Assured Guaranty Ltd. (AGO) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Assured Guaranty Third Quarter 2017 Earnings Conference Call. All participants will in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Robert Tucker, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and thank you all for joining Assured Guaranty for our 2017 third quarter financial results conference call. Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you are listening to the replay of this call, or if you are reading the transcript of the call, please note that our statements made today and may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures, and our current financial supplement, and equity investor presentation, which are on our website at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. [Operator Instructions] I will now turn the call over to Dominic.

Thank you, Robert, and welcome to everyone joining today’s call. In the third quarter of 2017 Assured Guaranty continued to execute successfully our strategic plan of market leadership in the municipal bond industry, developing new opportunities in international infrastructure finance, executing our alternative strategies in the recapture of reinsurance programs and effective capital management, all resulting in per share records for shareholders equity, non-GAAP operating shareholders equity and non-GAAP adjusted book value. This lead to further advance our capital management program, our Board of Directors authorized an additional $300 million of share repurchases. From 2013 through November 2 of 2017, we have repurchased 41% of the shares outstanding for a total of $2.2 billion while maintaining our strong claims paying resources. Across the entire range of our financial guarantee business, year-to-date, the present value of new business production or PVP totaled $212 million through September 30, up 64% from the nine months of last year. Focusing on the U.S. public finance market, for the first nine months, new issue volume lag last year’s volume by 16%, but the insured market declined by only 9%, resulting in a 16% increase in Assured Guaranty's penetration of the total market. Year-to-date, we ensured $9.8 billion of primary market pars sold through September. We also increased our year-to-date market share to 58% of insurer pars sold impart by providing $100 million or more of our insurance of on each of 14 new issues totaling approximately $1.9 billion of insurer pars. For all of our primary and secondary market U.S. public finance transactions closed from January through September, PVP increased by approximately 54%. Turning to the international infrastructure market, we continue to have good market traction with investors and strong credibility in the market generally. In the medium and longer-term, we expect infrastructure to be a core part of UK government backed economic growth and we believe Brexit more likely than not will be neutral or even positive for the flows of infrastructure opportunities in the UK. Near-term, we spoke to find refinancing opportunities in the P-3 sector given continued low rates and the proof we have shown the market of our value proposition. We also continue to be active in the secondary market where we closed transactions in the third quarter involving bonds of a UK [indiscernible] company and the Euro issuance for our European Utility. As we move forward on diversifying our new business production, we also continue to pursue our alternatives strategies. These fall into the probably main categories. Lost mitigation, capital management, acquisitions of legacy Monolines of their insurer portfolios, investments in asset management firms that benefit from our core competencies and credit experience and have risk profiles in line with ours and then commutations where we resume financial guaranteed business we previously seeded to other affiliated reinsurers. Commutations not only increase our premium reserve, but also may result in commutation gains. In September, we reassumed the entire book of business we assumed to a major reinsurer and a portion of our acceptance to another reinsurer. These re-assumptions totaled $3.5 billion of par and resulted in a $255 million addition to pre-tax income in the third quarter and an addition of $62 million through to [unearned] (Ph) premiums. Also in September, we completed our first investment in the asset management field purchasing a minority interest in Wasmer, Schroeder & Company, a highly regarded independent investment advisory firm that specializes in fixed income management. WSC focuses on municipal and taxable separately managed accounts for high net worth individuals, wealth management groups and institutions. It has approximately $8 billion under management and a national presence with clients at all 50 states. This alliance is a great strategic fit that capitalizes on the core competencies of both companies especially in connection with our public finance business where both companies can get credit analysis and maintain strong industry relationships. You should rate both companies profile among retail investors. We expect a support to continue the growth of WSC as it seek acquisitions of other fixed income as it may investment managers. We have also committed a $100 million - investment account that will be managed by WSC. We continue to evaluate additional opportunities in the asset management arena that meet our criteria of synergy, attractive ROI and comparable risk profiles. As for the legacy Monolines, a member of [indiscernible] guaranty portfolios with significant unearned premiums remain available and we believe we are the most likely party to acquire or assume one or more of these portfolios. We also continue to execute our capital management program, which includes share repurchases as well as appropriate allocations of capital at the subsidiary level. Our MAC subsidiary insured portfolios amortized materially over the last number of years. And to rebalance assets during the third quarter, MAC repurchased $250 million of its own shares from its holding company which is jointly owned by AGM and AGC. The cash from the repurchase was distributed to AGM and AGC in proportion to their ownership shares. This provides additional liquidity for AGM and AGC to upstream dividends. Speaking of share repurchases, as of yesterday we have bought back 11.3 million shares for a total of $451 million this year and expect to reach $500 million or more by the end of year. One thing the third quarter helped spotlight was the potential risk to uninsured bond holders from natural disasters. While on the other hand, if you own bonds we insured, your bonds have maintained strong valuation and you know with certainty that you are going to receive your interest on principle in a timely manner. Timing again we have seen cases where bonds we insured held their trading value while nearly identical uninsured bond valuation declined significantly. This divergence was already evident in Puerto Rico bonds and was even more pronounced after Hurricane Maria. To be clear Assured Guaranty does not take property or casualty risk. PMC insurers will be injecting money into the Hurricane affected areas as those types of claims were made as well FEMA and other federal agencies. However, Assured Guaranty does have to consider the short and long-term economic impacts of natural disasters on municipalities whose bonds we insure. In the past, we have paid hurricane-related claims that provided liquidity when, for example, technical or communication obstacles prevented a municipality from funding a payment. Those claims were ultimately reimbursed by the