Assured Guaranty Ltd. (AGO) Q4 2013 Earnings Report, Transcript and Summary

Hello, and welcome to the Assured Guaranty Ltd. fourth quarter earnings conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Tucker, Head of Investor Relations. Mr. Tucker, please go ahead.

Thank you, operator. Good morning, and thank you for joining Assured Guaranty for our fourth quarter 2013 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, 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 are 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. And turning to this 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'll open the call to your questions. [Operator Instructions] I will now turn the call over to Dominic.

Thank you, Robert, and thank you, all, for joining us today for the fourth quarter 2013 earnings call. I'm pleased to report that we ended 2013 with Assured Guaranty's strongest production quarter of the year, and increased our operating shareholder's equity per share to an all-time high of $33.83. Adjusted book value per share ended the year at $49.58 which reflects significant value to our shareholders. Our 2013 operating income of $609 million was 14% higher than in 2012. This was our fourth consecutive year with an operating income that exceeded $0.5 billion. And during this 4-year period of difficult economic times and turmoil in the financial guaranty industry, we generated $2.4 billion in operating income despite paying $4 billion of insurance claims for RMBS and some other transactions, a truly remarkable result. Also during this timeframe, we significantly deleveraged the company, reducing our insured portfolio by $181 billion, of which $101 billion of this decrease was structured finance, taking the portfolio from $640 million of net par outstanding at year end 2009 to $459 billion at year end 2013. We also significantly changed the risk composition with public finance exposure now representing 84% of our insured portfolio. At the same time, our statutory capital increased from $4.8 billion to $6.1 billion or 27% and the ratio of our net par outstanding to statutory capital decreased 45%. It's important to note that since the beginning of the global financial crisis, 6 years ago, we paid a total of $6 billion in claims yet still added $1.4 billion to our statutory capital, a further confirmation of our sound performance and our ability to handle adverse credit situations. As an insight if you told me at the end of 2007 that we would pay $6 billion in claims over the next 6 years but still increase our capital by $1.4 billion, significantly deleverage our insured portfolio, and improve its risk profile, I would conclude that our financial strength ratings today would be super AAA. So I'm sorry to say our financial guaranty ratings by some rating agencies no longer reflect the amount or consistency of operating results or our capital adequacy. What is undisputable is that we proved the financial resilience of our company, that one of the worse economic cycles of the last century. Year-after-year, we have accurately assessed the market, divide our strategies accordingly and executed those strategies effectively. Looking back, our assessment going into 2013 was that our insured portfolio would experience a net decrease and part outstanding during the year due to schedule runoff, as well as the low interest rate environment would likely continue to limit the demand for new bond insurance. Therefore, we enhanced our capital management strategy by returning $264 million to our shareholders to the repurchase of 12.5 million common shares as part of our ongoing share buyback program. These repurchases, at an average price of $21.12 per share, were accretive to earnings, operating book value and adjusted book value per share. We also increased our quarterly dividend per share by 11% in February of 2013 and further increased it by an additional 10% in February of 2014. To strengthen our competitive position in the market last year, we established a new municipal only bond insurance company that provides Assured Guaranty the response to the market desire for a U.S. muni-only insurer, and gives us a valuable strategic flexibility as we assess market demand in the future. We successfully launched MAC in July of 2013 with $1.5 billion of claim-paying resources and an initials statutory unearned premium reserve of $709 million. Unlike other start-ups, MAC started out with strong competitive position because it does not have any of the key risks associated with many start-ups. From day 1, MAC benefited from market acceptance to Assured Guaranty's leadership and from mainly highly granular and geographically diversified insurance portfolio that produces positive operating results. We're pleased with the markets reception of MAC which is rated in the AA category by both Kroll and S&P. Our Kroll rating of AA+, Stable is the highest in the industry despite what you might hear from some other financial guarantor. With regard to international business during last year's fourth quarter earnings call, I talked about the growing international infrastructure finance opportunities that we envisioned for 2013. Our prediction was on target. In the second half of the year, we insured approximately GBP 240 million of U.K. infrastructure bonds across 3 separate transactions to produce $18 million of PVP. Our years of commitment to international infrastructure finance clearly began to pay off in 2013. And we are confident that our U.S. structured finance business will also benefit from the same level of strategic commitment. Company-wide, in all of our markets for 2013, we generated a present value of new business production totaling $141 million by running $9.4 billion of financial guaranties. We achieved this in a market environment full of headwinds, as municipal issuance was down by 15%, interest rates generally remained low and credit spreads are relatively tight. With financial guaranty opportunities constrained over the past few years, we have demonstrated that we can develop and execute alternative strategies for value creation. Specifically, in 2013, we repurchased $331 million of our wrapped bonds at 70% of the par value, generating an increased tax adjusted book value benefit of $38 million. We terminated or redetermined over $7 billion of net par outstanding on 84 policies on which we accelerate the earnings of 100 per 70 expected premiums. Total terminations including these 84 policies contributed $144 million to pretax operating earnings for the year. And we called the rep and warranty providers or other responsible parties to pay or agree to pay over $700 million in RMBS recoveries. Our cumulative recovery today from RMBS put backs settlements and litigation has now reached $3.6 billion. On the subject of public finance loss mitigation, Assured Guaranty remains committed to working cooperatively with financially stressed municipalities including those in the fall. Jefferson County is an excellent example where we and other stakeholders provide some innovative solution to facilitate an exit from bankruptcy. As part of the county's restructuring plan, which involved the issuance of $1.8 billion in securities, our insurance facilitated an optimal sale of $600 million of senior sewer revenue warrants. We guarantee the warrants based on the county's approved credit and Assured's participation in the county's bankruptcy exit plan underscores our unique ability to assist issuers in assessing the capital market that helped them achieve critical financial objectives. Additionally, we reached final agreements with Harrisburg, Pennsylvania and a tentative settlement Stockton, California in connection with debt restructuring plans that should contribute to stabilizing these cities financial conditions. The direct insurance in for us are approximately 10,000 municipal credits, our credit track record is outstanding. We expect ultimate losses on fewer than a dozen municipal credits, and during the fourth quarter of 2013, we made claim payments on only 5. Now let's take a moment to address 2 of our credits that have been in the news lately. Detroit, which is negotiating a bankruptcy plan of adjustment; and Puerto Rico, which although recently downgraded, is still current on all of its debt service payments. In both cases, of course, holders of bonds that we insure are fully protected by our unconditional guarantee that they will receive their principal and interest payments on time and in full in accordance, with the terms of Assured Guaranty's insurance policies. Even now, holders of Assured Guaranty insured Puerto Rico and Detroit bonds are benefiting from their insured bonds relative price stability when compared with the same issuers insured obligations. The city of Detroit has filed a plead of adjustment with the bankruptcy court that we believe is not confirmable. Besides unfairly discriminating against bondholders the plan failed to respect State law restrictions on border approved special tax revenues and bankruptcy code protections for secured creditors. In the case of Detroit's order and sewer revenue bonds which account for 85% of our insured Detroit exposure, the plan disregards the protections of board to holders of special revenue bonds of solvent water and sewer systems. While our exposure to the unlimited tax general obligation bonds is limited to $146 million, the plan's proposed treatment of those bonds has serious implications for Detroit and more generally for municipal finance in the state of Michigan. The plan proposed the ULTGO bond holders effectively received 20% of what they own, and it proposes to diverge special tax revenues specifically approved by the owners only to pay the debt service on the ULTGO bonds to the city's general bonds as the fund distribution to other unsecured creditors. Additionally, the secured ULTGO bonds ultimately may be treated less favorably than other unsecured general fund debt which challenges the fundamental principles undertaking the entire municipal bond market. Further, there's no basis in law or morality for the city to insulate selected assets to obtain additional funding from outside sources, like foundations or the state and then apply those funds preferentially to similarly situated or even lower ranking classes of creditors. There's a true bankruptcy in Detroit and that is in the moral and ethical behavior of the state elected officials and their appointees. In the case of Puerto Rico, we recognized that interim administration are shown and knows the importance of funding solutions that both improve its financial stability and honor its obligations to creditors. However, based on our analysis, the economic conditions and the dynamics regarding Puerto Rico, including its access of potential costs for future financing, we internally downgraded these credits and establish reserves which are reflected on our 2013 results. Rob will address this further in his commentary. That said, S&P and Moody's have both made it clear that Assured's exposure to Puerto Rico in Detroit have not affected the ratings or stable outlooks of AGM or AGC. MAC, by the way has no Puerto Rico or Detroit exposure. While we don't believe these credits reflect the systemic trend in public finance, it is important to note that headlines about municipal risk due generate interest in bond insurance reinforcing the value that our bondholder protection provides in troubled situations and the relative price stability of our insured bonds. Looking ahead, we're well positioned for 2014 with $12 billion in claims paying resources, close to $400 million of annual investment income and $4.1 billion in consolidated net on their [ph] premium reserves. Ultimately, the need to replace the aging U.S. infrastructure and to fund new projects will support the issuance of municipal bonds. And in the longer run, we are confident that interest rates will rise as the economy continues to improve and that credit spreads will in due course, widen creating improved conditions for new business origination. So what is our vision for 2014? We believe we can achieve growth in new business production with contributions from all of our business areas. We expect opportunities to augment both our production results and our unearned premium reserve to the reassumption of the previously ceded business or acquisitions on insured portfolios from legacy insurers. We will continue to extract value where we find it through our loss mitigation strategies. Finally, we intend to continue optimizing our capital management across the group which will include utilizing when appropriate, our share repurchase authorization, which now stands at $400 million. For excess in achieving greater capital flexibility, continuing to deleverage the company, launching MAC, capturing more recovery and resolving troubled credits, Assured Guaranty is clearly in a very good position for the future. We have proven that we have the strength, flexibility and human capital to deal with even the most challenging market conditions. I'd like to thank our shareholders and policyholders for their continued support. I look forward to updating you on our business developments and financial results as the year progresses. I'll now turn the call over to Rob.

