Assured Guaranty's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Assured Guaranty Ltd. (AGO)

Q2 2012 Earnings Call

August 10, 2012 9:00 a.m. ET


Robert Tucker – Managing Director, IR and Corporate Communications

Dominic Frederico – President and CEO

Rob Bailenson – CFO


Mark Palmer - BTIG

Brian Meredith – UBS



Good day, and welcome to the Assured Guaranty Limited Second Quarter 2012 Earnings Conference Call and Webcast. (Operator Instructions).

I would now like to turn the conference over to Robert Tucker, Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Robert Tucker

Thank you, operator. Good morning and thank you for joining Assured Guaranty for our second 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. It 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 and 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 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, 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 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.

Dominic Frederico

Thank you, Robert and thank you all for joining Assured Guaranty for our second-quarter 2012 earnings call. Our positive operating results in the second quarter reflect our strategic versatility and the strength of Assured Guaranty’s business model. While the reliable stream of revenue from our $5.6 billion of unearned premium reserve led a solid base of income, we wrote new business generating $50 million of PVP and created additional shareholder value through our alternative strategic programs.

Our business production in the second quarter concentrated on U.S. public finance where our gross par written totaled $4.7 billion, up 28% from the second-quarter of 2011 and PVP reached $47 million, up 5% from last year’s second quarter. Our premium rates have held for over the last year but compared with last year’s second-quarter PVP, PVP grew less than the par insured. This is because our premium rates are applied to total insured debt service. That is principal and interest to calculate PVP.

As average 30-year yields have decreased about 125 basis points from where they were in last year’s second quarter, total debt services reduced, and this is the basis of premium we recorded in the quarter. The fact that we insured over 350 new issues in the quarter despite adverse market conditions is testimony to the fundamental demand for our guaranty.

Our market penetration remained consistent with prior quarters. In our target market bonds with single A underlying credit quality, our market penetration in the second quarter remained reasonably strong as we insured 29% of the transactions and 10% of the par sold despite the low interest rate environment.

Turning briefly to the structured finance and international markets, our near term structured finance opportunities are primarily in non-cash bilateral trade with large financial institutions looking to manage their capital more efficiently. In international business, we've seen a steady increase of European public finance transaction increase as banks continue to reduce their long-term infrastructure lending. We continue to look forward to increased opportunities in both of these areas over the next 12 months.

As most of you know, Moody’s placed our ratings on review for possible downgrade at the end of March. I want to emphasize in U.S. municipals we still insured 445 primary and secondary market transactions totaling $4.7 billion of par even with the uncertainty caused by Moody’s action, proving once again the value and resiliency of our products. We believe that by far the most important reason for any downward pressure on insured market penetration is the unprecedented low interest rate environment.

As we pointed out before, we believe Moody's negative view of the future of bond insurance is not supported by the facts. Countered the Moody’s statement, there is a number of indications of the prospects for increased demand are strengthening. In our view the recent entrance of a new player in the bond insurance business underscores the importance of the product and the expected growth in demand for it, as well as the opportunity that fresh capital sees in participating in this market.

Even Moody’s has said the presence of a new guarantor could help revitalize the financial guarantee insurance sector through greater insurance penetration. And S&P recently wrote that the industry could end up insuring 20% to 30% of new issue par in U.S. public finance markets. We agree with this view over the longer-term, although we believe the current interest rate environment will still depress the insured market in the short term.

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