of $1 billion in SoundPoint managed alternative investments within two years, we committed $150 million to two SoundPoint funds in the third quarter and another $100 million since the end of the third quarter. including funds managed by SoundPoint, AHP and others. As of September 30th, 2023, we had $630 million in alternative investments. Our inception to date annualized returns across all alternative investments is 12%. Before I get into a discussion of the third quarter, I wanted to highlight a few financial reporting changes resulting from the SoundPoint and AHP transactions. First, While we are still reporting an asset management segment, it now primarily consists of our 30% share of SoundPoint's earnings, net of any amortization of intangible assets associated with the SoundPoint investment. Because all SoundPoint reporting is on a one-quarter lag, our share of SoundPoint results will be first reported in the fourth quarter. And second, the SoundPoint and AHP transactions triggered the deconsolidation of all Assured IM CLOs and CLO warehouses, as well as the AHP funds. However, due to the significant ownership interest and other control rights that we maintain in certain funds, we continue to consolidate three Assured IM funds that are now being managed by SoundPoint, a CLO fund and two asset-based funds with a total net asset value of $272 million. The net impact of CEIVs to adjusted operating income was a loss of $10 million, which primarily consists of a loss on deconsolidation of the CLOs and AHP funds. In the insurance segment, adjusted operating income was $59 million in the third quarter of 2023, compared with $159 million in the third quarter of 2022. The decline was primarily attributable to increase reserves on PREPA exposures and a lower benefit on RMBS transactions compared with the third quarter of 2022. Economic loss development in the third quarter of 2023 for RMBS transactions was a benefit of $48 million, primarily due to higher recoveries for charged off loans. Higher earnings generated by the investment portfolio partially offset increases in loss expense. Net investment income on available for sale fixed maturity securities increased by $32 million due to the acceleration of accretion on loss mitigation securities and higher short-term interest rates and average investment balances. Equity in earnings on alternative investments was a gain of $25 million in the third quarter of 2023, compared with losses of $11 million in the third quarter of 2022. In addition, fair value gains on Puerto Rico contingent value instruments were $4 million in the third quarter of 2023, compared with losses of $8 million in the prior year period. Net earned premiums and credit derivative revenues increased to $99 million in the third quarter of 2023, from $92 million in the third quarter of last year. Accelerations were $15 million in the third quarter of 2023, compared with $12 million in the third quarter of last year. Deferred premium revenue remained steady at approximately $3.6 billion as new business production replenished the amortization of deferred premium revenue. Total operating and compensation expenses across all segments were $91 million in the third quarter of 2023, down from $94 million in the third quarter of last year. The third quarter of this year includes $14 million in sound point and AHP transaction expenses, and no longer includes asset management segment expenses, which were $24 million in the third quarter of last year. As you know, our effective tax rate fluctuates from period to period based on the proportion of income in different tax jurisdictions. On a year-to-date basis, the effective tax rate was 18.4% for 2023 compared with 8.1% for 2022. In addition to advancing our key objectives in asset management, alternative investments, and new business production, We continue to focus on capital management. In the third quarter, we increased the pace of share repurchases to $64 million for 1.1 million shares. Last week, the Board of Directors increased the share repurchase authorization by $300 million. We also achieved a great execution on the refinancing of $330 million of debt that was scheduled to mature in mid-2024. Our next debt maturity is now in September of 2028. The refinancing provides us the flexibility to pursue other capital management strategies, including share repurchases. At the holding company level, we currently have cash and investments of approximately $146 million, of which $67 million resides in AGL. These funds are available for debt service and corporate operating expenses. as well as share repurchases and other strategic initiatives. The transformation of our asset management segment, the efficiency of our capital management activities, and focus on new business origination and earnings growth continue to drive adjusted operating shareholders' equity and adjusted book value per share to new records of over $99 and $148, respectively. I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. If you're using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. First question comes from Tommy McJoint with KBW. Your line is open.

Hey, good morning, guys. Thanks for taking my questions.

Good morning.

