Assured Guaranty Ltd. (AGO) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Assured Guaranty Ltd. Fourth Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Robert Tucker, Managing Director, Investor Relations, Corporate Communication. Mr. Tucker, please go ahead.

Thank you, operator. Good morning, and thank you for joining Assured Guaranty for our fourth quarter 2012 financial results conference call. Today's presentation is made pursuant to the Safe Harbor provision 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, 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 and for the Risk Factors. And turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd.; 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.

Thank you, Robert, and thank you all for your continued support of Assured Guaranty and for joining us on today's fourth quarter earnings call. I'm pleased to report that 2012 was another solid year for Assured Guaranty. Once again, we succeeded by executing our core strategies, which have consistently produced positive operating earnings and continued to great shareholder value. These strategies led to significant accomplishments in 2012. Specifically, we generated $535 million of operating income, our third year in a row with operating income in excess of $500 million. We increased operating shareholders' equity per share to a record level of $30.05. We repurchased 2.1 million shares at an average price of $11.76 and the share price ended the year 21% higher at $14.23, and as of yesterday's close, it was 57% higher. We doubled our quarterly dividend to $0.09 per share early in the year, and further raised it to $0.10 per share in the first quarter of 2013 for a total increase of 122%. We executed reassumption transactions with Radian Asset Assurance and with Tokio Marine and Nichido Fire Insurance Co. for a total economic benefit of $191 million. We produced a total of $210 million of PVP, ensuring $16.8 billion of par direct and reinsured transactions. We accomplished this in a persistently unfavorable business environment caused by unprecedented low interest rates, tight credit spreads and uncertainty about our ratings caused by Moody's having us on review for 3 quarters of the year. And we did it while consistently maintaining our rigorous underwriting and pricing standards. In the U.S. public finance market, we ensured 1,770 new issues and secondary market positions during the year, representing $14.5 billion in par. Our penetration of new issues in our targeted market of single-A issuers was 30% of the transaction sold and 12% of parcel during the year. We also guaranteed $620 million of par and structured finance, which contributed $43 million of PVP. In our residential mortgage loss mitigation efforts, we caused providers of representations and warranties, or R&W, to pay or agree to pay approximately $500 million, including amounts related to 2 new R&W agreement signed during the year. This brings the total receipts and commitments from R&W providers to $2.9 billion to-date. We also purchased $396 million of bonds we had previously insured at an average cost of 63% of the par, which created approximately $250 million of future economic value. Such ramp-on purchases mitigate losses, improve our excess capital position, and increase future investment income. We agreed to terminate 53 policies totaling $4.1 billion of net par outstanding, while still collecting 96% of the expected premiums, further increasing our excess capital. We experienced improvement in our insured portfolio, as structured financing transaction amortized and our overall below investment grade exposure decreased by 13% during the year. Finally, we lowered our insured leverage with the ratio statutory net par outstanding to qualified statutory capital declining 12%. Since the acquisition of AGM in 2009, that ratio has fallen by 41%. And I want to discuss 2 other recent developments: our victory in the Flagstar Bank case and Moody's failure to assign us financial strength ratings based on their published criteria instead of subjective speculation. On February 5, Federal Judge Jed Rakoff awarded Assured Guaranty substantially all the damages we sought for Flagstar's refusal to honor its RMBS rep and warranty repurchase obligations. We believe the ruling will be upheld if appealed, and we will receive approximately $90 million as compensation for claims paid to-date, plus additional amounts to be determined by the court, which we estimate to be at least $20 million for interest costs and attorney's fees, in addition to amounts requested for future claims. This is the first trial related to RMBS rep and warranty put backs that has come to a final court ruling, and it sets a strong precedent in support of our industry in similar cases. The decision establishes clear liability as it relates to originators and securitizers of RMBS, and it articulates the responsibilities of rep and warranty providers to honor contractual obligations to purchase defective mortgage loans. Additionally, this decision, which definitively clarifies issues related to causation and statistical sampling, should prompt regulators, auditors and the boards of our remaining rep and warranty providers to seriously question their reserve levels of related disclosures. For example, we have put back $2.1 billion of defective loans to Credit Suisse and $2.4 billion to UBS utilizing the same process and control procedures that we used with the Flagstar portfolios. These amounts are based on collateral losses, which are generally at least 4x Assured Guaranty's protected bond losses on these portfolios. The amount that we just disclosed also exclude any further calculation at fees and interest like those that will be awarded to us in the Flagstar litigation. Turning to Moody's, on January 17, they announced an unjustified downgrade of our financial strength rating. The next morning, we issued a 5-page rebuttal detailing Moody's lack of transparency, contradictory explanations and disregard for their own capital model. It is on our website, and I urge you to read it. On January 24, the flaws of Moody's rating process became even more obvious when they published a credit opinion on AGM, containing a financial strength scorecard, which lists the main factors used by Moody's to determine our financial strength rating and provides a score based on their published criteria for rating financial guaranty companies. Unlike the rating change announcement, which was widely distributed via press release, the credit opinion was made available only to subscribers of Moody's research products. This new scorecard is comparable to the one they published 10 months earlier on March 26, 2012, and the comparison is alarming. On the 2012 scorecard, AGM had an overall rating score of AA2. And Moody's then adjusted that overall rating down one notch from AA2 to AA3 based on their speculative concerns over future qualitative