Assured Guaranty Ltd. (AGO) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Assured Guaranty Limited Third 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 this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations. Please go ahead.

Thank you, Operator, and thank you all for joining Assured Guaranty for our 2018 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 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 Web site 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, in our current Financial Supplement and Equity Investor Presentation which are on our Web site at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd.; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled for Q&A, please dial in to the call if you would like to ask a question. I will now turn the call over to Dominic.

Thank you, Robert, and welcome to everyone joining today's call. Assured Guaranty continued to generate solid performance during the third quarter of 2018. Non-GAAP operating income was up compared with the third quarter of last year and operating income per share of $1.47 was 14% higher. We continued to enhance shareholder value to our capital management program during the third quarter, repurchasing an additional 3.3 million shares at a total cost of $130 million. As of this week we repurchased 48% of the total shares we had outstanding when we began our share buyback program in 2013. In new business production to 3 billion of insured par we closed in the third quarter produced $52 million of present value new business production or PVP compared with last year's third quarter, PVP was up 21% on year-to-date basis which includes the large portfolio of business we assumed in the Syncora transaction in the second quarter. We have produced $567 million of PVT which far exceeds our PVP for the first three quarters of any year since we acquired AGM in 2009. All of our financial guarantied businesses U.S. public finance, international infrastructure finance and structured finance contributed to this strong result. Conditions in the U.S. public finance market remain challenging during most of the third quarter. 30 year AAA municipal bond yields rarely exceeded 30-year AAA municipal bond yields rarely exceeded 3% in July and August and credit spreads stayed near the lowest levels in the decade. Yields have since beginning to move in the 30-year AAA index finished in September at 3.19%. It has continued rising topping 3.4% at times in October. However, credit spreads have remained relatively tight in spite of the increase in rates, a situation we hope will diminish. And as spreads widen, our market share for new business should increase. Our 56% share of ensured new - new issue volume sold in the third quarter of 2018 reflects Assured Guaranty's continued market leadership and the appeal of our guarantee across a broad range of bond types and transaction sizes. In addition to leading the volume insured with $2.4 billion of insured par, we led in the number of transactions insured with 160 transactions or 53% of the insured new issues. We guarantee the 11 new issues with underlying ratings in the AA category indicating investors' strong appreciation of our value proposition. Year-to-date through September 30 Assured Guaranty also led with a 56% share of the insured new issue par sold totaling 7.5 billion of primary market par approximately 30% more than that of our nearest competitor. We continue to see significant interest in our insured PREPA among institutional investors during the first three quarters as reflected by the nine new issues where we provided more than $100 million of bond insurance on each transaction. And if you include the new business generated through us in core reinsurance transaction, we closed over $15 billion of insured par year-to-date. Also, we have recently guaranteed two significant transactions for nationally recognized providers in the healthcare sector for nationally recognized providers in the health care sector. In the first, we helped Montefiore Health System achieve a lower all in costs for its $1.2 billion offering by insuring $3.2 million of federally taxable revenue bonds. And last month, we guaranteed more than one third of the $1.5 billion of taxable and tax exempt bonds issued for the ProMedica health care system. Our extensive experience in both health care and public private partnership financing was key to those complicated transactions. The strong executions of both transactions demonstrated the value of insuring a substantial portion of a large transaction to lower the all in financing costs and attract a more diverse investor base. Our international infrastructure activity continues to show that our ongoing commitment and efforts in that market are paying off. In a business where transactions have long lead times and the timing of bringing bills to the market can be somewhat difficult to predict. We have now generated international infrastructure premiums in 12 consecutive quarters. During the third quarter, we again rapped the UK University Housing financing, this one a $90 million British pound transaction for Durham University. Then in September for the first time since the financial crisis, we executed a significant transaction in Australia guaranteeing AUD 100 million of bonds issued largely to refinance existing facilities of the port of Brisbane. This transaction was also notable because it was privately played - played with a group of South Korean investors, representing a new market for insured infrastructure bonds. In fact we saw further reinforcement of this investor's appetite for insured paper in October when a similar group of South Korean investors purchased a £75 million pound UK social housing transaction. The first we have insured in a number of years in social housing The guarantee notes were issued by one of the largest UK housing associations places for people and illustrate our ability to assist in cost effective funding and to attract the more diversified investor base for social housing issuers. In structured finance during the third quarter, we continue to execute transactions in the aviation, commercial real estate and CLO markets, while continuing to pursue opportunities in life insurance, excess reserve financing, whole business securitizations and other asset finance sectors. We are also beginning to field inquiries related to the use of our guarantee to support compliance with increased back - bank capital requirements on the Basel IV. Looking at our insured portfolio, we've been seeing positive developments in the Puerto Rico economy and debt negotiations and the situation there continues to highlight important elements of our value proposition. Investors that hold the bonds to reinsure have received all of their principal and interest on time and those investors have not had to spend any time, money or energy on restructuring negotiations or