Looking at the gross written premium and the PVP in the quarter, there was a sizable decline. And while I understand that the structured finance side can be lumpy, should we read anything into this such as a pullback or a tightening of credit from your underwriting standpoint? Or is this simply a function of what the market gave you and you're really trying to write as much new business as you can?

It's really a function of mix of business in the quarter. You know, there was a rapid start decline in the BBB issuance in the quarter, which obviously is where we eat most of our pudding. So that affected what we were able to write. So we wrote a lot of what I'll call down the middle of the road, slow business, highly rated, you know, at the rates that are available to us in the marketplace.

Okay, got it.

And Tommy, as we said, as Dominic said in the fourth quarter, we're seeing a strong flow in public finance.

Got it, okay. And then switching gears, on the capital standpoint, is your leverage position, your debt to capital, a constraining factor that could inhibit you from doing more buybacks at some point? And when you and perhaps your regulators look at the opportunity for buybacks and what that could mean for your debt-to-capital ratios, do you look at a capital number that includes or excludes the other comprehensive income, given the swings that we've seen there?

Well, the regulator would look at excluding other comprehensive income, just to look at it on a statutory basis. And we generally look at our debt-to-capital ratios with respect to the rating agency constraints. And yes, it's true that, you know, if in fact you somehow shrink your capital, that you also have to deliver. But, you know, with our refinancing that we did this year and that we're able to push our maturity out five years, we have flexibility going forward of what we can do in capital management.

At this point in time, it's not a constraint.

But it's always something that we look at.

Okay. Got it. And then just last question. What's your initial understanding of the potential tax regime changes in Bermuda and how that could impact your business. And to the extent that the effective tax rates do increase there, do you think that your business could pass through those rate increases in order to maintain returns?

Yes. And at the end of the day, as you know, the global minimum tax is going to be effective in 2024. So because Bermuda had a a no tax jurisdiction, we would have had to pay whatever income that Bermuda makes, 15% would go to the UK because we're UK tax resident. So if Bermuda initiates tax, then we just would not have to pay that tax to the UK, we would just pay that tax to Bermuda. And yes, we believe that obviously would be profitable. And also, just remember, it's still significantly lower, whatever tax, significantly lower than the US. And there's a significant amount of capital here in Bermuda that earns at a lower tax rate. And we constantly evaluate and do tax planning based on that.

Got it. Thank you.

We now turn to Giuliano Bologna with CompassPoint. Your line is open.

Good morning, and congratulations on another successful quarter. It's great to see the continued strong performance. Thank you, Giuliano. Well, one thing I was curious about asking, and I may have missed this during the credit remarks, I'm curious if there's any commentary about special dividends or how you think about your ability to request special dividends at this point, and then also how you think about Yeah, topping off capital to the holding company on kind of a go-forward basis that way.

Well, Giuliano, I'm pleased to report that we filed applications with both regulators for a special dividend approval. So we're now just in waiting mode, which we're optimistic of those to be approved. So that's part of the capital management strategy, part of the capital buyback strategy. So we're doing exactly what we said we would do.

That's great. Then one thing I'd be curious about on the new business front, you know, the higher interest rate environment obviously drives a lot of demand, but it's not linear the way it flows through. I'm curious when you think about, you know, market penetration rates on the muni side, you know, and where that could go over the next, you know, couple years, obviously assuming, you know, we stay in a higher for longer environment.

Well, as I said in my comments, penetration rates are at all-time high relative to the last, say, 10 years. And he gave you some really startling statistics. So as we said, in the quarter, there was not a lot of BBB issuance because I think there's a wait and see in terms of the interest rate marketplace. And you don't want to finance high and then have the opportunity to look later on in life that the rates are a lot lower. But to give you some statistics, in the third quarter, on a transaction basis, 84.7% of all BBB issuance took insurance, 84.7%. That means only 15% of the BBB issuance did not take insurance. That's a tremendous statistic for the insurance industry. I think it's reflective of the higher rate marketplace. Our problem is we just need more volume in the market to really drive more premium growth, which we can see in the future. As Rob mentioned, we're having a great fourth quarter start. We expect the fourth quarter to be spectacular on the public finance side, as well as our other marketplaces as well.

