Assured Guaranty Ltd. (AGO) Q1 2018 Earnings Report, Transcript and Summary

Operator Good morning. And welcome to the Assured Guaranty First Quarter 2018 Earnings Conference Call. All participants will be 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, Senior Managing Director, Investor Relations. Please go ahead, sir.

Thank you, operator. And thank you all for joining Assured Guaranty for our 2018 first 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 a replay of this call, or if you are 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 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. Assured Guaranty had a successful first quarter in 2018. Measures of Assured Guaranty’s value per share again reached record levels, including those for shareholders’ equity, non-GAAP operating shareholders’ equity and non-GAAP adjusted book value. Non-GAAP operating income was a solid $155 million. Rob will provide more detail on the call on this quarter results later in the call. Turning to production. The expected decline in overall U.S. municipal issuance materialized with PAR volume declining 29% compared with market volume in the first quarter of last year. One cause of the reduction in issuance was a dramatic decline in refunding due in part the last year's tax reform which significantly impacts advanced tax exemplary funding. Insured market volume exhibit similar results to the overall market also declined about 30% with Assured Guaranty still capturing a lion share of bond issuance guarantying 62% of insured car sold. In the quarter, we once again benefitted from institutional investors continued preference for Assured Guaranty's insurance on larger transactions. And we were selected on 10 different transactions to issue more than $50 million of PAR including three where we insured of more than $100 million of PAR. Combining our primary and secondary market business, U.S. public finance PAR sold with our insurance exceeded $2.4 billion and have now the one large structured infrastructure financing in the first quarter of 2017, our first quarter 2018 PVP will equal to comparable results than last year's first quarter despite a significant decline in our 2018 PAR insured. This reflects our firm's pricing discipline in a market where issuance is low and pricing competition was aggressive. Looking ahead, the Federal Reserve has indicated multiple Fed Fund rate increases this year and next which should create more opportunities for us to add value to the obligations we insure. We believe the issuers will have more incentive to use insurance to stable on borrowing cost not only because yields are higher, but also because credit spreads are likely to wide. Because our premium is based on total debt service, increases in rate should also result not only in great demand but in greater premium revenue as well. Our international infrastructure business also performed well in the first quarter and has now produced PVP in 10 consecutive quarters. This is impressive given the long gestation period for many transactions in this market. We believe it indicates growing interest in using our guarantee to enhance capital market access, reduce financing cost and transfer risk in the regulatory capital requirements efficiently. During the quarter, we executed UK, P3 and utility transactions in both the primary and the secondary markets. We also took an additional step that should help expand our infrastructure financial business. We acquired a minority interest in Rubicon Infrastructure Advisors, a full service investment banking firm active in the global infrastructure sector. Rubicon has advised on over 70 mergers acquisitions and capital raising assignments worth more than $30 trillion over the past five years. We look forward to working with Rubicon to expand both of our Company's opportunities in global infrastructure finance. The transaction perfectly fits our alternative investment strategy to diversify our revenue sources by investing in carefully selected non-financial guaranteed businesses that operate in markets we understand and have risk profiles like our own. In structure finance, where transaction flow fluctuates from quarter-to-quarter, we expect to close primary and secondary market transactions this year in a variety of sectors, including aviation, financial institutions and whole business securitizations. Already in the second quarter, we have provided $139 million of residual value insurance on three aircraft transactions. Our persistent loss mitigation activities continue to show good results in the first quarter. In terms of loss development in U.S. public finance. We saw an economic benefit primarily because of the State of Connecticut and its Capital City Hartford reached an agreement for the state to backstop Hartford’s bond obligations. We work with various legislative and government officials to help develop possible solutions and there is both state and city public officials to agree on a solution that can protect without a bankruptcy, protecting to seize access to the capital market and preventing a state-wide contagion that would have lowered the perceived credit quality and raise the cost of borrowing for many Connecticut municipalities. In thinking about our loss reserves, we have a very rigorous process and follow accounting standards that require us to establish loss reserves based on profitability weighted scenario analysis. Depending on the size and nature of the exposure and the potential loss amount, we run the scenario models using either transaction specific fact of inputs or macro-based inputs applied to each specific transaction. Currently, our transaction specific loss scenario models generates 98% of our loss reserves. In Puerto Rico for example, we model separate transaction specific scenarios for the Commonwealth and our individual public corporation exposures. Speaking of Puerto Rico, the