litigation costs. In a positive development in October, we joined senior and subordinated COFINA creditors, the Commonwealth and the Oversight Board in an agreement that defines how to allocate COFINA's future sales tax revenues. It is the basis for the COFINA plan of adjustment that the Oversight Board has submitted to the Title III Court. With judicial approval, it will resolve almost a quarter of Puerto Rico's total capital market debt outstanding and according to the Oversight Board, save Puerto Rico approximately $17.5 billion in debt service expense over the term of the bonds. To complete the transaction, COFINA will issue exchange bonds to replace existing debt. The exchange bonds will effectively convert our subordinated exposure to senior exposure and provide a significantly better recovery when compared with recent market prices of comparable uninsured bonds. Additionally, we expect to wrap our share of the new senior lien exchange bonds which will be sold in the public capital markets for the purpose of further improving our overall recovery. As to the sales tax revenue that will be allocated to the Commonwealth, we reserve all of our rights as a Puerto Rico general obligation bondholder. Under the Puerto Rico Constitution, such revenues and other resources must be used to pay general obligation debt before any other government expense, a priority that permits requires to be respected. Separately, a new opportunity to set PREPA on the right path by installing responsible management appeared on August 8 when the First Circuit Court of Appeals vacated the Title III court order denying our request for relief from the automatic stay. We subsequently re-filed our motion for stay relief and expect a hearing on that motion to occur early next year. Our motion focuses simply on installing an experienced, professional management of the utility which would reassure all stakeholders that the monopoly power supplier would be managed competently. Meanwhile, a proposed restructuring support agreement has been reached among PREPA, some of its creditors, the Oversight Board in the Commonwealth. While we are not satisfied with its terms and are not a part of that agreement, we do see it as a positive step forward and believe that a deal can be achieved. In general, it's fair to say that progress is being made and in number of negotiations and there has been good economic news as well. The Island's recent unemployment figures are the lowest recorded in more than 75 years according to Puerto Rico's Department of Labor and Human Resources. In another positive development, the Oversight Board released the new fiscal plan in October that incorporates some updated updated results in correct some of the unrealistically entire predictions we saw in earlier fiscal plans. The new plan gives credit for economic stimulation consistent with the higher levels of disaster relief that are realistically expected. It also assumes a smaller population decline as a result of these and other factors and assuming the government follows through on some but not even all of the reforms the oversight board once, the new plan projects a surplus through 2023 of $17 billion which we believe is enough to cover the Commonwealth's contractual debt service requirements over that period; the projected surplus jump by more than $10 billion since the previous fiscal plan released in June. So the outlook for more consensual settlements has clearly improved and there is more reason for optimism although considerable work lies ahead. The fiscal plan still contains unrealistic and unsupported assumptions notwithstanding the improvements I've mentioned. The plan continues rely on the faulty reasoning behind its assumptions of a fiscal cliff regarding the federal share of the island's Medicaid funding. A more reasonable assumption based on the 55% percent average federal share over the last 11 years resulting almost $4.5 billion more flowing into Puerto Rico. And if instead the 86% rate the plan assumes for fiscal year 2019 we're staying through fiscal 2023. The additional amount over the plant's estimate would approach $9 billion. We found similar results when we analyzed the June fiscal plan and encourage you to visit revitalizepuertopico.com/medicaid to see that analysis. Similarly, the updated fiscal plan contains what appears to be unreasonably low projections Act 154 multi-national excise tax collections. Act 154 taxes have provided approximately one-fifth of the -- before taxes have provided approximately one fifth of the Commonwealth's revenues in recent years and collections were actually up 6% and 10% in the second and third quarters of 2018 compared with last year's comparable quarters. Yet the fiscal plan projects a 37% decline from 2018 and 2022. I also want to draw your attention to recent misleading comments made by Puerto Rico and repeated in the media about its per capita debt levels being far higher than the per capita debt levels of certain states in the U.S. and key problem with their analysis is that it compares only state level debt and ignores local government debt and federal debt which is also the responsibility of state side taxpayers. Remember that people in Puerto Rico are not required to pay federal income tax. When you include the state, local and federal debt that is paid by state side residents, Puerto Rico's per capita debt load is only 25% of the average for the 10 states with the lowest per capita debt burdens in the US. And it's important to note that the Commonwealth itself fully supported this very measure of debt burden, very measurement of debt burden in the past. For example in an Investor Presentation in October 2013 the time when Puerto Rico was looking for ways to access capital market financing, it stated quote "any comparison of the public debt levels of Puerto Rico with the states should include state local and federal debt for all taxpayers in the United States." It further stated if one factors in the federal debt load, Puerto Rico would rank - would rank last in outstanding debt per capita among all of U.S. jurisdictions. As we continue to protect our rights, it appears clear we are starting to see progress in Puerto Rico. Its economic and financial situations as we and others predicted are performing better than what was represented in earlier fiscal plans. Consensual Settlements are being reached or negotiated on more realistic terms are being negotiated on more realistic terms and recent court decisions are more supportable to the rule of law and the right of stakeholders. I'll conclude by observing that the interest rates are rising and public demand for infrastructure investment continues to grow, both of which are likely to increase our business opportunities. I believe that in the not too distant future, we will enter a favorable business environment than we have seen in years. I will now turn the call over to Rob.