obligors. To-date, we have now claims, we have had no claims in Florida, Texas or California based on their natural catastrophes, which has historically been our experience. Puerto Rico, of course, is a special case. A number of its obligors were already in default when Hurricane Irma and Maria hit. And some obligors are bankruptcy right perfection under federal III of PROMESA. Given this offering Puerto Ricans have endured and continued to endure restoring water and power among other things are the most immediate and [indiscernible] concerns, and we support all recovery efforts. While we continue to be confident that all of our various legal rights are valid and forcible gives Puerto Rico its Oversight Board instead of its public corporations, we have withdrawn two of our law suits for now. One challenge to use of the Oversight for its fiscal plan and the other challenge is the failure of PREPA, the Electric Power Authority to imply pledged revenue to the payment of its bonds. Although we expect to be successful in these cases, there is no reason for any party to extend resources litigating them until the Oversight Board indicates its new plans in the aftermath of the storm and services restored to all customers of PREPA. It is encouraging that the federal government has approved a $336.5 billion disaster relief package that along with the help for other locales includes significant aid for Puerto Rico. We do have concerns about the potential for inappropriate divergence of that aid and call in all responsible parties to maintain strong controls. One example of this relates to PREPA, we and other creditors have been seeking to exercise our legal rights to have a receiver appointed for PREPA. One was substantial experience managing in electric utilities. The controversy over the wipe this contract. Only reinforces the need for independent strong professional management. The Oversight Board has now essentially acknowledged this need by asking judge [indiscernible] to authorize a revitalization coordinator to quote assume the powers of a Chief Executive Officer at PREPA. While at this point, we are still reviewing the experience of the person they have selected. The fact that they are now trying to install an independent manager show that they have recognized the importance of the point we have been making, which is the one that we have the legal right to require and were denied. The new conditions in Puerto Rico gives the Oversight Board an opportunity to correct its legal and economic mistakes. The fiscal plans that’s certified must be reevaluated not only in light of the hurricane damage, but also in light of the plans barrier to imply with [indiscernible] and the laws of constitutions of the United States of Puerto Rico. Especially at this critical juncture, the island should not be bogged down unless - in expect of litigation in which it is unlikely to prevail. Make no mistake, either access to the capital markets nor of sufficient private investment in Puerto Rico is going to be possible while the Board appoints to establish fiscal responsibility in the island supports a fiscal plan that shows [limited guard] (Ph) for creditors rights. Additionally many Puerto Rican bonds are held by individual retail investors in the 50 states of Puerto Rico either directly or through mutual funds. And treating them unfairly could have broad repercussions in the $3.8 trillion municipal bond market that would raise the cost of all U.S. municipality’s future borrowing. It is important to understand that when municipalities talking about not meeting obligation to bond holders. The people who will be impacted are predominantly U.S. citizens who are also U.S. tax payers and as importantly U.S. voters. Some of our elected officials and the nominees to control Boards and other group seem to ignore this important fact. The [indiscernible] awarded the loss intent by disregarding the lawful priorities in lien set forth in the Puerto Rico constitution. Turning to differentiated, essential and non-essential services and elevating virtually all non-debt spending above debt service. Relying on this type of fiscal plan structure is a sure way to eliminate the capital market access that is one of the primary purposes to the Oversight Board under [indiscernible]. Puerto Rico Oversight Board should take this opportunity to work collaboratively with creditors to reach consensual agreement. One can argue that the priorities in liens have been respected and the PREPA restructuring support agreement has been approved and an experienced receiver putting to manage pressure they would have had access to the capital markets funds to address some of the emergency recovery efforts and we might not have 70% of Puerto Rico population still without power. Keep in mind that our loss mitigation efforts have been highly effective over the years. We helped to have solutions in distress municipalities that limited our losses while allowing us to assist issuers in returning to the capital markets. And where the outcome for bond holders were far more favorable than borrowers initial proposals would indicate. Given our legal and contractual right, we believe the outcome in Puerto Rico is likely to follow this pattern. Another credits that has been in use is [Harfer] (Ph) connection, which has a structural disadvantage because of the state capital, half of the property is hard for is tax-exempt. Today, recently enacted a budget of continuing assistance for hardware where we’re optimistic that the state and the city will work together to address the city’s long-term financial challenges. We are prepared to work constructively with the city and other stakeholders to up return Harfer to sustainable financial footings. We prove that the value of our product and the resilience of our enterprise through the most difficult economic dead case since the 1930. Now with domestic and global conditions improving, interest rates rising and pent up demand for infrastructure development almost everywhere, we expect steady, long-term performance from our core business. At the same time, we have flexibility to make accretive acquisitions by improving profitable investment and to distributor excess capital to our shareholders. Our success will be based as always on our proven profitable business model and our demonstrated abilities to form a realistic vision of the future possibility, to define strategies for achieving our goals and to execute those strategies effectively. This is how for three decades, we had built value for our policy holders and shareholders and entirely and its highly [indiscernible] to greater value in the future. Before I end, I want to acknowledge Jim Michener, who has been our General Counsel and Secretary of Assured Guaranty Limited since our IPO of 2004. Jim has chosen to leave that role at the end of the year. But I’m happy to say that he will continue to serve as my senior advisor until the end of next year. Jim has been deeply involved in every important initiative we have undertaken as a public company. And I thank him sincerely for doing so much to help make us the leading financial guarantor during his years as General Counsel. Succession planning is something we take very seriously and we are fortunate to have Ling Chow who was working alongside Jim for many years and has a superbly led the legal operations of our U.S. subsidiaries as U.S. General Counsel, is on hand to take on the additional responsibilities of Corporate General Counsel. After 15 years at Assured Guaranty, Ling knows our business and knows the job. And I’m proud to recognize Ling in at her new role. I will now turn the call over to Rob.