Federal Government has made billion in disaster relief funds available to the island which will have a stimulating effect on the economy as well property insurance proceeds to pay for damages sustained in the hurricane. Additionally, earlier this month the Oversight Board certified fiscal plans for the Commonwealth in a number of the public corporations. According to the recently certified fiscal plan, the Commonwealth’s annual general fund revenue averages $8.4 billion over the next six years. Over the same period, the territory’s estimated annual general obligation in Commonwealth guarantee debt service aggregates less than $1.4 billion, which indicates there are plans for both residential public services which still need to be defined by the Puerto Rico government and for the constitutionally guaranteed debt repayment. This demonstrates there should be an opportunity for conceptual settlement of the Commonwealth’s debt, should the Commonwealth desire such an outcome. Through multiple iterations of the Commonwealth fiscal plan, the operating devises found that the earlier versions have been eliminated and a $6.7 billion general fund surplus is shown in most recent certified plan before ending funding for debt service. And this is probably a low estimate as it reflects for example, six years of Medicaid expenses with only approximately 2.5 years of federal Medicaid funding. Also by not distinguishing between the essential and non-essential services, the plan assumes all expense are senior and payment priority to any constitutionally protected bond indebtedness, including in the plan $1.5 billion for litigation and related expenses that could be avoided by working cooperatively with creditors and other stakeholders to reach a conceptual settlement. This treatment of Commonwealth debt also violates PROMESA which requires a fiscal plan with respect to contractual leans and the constitutional debt payment priorities established under the Puerto Rican law prior to the enactment of PROMESA. [indiscernible] to the Oversight Board before the fiscal plan certifications, Congressman Rob Bishop, The Chairman of the House Natural Resources Committee noted that the Oversight Board was misapplying PROMESA and undermining Congress’ intent in enacting the PROMESA law. He criticized the Oversight Board for losing site of their specific mandates to restore fiscal responsibility of capital market access. He also reiterated his frustration with the Oversight’s Board for lack of creditor engagement and its inability on willingness to reach conceptual settlements, which PROMESA was explicitly written to encourage. And the expressed concern over increases in government expenses while the Commonwealth projects a population decline and claimed to have inadequate financial resources for debt repayment. The Oversight Board has so far appeared to ignore these concerns and we think it is also inconceivable that the oversight board is approving fiscal plans in the absence of audited Commonwealth financials, which have not been produced since fiscal 2014. Without audited financial statements, how could the Oversight Board determine that the financial integrity of system generated accounting processes used to develop the underlying information and assumptions were adequate prior to certifying the plans. We believe that Puerto Rico recovery can succeed only with consensual settlements that under the rule of law make possible future capital market access and most importantly assure sustainable economic future for the people in Puerto Rico. We remain willing and ready to negotiate settlements that achieve these goals. We have a long term interest at Puerto Rico success and can assist as we have done with other financially distressed municipal issuers in the past in solutions that address near-term liquidity and capital market access. For us to do this, the governor and Oversight Board must be willing to engage in meaningful discussions rather than squander Puerto Rico taxpayers' time and money on few tile litigation. Beyond Puerto Rico, we remain confident that fundamental stress of our core U.S. public finance portfolio. By the way of illustration, over the course of the past 12 months, we have paid on only seven transactions, paid claims on only seven transactions excluding Puerto Rico out of more than 8000 insured obligors. And over our entire history, we have insured approximately $850 billion of U.S. municipal bonds and incurred losses of less than $300 million, again without Puerto Rico. This record of success reflect the value for our legal rights, the importance of capital market access to governmental issuers, the strength of the U.S. municipal market and our ability to add value and avoid material losses over a long period of time. We continue to improve the strength and resilience of our business model on remaining profitable and sustaining our claims paying resources while still paying billions in claims during the worse economic conditions in three quarters of its entry and also while repurchasing 44% of our shares outstanding, since we began our share repurchase program. Year-to-date, we have repurchased 4.2 million at a cost of $151 million and have $197 million remaining in the current buyback authorization. We now the small amount of exposure that we have 10 years ago with less risk, but similar claim paying resources and a high quality liquid investment portfolio that is producing more than $400 million a year in investment income. We are positioned to continue leading the financial guarantee industry and should be able to write more business as interest rates continue to rise. We are committed to maintaining our financial strength and strong credit ratings to protect our policyholders as we prudently diversify our revenue sources and thoughtfully right size our capital to ensure appropriate shareholders returns. I will now turn the call over to Rob.