issues of market demand and penetration. Now 10 months later, the scorecard shows that the company earned a stronger rating score, resulting now in an overall rating of AA1, a notch higher than that in March 2012, and one of the highest ratings a financial institution can achieve. But even though our current overall rating score is higher, Moody's adjusted the rating down without proper justification to come up with a lower overall adjusted rating of A2. So even though AGM got stronger, based on Moody's own published rating criteria, AGM was somehow downgraded and significantly so. Moody's made this one-notch adjustment without any of the transparency called for in their own code of professional conduct. That code states that Moody's will publicly disclose any material modifications to its rating methodologies and related significant practices procedures and processes. It also specifies pre-implementation requests for comment and publication of sufficient information for a financial market professional to understand the basis for a credit rating. As the client, we can't understand the basis for the credit rating. The absence of such disclosure renders the Moody's review process incomprehensible. It also does not comply with Dodd-Frank Act's call to increase rating agency transparency and follow established procedures for changes in rating aging methodology. This kind of opaque and arbitrary behavior, where model results are discarded and a subjective valuation is applied, has prompted the Justice Department to bring a civil fraud suit against another rating agency. As I previously stated, when capital and the quality of your insured portfolio no longer matter in regard to your financial strength rating, there is a serious problem with the process. Moody's unsupported and unjustified downgrade of Assured Guaranty adds to the mound of evidence that there needs to be comprehensive regulation and oversight of the rating agencies. Getting back to our 2012 activity, we also acquired MIAC, a financial guaranty company that was already licensed to 37 states and the District of Columbia. We renamed the company Municipal Assurance Corporation and intend to begin writing U.S. municipal business in MAC this year. I want to be clear that we are launching MAC to increase our municipal bond insurance penetration by expanding our current base of demand. The new company is simply an additional platform, AGM and AGC, both of which are rated AA- with a stable outlook by S&P, are key components of our business franchise and valuable brands. MAC will complement those brands and provide us with additional flexibility to address new market needs, while also providing new competitive positioning. The launch of MAC is part of our permanent commitment to the U.S. public finance market, where we expect to see more opportunities as interest rates rise and credit spreads widen, as they eventually will. We will fund Mac internally and seat it a portfolio of municipal risks to leverage its capital base, provide earnings at inception, and respond to clients looking for a new municipal-only platform. We also believe our structured finance and international infrastructure businesses have significant potential. We continue to engage issuers and their advisors in the asset-packed market, as well as large financial institutions seeking credit protection for selected assets and more efficient capital management. In infrastructure finance, we anticipate more international opportunities in 2013. In the U.K., the government is currently seeking to tap into the capital markets for alternative funding sources for public private partnerships. We offer solutions that allow pension funds and life insurance companies to invest in the capital market infrastructure financings. We expect to be able to take advantage of the opportunities in all these markets because we have proven our financial strength and the value of our insurance time and again. Paying claims reliably and on time is indisputable proof of this. And we have done so for municipal investors in Jefferson County, Alabama; Harrisburg, Pennsylvania; and Stockton, California, all of which have declared or attempted to declare bankruptcy in a charged political atmosphere. However, these public officials must recognize that it is their or their predecessors' actions that have caused their financial difficulties, and their behavior in dealing with these issues will have long-term consequences. While they have budgeted themselves into financial difficulty through unsustainable expenditures, they should not attempt to use creditors or bond insurers as escape goats. When a municipality breaches the trust of its creditors, which often includes bondholders that reside and vote in that same community, it harms all of its constituents by eliminating its access to the capital markets and increasing its funding cost, and potentially those of other municipalities. We have seen that the vast majority of municipal issuers practice sound financial management, and that the ones we insure overwhelmingly value our ability to work with them to deal with any problems before they become serious. In each of the 3 cases I just mentioned, we attempted to work instructively with local authorities to negotiate an equitable resolution for all parties. Looking forward, our goal remains to write as much quality business as possible that meets our strict underwriting and pricing standards. However, as long as interest rates remain low and credit spreads tight, pressure will be put on our ability to write large volumes and new business. This combined with the runoff of our existing portfolio and our other capital creating strategies will continue to increase our excess capital position. In January of 2013, we announced a $200 million share repurchase program that will be financed entirely with holding company funds in order to preserve the capital strength of our operating companies. We will look to augment this repurchase program going forward, as our capital levels become more redundant, and we have funds available at the holding company. We have developed strategies to increase holding company funds to be available for share repurchases in the future. In closing, I thank our shareholders and policyholders for their continued support. As the economy recovers, Assured Guaranty is well positioned as the prudent leader of bond insurance. We've demonstrated the fundamental demand for our product, even when interest rates are at their lowest. We have shown we have the financial strength to effectively serve our target markets, and we clearly have the financial flexibility and the right mix of strategies to continue to create shareholder value. We look forward to protecting policyholders, saving issuers money and building value for shareholders in 2013 and beyond. I will now turn the call over to Rob Bailenson for additional details regarding our financial results.