Thank you, Dominic, and good morning to everyone on the call. Operating income was $156 million for third quarter of 2017 compared with $497 million for the third quarter of 2016. The results in both periods include significant gains attributable to our strategic initiatives. This quarter we commuted previously seed portfolios resulting in the re-assumption of $3.5 billion and $62 million of unearned premium revenue, generating pre-tax commutation gain of $255 million or $165 million after-tax. Third quarter of 2016 included an after-tax gain of $293 million related to the acquisition of CIFG Holdings. Excluding these amounts the decrease in operating income is attributable to higher loss expense in the U.S. public finance sector and lower earned premiums. Economic loss development during the third quarter of 2017 was a loss of $204 million primarily due to Puerto Rico. This was offset impart by a benefit in U.S. RMBS resulting from improvement in performance of the underline collateral. The increases in risk free rates use the discount losses resulted in a benefit of $6 million, which is also included in economic loss development. Net earned premium and credit-derivate revenues were $194 million in the third quarter of 2017 compared with $249 million in the third quarter of 2016. The decrease was due primarily to the lower refunding and terminations which were $87 million in the third quarter of 2017 compared with $126 million in the third quarter of 2016. The third quarter of 2017 had an effective tax rate of 34% compared with 3% for the third quarter of 2016. The relatively high rate in 2017 was due to the commutation gains in the U.S. and loss expense in the Bermuda companies. The 2016 tax rate was relatively low due primarily the non-taxable [indiscernible] purchase gain from the CIFG acquisition. During the third quarter of 2017, we purchased 1.87 million shares for $80 million at an average price of $43.29 per share. This brings our total share repurchases to over 79 million shares since the beginning of 2013 or 41% of our outstanding shares. The cumulative impact of these repurchases have contributed $11.48 per share to operating shoulders equity and over $19 to adjusted book value per share. And as Dominic mentioned the Board of Director authorized an additional $300 million in common share repurchases bringing our current remaining authorization to $390 million. As of October 31st, 2017 we had cash and investments available for liquidity needs and capital management activity of $47 million in the Bermuda Holding Company and we also had a $114 million at the U.S. holding companies. A successful execution of commutations and continued share repurchases has led to new records for non-GAAP operating shareholders equity per share and adjusted book value per share of $55.87 and $74.78 respectively. I will now turn the call over to our operator to give the instructions for the Q&A period. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And today’s first question comes from Josh Stirling of Wall Street. Please go ahead.