Thank you, Dominic and good morning to everyone on the call. Operating income was $155 million for the first quarter of 2018 compared with $273 million for the first quarter of 2017. First quarter of 2017 results were higher primarily due to gains resulting from the execution of two significant transactions the MBI UK acquisition and a communication of a previously seeded business. We continue to execute on our strategic initiatives in 2018. The reinsurance agreement with Syncora that we previously announced is expected to result in recurring earnings over the remaining terms of the assumed business. And an immediate benefit to ABB when we closed. We have obtained the regulatory approvals required of us and we understand that Syncora is in the process of obtaining a regulatory and third-party approvals that needs for the transaction. In the first quarter of 2018, net earned premiums were $145 million compared with $164 million in the first quarter of 2017. The decrease was due primarily to lower scheduled net earned premiums due to the amortization of the insured portfolio and lower refunding and terminations, which were $52 million in the first quarter of 2018 compared with $58 million in the first quarter of 2017. We expect to see the effects on the amount of refunding due to the elimination of tax-exempt status from advance refunding in the coming quarters. The impact of tax reform combined with the release of tax reserve for uncertain tax positions resulting from the closing of an audit year resulted in an effective rate of 9.6% in the first quarter of 2018 compared with 11% in the first quarter of 2017. If not for the MBIA UK non-taxable bargain purchased gain, the effective tax rate for the first quarter of 2017 would have been 13.4%. Economic loss development during the first quarter of 2018 was a benefit of $24 million which was primarily attributable to the improved outlook for the Company’s Hartford, Connecticut exposure. The expected loss for this exposure and calculated in the same manner as approximate 98% of our expected losses. As Dominic mentioned, these losses are based on detailed scenario modeling of transaction specific factors which incorporates a wide range of economic scenarios. Also included in economic loss development is a benefit of $6 million due to increases in risk-free rates to use discount losses. During the first quarter of 2018, we repurchased 2.8 million shares for $98 million at an average price of $35.20 per share. Since the beginning of 2013 and through March 31, 2018, we have repurchased a total of 84 million shares. The cumulative impact of these repurchases have contributed approximately $12.83 per share to operating shareholders’ equity at approximately $21.87 to adjusted book value per share. We have continued repurchasing shares since March 31st bringing the current year-to-date share repurchases to $151 million or 4.2 million shares representing 44% of the outstanding shares at the beginning of 2013. As of April 30, 2018, we had $487 million in cash and investments available for liquidity needs and capital management activity at the holding companies. The continued share repurchases have helped to drive non-GAAP operating shareholders’ equity per share and adjusted book value per share to new records of $57.97 and $79.45 respectively. I will now turn the call over to the operator to give the instructions for the Q&A period. Thank you.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. Today’s first question comes from [indiscernible]. Please go ahead.

Hey guys, good morning. I was wondering, genuinely perplexed by Einhorn melting ice cube analogy. So as exposures roll off, can you talk about the impact on organic capital generation and your excess capital position? So in a period of low interest rates, doesn’t it make more sense to reduce your book of business and organically generate capital? And so, can you suggest that point in Einhorn’s presentations.