Thank you, Dominic, and good morning. The fourth quarter contributed $134 million to the 2013 full year operating income of $609 million. Full year 2013 operating income represents a 14% increase over 2012 operating income. On a per-share basis, operating income was $0.73 for the fourth quarter, bringing full year 2013 operating income to $3.25. I would like to discuss a few highlights of our financial results which include the economic benefits of our strategic initiatives. First, as part of our continued R&W recovery efforts, in the fourth quarter we settled the 2 R&W providers, as a result, realized $23 million of positive pretax economic development. In 2013, we had a total of 7 separate R&W settlements, bringing the year-to-date positive pretax economic development from R&W settlements to $314 million. The after-tax effect on operating income was $9 million for the fourth quarter of 2013 and $154 million for the full year. Second, we negotiated terminations of selected exposures which resulted in $38 million of pretax premium and CDS revenue accelerations in the fourth quarter. In addition to the immediate benefit to operating income, terminations, along with refundings, deleveraged our portfolio and strengthen our capital position. Refundings were $32 million in the fourth quarter of 2013. For the full year 2013, terminations and refundings contributed $284 million in pretax net earned premiums. Third, we continue to purchase loss mitigation bonds for our investment portfolio. In the fourth quarter, we purchased $85 million in par bringing the full year 2013 purchases to $331 million. Purchase loss mitigation bonds offset expected losses, boost investment yields and help offset the effects of lower reinvestment rates. As of December 31, 2013, we held $439 million in loss mitigation bonds at fair value in the investment portfolio, having a 9.7% yield. Finally, we negotiated consensual restructurings with Jefferson County, Alabama and Harrisburg, Pennsylvania in the fourth quarter which resulted in over $40 million of PVP on newly insured revenue bonds for both municipalities. As Dominic noted, Assured Guaranty's ability to help these municipalities restructure their debts and regain market access further demonstrates the value of our financial guarantee product. For the full year, we wrote $141 million of PVP, including 3 U.K. infrastructure transactions, that marked the reemergence of wrapped capital market infrastructure financing in the U.K. In total, operating income for the fourth quarter of $134 million is down compared with $184 million of operating income in the fourth quarter of 2012, due primarily to lower terminations and refundings and the scheduled amortization of unearned premiums. This was offset in part by lower loss expense, primarily in the U.S. RMBS sector. Pretax economic loss development was $89 million in the fourth quarter of 2013 which was primarily due to development in U.S. public finance exposures, including Puerto Rico and Detroit. Full year 2013 economic loss development was $56 million. The U.S. public finance sector was the primary driver of economic loss development. These losses were largely offset by R&W recoveries on RMBS. Turning to Puerto Rico, I would like to start by noting that all of our obligators have made all their debt service payments, and we believe that the Commonwealth is taking appropriate steps to address its budget issues. However, we recognize that the rating agencies announcement that Puerto Rico have been put on watch due to budget deficits and weak economy could hurt the Commonwealth's prospect for exception in Capital Markets. As a result, the company downgraded most of its Puerto Rico credits to below investment grade and the rating agencies subsequently announced they'd also downgrade Puerto Rico. After the downgrade of Puerto Rico, Moody's reaffirmed our ratings, and S&P stated that the incremental capital charge to Assured Guaranty for all our Puerto Rico closure would be approximately $65 million. Under our loss estimation process, which takes into account estimates of both the probability and severity of fault of each issuer, we established the loss reserve for below investment grade Puerto Rico exposures. The effective tax rate on operating income was 25.2% for the fourth quarter. On a year-to-date basis, it was 26.7%, which is slightly higher than 25% for 2012. The primary driver of effective tax rates in recent years has been the allocation of loss expense between taxable and nontaxable jurisdictions. In 2013, economic loss development was relatively higher in nontaxable jurisdictions which increased the full year effective tax rate. Adjusted book value per share increased to $49.58 from $47.17 at December 31, 2012, primarily due to share repurchases. Operating shareholders' equity per share increased to a record $33.83 from $30.05 at December 31, 2012, primarily as a result of share repurchases and year-to-date operating income. On a per-share basis, 2013 share buybacks added $1.84 to adjusted book value, $0.83 to operating book value. Seeing that we would benefit from greater capital flexibility within our corporate structure, we took 2 further important steps during 2013. First, we obtained regulatory permission from Maryland and New York insurance regulators that increased unencumbered assets at AG Re, a key source of funding for our share repurchase program. Second, we became a tax resident of the United Kingdom. Both of these actions will make it easier to manage capital efficiently across our group as we continue to evaluate and respond to business opportunities and market conditions. While we have not repurchased any shares since the third quarter of 2013 under our $400 million authorization, we have moved funds in place in order to be able to efficiently buy shares in 2014 depending on market conditions. As of December 31, 2013, we had unencumbered assets of $238 million at AG Re, $228 million of liquid assets at the U.S. holding companies, and $33 million at AGL. Looking forward, I would like to point you to our financial supplement for detail on some of our expectations for 2014, where we provide you with estimates for net premiums earned and loss expense. Premium estimates did not include refunding and termination. We expect 2014 net earned premiums and CDS revenues to be less than prior years based on scheduled amortization at par, and the fact that we terminated $24 billion in par over the past 3 years. With respect to loss expense, we have fewer R&W providers left to pursue, and therefore, expect that the benefit to operating income and economic loss development in 2014 to be less than the amounts we have recognized in the past several years. I expect 2014 net investment income and operating expenses to be relatively flat compared with prior years with the first quarter operating expenses being slightly higher than the rest of the year due to accelerations of compensation expense for retirement-eligible employees. I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