Hey good morning, thanks so much for taking the question and I appreciate you guys for hosting the call. So look I would love to - obviously a lot of us are looking at this law in Puerto Rico thinking about is it tragic event both for the folks and the ground and obviously it’s sort of a challenging event for folks like you and all of the bondholders. You mentioned I think one of the critical moving pieces and I would love to get your further thoughts on it, which was the new fiscal plan being put out by the FONB. You know there is lots of pieces in the first one and I know the creditor of the community was say unhappy about like low revenue expectations and things like that as well as leans and sort of lack of preferences that was given to you, central services and everything else. What are the big moving pieces that you guys are looking for them to potentially changes that you are going to hopefully ask them to make when you go to their public statements and then from our perspective what are the big moving pieces of things that you are hoping that will be included in this budget that we should be watching for as we are trying to keep track of this evolving story. Thank you.

Thanks for the questions. So moving pieces we’re looking towards, so obviously we have got a problem with the fiscal plan from the first go round of the draft and then the approval by the Control Board and that we believe it violates [indiscernible] because it also respects the constitutional priorities and contractual leans. So obviously first and foremost we expect to see something that corrects values to those issues specifically than the new plan. Number two as you are well aware the constitution provides the first dollar of government funds, goes to the GO bondholders once again that’s been a violation and although there is going to be an argument as to whether essential services have priority or not it’s not clear within the constitution there has been no segregation of essential and non-essential services within the fiscal plan as well. So first and foremost, they are going have to correct that, or if not we’re going to bogged down the litigation that I believe in the long-term really does not assist Puerto Rico whatsoever its goal to getting financial stability, growing its economy, establishing [indiscernible] fiscal base to be able to continue with development in advancement. So number one. Number two when we expect, as we understand Puerto Rico and we know pretty well, Puerto Rico acquired a significant amount of investment who is going to continue to provide a environment to grow an economy until it correct it’s fiscal policies and procedures. Because a lot of that infrastructure has been damaged significantly. We think it is the unique opportunity that that infrastructure now can be its growth and reconstruction will be supported by not only internal funds and now external funds and specifically through the proceeds of normal insurance and commercial insurance as well aid provided by the U.S. government. So although we think in a short-term, the fiscal plan should and will be challenged on a revenue basis. Anything to growth trajectory coming out of the recovery and restoration should be significantly better than what it had been in a plan that would rely on specifically internal funding only to allow for that improvement in development of both infrastructure and economy. So in the short-term, we think that will be challenged, in the longer term we think it’s better, however in any case there has to be a recognition of our legal rights or write back to court and we believe strongly in our legal rights in Puerto Rico once it continue to pursue basically in a legal path and they will have that problem to deal with for a very long period time, which we don’t think is beneficial for them.