Well as we have seen over the past couple of years the high level of refunding has caused accelerated amortization of the outstanding portfolio coupling that with the low interest rate market that impacts demand for our product. So the two are kind of the perfect storm in money in the portfolio down to the lowest leverage we have had in the Company's history. However, as we look at today, with the rise of interest rates, with the continued increase in demand for the products, with as writing more business year-over-year and typically depending on the quarter-over-quarter, we see that there is going to be a balance and see there are going to later this year sometime in the middle of next year, where the portfolio will no longer amortized down because of the refunding washing through as well as the new demand and the increase in interest rates plus some other special transactions like Syncora reinsurance deal. So we expect to see the unearned premiums start to build out. That still puts us in a position where we have to manage rates of capital and as you know we have got two strategies there, one to try to utilize the excess capital that track within the operating companies and creating new opportunities in the diversification of our revenue sources, and number two obviously continue to demand the overall level of our capital debt by repurchasing our shares especially the current accretive value that the shares currently represent. So we see bounce coming, so that ultimately we start to grow the franchise. We see the market demand for the insurance product continue to increase and with any help by the increasing interest rates that should become a very strong growth environment for us. And as I said, we still have opportunities to create additional benefits through transactions like the Syncora Reinsurance, and as we have said the international market has continue to perk up and provide great opportunities as well to grow the portfolio.

Great. Thank you.

You are welcome.

And our next question today comes from Bose George of KBW. Please go ahead.

Yes, good morning. Actually just in terms of the outlook for refunding activity in the market. Does the first quarter number kind of reflect the new normal as that kind of the way to think about it.

The refined unearned premium in the first quarter is not what we expect to continue over the next three quarters. We expect to the fuel the excess of those advanced refunding not being allowed under the new tax reform coming through within the second, third and fourth quarter. So we expect that that should decrease.

So the first quarter have some spillover basically from last year so to happen.

I mean you have to under the GAAP rule as you required to see that you have - contractual defeasance has occurred. And you must get that support and see that there has been a legal defeasance. And that yes, we had to find that support and there was some rolled over from previous year.

Just remember Bose, 2008 was still a very big underwriting year for the industry and for the insurance in general. So you are starting to get the benefit of that, where we really expect to see a significant decline is in the out years. when you start looking at the rise in 2009, 2010, 2011 that will be subject to a tenure call.

Okay great, thanks. And then actually just in terms of the new business, what was the market share this quarter?

Overall industry is in the 6% range for PAR a lot higher for transaction. The interesting thing there remember and we always point this out, because we believe that the market will return to a 50% penetration rate. But before lets qualify that. Remember, we have eliminated about 50% of the market both from standpoint of us being AA and therefore providing no value to a AAA issuer as well as us not being in certain businesses like credit default swaps, RMBS securities. So we really believe we were able to write 50% of the old marketplace and we still believe penetration in the right interest rate environment can get to 50%. So 50% and 50% gets to an overall 25% market penetration. I think that’s people funding out similar a couple year back. The thing I would point at is, if you look at just the A rated issuance, so where our insurance provides the most value today, over 50% of all A rated transactions by insurance. So my view in a normalized interest rate world, that’s 50%. And we still write AA insurances business for AA insurance as well. So my view is that 50% will carry out into the other areas of BBB and AA to provide an overall penetration in that range. Knowing that certain businesses we can write, certain businesses that have too tight capital charges for the rating agencies than our own, so we just can’t make a profitable return. But that statistic on the A rated insurance I think is important that the value of the business still dictates or still could result in a 50% penetration rate.

Great, thanks. And then do you have just to break out per share with you versus them this quarter?

I think I said we were 62 on PAR versus their 38. There is no other writers in the business.

Great, thank you.

You are welcome.

And our next question today comes from Joshua Esterov of CreditSights. Please go ahead.

Well good morning. Just following on that question asked just a little bit earlier. Can you discuss how the amortization of the insured portfolio and declining revenues translate on a statutory accounting side and your ability to distribute funds from OpCo to Holdco for the foreseeable future?

Well remember, as the portfolio amortizes the improvement over the number of years and just look at things like our excess capital for the S&P calculation, that number is growing each year even in spite of the fact that our significant capital return through the share repurchase, meaning the amortization of portfolio creates excess capital. As any management team, we have to look at that excess capital position and figure out what are the best uses and sources that we can provide for that excess capital, obviously because carrying it around would just impact our ultimate returns. By and large we have paid attention to the capital management through the share buybacks and the return of capital to shareholders, we have looked for opportunities to diversify in fee based businesses to get out of the risk based capital allocation and we will continue that process. So the amortization as we said we think it kind of stops at the end of this year or early next year, because of the bouncing that the lower level of funding which has caused the most of the accelerating amortization to portfolio. It’s still frees up capital. We select and find out good sources and uses for that capital which predominantly has been share buyback at this point in time. As I have said for the track capital in the operating subsidiaries, we are still looking at opportunities to put that capital to work through our diversification strategy.