Thank you, Dominic, and good morning to everyone on the call. Fourth quarter 2012 operating income increased 7% to $184 million or $0.95 per share compared with $172 million or $0.94 per share in the fourth quarter of 2011. The primary driver of the increase in operating income was premium accelerations, which totaled $153 million in the fourth quarter of 2012. This included $96 million from termination. The remainder was attributable to refundings of public finance transactions due to the low interest rate environment. The comparable fourth quarter 2011 totaled premium accelerations were $48 million. In addition to the immediate benefit to operating income, terminations and refundings have the added benefit of deleveraging our insured portfolio and increasing excess capital, as reflected in the 12% decline in the statutory net part of qualified statutory capital ratio, which went from 95:1 at the end of 2011 to 84:1 at the end of 2012. Net investment income is relatively flat compared with fourth quarter 2011. Our general portfolio reinvestment rate has declined in this low interest rate environment. However, our loss mitigation bonds, which are typically purchased at a discount and produce relatively high yields, has helped to offset this without taking on any incremental risks. The overall pretax book yield was 3.85% at December 31, 2012, and 4% at December 31, 2011. Excluding bonds purchased for loss mitigation purposes, pretax yield was 3.51% as of December 31, 2012, compared with 3.69% as of December 31, 2011. Loss expense was $127 million for the quarter, compared with $82 million in the fourth quarter of 2011. U.S. RMBS was the largest contributor of loss expense in both quarterly periods. Loss and expense is different from net economic loss development due to the amortization of unearned premium reserve on transactions with expected losses. Net economic loss development was $73 million during the fourth quarter of 2012, driven primarily by U.S. RMBS, including additional provisions for loss adjustment expenses as we continue to pursue loss mitigation strategies in changes and assumptions on one specific transaction. Offsetting these increases were improvements in the truPS portfolio. Changes in risk re-rates were not significant during the fourth quarter of 2012. The Flagstar judgment earlier this month was an important development in affirming the company's R&W claims and our rights to fully recover under breaches of R&W. We will continually update our loss and R&W models to reflect the range of possible scenario, including a final decision with respect to the recoveries of interest and cost in any potential appeal. Fourth quarter 2012 interest expense declined by $4 million to $21 million, which represents a recurring quarterly cost savings to the retirement of the equity unit. The effective tax rate on operating income was 26.3% for the fourth quarter of 2012 compared with 19.6% for the fourth quarter of 2011. On a full year basis, the effective tax rate was 25% for 2012 and 24.4% for 2011, which is in line with our expectations. The effective tax rate on operating income varies from quarter-to-quarter due to the amount of income in different jurisdictions. Operating shareholders equity per share was $30.05 per share, up 5% from year end 2011, which equates to an operating ROE of 9.7%. Adjusted book value increased by 2% to $9.2 billion, driven by new business and by the re-assumption agreements with Radian and Tokio Marine. On a per share basis, ABV declined to $47.17 from $49.32 per share at year end 2011 mainly due to the issuance of 13.4 million shares upon the conversion of the equity units. Full year 2012 operating income was $535 million or $2.81 per share, which compares with $601 million or $3.24 per share. Operating income in 2012 includes an after-tax loss on Greek sovereign exposures of $136 million, which was partially offset by after-tax commutation gains of $53 million related to the rating in Tokyo Marine transaction. With respect to the Moody's downgrade, I would also like to point out that the company had commitments for 47 new U.S. municipal issues that had sold with our insurance, but had not yet closed at the time of the Moody's announcement. All of those transactions, which aggregates to $385 million in par have closed or are in the process of closing with no pricing concessions. I'll now turn the call over to the operator to give you instructions for the Q&A period. Thank you.