Thank you, Dominic, and good morning to everyone on the call. Operating income was $161 million in the third quarter of 2018, a modest increase compared with $156 million in the third quarter of 2017. The increase in the operating income is a result of lower losses, again of $31 million related to the company's minority interest in the parent company of TMC Bonds LLC which were sold in the third quarter of 2018 and a lower effective tax rate, offset in part by lower commutation gains and lower than net earned premiums. The decline in net earned premiums from $186 million in the third quarter of 2017 to $142 million in the third quarter of 2018 was attributable mainly to reduced refunding activity, accelerations due to refundings and terminations were $40 million in the third quarter of 2018 compared with $87 million in the third quarter of 2017, which as expected reflects the elimination of the tax exempt status of advanced refunding bonds as well as the reduction in the short portfolio subject to provision. In aggregate, there was almost no economic loss development in the third quarter of 2018. Improved performance of the underlying collateral in the U.S. RMBS transactions resulted in the benefit of $40 million, which was offset by increases in expected losses primarily on certain Puerto Rico exposures. The effective tax rate on operating income in third quarter of 2018 was 7.4% compared with 34.2% in the third quarter of 2017. The effective tax rate in 2018 reflects the effects of the Tax Reform Act, as well as release of reserves for uncertain tax positions for a closed audit year. It also fluctuates from quarter-to-quarter based on the proportion of income in different tax jurisdictions. We have continued to repurchase shares in order to efficiently manage our capital position. During the third quarter of 2018 we repurchased 3.3 million shares for $130 million at an average price of $39.41 per share. Since the beginning of [ph] 2013 and through the end of the third quarter, we had repurchased a total of 92 million shares. A cumulative effect of these repurchases was a benefit of approximately $14.54 per share in operating shareholders' equity and approximately $25.68 in adjusted book value per share. We have continued repurchasing shares since September 30, bringing the current year-to-date share repurchases to $429 million or 11.4 million shares. In just under six years, we have we have repurchased 48% of the shares that were outstanding when we began repurchase program, while still maintaining total statutory capital of $6.8 billion in claims-paying resources of $11.8 billion. This has been a key strategy that helps drive operating shareholders' equity per share and adjusted book value per share to new records of $60.20 and $84.51, respectively. As of today, our remaining share repurchase authorization is approximately $169 million. We currently have approximately $250 million in cash and investments available for liquidity needs and capital management activities at the holding companies. Another positive note this week we received the final approval necessary for the combination of our European subsidiaries and as of November 7 the portfolios and operations of our four European financial guarantee insurance companies are combined. As a result, all obligations and bonds previously insured by Assured Guaranty London, Assured Guaranty UK and CIFC EU are now insured obligations of Assured Guaranty Europe and are soon expected to receive Assured Guaranty Europe's financial strength ratings. The business combination simplifies the capital structure of our European business while reducing operational costs and increasing -- excess capital. I'll now turn the call over to the operator to give you the instructions for the Q&A period. Thank you.