And also just U.S. bag how can be sent out for the insurance companies, that’s all limited by investment income for AGM and AGC and we also disclose how much is available to set up the holding companies from AG Res in our equity settlement.

Thank you very much for the color. I appreciate it.

You are welcome.

And our next question today comes from [Michael Temple] (Ph) a private investor. Please go ahead.

Good morning gentlemen and congratulations on a good quarter. Three quick ones. Regarding the difference between book value and unadjusted book value, my understanding is that the difference basically is almost entirely the unearned premiums that you have sitting in the account. Given that you have that money kind of just waiting to recognize revenue at the appropriate times. I wondered if you could speak to why do you think it is the market doesn't give more credit to the solidity if that's the proper word of the nature of that unadjusted book of value?

Okay let me answer that one first. Okay. So if you go back into history of the time, prior to the financial crisis. Companies in our industry did sell for adjusted book value, recognized exactly that fact. I think the financial crisis and what had happened to some of our former competitors kind of shook some of that confidence as well as some of their activity since that point in time. However, we believe that is a good solid measurement and remember, as you said, the adjusted book value recognizes the unearned premium reserve which is cash that your holding anyway. So this is your money, so therefore the earnings are fairly certain, minus taxes that you would paying on that right. But what it doesn't include is any investment income from that unearned premium reserve which is also offset by assets on the other side. So we think it’s actually a low approximation of the two intrinsic value of the company and hopefully if we continue to write the shift, push up demand, getting to the penetration levels that we talked about and show growth. Remember, we have been managing at a bring no growth environment. I think once we get to a growth environment, which hopefully we see sometime later this year or next year right size our capital and do some minor diversification. I think you can start to see valuations approximate that level.

Just also to clarify the adjusted book value net sale as Dominic said taxes - also net that any embedded losses embedded with that EPR as well as any differed acquisition costs.

Alright, thank you for that. Second question, and again I mean this more on the spirit of a conversation not argumentative. Clearly you have done [indiscernible] work in capital allocation via the share buyback as most of us who follow you are quite aware. It's been a compound annual return of capital well in excess of 12% 13% for the four or five years. My question is this, any thought perhaps to perhaps allocating a portion of that roughly $500 million of annual buyback, and perhaps does a special actual dividend in the hope or expectations that shareholders might want to have something that has a current yield of actual cash that exceeds the current common stock dividend while perhaps still allowing for accretive buybacks.

We have had this discussion among ourselves for the beginning of time once we began the buyback process or policy. And your point is well made in terms of is there benefited by doing an acceleration of the buyback or these are benefit by having a consistent steady reduction of capital overtime. Obviously the ladder is the safer way to proceed, because obviously it allows you to react to unforeseen circumstances. The former obviously provide the more accelerated benefit. Our decision today and we still continue to believe that is the long drawn out a $500 million a year is prudent it's done the right things as we see it relative to both fixed income investors as well as equity investors, everyone has been rewarded with the maintenance of our strong ratings as well as the continued appreciation of our stock. So we believe that the case and the course that we want to take, obviously we do reconsider it many points in time, as you are well aware, to get to our 500 million of share buyback annual. We still have to request special dividends from the regulars which we have done in the last few years and both been granted those special dividends requests. So that’s our anticipation going forward. And we try to accelerate a larger share buyback. Remember that then go back to the regulatory advance for a higher annual special dividend and we like the comfort level they have in the company, the confident they have kind of slowing steady management that we have provided for capital. I think it provides them great assurance and I think that allows us to accomplish the goals that we need to accomplish in the company.

And when we look at share buyback versus dividend we see that where the share price is today how accretive the transaction is. We still believe share repurchases are much more accretive transactions and one-time special dividend. In addition to which we do look at our dividends and our dividend increase every year. And we look at that, and look at dividend payout ratios with respect to our peer groups and we make sure that we are in line with that as well.