[Operator Instructions] And the first question comes from Marc Palmer with BTIG.

Has the company seen any change in the willingness of counterparties, who had previously been reluctant to negotiate on R&W to come to the table as a result of the Flagstar ruling?

I'd say, in general, Mark, the people that we had reasonable discussions continue and maybe there's a little bit more sense of urgency, but less of that than you would normally have thought based on, as we believe, the completeness of the Flagstar ruling. And especially, I refer to the leverage in our deals, to settle with Assured Guaranty, I would still expose some of these counterparties to other claims by other bondholders. But obviously these bondholders are not part of our, what I would call, contracted relationship group, therefore, don't have the same rights. And there's a very public case, which I don't need to quote, that you can see the difference between an insured settlement and potentially open market or third-party private label investor settlements. And therefore, the significant leverage for us still kind of surprises us that there isn't more of a sense of urgency when these banks, and we're talking specifically here UBS and Credit Suisse, have significant multibillion dollar exposures were the assured losses, obviously a percentage of that, and therefore, we believe it makes the most sense to deal with the party that has the contractual rights, but not as much as you would think. So we'll continue to monitor that, and obviously, we hope to continue to be able to successfully negotiate settlements, but at least, we proven if you want to take this all the way to the courtroom, we're more than happy to do that, and we've been quite confident in our rights and, therefore, ultimate remedies. And if that's the way this will go, Assured has obviously the liquidity, the financial wherewithal to be able to stand there and meet the requirements and ultimately get the full value of our settlements.

Okay, one other questions. What is the status of the company's efforts to bring on an additional rating agency?

Those efforts continue, as you can appreciate. We have to be comfortable with their methodologies to make sure that there is proper disclosure, that they're going to be done in accordance with the regulations that exist, albeit, rather scant at the time. And obviously, we'd like to make sure that these ratings will be consistent overtime, so that we're not going to be put in any reactionary position. So our plan is to have that happen in 2013. And whether it's 1 or 2 additional ratings, we'll see how that plays out, but you can assume we're working very hard and our folks to deal in the rating agency area, continue to provide data, get further feedback, et cetera, from the parties that we're discussing ratings with.

And the next question comes from Geoff Gribling from Caspian Capital.

But I also wanted to ask about Puerto Rico, because it seems like another topical area, and it seems like you guys have reasonable exposure. It looks like about $2 billion of GO-ish type exposure and then about $1 billion of highway bonds net par, and I wanted to ask you about that. Just the nature of those and kind of your thoughts there in terms of risk to those exposures.

Puerto Rico is another one of those troubled credits that we continue to monitor aggressively. As you know, there's been a change in local government. The new governor has, at least, communicated that he has a desire to correct what is probably the biggest issue with Puerto Rico, which is the low amount of funding on their retirement obligations, which we think could put a drag on the system. As you point out, a lot of our exposure is in the general obligation, and we have a lot of further exposure to revenue-type bonds that theoretically should be self sufficient based on the revenue streams to which they apply, which obviously, has not been the case because of this further other economic slowdown. So there's more exposure. Half of it roughly relates to GO revenue. The other exposures either relates to local tax or other revenue streams. So it's a complicated process, obviously. As you point out, it's significant. We monitor it. We believe that the right measures are being taken, but obviously, they need to benefit like most of the world does in a better economic recovery. And we continued to take a very, very close look at that and continue to engage ourselves whenever we can with what's happening locally. But we're encouraged by, as I said, the new government or what there seems to be the commitment to solve which is the biggest problem, which is the low funding of the pension liability.