[Operator Instructions] And our first question comes from Sean Dargan of Macquarie.

I just have a question about share repurchase or lack of it in the fourth quarter. You had dividend capacity in most of the statutory entities. Why did you choose not to repurchase shares in the quarter?

Sean. We have been making plans and moving money to the right legal vehicles. And we plan on exercising and moving forward with our share repurchase plan. We just want to make sure we had all of the regulatory approvals and getting share and moving money into the right places. So we had to deal with regulators and making sure we had the right liquidity in place, making sure that we were cognizant of all of our response abilities with respect to our insurance collateral posting requirements. But as you can see I've just disclosed exactly what we have, available at all the holding companies and we're fully expecting to utilize our share repurchase program in the coming months.

Sean. Just I understand. There's not really an official waiting period, but on the advice of our tax counsels, they had prefer that we have a severance of operations for a period of time relative to the U.K. residency qualification and we wanted to honor that. In the same time, we still had a look at year-end where typically you'll see a lot activity from our reinsurers in terms of posting new reserves for the year-end financials. So obviously, the extent of debt will increase, encumbered assets at AG Re, we have to be cognizant of that as well. So we are just not being cautious and to provide what I'll call a pure period for the restructuring.

All right. Question on Puerto Rico. I recognized that the Commonwealth is doing the hard things as making but the right decisions. Just in thinking of the possibility that at some point down the road, there may be a restructuring. What might that entail? Would that be Puerto Rico going to the bondholders and saying, you have to accept $0.60 on the dollar or you get 0? What might be some possible options if Puerto Rico, at some point had to restructure its debt?