That's very helpful. I realize it's very early. in the process with the sound point transaction. I'm curious, you know, just from a higher level, do you expect contributions to be positive, you know, starting next quarter? Because you referenced that, yeah, we get the first full quarter of, yeah.

Absolutely. We owe 30% of a $50 billion asset manager, Tom. I'm sorry, Juliana. So we expect it to be positive all the way through. We wouldn't have done it otherwise.

That's very helpful. I appreciate it, and I will jump back into Q. Thank you.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. Now turn to Jeffrey Dunn with Darling and Partners. Your line is open.

Thanks. Good morning. Good morning, Jeff. Dominic, I was wondering if you could just talk about how the market for new business has evolved in the last two years. Obviously, we've had a lot of movement on rates and spreads, but can you give either qualitatively or quantitatively how the market has changed over the past two years with respect to penetration rates, pricing terms, conditions? I mean, net-net, it seems like it all should be positive, but obviously it gets distorted from what we see with mixed change and all that stuff. So I'm wondering if you could just dig a little bit more into that.

Oh, Jeff, I would say it's all positive except for one thing, which is issuance. So let's talk about it. So number one, interest rates are higher. That's a real benefit to our business across the board. So it's what we can charge for premium versus in addition to how many people would seek insurance now, try to save some financing costs. The issuance has been as A, the municipalities have been awash with cash and the relief that they got through the pandemic. So they had to run out of their checkbooks, which has taken quite a long time. So we didn't have any need to finance. And then 2, because of the volatility in the marketplace and the interest rate environment, people are a little concerned that there's always a prediction that rates are going to come back down. So, whether I should wait to finance in 6 months or 9 months, because I get a better rate. So, I think we've got conditions that support the growth of the business and support the insurance industry through the interest rate process. Like I said, they haven't had a need to borrow, but we know in the municipality world, it's not a matter of if it's only a matter of when and the winds coming. And because of the higher rates, we think we're in great shape to make significant production gains across the board. Spreads, of course, in a volatile market tend to be a little bit volatile. They're a little tight now, but we expect them to widen out as well, which will further benefit production. So I think it's a tale of two stories. The interest rate environment helps, but the issuance market is lower because of the awash cash that came out of the pandemic relief, as well as the fact that people are looking for better rates to finance.

And if I remember, we were six and change penetration rate two years ago, and now I think you said eight and a half year to date.

Right. And like I said, if you break it down between where we're actually strong in the marketplace in the single A and the triple B, so to give you another statistic, so I told you 84.7% of triple B transactions grabbed insurance, 59.5% of single A transactions grabbed insurance. So think of it, both in the triple B and the single A space, well over 50% penetration rates. which is what I had predicted a thousand years ago based on penetration rates that I expect based on us being AA rated and what's available in the market. And also, you know, the fact that we're in the other two markets of structure finance and international infrastructure really provides us further support and a little stability in the earnings that we can see and the production that we can make. And of course, as you know, the returns on those businesses are even higher, significantly higher than the domestic public finance business.

And then one last follow up, given what you just said about the triple B and single A penetration, you also indicated that you're gaining traction in double A. So is your view that it's an 8% to 10% type of penetration rate? Or is it still, I think years ago, we were talking about maybe recovering at 15%. What's your view on the ultimate penetration?

I still think we can get to 50% of the 50%, which is 25%. That's my view. And I still stick to it. And as I said, if I look at the triple B and the single A penetration, we're there. We just need to get more participation in the AA, and I think we'll get to the numbers. So I think easily over 10% in a normalized marketplace, if you continue to see high interest rates and spreads widen out, that penetration rate will grow as well.

Okay. Thank you.

Thanks, Jeff.

This concludes the question and answer session. I would now like to turn the conference back over to our host, Robert Tucker, for closing remarks.

Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.

This concludes today's conference call. Thank you all for attending. You may now disconnect your lines and have a great day.