So let me just rephrase the question. So 500 million is the annual pop that you can direct towards share buyback. I guess the more direct question is, have you had or would you consider having conversations with your shareholders, leading shareholders might they want to see 100 million or 200 million of that share buyback be diverted to a cash dividend and the remaining for share buyback or do you simply believe the market doesn’t really want to see a one-time annual special dividend that could use the physical cash payout back to shareholders perhaps as high as 5% to 7% and the other 7%, 9% goes to share buyback.

Yes, so two things. One, we work for the shareholders that we listen to our shareholders very closely. We make it a point go on visit our largest shareholders and any shareholders that want to see us we more than welcome to come in and have a conversation. If we are traveling it to their specific city, we will go to them. So we are very open and transparent organization, number one. Two, as Rob said, the current stock buyback is the most accretive transaction versus a special dividend. And as I said, we do listen to our shareholders infill on what they would rather see a dividend or buyback. They would rather see us continue to build a long-term intrinsic value of the company and the stock through this protracted consistent share buyback.

Fair enough. And then final question. We all know that Puerto Rico is number one, number two, number three concerns in the marketplace regarding Assured. I want to pivot away from that and ask, is there enough maturity to your UK European business that you can demonstrate sort of tangible book value or value of that franchise, because it seems to me that with the discount that the stock trades and how consistent we traded at. Now that you have a significantly new business that you are grooming, is that mature enough for you to be able to demonstrate that it has X billion or $100 million worth of capitalization or is it just too early in the process to be able to demonstrate to the marketplace when you think fair value of that franchise maybe worth at this time.

Well if you remember through the I don't know how long you have been shareholders, but part of our conversation over the past number of years has been first an effort to rebuild the international franchise because it was done some significant damage by the knock down of our former competitors and how they treated the international business. We believe we have done all that work and we are seeing the fruits of that labor as we have talked about on the call the last six quarters is being able to book reasonably significant international production and we are very optimistic about its future. We further invested vertically in the infrastructure operation through the Rubicon Advisors' investment. So we really do have a very optimist view. And we are looking to expand geographically the international franchise. We see opportunities both in Australia as well on the comp --, and we hope to complete some of those opportunities that have bring them fruition this year. So we think the international franchise is of significant value, number we are the only people then remember everybody but then in the international market. So when it comes to access to the capital market through insurance we are the only company that provide that today. So that's a very good situation. We have about $30 billion portfolio of international business so that's growing. We are doing a restructuring of international. If you remember we have done a lot of acquisition, so we now have four different companies that sit over there. We like to combine them in the once you get capital efficiency, which will then give us a better opportunities to prove to the market what the value of that organization is and provides some more statistics on the a standalone basis to further defend the value or defending increase in the value of the Assured franchise and the Assured stock.

Alright. Thank you very much for your time and I will go back into the queue.

Thank you.

[Operator Instructions]. Today's next question comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks good morning guys.

Good morning Geoff.

Good morning Geoff.

Rob, you gave the consolidated holding company balance. Can you break it out between the Bermuda Co. and U.S. Holdco please?

Yes, it's about $25 million in the Bermuda Holdco. and the rest of it is sitting at the U.S. Holding Company.

Alright. And then Dominic.

But that's all available Geoff. It's very, both available to be used for share repurchases. We just moved that up when we need to.

Right, Dominic, one of the challenges right now and it's always in the case with credits in the past until you actually get resolution. And it's a he said she said thing in the market as everybody debates the outcome and it makes the stock more event driven. Is there any timeline or date or Events that are in the process that you can make us aware of in terms of how either that Swain in PROMESA may or may not be progressing. And how this thing actually moves forward versus kind of the I guess languishing state we are currently in?

Okay. And I want to give you a long answer.

I was afraid of the question so.