Well, Sean, your guess is as good as mine. And I'm sure, both of us have read thousands of pages of various new intention in Puerto Rico. What can we say? Well, in those cases, about 50% of our exposures and obligations, 50% of our exposure is revenue. Both have had historically very, very low levels of both the fall, as well as severity end of the fall based on the revenue streams that are attached to both. Number two, Puerto Rico does not have a Chapter 9 option or opportunity. Therefore, settlements have to be negotiated as opposed to as in Detroit's case, lustering rev rec through ridiculous plans being aired. So you would think there'll be a conceptual view to it much like at Jefferson County, where things did work out into the market. So hopefully, a fairness and equitable settlement with all stakeholders. And as we move on and look at all that in Puerto Rico, debt service in tunnels is roughly about 10% of the budget. So if the budget has the structural deficit, of say 2 or 3%, that would appear to be more than enough funds to be able to fully satisfy the debt. And because the debt is critical to the continued development of any recovery and I don’t care what municipality or organization look at the access to funds is as critical to stimulating economic growth going forward. If anything else, at least Puerto Rico, most creditors obviously fully understand that, I've made every proper statement in the full support of that. So I look at our track record and you can't ever come up with any concrete answer here. But a, we've done very, very well, even where the troubled credits are truly troubled and really don’t want to respect the bondholders. And therefore, I'm pretty optimistic we've got the troubled credits that really does respect bondholders, appreciates the value of the access to the market that is trying to work cooperatively with all stakeholders. So we're very optimistic on Puerto Rico and obviously, stand there in full support to help them accomplish their goals. And if that means a restructuring, where we extend terms, lower rates that you typically do in a lot of units will work out then so be it. Obviously, we look to preserve our economic integrity and that's the goal we've always looked on as we look in any of the states but in the same time, try to help the municipality achieve some level of balance or at least support for their current years if they need that and obviously, push the obligation out of the future.

Our next question comes from Geoffrey Dunn of Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Dominic, can you or I though Rob maybe, too, can you talk about how you think about going about reserving or such uncertain exposures like Detroit and Puerto Rico. I know it's probability of scenario weighted and I look back on the example of Greece where you're doing that same thing and all of a sudden at the end, you have this big true up because the loss exposure just changed with the reality of the settlement. How do people get comfortable that each quarter goes by you have more information, you update your probabilities, maybe you plead more in the reserves or a little less. But how do you get comfortable that all of sudden things just don't change like they did in Greece and we have a big loss in front of us. How does the world you're facing now it's a little bit tight, how you think about reserving and the practice of reserving?

Well, Geoff, I want to thank you for opening up an old wound. We have said repeatedly, I think we've done a fairly good job in assessing troubled credits and credit impairment. I do not think we did a very good job in Greece. We gave a value to the substitute bonds that weren't there. And we misread that situation entirely and we will take the beating and we will give you our apologies repeatedly. In the municipal world, Rob will work through the mechanics, but you do start off with some firm decision, you got a type of security that you're familiar with. You got all sorts of published, both the faults are very probabilities by every rating agency, including our own experience. That gives you kind of a guideline as you try to assess the various scenarios that you want to evaluate as possible outcomes in developing your reserve calculation. That's always been a premise and you're right. We updated based on new facts that we see and obviously we also assess. Remember, in a lot of cases, we'll always tell you that the first thing we start off with is, what is the issuers attitude to see looking to cooperatively work this thing out, it's antagonist or confrontational situation because that's going to obviously dictate a lot of things, i.e. how much money we have to spend in litigation, if it comes to that; as well as the substantial size of the settlement. So I'll give it to Rob. I think you got it -- Greece was Greece. And yes, we will continue to take the appropriate amount of lashes from you and our shareholders for the missed estimate on our part. But this is muni.