Thank you. We will now begin the question answer session. [Operator Instructions] Our first question comes from Bose George with KBW. Please go ahead.

Hey, guys. This is Tommy on for Bose.

Good morning, Tommy.

I want to ask about -- hey, guys. Yes I want to ask about a couple of the potential opportunities that you guys have mentioned. So this quarter you guys had your first CLO obligation and then you've also mentioned on the call some - some bank inquiries for Basel IV. So could you guys talk about the potential impact down the road of how big those opportunities could grow?

I think the potential impacts really go back to one common premise, which come premise which is rising interest rates, right. These are examples of where we're seeing markets that have been dormant for a number of years now starting to come alive and obviously if interest rates continue to increase and spreads widen, we expect that activity will geometrically further increase. Remember, this is an industry that used to produce $4 billion to $5 billion of annual premium in a year and although we expect the penetration rate levels because of rating changes, capital requirements our own risk appetite might be here for that. There's still a huge market of opportunity that has not been available to us production - predominantly because of interest rates and spreads. And as we're seeing these markets start to rebound, I think it's a good indication of where we think we can get to over the next couple years along as the market participates relative to the continued rising rates.

Okay. And so going on that does - do you kind of have an - an updated sort of expectation for when you'd expect the portfolio to stabilize or is that again waiting on sort of to see where - where interest rates end up?

No. There's three factors there. Okay. So you know and we try to measure all three and we try to predict the balance and of course our predictions have been pretty weak because we've been wrong on interest rates for the last six years or seven years in a row. So the story continues. However, we are seeing a little bit of late today. So what are the indicators I look at? So first and foremost is when do we stop the pleading the story of unearned premium reserve. So we're hoping that by the end of the year the unearned premium reserve this year wind up higher than it was at the end of the previous quarter. Now we're bigger than the unearned premium reserve as of third quarter is greater than it was of your end but not of third quarter of 2017 and that's says okay, we've now stabilized the earnings store so that year-over-year comparison in income just start to stabilize as opposed to decline. And that's been two things right. The lack of new business rating because of rates but also the heavy earnings we've gone through refunding activity to this slow interest rate period while there was significant call of a par that was out there from the early writing years of say 2004, 2005, 2006, or 2007, so that's number one. Number two is the amount of par outstanding in the overall portfolio, we're down to $250 billion-odd right and that continues to decline because of the amortization against new writings, so when does that hit the balance and we're hoping that balance is 2020 or late 2019. So once again, that could change depending on if we continue to see rising rates and more demand for product and you could turn that around or if we do another large reinsurance deal that allows [indiscernible] and third, most important is the production levels itself, the PVP, one is our PVP writings in any quarter, greater than the earned premium in the quarter, once again the same indication you're building up [indiscernible] and it's not completing earnings. So as we look down that very complicated path, we're kind of saying in our minds 2020 is probably the year of the balance.