And the next question comes from Geoffrey Dunn with Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Dominic, could you talk a little bit about the reaction of your trading spreads and your clients since the downgrade? I think Rob indicated you've closed all the muni deals that were pending? But can you give a little more color on the environment for your rep?

Well, the environment is still most impacted by interest rates. And as we continue to maintain a federal policy of low interest rates, as we said in both my commentary and Rob's, we're going to be hard-pressed to generate revenue volume irrespective of spreads. Now specifically, the spreads, as you well know, our credit vault swap spreads have come in substantially post the downgrade. We have closed all the deals, principally, that were outstanding at the time. New business volume is low, once again, related to more economic uncertainty. What's going to happen relative to sequestering, especially if that hits the Build American Bonds? what's going to happen with municipal interest? So there's just so much uncertainty hanging over the market that it's hard for us to get a good read. Obviously, we do believe that Moody's downgrade has caused us some level of activity within a market where if our penetration was 3% and this takes it down to 2.2%, you're talking maybe $12 million of future earned premium, which will be spread out over 30 years. So it's not economically significant to us, but it's something that we continue to monitor. And the last thing that I would say is that the good news is that it doesn't appear that there's been any impact whatsoever in our efforts or opportunities in the international markets. And we're very hopeful that we're going to actually book some business that we're going to be very proud to announce in the upcoming quarters relative to the international operations. So by and large, it's had an impact and not significant in this market. It's hard to have anything significant because of the interest rates. But the good news is, at least, international market continues to provide opportunity. Our credit spreads have actually come in, which is positive relative to the overall organization. And obviously, we have communicated to you that we do have plans to be able to compensate for some of these impacts. But unless we get some real movement in interest rates, we're going to still be fairly well exposed to a benign new business market in the United States. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And that actually leads in my second question about international. Can you go on a little more detail? What is changing or evolving that '13 looks more optimistic on the business front? They still have the economic pressures over there, so I'm just curious, what is changing that makes it a more interesting opportunity?

Well, I'd go a couple of things. One, so like it or not, at least the Moody's rating now has a stable outlook to it. And a lot of people were just saying, okay how far is the knife going to fall? So at least that has been resolved. And in that marketplace, the AA wasn't really a requirement. As you look what the requirement there is for investors, it's more getting the support and participation of the institutional investors, which we've done -- that our European office has done a fantastic job of continuing to go around and continue to provide data and, therefore, maintain our support. And typically as we get an opportunity on the deal, we will actually go out, solicit letters from investors that will be more than happy to provide a letter of comfort that says they will invest in the bond. So that works for us. Number two, in that market, our value of our product is a lot more than just a guarantee. Obviously, they value our surveillance significantly. Three, the bank funding is starting to dry up there. And if you think about where rules around, say, swaps are going, a lot of the local financing is typically done, in some cases, offshore. And there's always a swap put on the currency. Well, as you can appreciate, swap has turned out to be a 4-letter word in today's regulatory environment, and therefore, that's going to be harder and harder. It's got more long-term implications relative to accounting and capital. So there's a movement away in a more interest in creating long-term capital market fundings. And then last but not least, everyone is trying to stimulate their economy. One of the easiest way to do this, obviously, invest in your own infrastructure, and the majority of the European opportunities are infrastructure projects.

[Operator Instructions] And the next question comes from Bill Clark with KBW. William Clark - Keefe, Bruyette, & Woods, Inc., Research Division: Obviously, refunding is hard to predict given where rates are and where they may go. Just wanted to talk a little bit about the termination side. Just wondering if you could comment maybe on the pipeline. Fourth quarter was certainly a pretty big level. Just wondering if that's something you think kind of took some opportunities out that you could potentially see going forward, or if you still see a pretty good pipeline for the future.