I mean, Geoff, just to add a little color. Like Dominic said, we look at new available information in the market. I mean with respect to Puerto Rico, we went through a risk management process where we downgraded all the Puerto Rico credits. I mean, and you look at our process, when you downgrade something to below investment grade, you look at the probability and severity of the fall for reach individual credit. These probably and severity factors are based on a number of factors. We look at statistics that are out there in the market, we look at rating agency statistics, and we evaluate that information. And as Dominic said, it's very important to look at the willingness of that issuer to pay his obligation. And with respect to all municipal credits and all credits, we look at new information and we go through a robust reserving process where we evaluate and we come up with, it's not an exact science, we come up with a probability weight of what we think is ultimately going to happen. I mean, liquidity is not as if we missed it, but we were looking at information that we thought was appropriate. Ultimately, the estimate was -- I will not say it was not incorrect, it just -- we got a new information that shown that we were not correct at the time. So that's how we look at this and we continue to evaluate it. And we look at this available data to come up with our reserving process. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: All right. Just 2 follow ups then. I'm just being -- trying to understand and being a little bit double basket. So on Puerto Rico, what changed this quarter versus last quarter that prompted the downgrade now versus a quarter or 2 ago? It doesn't seem like too many things are different other than a lot of positive talking out of the government. And on Detroit, how do you gauge the probabilities when kind of all the old guidelines are thrown out of the window by officials who don't seem to really care about the full faith that's supposed to be behind Geos?

Well, with Puerto Rico, we looked at what all rating agencies were putting them on watch. Once -- I think with S&P, Moody's and Fitch, all put them on watch, we thought it was a likelihood that they are going to be downgraded. So we looked at that analysis and we looked at our exposures. And we felt it was necessary, as we do in our risk management committee meetings, to evaluate the likelihood that they should be below investment grade. And because they put them on watch and because they were -- we believe that one was going to eventually downgrade them, it does affect, it could affect their access to the capital markets. If some issuer has -- will have a problem accessing the capital markets based upon all you've read in Puerto Rico, we think most of those credit deserve to have a below investment grade credit, below investment grade rating. So that's what happened this quarter which caused us to downgrade Puerto Rico's credits. And if...

Geoff, so you said what would we change in the quarter, obviously all 3 rating agencies put you on negative outlook or negative watch was one of the key factors. And yet to be very honest with you, it was still a high level of discussion in the company for us to make a move. And one of the things that led us, believe it or not, to further evaluate it was S&P's was the last one to move. And we had all 3 rating agencies then put them on a negative watch, we believe the impact that would have on their ability to access the market if they chose to do so, would create a bigger structural balance because of higher costs of financing so. That was, for us, the big kick. And we're probably still trying to hold this, that investment grade as we looked at the quarter and the quarterly results trying to prepare the final year end and 10-K, as you are well aware, what kind of production that is for any company in light of the everything you got to put in these things. So it's really a close call. But at last I'm trying to strong camel’s back was S&P on the Friday as we are looking to finalize the result that also that put them on negative watch list that concluded that there was the high probability to downgrade. If downgraded would -- definitely increase at a minimum across the financing therefore, we really had to take a hard look at the credit and make the determination we did. In Detroit's case, I can tell you we're going to get paid 100%. That's about it, got much basis is that plan of adjustment that we just filed last week. This thing will ultimately be determined in the courts. We're very comfortable with our position. Vis-à-vis how we view our protections that are provided within those specifics as documents that support the financials including the City Council's vote and authorization of bonds -- the citizens both and approval. The fact that some of the projects that were financed with those bond offerings actually doubled the ARPUs in and now they claim that's not even an asset of the city. I think they've not done this the right way, as I said aren't look at the moral and ethical behavior of these people is absolutely deplorable. And we're very confident that as these things played down the courts, there will be some justice served and things will be righted as they should be.

Our next question comes from Brian Meredith of UBS.

A couple of questions for you here, Dominic. The first. I'm just curious. When you go through a restructuring like you did with Jefferson County and Harrisburg and wrap some debt, where the terms that, debt look like? Is that any different than you typically do? Is it -- do you get more money there? Do you have any other protections that you get?

Each of them are kind of unique. You use the view that really took very divergent payouts. I will tell you that the flavor of the day appears to be and it kind of came out of the stocks and we think it ultimately be included in a lot of other restructurings that they're necessary. Is that you want to taking some fixed and absolute payment of some reasonable value against the obligation, and there's typically some contingency payments that really looks to the future development and expansion of the revenue base of the specific municipality. So you think about the old-fashioned magazine got the equity in the company. In municipal bankruptcy, you don't have an equity opportunity here, but you do can -- you can structure contingent type securities that participate in the recovering world of the specific municipalities, Stockton is the perfect example of that. Jeff Co, these are just senior sewer warrants that we would've insured at every day of the week, every month of the year because they were really highly preferred, highly structured, based on the new rate structure of [indiscernible] for the bankruptcy. These things had great cash flow protection. And yet, they needed us to affect that solutions which, once again, validated the product, validated the Assured Guaranty's value into the marketplace. So Jefferson County is very different than Stockton, very different than Harrisburg. Harrisburg has the same type of contingency plan and in this case it's on a specific asset, the parking garages versus stockings case, it's really on the entire city revenue source. So seeing other start to take a flavor of kind of a quasi-equity type participation. But what you're providing, you're providing some relief in the current period to allowing the opportunity to restructure and make some investments to grow, and then you participate in the growth going down into the future.