Thanks and last one just on the tax rate. So you've had a few of these release of reserves from uncertain tax additions over the past year or year and a half, going forward is - it's kind of a 15% still a good run rate to think of obviously recognizing that it can bounce around a bit quarter to quarter depending on where the - which jurisdiction and in these releases?

Yes, we estimate between 14% to - and 16%, so 15% is perfect.

Thank you.

You're welcome.

Our next question comes from Dan Carson with [ph] Karpel. Please go ahead.

Hey, guys. I appreciate, just your thoughts around Puerto Rico highway authority or HTA and specifically how you anticipate that that will get restructured and what the sequencing for that particular credit will be with respect to the broader Commonwealth restructuring?

Wow. Great question, and I wish I had a really great answer. So let's think about it. So, transportation is probably one of the more complex exposures that you're going to deal with. So you have to look at it from two different perspective. If you believe in rule of law and if you believe in rule of law being upheld then we think that much like everything else that is going on in terms of new securities being issued and you think back to the original RSA or PREPA, as well as the current deal for COFINA, each situation seems to be being replaced by securitization type structure where they're going to hive off a given amount of revenue, lock it away and use that to pay down whatever the replacement bonds are. So, that's going to be the structure that's going to win. Now it's only a matter of does rule of law applies. So think of it, we just told you our presentation that the most recent fiscal plan projects a significant surplus on behalf of the Commonwealth. If you believe that and if it's achieved, remember under the law and once again as the rule of law applies, you can't clawback any revenue from transportation unless it's to pay Commonwealth general obligation debt. If the Commonwealth already generates a surplus it would have absolutely no reason to clawback any revenue. And the revenue if I remember correctly over that like five-year period is about $2.5 billion. So if the Commonwealth is showing a $17 billion surplus. If the Commonwealth debt service excluding transportation is about $10 billion, you still have $7 billion left over. If you take back the $2.5 billion of clawback, you still have $4.5 left over. So under that premise you'd have absolutely no legal right to call back any of the transportation revenues, if don't call back the transportation revenue, it does have enough money to meet that service. However, nobody is going to lead them anymore, so you're going to have to get to these securitization structures when you lock that money away so there is a real certainty that future bondholders will absolutely get paid and no governor can act irrationally and just start taking money out of wherever he feels like it. So it get back to rule of law, he back to Commonwealth surpluses and budgets and it gets back to the call back issue as to whether it could be enacted or not. So I think transportation believe it or not will be last on the, list because if you solve the other problems we wind up with the Commonwealth in funds and creating a surplus than the -- transportation I think from the bondholders side become stronger. And as I said any new structure or replacement bonds because they're still going to want to extend term to get some relief in the budget and do under these new securitization type approaches.

Okay. Great. Thank you.

You're welcome.

Our next question comes from Michael Temple, a Private Investor. Please go ahead.

Good morning, gentlemen and congratulations on another fine quarter.

Thank you.

A series of questions, I'll keep them brief. As you mentioned your overseas penetration of markets that are kind of virgin territory for you, and investors who are appreciating your financial guarantee; I'm just curious to get your thoughts. We know the Assured story had nauseam here in the States. Is there an opportunity for you to market the Assured Guaranty equity story to a fresh other eyes on a global basis as you are becoming better known to investors throughout the globe?