That’s helpful. If I could just ask one other question and just to sort of just to …

Taking the second.

I’m sorry.

You are taking the second question. We only do one per party.

Oh, there you go. That’s fine. I’m just wondering if you guys can take a moment to walk us through sort of from Layman’s perspective and outsiders perspective, how we should think about your loss accounting? Take Puerto Rico for example, obviously financial guarantee accounting is not mark-to-market. And so, there is this big market implied losses in the bond market, you guys approach is as I understand is you use scenarios to figure out ultimately what the amount is that you then put into your expected losses in the future, which then roll through your accounting. I’m not hoping in respect to everybody in the call. I don’t want to go through the details that we know predict, but I do think it will be super helpful if you guys could willing to help us understand the range of the scenarios you are looking at? And how should we think about conceptually your current reserves as they relate to sort of the things that are actually evolving on the Island? Thank you.

Okay well we will try to keep everyone awake on the call without having to do a deep dive to accounting policy, which I will tell you is incredibly complex and quite boring. However, let’s address your first concern, which it appears, there has always been this issue relative to what is the economic ultimate underlying circumstance, including potential losses versus what is the spot price in the market. And the easiest example I can give you is, through the great recession as we had significant exposures to residential mortgage backed securities, those securities sells in the market for anywhere between $0.25 to $0.35. And the true economic value was substantially ahead of that. We took huge advantage of buying back those securities, understanding what the true economic valuation was, which is kind of how we try to get to our reserve. I will let our CFO who is the reserve, who was the reserve wizard of time to give you a little bit more detailed explanation, but you can’t look at a spot price against what is an economic impairment, because obviously it ignores a whole lot of other things. There is liquidity demand, [indiscernible] stock price, there is kind of market emotion, there is balancing of positions, for every seller there is a buyer. At the end of the day, we have to evaluate what is it that we’re looking at including the timing of any potential claim payments, legal ramifications, other client [indiscernible] impact of with that specific acts that are or exposure that’s with the company. So Rob why don’t you give them a [indiscernible].

I’m just going to - Dominic will explain the difference between the market price versus a expected loss under the accounting guidance under FAS 163 and will require under that FASB to actually look at all possible scenarios and probability resource scenario and we look at events that occur within the quarter and adjust those scenarios based upon those events. So if there is some negative event that could affect timing of certain cash flows or there is a negative event that can affect bench - hair cut on certain credits then we will adjust accordingly and increase reserve. If we see an event in a quarter that actually is a positive event then you will see a benefit coming from. We have stuck to this guidance that’s exactly what we’re supposed to do. All of that has been discounted back at the risk free rate that’s required on the GAAP. So that in a nutshell what we do and we have been sticking to that and obviously if there was no events and no change, you would see no change in months.

Okay, thank you for walking me through that. Good luck and appreciate taking the question.

Thanks.

And our next question today comes from [indiscernible] a private investor. Please go ahead.

Good morning gentlemen. Handful of questions, I will keep them on point. Can you explain to us the current situation as regards the rating agencies and what if any dialogues you have had either proactively or in response to them about any potential for credit review, again not implying that they will necessarily take a dim view, but in light of the extraordinary change in circumstances how they [indiscernible] are guarantee at this time?