Well you give me a great opportunity, so I appreciate it Geoff as always. So let's get back, so number one, we are event driven. So we have gone back and done a lot of analysis as you typically would expect this to. So let's look at our below investment grade, since that seems to be an area of conviction. If you look at below investment grade. And the best we are able to do is go back to March of 2012. And we started with a blow and that’s created about $4 billion and we gave you round numbers. Since that time, since March 31st of 2012 we added $3 billion of new below investment grades, all have been driven. So we had $7 billion of below investment grade. On that part of $7 billion, $5.7 billion of it was resolved without a payment. So we treat things when we expect there is a probability of a loss, we get into kind of hyper surveillance and hyper intervention and on that basis of that work we were able to defuse or decease 83% of that number. These are for credits above $50 million so obviously it’s more credits really don’t matter when you are talking $7 billion. So by and large in the main and so 83% were resolved without payment. We still have 16% remaining in the portfolio in terms of below investment grade and we paid $116 million of claims. That’s a claims ratio of 1.6. So the below investment grade we agree event driven, credit headline super priced, whoops there we go and things reacted, the majority and I am talking significant majority do not result in a claim. Number two, I gave you a specific earlier in my conversation we said when we look back all the public finance we have ever insured, that’s over $850 billion and then we paid claims for under 300 million. It gives a PAR to open the loss ratio of 3,000 to one. When you think about a leverage today of 40 to one or 35 to one it kind of pales in comparison to the true claim ratio they would theoretically require if you just based it on claims. So I agree event driven, but understand events typically to resolution, why, because 99% of these issuers to have to concern themselves with market access going forward, right, as well as our legal right and legal protection that are embedded in these deals. So therefore, their results that you need to think about although I agree we are even driven. Now we talk about Puerto Rico, what’s interesting in Puerto Rico is in the last month you have had three people that have mentioned a word creditor or debtor actually mention us. You had carry on in this piece that we have priorities or protections against the pensions which was the first time you ever recognized the fact that we have legal rights, you had Jaresko mention the fact that she want to start to get involved with creditor “negotiations” and you had head of the FAFAA make the same comment. So whether you see change happening or not, at least now we have three people recognizing the fact that there are these people out there called creditors they are not just anonymous group of carpet baggers but they are real people with real legal rights that ultimately get back to individuals that are typically U.S. citizens, U.S. tax payers and U.S. voters. So there is no loss falls upon this body of people that make no difference. Wrong answer, wrong answer, wrong answer, and hope by the way we have legal rights. So you are seeing that. Number two or three or whatever, you have got a fiscal plan that now actually shows a surplus and we know the surplus is understated, because it doesn’t count Medicaid reimbursement from the Federal Government. It’s nice to put six years worth of Medicaid expenses and only two and half years of reimbursement by definition, that’s about a $6 billion delta in that fiscal plan add back to the 6.7 billion of surplus they show and oh my goodness it seems like you could pay most of the debt service or at least good sensual deal structured and move forward. So I’m optimistic that A, people are talking about credit, B, there is a surplus, C, we know that it’s understated. D, there is no audited financials. So who knows what the real numbers are. And then we still have our strong legal rights which will further highlighted Congressman Bishops letter to the Control Board, that said actually you are violating the law. Who would the first one we would call in any further legal activity on this thing. Getting back to the real case, we still have the really suit that Swain is on ruled on, you have got the COFINA versus Commonwealth that is not been ruled on and you have our appeal of the treatment of the transportation revenues that we believe should be heard sometime this year. I think any of those things have a dramatic impact on what happens with Puerto Rico. So I’m optimistic on the surplus, I’m optimistic that it's understated, I'm optimistic that people are talking about creditors for the first time ever and recognize there is something going to debt service and I believe our days in quarter going to be rewarded somewhere during this year.

With respect to the Medicare delta. Obviously the Medicaid I'm sorry. The PROMESA have certified the fiscal plan. So what is the mechanism that calls them out in and get that into the fiscal plan. Or does that by matter, really only manage when you go in front of Swain and actually get this solve negotiated and washed out?

Yes it only matter when you go in front of Swain or Bishop decides the whole congressional hearings and brings the Control Board and specifically put them on the stand and say okay tell us why you are projecting six year forward but you don’t project anything for Medicaid after 2.5 years.

Okay. And then you do think there is a possibility that some of these I guess pending court items could actually be heard before the end of 2018?

I don't know how do you get to a certification or approval of plan restructuring without having those cases out, right. At the end of the day, everything will be subject to whatever the outcome of litigation is. At this point, with litigation that you know already exists let alone the new litigation that will filed based on any adverse decision in those fiscal plans or plan of adjustment.

Okay. Alright. Thanks for the comments.

You are welcome Geoff.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Tucker 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. Thank you very much.

And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect and have a wonderful day.