Yes. The answer to that is absolutely, yes. So one of the things we realized over - by the last four or five years, in the old days, you really, when you looked at your marketing efforts and your outreach programs, it really affected issuers and the banks who basically are the gatekeepers for the - placing of these securities into the capital markets. It has to be easily six or seven years ago in Europe because there was so much damage done by the former competitors in terms of how they treated their policies there and the reinsurance that came back in the States. We really embarked on in an investor outreach programs, because we really had to go back and reestablish credibility and confidence that we would honor all commitments that we're not kind of the way the other guys were. And we're here to actually service their business and make sure that the benefits and the rights that they provide in those deals are actually honor [ph] and given back depending on the circumstance. And as we've done that and we've built that investor confidence, we can see now the results in the international marketplace as we're booking our 12th consecutive quarter of activity. And in the old days we had to search for deals now we basically see every deal that's in the market and it's really expanding what is that market opportunity, remember we've been predominantly a UK player. We've given our international provision [ph] mandate to looking more continental and now even global. And it's all part of an overall strategy as we look at our outreach program and our diversification program for asset management. We're still looking to get in the markets that we're really not, but the investor outreach program we've taken globally. And when you go to sit in these markets and talk to, say large lead companies well, they need investments on both sides in the time. They need the equity as well as the fixed income. The fixed income quite honestly from a U.S. perspective looking internationally is very attractive. We're getting a highly rated security with a long-term to match certain structures overseas like pension obligations, et cetera, and it's got a good rate of return relative to what's available in those local markets. So that seems all of us to have been a home run all along. So we really then focused on. And now you're seeing that we're spending more and more time in our Investor, our region and more and more time internationally as we said the Port of Brisbane was an absolute a real reflection of how successful the program is and that we've got a South Korean investor basically buying 100% of an issue relative to our Australian port. Now that's kind of the future of our business. It does represent a future opportunity for real growth that really hasn't been passed in the past. And I think can become a very integral part of the market. And remember where we go internationally we typically have a huge capital efficiency advantage. So those products make sense and I've always said in the international infrastructure market, our product is the best most elegant solution if you're going to finance the long-term asset, when you want to finance it with long-term kind of known debt service. And in the old days we competed against banks that did these deals on a refinancing basis that you give a five-year to eight-year or even a 12-year term. But you're looking at a 30-year asset or a 40-year asset in some cases here in the UK. It didn't make sense. Because why would you take that refinancing risk. So we're very optimistic with this strategy could ultimately create for us. We've actually just recently dedicated another investor you know significant - not significant but further investment on our part, we put another investor outreach person dedicated a full time to our structured finance division because we really believe that it really does make sense to go outreach and make sure we identify people that would be interested in the Assured Guaranty paper and once again as you said getting our name out there and to continue spreading globally we'll get that recognition and get those people also involved to potentially looking at the equity.

Very good. Thank you. Couple other quick questions, if I could. We know, as well, that shareholders - our potential shareholders have very much adapted the old Missouri show-me attitude as regards the brightening outlook for Puerto Rico and understandable why just because of the uncertain nature of any bankruptcy. My question is this, assuming confirmation of the COFINA plan and a core AG Re plan for the GOs that flows from that and PREPRA which again seems to have some momentum. Let's just for argument's sake say that by Christmas of 2019, so 14 months, 15 months from now we have confirmations and they're done, they're all tied up. Can you speak to the -- your policy towards the reversal of your reserves, if and when those obligations get terminated. I mean, would we see an accounting reversal in those quarters, again if you could just speak to that. Again, I know that's a question that nobody would have thought to ask a year ago, two years ago, maybe even earlier this year. But as you've pointed out and as the marketplaces they have pointed out, there are tremendous recoveries to date in almost all Puerto Rico [indiscernible]?

Well, you're asking a very tough question obviously. So let's think about it. We put up reserves when we believe there is a probability of a loss and we then do the analysis of theories in areas under the specific obligations and then probability weight them. If - as you say there are settlements kind of across the board and [ph] cropped up general obligation and COFINA, obviously as we look at our probability assessment in the reserve that would be created under a probable law scenario, you have to affect whatever the settlement numbers are and therefore that would change the mathematics. Every quarter we look at all the most available information and say does it do one of two things. Does it change the amount of loss we would realize if any under our optimistic kind of mid optimistic realistic and pessimistic. So does it change any of those numbers? And then number two, does it also change my probability weighting that either court will approve it or ultimately will get forced by another higher level of court's affirmation. So you got that metrics of two soft sides, right. The amount of a loss in any scenario and then the probability again [indiscernible] so as you said if you have a settlement on PREPA, settlement on COFINA, settlement on all the general obligations, we go back and look at exactly all of the [indiscernible] little table of reserves and we have - obviously as corporate actuary ones - that were one of the methods that they were the only financial guaranty company the actuarial [indiscernible] department that was a lesson that everybody should have learned. So we will go back to those exact schedules, redo the math and tell you what the numbers are. We carry reserves. We've been very aggressive in how we've continued to try to deal with our issues on Puerto Rico. But at the same time we have a responsibility relative to get financial statements and have reserves be calculated and we'll go back and look at the schedule and say is there an impact that's going to resolve, and a change in that reserve position positive or negative. Obviously under settlement, we'd hope that would be positive.