Well let me give two things, one when we talk about extraordinary change, I think it’s not an extraordinary change. If you look at the fiscal plan and what has been the behavior of the Puerto Rican government illegally as it is, they were paying us absolutely no current debt service. So the fact that there is a hurricane, that is causing a tremendous amount of reconstruction in recovery efforts. It really doesn’t change very much our view with the expected outcome of Puerto Rico over the next six to 12 months. And as I said, I look at it positively in that you are going to have a better distribution network for the electric utilities than you had in the past. You are going to have certain parts of the infrastructure being rebuilt that should aid in further development of both economic opportunities where other asset investments within the country. So I looked it as some horrific situation that we’re now faced with, at the end of the day this control Board and its government is not going to heal and act illegally and until we get our absolute day in court, I think we will change in the behavior. So from that point of view, it’s not much of an issue for us and therefore we were fully prepared and as Rob said we had scenario analysis that we look at these scenarios as possibility. However we’re still firmly convinced what our legal rights are and at the end of the day I believe the court whether it be the initial court, the public court or supreme court is going to say yes the constitution matter of both the United States of Puerto Rico and your legal agreements matter and like anybody else that have the contract and the legal right supported by constitution that is due funds will get those funds repaid under whatever timeframe is best served. Remember, we have perpetual lean on the net revenues of the electric utility. Okay, let’s play, how far is that going to go. So at the end of the day, I don’t see this thing horrifically whatsoever. Number two, I think the rating agencies have been very public about their view of what the potential impacts are on the Monolines, I think, specifically, Assured Guaranty, which always said, they don’t believe this will have any impact whatsoever on Assured Guaranty’s ratings, financial strength, et cetera, in the market. And if you look at our excess capital position, our liquidity, our earnings stream also the book of business, for us this is an issue that we’re not happy with, we feel that we have been mistreated basically, illegally and therefore we’re going to exercise our right [indiscernible] for Assured Guaranty where in the financial position we are that we have more than the capabilities to be able to manage this throughout the entire process and until we get our real day in the court.

Okay. Another follow-up more operationally, there has been talk in the marketplace again given the low, low prices on many of the bonds of debt for equity solutions. I know we’re extremely early in the game, in the process, but do is there the possibility that has private capital comes into the marketplace for reconstruction efforts above and beyond PMC funds PMF funds is that something that you might be involved with or just too early in the process to have a meaningful outlook on that specific view?

Well, I think, maybe a little bit too early in the process. But more importantly we have to understand and why wasn’t there immediate emergency funds available for the electric utilities, why isn’t there are other funds being offered? So none of litigation that has been basically filed here is going to tie up every asset, every dollar, every activity of the government. How do you think that you can go on raise, public funds on that basis? [indiscernible] I love the conversation privatizing electric utilities. Okay, how does that work? With our litigation sitting here, where we would step into that shoe has the real risk guided. Some point down the road and they are going to lose every revenue of that facility that will, say just privatize, does not privatize as we are on the right for that revenue and we don’t go away. So when you talk about these type of things, okay, I’m more than happy to consider anything that moves the ball forward, but also respects our rights. So once again, the litigation that they have now basically brought it down upon them, the amount of money, the amount of cases that are going to have to be here, how long that’s going to tap the government. Before I can say a potential agreement is preferred, now I’m going to tell you from a Puerto Rico point of view, is that most required. Because how do they go forward with all the litigation [indiscernible]. Who could possibly [indiscernible] provide anything, if they have any confidence or have any meaning when the litigation is ultimately [indiscernible] result. Number two, who would trust this government to provide any funding whatsoever. If you willing to walk with your constitution, the laws and the legal agreements that you signed and the promises you made, I’m sorry, I don’t go into that kind of environment with an open checkbook.

Good point. And then kind of the final question Rob that I have relating more to financial and capital management. You lay out a very positive outlook despite gloomy Puerto Rican headlines of how strong your businesses are especially your international infrastructure, the continued opportunities to regain the commutation and possibly acquisition of the portfolio of the business that Assured to have a very bright future. My question is this, industrial market has obviously reacted we all know why whether it’s an overreaction or a proper reaction, either here nor there but clearly stock is significantly lower. I’m just wondering given your excess capital and positive outlook would you consider adjusting the method of your buyback and by that I simply mean would you look to maybe do a one-off auction and rather than buying on a kind of daily basis as you have been throughout the last four years, simply make the determination. You know what we’re not necessarily world’s greatest stock pickers, but at less than 50% of adjusted book value which is where the shares currently trade. You know what, we would like to try to buy a couple of 100 million or more knowing that on an ongoing basis you will be able to replenish a buyback authority. I just wonder if you could comment whether that’s a possible strategy to take advantage of perhaps the markets over reaction to the ultimate disposition of what Puerto Rico will be?