So I'll break that down to 2 pieces. So let's deal with the refunding side. So on the refunding side, obviously, we've been benefited by a significant refunding activity relative to the low-interest rates in the marketplace that really stimulate that type of opportunity and demand. And what we see is a similar level in '13 that we saw in '12 because you kind of go back to see what was the issue rate in 2002 and 2003 as you're hitting the 10-year call. So we're pretty optimistic that '13 represents a pretty good year. To your second question on terminations and accelerations. Obviously, we have a targeted list. Easy to grab the low-hanging fruit, as you can well appreciate it. Yet we still see reasonable activity. Now, obviously, '12 was a very unique year for that, but there are similar opportunities in 2013. And it's hard for me to give you an approximate will equal to the same level as '12. All I can tell you is it's still very significant, both from what we're negotiating to terminate as part of a wider, broader settlement with the counterparties. They're looking to clean up their balance sheet and move some assets around. They need our acceptance to that, and therefore we typically try to put in some further negotiations of other things we like. As you know, we like to buy back insured securities, where we can, at a discount. And that allows us to retire a lot of obligation and, therefore, accelerate the recognition of any on our premium reserve we have for that. And there's still a very active market for that in 2013. So although '12 was a great year, I expect '13 to be a very good year as well in that regard. William Clark - Keefe, Bruyette, & Woods, Inc., Research Division: And then on the share repurchase authorization, the $200 million, I'm just wondering if you can maybe give some commentary on how aggressive you plan to be with that going forward.

Well, as I said -- we're waiting for this question. We appreciate that as we look at the company, its market position, its market opportunities, and we talked about interest rates leading to a low level of demand and the continued amortization of the portfolio, we have significant capital that we need to retire. We've always said we would be a very efficient capital manager. We put in an initial, and I'll highlight initial, share repurchase authorization of $200 million. We'd like to get through that in a reasonable timeframe without really significantly impacting or impairing the stock, but still to be efficient on how we dispose of that authorization. And obviously, our goal is continue further authorization until we believe we brought the capital down to a reasonable level, relative to both the portfolio ratings and new business opportunities.

And the next question comes from Josh Bederman from Pyrrho Capital.

Just following up on the last question a little bit. Can you give some color around some of the, I guess, structural changes or the flexibility that your envisioning to actually upstream the excess capital into the holding company?

I assume you appreciate it, and you've obviously hit the question right on the head. The biggest issue we have in the ability to buy back shares is how much free capital, free cash, we can get to the holding company in Bermuda. And there's obviously a lot of legal and regulatory restrictions in moving money around. So what you can infer from that is we've obviously developed strategies that deal with either the legal or the regulatory side of what's limiting or needs to be acquired to further move cash and addressing each one of those areas with the goal to significantly increase the amount of cash availability and free capital that would reside in the holding company that can be used for the repurchasing of shares. And what we're going to tell you is as we get approval and, therefore, free up the capital, we will disclose that and release it to you at that time. But obviously, we don't want front anybody, especially when it's a regulator, to say, well, this is kind of what we're doing until they actually give us their approval. There's some structural things that we have to do as well that we're working on that would also continue to assist in this issue of freeing up capital to move to the holding company. So all I can say is, we've got things in motion. And as they come to fruition, we will disclose, and we will talk to you on a regular basis about the available cash flow that sits in the holding company. See if you can figure out then what's available for share repurchase.

And the next question comes from the line of Rob Maton from Schneider Capital.

I guess, sticking with the same topic there, separating the regulatory needs to move money to the holding company, could you talk about the amount of excess capital that you feel like you have relative to rating agency models at this point?

We opened this door, so now we can't shut it, but okay, so let's keep it going. Based on our best guess, and remember, the rating agencies are not very transparent when it comes to free capital. And specifically, as we sit here today, we've never received a full capital model from Moody's. So if you want to add another tick mark of disgrace to their rating, put that one on your list that we still, to this day, do not have a capital model from these people. And if they did do a credit score card, which I'm very amazed by because it does have capital adequacies for that scorecard, although they never shared it with us, very nice of them, so let's set them aside. As far as we can determine on S&P, as of year end, we have about $800 million of excess capital at the AAA level. And that's our determination, so make sure you couch it that way. And remember, we have to maintain AAA capital to wind up with the AA because we failed the large double gore test[ph]. So that's the best rating agency number I can give you as of today.

Okay, and then overtime, I would assume the continued runoff of the U.S. RMBS is the biggest -- one of the biggest drivers of continued capital generation relative to those models?