Correct. Thank you for that. Jumping to your comments about the Again incredibly low estimates of Medicare reimbursement that Puerto Rico has been using in their documents, again I know you're not a lawyer but you're obviously -- asked about. In terms of winning that argument as you and others are claimed in court, is that something that's just a very factual assessment that a judge just takes a look at and says, Puerto Rico you don't have a leg to stand on, here are the historicals, there is no basis for you to set much more draconian levels going forward. I hereby order you to amend your plan to reflect the past reality unless you can show us something of Senator that shows that Medicaid reimbursements are going to drop precipitously. In other words, is this just like a simple rubber stamp or in bankruptcy, all cards are up in the air until they are settled?

Well, although I'm not a lawyer, I play one on TV. So let me answer it in the best lawyer -- because my General Counsel just fell off her chair but it's time to side before you. So if you think about it, it would be lovely if it was a slam dunk, it's not. So we can say look historically the United States has provided a 55% reimbursement of Medicaid and goes all the up to 83% or whatever it is for the 2018 year but that's just historically. It's still an appropriation from Congress. And unless you get Congress to make some permanent statement that says we will continue to support Puerto Rico at some level which your guess is as good as mine, in a divided Congress can you get agreement that you put out such a statement. I don't think you'll ever have a core slam dunking. However, as you can see on the fiscal plan even with the draconian assumptions there is today, there's still a surplus. And remember that's only one half of the equation, the real equation is what are our legal rights and what those - this rule of law require. And it appears that the First Circuit Appellate is actually starting to really support rule of law. We've had the overturn of the stay against our ability to put a receiver in PREPA. We have the - what's the other overturn on - I'm forgetting…

Those two.

So I think as you look at that we're going to be very pleased I believe in the long run that now that we've gotten rid of the economic argument, then we always get back to Detroit. Detroit had a real economic argument, will argue that Puerto Rico doesn't have an economic argument and therefore a rule of law shouldn't be really influenced or interfered with relative to our rights to collapse. For instance in the general obligation, you're supposed to pay first [indiscernible] that debt service, you're not even attempted to put that service in the fiscal plan. I would hope that a court - superior court is obviously not getting and in the lower court recognizes that and realizes the ridiculousness of that [indiscernible] the game is over. This has to be provided for. So there is many estimates out you're going to get a court long answer to your short question. The same case you must put in the Medicaid money but remember these budgets are full of many estimates. So every level of revenue so you could - can make the argument in court as reasonable as they're trying to project sales tax going forward, how could you not project Medicaid going forward based on some historic analysis of previous activity. So…

Sure.

I don't think, this court will say but I think the court have talked to their opinion will, I think, it will still make a good basis for an appeal and once again with the surplus to show, there should be no reason why that service is not being provided for.

Thank you for that. And then a final question, and again I appreciate your forbearance. You've talked in the past about your appetite for buyouts of legacy competitors. As the Puerto Rico situation continues to improve here, does this perhaps enhance the opportunities as other competitors feel less pressure on them as the industry as a whole achieved better recoveries or does that really not have an impact on the possibility of seeing another transaction or two as you try to consolidate more of the legacy players?

No. If you think about it, so we've switched this consolidation issue going back to 2009.

Right.