And just to be clear. With Jefferson County, we provided significant amount of savings with that issuance in wrapping a de-levered sewer authority that we're very comfortable with the credit and provide savings and get paid a very nice premium. So we were very pleased with that execution.

Got it. And then a follow up. Looking at kind of what's going on in Detroit right now, and is there anything that you could do or are thinking about or contemplating doing with your contract wording to maybe alleviate a situation like that occurring again?

Yes. We like the contract so we'll see how this plays out in court. And I mean thank God, when you get to the senior levels of court they tend to read the documents. And when you look at our documents and how they specifically state the facts, will only be used to repay the debt that the taxable city council and voter-approved and only specifically to repay the debt. Yes, can you make the word entirely, I guess we can make them all put their hands on their chest. But they don't believe in pledges. I'm not really sure they get those anything, but of course we'll look at, as this things plays out, whether it's going to be in -- we try to learn from every credit situation there is. Obviously, we're learning a lot about pension obligation bonds as you can well appreciate no pun intended. So we look at that as an ongoing part of how we view the underwriting process that Stephen Donnarumma who's the chief underwriter of the company and this year they went through a major revision of limits, kind of aggregate exposure. We redefined what businesses, where we looked to insure. So we constantly upgrade and if we think that there's an ability to upgrade the contract, we will definitely research and make those changes as we see fit.

Great. And then last question. Any update on any progress with Crédit Suisse?

We haven't heard anything yet. We had a really good year in the rep and warranties space, I account several different settlements of either whole or part of transactions with several different providers. You can see there's a lot more press now. They seem to be in a rather large settlement right now, if I remember reading the other day about them. So when they turn to us, it's going to be very expensive for them, the longer they wait the more expensive it's going to become. We have the luxury of being able to wait, I think we believe the case will go to trial somewhere in '15. So, we're more than happy to play.

[Operator Instructions] And our next question comes from Larry Vitale of Moore Capital.

I just wanted to go into a little bit of detail on the way the reserves ceded to Bermuda and the posting of collateral works. If so, can you give us some flavor or quantify the amount of losses ceded to Bermuda? And how much collateral you had to post, my understanding is it's dollar for dollar. And if this would have taken up at least some of the cash that might have gone to share repurchase in Q4?

Well, I think, Larry, as we've said, everything that we cede to Bermuda, not just us, but anybody that's it a third party that's ceded to AG Re, you have to collateralize the GPR losses in contingency reserve. We, as I said in my script, we have stated that we made great efforts this year with our regulators to recapture for our own accounting, contingent reserve that was ceded to AG Re. And that freed up about $160 million in 2013. We do have a scheduled release in 2014 based on a regulatory approval that will hopefully would be another $240 million. So that's how that process works.

Hopefully, $240 million. Rob, what could make it less than that?

Well, you know, it's always at their discretion. So they have to evaluate AG Re's credit. They have agreed to the schedule, but they've also agreed -- they've also asked to have it reviewed before they give us final approval. So they'll evaluate AG Re as a credit. And they'll let us know by July. Well in addition to which I just want to make sure, it's clear that we don’t -- with this agreement with the regulators, we will not be posting additional contingency reserves on ceded business from our affiliates to AG Re as well. So the problem won't exacerbate.