You are exactly right. So let's talk about that for a quick second. So if you look at the capital models, and although we still disagree with the levels, but since they never really give us any chance to put forth those objections because it typically doesn't matter in our rating, as they said, we're actually arguing with S&P not too long ago about an upgrade. And so what we can do to get this upgrade? And we say, what about another large rep and warranty agreement? And they said, look, you're already significantly over the AAA. You're already over our highest capital level for capital adequacy that we have, so that doesn't do it. And we're like, okay. So thanks for your help. Anyway, even if you look at the numbers, the majority, and understand this, the majority of our capital requirement, per the rating agency, still relates to the RMBS portfolio. So that is the 800-pound gorilla sitting inside the room. As that improves, runs off, or it gets subject to another settlement, it substantially then would reduce the amount of capital, which is the majority of the capital we're holding to support our rating agency ratings would then get released. So it's not simply amortization. It's obviously looking at improvements in the market. It's looking at further rep and warranty deals that would have a significant impact and, therefore, accelerate how we would view our access capital position as it affects the rating agencies.

And the next question comes from Marina Lunackova of UBS.

I have a -- first question is on that MIAC. How much of capital do you plan to allocate to this new subsidiary? And what is the timeline for starting already [ph] the business?

Okay, the capital that we have initially targeted is $800 million, coming out of both AGM and AGC, so it'll be directly owned by those 2 companies. So when you think of it on a legal ownership basis, its benefits go straight up into the operating companies. We hope to begin rating sometime towards the middle to latter middle of the year based on just finalizing ratings for the company and approving the transactions that won't affect funding capital and move the portfolio into that organization. So it's property leveraged.

Okay. And on the ratings, are you still targeting to get at least 2 ratings?

Yes.

Okay. Then other question I have about the troubled credits, like Jefferson County, the latest development. Could you give us any color on what it actually means? What is happening there? And could it have any impact on your loss reserves for that exposure?

Well, we always thought we have set up reasonable loss reserves. We continue to evaluate that based on current activity. Where we see Jefferson County today, we believe we have adequate reserves, obviously, provided. And the settlements and discussion we've had continue to leave us with that view, that we're adequately reserved. Obviously, there's a lot of moving parts down there, as you can appreciate. We think we're in pretty good position relative to what was the deal that was on the table and what that meant for our reserve level with this last deal, theoretically, that was being pushed around in the last few weeks and what that means. So we're very comfortable with our position reserve levels. It's been an unfortunate situation, but that's why you have bond insurance. And we stand ready to honor and we've -- as you saw in this last quarter, once the trustee fail to make the payment, we went around the trustee and made the payment ourselves because we think that's the right to do and continue to honor insured obligations. That had no impact at all in our reserve level. We obviously anticipate that situation as being part of what we think is the ultimate shortfall that we would have to absorb as part of any negotiated settlement. In terms of our other troubled children, you saw recently in Stockton, where the judge is now scheduled a trial to discuss eligibility. We still think that's positive, as long as we continue to get our message out. And we are a little bit upset with the characterization that we did not try to negotiate. But when you tell us, you have to take an 80% haircut and that's your deal, I don't consider that negotiation. So we'll see how that weaves its way through the proceedings for the court hearing on bankruptcy and then what develops thereafter. Obviously, in my little presentation or prepared comments, I'm sick and tired of municipalities blaming outside parties for their problems. We didn't generate these contracts. We didn't authorize these expenditures. We don't control their budget, and for them to say it's our fault is just ridiculous. And obviously, like anybody else, if you want to walk away from your obligations, there are consequences to every action. We have consequences in our actions that we honor, and we think it's the right thing to do. Now these existing elected officials need to honor their own and take a hard look inside. A mirror is a tough evaluator of your behavior, and it's time for these people to start putting some mirrors up in front of them. And then last but not least, our friends in Harrisburg, Pennsylvania. There's always been an issue of stranded debt after the sale of assets. It's going to be the issue of who's going to pay for the stranded debt. I think it's around, based on our best guess, $20 million. So it's not a number that, obviously, should be a problem for anyone. Remember, we have the county and the city guarantee behind our obligations there. So ultimate liability still yet to be determined, but we think we're adequately reserved there as well.

Okay, and on Stockton, the fact that Ambac settled, does it set any precedents for other lines or it has no impact whatsoever on the negotiation?

We give them a ton of credit. Obviously, they got something done, which didn't appear to be possible. If you really look at it, which they didn't release a lot of details, it just looks like they provided some capital and maximum amount of annual payments based on availability and extended maturity. That's typically how you work these things out. So it's nice to see that some level of sensibility did reign, and they got something done. We would obviously look to a similar deal if that was available. But as we said, no one's offered us any proposal and then for us to take a significant haircut is not justified based on where we sit in that whole creditor pool. As we talked about, we're less than 10% of the general fund budget, yet they wanted us to take 40% of the pain. That doesn't make any sense to us. And if that means we're being unrealistic, uncooperative, okay, so call us what you like. We're just trying to be reasonable. And I think the Ambac deal is a reasonable -- if I understand it, which I don't know all the details, it appears like a reasonable compromise that you would typically see in these types of situations.