And so far we've bought five 5.5 of the original 8 competitors. So, we're well on our way in achieving our goal. We'll hold this up from the remaining. So, there's going to be three things. One, if there are these what I'll call concerned exposures on Puerto Rico, we really want to step in that try and increase even further our exposure. So, it's still a [indiscernible] situation. So, we're going to rely a lot on court activity. And although we feel very confident, in the outcome, it's still an outcome that has to be determined. So, if there were further settlements that lower the exposure or the volatility, you're right. It creates a more opportunistic environment for further consolidation. Number two, in terms of acquisition opportunity, its how complicated is the equity component or the equity structure of the target. So, if they have preferred stock, surplus notes, deferred payment obligations and in common it becomes a little hard to say how can I corral all of those four instruments and get a deal done. That's why we've gone to this new structure, reinsurance and said I can pull a lot of the economic benefit and therefore relieve for the target company, their required capital and maybe the regulatory scrutiny. So as they look to their future this gives them an opportunity to focus more on that future plus in the free up of that regulatory capital by the reinsurance does other components of the equity in terms of surplus plus deferred payment obligations preferred stocks they can make settlements there as well. So ultimately they get in the right position that we can then make an acquisition to actually pull in the rest of the - and if that capital base or equity component. And last but not least is the target has got to have figured out where they want to go once the capital gets freed up and do they have plans of being one effect or execute. So, in the old days we drove it very hard and that's the consolidation. Today I think it's equally beneficial for both sides. These transactions not only help us, because it continues to build our story and obviously creates earnings and we do these things at a pretty good price at a reasonable discount. It also provides the target with this opportunity to say, okay, now I can started to grow I can go into something that's got opportunity I start reward my shareholders. So I think it's a good answer for them. So I think, yes, as Puerto Rico continues to mature relative to ultimate resolution I think it will continue to further give us opportunity to increase our desire to consolidate the rest of the industry.

So in effect am I correct in interpreting your words there saying that if transactions were to take place they might look more like the Syncora reinsurance deal then outright acquisition like you did in Radian and CIFG?

Yes. For sure short-term but remember CIFG we did a reinsurance deal first that we acquire the company four years later.

Okay. Got it.

So same kind of structure, so the Syncora kind of looks like CIFG if you can remember CIFG and I still think it's good and we did a small reinsurance deal with one of the other guys I don't think we've probably said there deal with one of the other guys, I don't think we publicly said who was and what it was. But we're constantly working on that channel, because I think it is a good transaction for both sides, it makes the regulator happy because now it's in a highly rated, strongly capitalized company that pays its bills and pays its claims. It does free up capital on behalf of the seeding companies that they go out and sell some of their obligations. So I think it's a positive transaction. We're in the old days; we were kind of pushing the point of consolidation today as I said I think it's possible for both sides of the fence.

All right. Thank you very much for your time and attention. I'll hop back into the queue.

You're welcome.

Our next question comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Hi. Good morning.

Hey Jeff.

Good morning, Jeff.

Just a couple number of questions. First off, have you submitted the request for a fourth quarter special dividend?

We win day into we submitted.

All right. Rob what did the new money yields look like versus your current pre-tax portfolio yield?

New money yield right now is about 3.85.

So just a little bit better than the current portfolio?

Yes. Yes.

And then could you also break out the new issue versus secondary par in the many results this quarter both power and PVP?

Well, I have the new issue - so the new issue is 2.975, so I think we advertise something a little around $3 so the difference is the secondary market. I don't have a specific number in front of me but…

[Indiscernible]

So we did in 2018 total the primary was $25 million in 2018 - in the third quarter secondary was $8 million…

Par.

At par.

Yes.

Oh sorry, I've given PVP. You want par? Okay.

So that's PVP, you just gave me?

Yes. You want par or PVP?

Both.

Okay, so PVP was $25 million primarily, $8 million secondary…

It's a public finance.

-- in public finance.

Yes.

And in public finance, non-U.S. obviously was $12 million and structured finance was $7 million and the par - the primary par would be $2.2 billion and secondary market would be $182 million and in non-U.S. public finance would be $189 million, and structured finance was $473 million.

So the secondary market end is the - just under $200 million.

Great. All right. That's it. Thank you.

Thanks, 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, and 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.