There's 3 things, Larry, you have to consider when you look at the under covered assets at AG Re. So Rob's right, we are reinsured that we have the firm reserves, EPR and contingency reserves except now for the internal, but you have both internal reinsurance and external reinsurance. So in the fourth quarter, we had advised on very large reserve related to our friends in Detroit by a ceding company that we had a both dollar for dollar and it was significant and I don't know if we've ever released the number but a large number. Number two, in addition to having the post to reserves the cushion reserve posting has conceded in assets from vulnerable securities to the effect the valuation of the portfolio goes down because of the rising interest rates you have to top up the shortfall. So you have ceded reserves, both internal and external that goes dollar for dollar, and in the fourth quarter we got a large senior reserve. Number two, you don't have to top off the value of those collateralized assets based on any change in interest rates and therefore the carrying value in the securities. And as you're seeing, we can't go too far because the ability to recover money at AG Re is not something that's available to us day-to-day. Now, we do and have put in plans to make the capital a lot more flexible. So the U.K. tax residency will be big, and allowing us once we go through the cure period of time, whatever you want to call it to start to move funds out of the U.S. holding companies, and therefore, it gives us protection that if we do have a shortfall somewhere we can easily make it up based on the significant rise in interest rates or a new advice posting of a loss reserve. As Rob said, we do the schedule release further in 2014 of contingency reserves from both the state of New York and the state of Maryland, and that'll add significantly to free assets. So as we look down the pipe, it appears to be we have a lot more flexibility and freedom in terms of how we can apply excess funds that are in the current structure in the company.

And Larry, we would like, as Dominic just noted, we would like to keep a cushion at AG Re. And we have $238 million at year end free at AG Re. And this U.K. tax residency is going to allow us to use other funds and not consistently hit a subsidiary which, I think, is a very good rating agency back as well. We don't want to constantly hit AG Re to be the sole source of our equity and share repurchase.

Okay. So to be clear the $240 million that you're hoping to be released in July or by July, is in addition to the $238 million at AG Re, the $228 million at the U.S. Holdcos and the $33 million at AGL, is that correct?

That's correct.

Okay. And then last question. Your willingness and ability to use these funds to repurchase your shares at deep discounts to however you want to look at it, adjusted book or operating book, is a timing issue and in no way reflects a change in your attitude as to your willingness to do so, or your view of the attractiveness of your shares at these prices?

I will continue to restate one of our critical strategic objectives is capital management in 2014. Nothing has changed that strategic view to date nor do I see as I look out for the future.

Our next question is a follow-up question from Mr. Geoffrey Dunn of Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Dominic, I wanted to ask you. In terms of a mid- to long-term capital management effort, I've asked you about the prospect the special dividend in the past. I'm curious how do you think maybe the 2 to 3-year capital management plan might have been altered by the downgrade of Puerto Rico and now the moving of your BIG list to close to 5% at par now?

Well, it's been really BIG for us is really cautionary. It's how we want to surveil the credits more than anything else, we have a lot of things on BIG that never resolved in an ultimate economic loss so it's more of a management tool than anything else. And it's obviously something that we do track and our surveillance team is very religious in providing detail and discussion almost on a full weekly basis if you are Detroit or Puerto Rico, maybe monthly-ish some other things. We're going to do less meetings on RMBS and I'm happy to report. So for us, it really is a placeholder as opposed to an economic. So it hasn't changed at all my view or attitude as to the amount and the timing of share repurchases. So I don't think it has a long-term implication. Hopefully, that Puerto Rico is going to achieve this financing. We think that will relieve significant amount of pressures, whether it'll have everybody take a relook at ratings, we will take a relook at our own internal ratings as to how we manage it. But as I said our below investment grade is more like a placeholder than anything else for us to manage it internally within the company. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: And do you think that, that attitude holds for the regulators and how they might view a request?

We don't believe as we look at the amount and the volume of share repurchasing, right. We don't believe we have the need at this point in time to access special dividends. We think there's going to be enough available funds flowing through the operating companies. And now with the timing of the structure that we've been able to achieve in terms of the U.K. residency, we should be able to move enough funds on a reasonable basis to rather to keep a good momentum around share repurchasing without the need for special dividend. As you see, we're looking to potentially do some raising of debt, which will further release the pressure on special dividends. I think we got a lot of tools in the toolbox before you get a special dividend. Obviously, we're not concerned by that. If the need arises we have no issue going to the regulators and asking for that, we think. Just with the sizes of the portfolio runoff and the amount of capital we're still holding relative to a lot of smaller portfolio, I think there's more than enough justification. But at this point in time, Geoff, we think we have enough throughput from the operating subsidiary to continue to fund a rather, reasonably aggressive share repurchase program.

This concludes our question-and-answer session. I would now like to now turn the conference back over to Mr. Tucker 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.