And our next question comes from Darren Marcus with MKM Partners.

Just curious. The rep and warranty recoverable jumped this quarter, I guess, by about $70 million or so. And given the Flagstar ruling, I would have expected it to be up a bunch more. So can you just talk about why it didn't increase your reserve given the, I guess, increased confidence that you'll have more settlements and that you guys are right in essence.

Yes, our rep and warranty asset did jump $70 million. And part of that was due to Flagstar. But on other individual cases or on the individual rep and warranty providers, we view them each individually. We look at the circumstances at the time, where we are, as part of the litigation, and we probability weight them at that time. So obviously, if this thing went all the way through to appeal and our judgment is affirmed, it would have an effect on other transactions. But at this point, the effect that we have is on Flagstar.

And next question is a follow-up from Geoffrey Dunn from Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Dominic, on the $800 million to Mac, is that hard capital contribution or something that's aided by the intended ceding to that company?

That's hard capital based on your definition, right. So it's equity ownership of the 2 operating companies in the Mac. Obviously, they'll get soft capital through the under premium reserve that they would get passed down through this portfolio session of both AGM and AGC made to them. To constitute that company pretty much is a good, if it had to stand on its own 2 feet, company with a significant portfolio, strong earnings, all municipal business, no below investment grade, so be a very good strong company, which is the idea. Because we want it out there to see if we can attract institutional investors more back to the market because of the muni-only strong portfolio good earnings. And two, obviously, there are other buyers out there that would like a muni-only solution. Now in some cases, they're going to prefer that. Other cases they'd rather have the strength and liquidity and the size of assured guarantee municipal or AGMs. So we'll have 2 flavors. We'll segment the market, so one doesn't cannibalize the other and we hope to generate additional penetration and create a better competitive positioning on a muni-only basis with that company. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: And going at $800 million versus like 5, 6 that other new starts are doing, that goes along with trying to attract -- more attract the institutional buyers?

Yes, and then when you throw in the rest, you're going to have claim paying well over $1 billion, which we think is your kind of price and poker to get in the game. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And structurally, putting up a low AGC and AGM, is that just because of the capital considerations versus a large double gore test[ph] at those 2 entities?

No, it's really based on we want to make sure they appreciate that this is not any segmentation. This is not anything relative to the fact that we've got 3 operating platforms. The one is owned by the other 2. So everyone acts as a group. All funding is kind of co-mingled. They bear the financial wherewithal on the strength of the entire company. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And then last question as it pertains to capital management. I think I know the answer to this, but long-term benefit to being in Bermuda versus a near-term consideration that might make capital management easier. Is Bermuda still the right domicile? And is AG Re still an important platform for the longer-term strategy?

No, the fact that you've put longer-term strategy at the end of that, that's exactly the issue. And, Geoff, it's not a question that doesn't get asked, it's not a question that doesn't get a lot of analysis. Obviously, you can make a short-term decision that looks like it has huge benefits, but it's the old roach motel: once you go in, you can't go out. And we've got to be very mindful of that. And you got to say to yourself, what is the probability of the market returning to what it used to be? And it doesn't have to be what it used to be in 2005. If you can get penetration up and, say, to U.S. municipal market to say anywhere between 20 and 35, and maybe serviced by 2 to 4 insurance companies, you get the international market flowing again. And everything we see in the international market would indicate that there should be an active market there because of this issue relative to swaps, this issue with bank financing, this issue with bank capitals, Solvency II, Basel III. All these things would really support significantly capital market executions of the use of financial guarantee, you should have a robust market. Now when does that return? When did they finally require the full implementation of all these proposals relative to capital and regulation? We're all sitting here in the same basis. They continue to push back implementation. So you got to look at that longer term view and how much that ultimately means. And if we didn't think we had other strategies yet we could use, probably that gets even a higher level of screening, but we do believe, and you'll see as we go through this year with further announcements that we're fairly comparable that we've got a methodology or a way of attacking this issue, so that we get more of a benefit of capital flow into the Bermuda holding company.

This concludes our question-and-answer session. I would like to turn the call back over to management for any 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.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone lines.