Well I think you kind of hit the nail on the head, right. There is a huge contradiction, but at the same time we’re having the best growth in production and we have had in many, many years. So we’re able to basically have the market accept our guaranty across all the various diversified markets that we serve. To the highest extent we had in a numbers of years. And number two even [indiscernible] the activity on Puerto Rico we are still are able to execute the alternative strategy of acquiring other portfolios, commuting reinsurance but still continues to move up. [indiscernible] what is the true message of our company by the way book value and adjusted book value and in spite of that it’s the same time we have this kind of contradiction and that’s the bad thing. Well this reminds me very much of the year 2009, 2010, 2011 where we made substantial earnings, continue to build a very strong balance sheet and yet the market rewarded us with an ever decreasing stock price. You know capital management is a dynamic process that could be valuate every bit and we will continue to look at all opportunities and all contextual businesses or strategies that we can deploy. But like I said, let’s stick with the fundamental the business is growing better than it’s ever grown and its being used across all markets that we serve, we continue to execute the alternative strategies but people still willing to do these transactions even in spite of the overhang of Puerto Rico and yet what I would see higher stock price absolutely much like in 2010 and 2011. You know I can’t buy myself [indiscernible] as a company do anything about that, but I was going to continue to execute our strategies which we believe are getting credibly affected and [indiscernible] we have already retired 41% of the outstanding stock [indiscernible]. Show me another company that’s put the earnings [indiscernible] we have maintained the financial strength and we have our claims getting resources and still manage [indiscernible] 41% of the outstanding shares. Either we have days that you know we kind of [indiscernible] putting up, but to the end there we have a strategy where we will continue to evaluate that strategy and we will execute that strategy in what we believe is best interest of our shareholders.

Thank you. [Operator Instructions]. Today’s next question comes from Peter Josse of Barclays. Please go ahead.

Hi, good morning, guys. As you think about M&A options, where do you see more opportunity? Is it just to further consolidates the Monolines space or opportunities more, say on like the investment management sides and more to the Wasmer acquisition that you recently announced?

I think the opportunities on both sides and that is a very interesting place for us to be, obviously, on the Monoline space we continue to make further investments in that, we continue to have success in executing these transactions. Obviously we have always talked about consolidating the industry through [indiscernible] these very valuable portfolios that are out there. We have [indiscernible] in the factory half of them, we’re now assuming portfolios of some of the other lease attempting to. That’s been a really valuable to us and we will continue to do that. And as you have see in the past, they have been incredibly beneficial both on a capital basis and on earnings basis. However the same [indiscernible] much like Wasmer, although Wasmer is really need to continue to expand our relationships and our presence in the retail market which has become a bigger buyer of the municipal securities in the past and at the market that we now focus on very specifically. We still want to put diversification business into the company that still exercises our same risk profile, operates among our core competencies and provide once again a positive accretion in terms of the benefit of the financial transaction that we’re planning. We believe that also increases value, provides a fee based income as appose to risk capital, utilizing very little capital, great capital for us down the road. And that is also a form of opportunity we continue to examine companies in that space, we continue to do due-diligence, investment dialogues, hopefully we will be able to execute further in both strategies throughout the remainder of this year and next year.

Okay. Thank you very much.

You are welcome.

And our next question today comes from Geoffrey Dunn of Dowling & Partners. Please go ahead.

Thanks. Good morning. I know you only have 24 hours. But can you give your initial thoughts on this tax reform proposal and what it might mean as currently written for your company and the Bermuda platform?

Obviously the first thing on the Bermuda platform really about whether we go to a territorial tax system or not. I’m not really seeing anything that addresses that, Geoff, other than the reduction of the rates. And remember, if this is going to reconciliation, you have to be concerned as to the permanency of it. And therefore if you make a decision today that you cannot reverse and this is reversible, you have to think about on that terms. In terms of a current proposal that I have looked at, it really should have a positive effect if you are really think about on the municipal business, you get losing alternative minimum tax, you are leaving the upper tax rate in the same level, I think the demand for taxes and security should be as good if not stronger going forward. So on the corporate side, we really need to understand the impact of territorial tax, if not [indiscernible] the overall corporate tax, remember, if you look at our taxable income, we have the ability through the purchases of - our income is split, right, 50/50 between investment income and underwriting income of the premiums that we write. The investment income tax be cash amount through the investment in municipal securities. That gives a little bit benefit there. So that help us or doesn’t make huge difference [indiscernible] make a huge difference as to where we consider in a structure sure and as I said, there is a top factor that still maintains 39.6 the demand for the [indiscernible] still very strong.

The other thing that came out Geoff is the effect of reinsurance from an affiliate and that’s where we’re now looking at closely, because obviously if they are going to limit the deduction of reinsurance that you have from a U.S. company to you affiliate that would have a negative impact on how much we can see down to [indiscernible] evaluate that. But that’s what is currently we’re looking at in the plan, but you know the 20% corporate rate obviously on a company basis we have a significant amount of income from the U.S. will be very beneficial.

Right, there is a trade-off , your U.S. operations would drop and you could have an excise tax and I’m not sure whatever the alternative are, okay. The other question I have is in terms of the existing process with title-3 I think the judge offered a delay and the Commonwealth officially said, no, no don’t - give us only four weeks. Where is the process, is the process just on hold indefinitely right now or is there actually a timeline that’s still in place where the process resumes?

So what process are you talking about Geoff, mediation, litigation there is the plan which one?

I think just had to do with document submission with respect to the title-3 process.

Well I don’t think anything happens the timeframe is now for the fiscal plan to be drafted at least I guess subject to somebody’s review in December with the final view that will be voted on by the control Board in February. I think everyone is going to step back until they see what that is going to look like in response to the other former [indiscernible]. One of the other question is both that’s got to respect some level of contractual clarity,[indiscernible] I think they can have a the dramatic impact. Obviously the mediation has not been official, but there is the unofficial meetings going on in terms of trying to get to some level of consensus. This is a very complex issue and the hurricane has definitely caused the delay but as I said [indiscernible] as pessimistic or concerned about the hurricane delay as to what its effect on us is. But [indiscernible] start to put some real information out to the public and the outcome we will establish they have not really disclosed a lot and we have been complaining to the judged in the mediation that we still have no transparency by this government including what is going on today. We know they quoted a lot of cash, they are using obviously as some of that relative to the recovery efforts and we understand with the devastation at Puerto Rico has experienced that really needs a time to rebuild and get the poor citizens of that country to help with basics services. I mean I can’t imagine that it has to be like to not have power for six or seven weeks, in that case not even worked. So let’s get that [indiscernible] total recovery efforts, we as a company donated for the recovery efforts. We think that’s the thing that has to be the most important job for them and then we will get back to the [indiscernible] calling and scratching when the times comes, but at this point in time we’re waiting to the fiscal plan.

Okay. Thanks.

And our next question comes from Harry Fong of MKM Partners. Please go ahead.

Yes, good morning. Just a quick question regarding the share repurchase program. How do you intent to fund the current 400 million. I know there is some liquidity at the holding company right now and you do have additional as of right dividends from the OPCOs, but will you supplement all of that with another special dividend requested to the regulator?

Harry I think we have been very clear that the operational cash flows that are available kind of annually to dividend up, would create a buyback opportunity of around $300 million. And therefore, for us to maintain our goal of on that kind of rolling 12 month basis, to be able to affect capital by about $500 million number, we realized in a degree that we would have to request special dividends annually, as you know, we requested [indiscernible] guided we have been clearly that we would request and have requested one for this year and we expect that will be a normal part of our process in the capital management program.

Thank you.

You are welcome Harry.

And ladies and gentlemen, this concludes our question-and-answer session. I woo like to turn the call back over to the management team for any closing remarks.

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

And thank you, sir. This concludes today’s conference. We thank you all for attending today’s presentation. You may now disconnect your lines. Have a wonderful day.