Assured Guaranty Ltd. (AGO) Q3 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Assured Guaranty Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [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 and Communications. Please go ahead.

Thank, operator and thank you all for joining Assured Guaranty for our third quarter 2020 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 to the 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. As the webcast is not enabled for Q&A, please dial into 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. In our financial guaranty business, Assured Guaranty is having our best year for direct new business production in more than a decade based on direct PVP results since 2009 for both the third quarter and first 9 months of 2020. Additionally on a per share basis, Assured Guaranty’s adjusted book value, shareholders’ equity and adjusted operating shareholders’ equity reached new highs. As part of our capital management strategy, we have purchased more shares in 9 months of this year than we did in all of 2019 and our Board of Directors has authorized additional share repurchases of $250 million. Also on October 1, S&P Dow Jones Indices announced that Assured Guaranty would become a component stack of the S&P SmallCap 600 Index on October 7. Both the price and trading volume over here is increased on the news, presumably because index funds and ETFs that track the S&P 600 as well as actively managed funds benchmarking the index began accumulating positions in our shares. KBW estimated that passive funds that tracked the S&P 600 would need to purchase 8.7 million shares. I think it’s safe to say that certain passive investors and active small cap mutual funds and ETFs now form an additional base of AGO’s shareholders. There are more than 2,000 funds in the SmallCap investment category. Turning to U.S. public finance production, we wrote $93 million of PVP in the third quarter more than double our third quarter 2019 PVP and an 11-year record. In terms of insured par assault, we continue to lead the industry guaranteeing 64% of the $11.9 billion of primary market insured par sold in the third quarter, which was the industry’s highest quarterly insured farm-out since mid-2009 and 82% higher than last year’s third quarter. Bond insurance penetration reached 8.3%, up from last year’s third quarter penetration to 5.7%. With 7.7% penetration for the first three quarters, the municipal bond insurance industry is likely to see its best annual market penetration and insured par volume in over a decade. And this is still in a very low interest rate environment. We benefited from credit spreads that are wired than at the beginning of the year, but this is still a market where AAA benchmark yields have been below 2% almost all year. The Wall Street Journal has called this increase in penetration, a renaissance in the municipal bond insurance industry. Driven by the heightened demand for insurance, combined with a 35% year-over-year increase in quarterly issuance, Assured Guaranty’s third quarter originations totaled $7.5 billion of primary market par sold, essentially double the amount during the third quarter of 2019. One of the new issues started with our insurance in the third quarter was Assured Guaranty’s largest U.S. public finance transaction since 2009, a $726 million of insured par for the Yankee Stadium project. This transaction closed in October, so it’s PVP and par exposure will be reflected in the fourth quarter results. It refunded $335 million of our previous exposure. So our net exposure to this credit increased by $391 million. This is one of 19 new issues that utilized $100 million or more of our insurance during the third quarter. For the first 9 months, we provided insurance on $100 million or more of par on 32 individual new issues more than in any full year over the past decade, a significant capital resources and strong trading value on large transactions are important competitive advantages. We believe two types of investors have driven our increase in larger transactions. The first are institutions investing in the traditional tax exempt market, which are attracted by our strong balance sheet and broad proficiency and credit analysis. The others are non-traditional investors in the growing taxable municipal bond market, including international investors to internal resources to evaluating severe U.S. municipal credits maybe limited. Taxable issuance represented approximately 30% of the muni markets total new issue par volume during the first 9 months of 2020 compared with 5% to 10% in recent years and 35% of our par insured on new issues sold in the period was taxable. During those 9 months, the par amount we insured on taxable new issues totaled $5.5 billion compared with $1.5 billion in the first 9 months of 2019. In case of credits with underlying S&P or Moody’s ratings in the AA category, we insured a total of $806 million of par for the quarter and during the first 9 months more than $2 billion of par. This year-to-date par volume is greater than our par volume with such AA credits in all of 2019. This reflects the strength of our value proposition in the markets view of our financial strength. Year-to-date through September, we provided insurance on $15.7 billion of municipal new issue par sold, of which $1 billion more than in all of 2019. Combining primary and secondary market activity for the first 9 months, we guaranteed $16.6 billion of municipal par, $6.2 billion more than in the same period last year, a 60% increase in international. In international infrastructure finance, we completed the best third quarter originations in the 2009’s acquisition of AGM, producing $24 million of PVP, 52% more than in last year’s third quarter. Our guarantee is now a mainstream solution and widely accepted option for efficiently financing infrastructure development. The flowing of transaction inquiries is much stronger than it was just a few years ago. In little over a year’s time, we guaranteed 4 solar power transactions in Spain, including the most recent one in August. These transactions are good examples of our guarantee that makes the financing of renewable energy projects more cost efficient. Another significant third quarter transaction was a 90 million pound private placement to finance improvements to student accommodations at Kingston University in the United Kingdom. The high insured ratings and associated lower investor capital charges as well as the long tenure of many infrastructure bonds we guarantee makes them an attractive for institutions seeking to optimize long-term asset liability matching. The impact of COVID-19 has temporarily slowed the new issue transaction flow, but it’s also creating conditions that we expect to provide significant international opportunities. We believe downgrades with the potential for them could make our guarantee more valuable for even a broader range of essential investment grade infrastructure finances, such as airports that are crucial for the region’s economies. In the medium-term, we expect a massive global policy initiative to invest in infrastructure and renewables. Additionally, we see opportunities where guarantee has been underutilized. In Australia, for example, we are ramping up our business development and advertising efforts and working with the local origination consultant to help us expand our network of relationships on the ground. Our international and structured finance groups often collaborate when it comes to bilateral risk transfer transactions that allow large asset portfolios to be managed more efficiently, whether from the perspective of capital efficiency, capital management or risk mitigation. Transactions of these types are a strategic focus of our structured finance underwriting group. These tend to be large transactions requiring significant due diligence and their timing is irregular. We have a number of them in progress and expect to close in the fourth quarter or next year. In other aspects of structured finance, we continue to explore opportunities to add value to a variety of securitizations, including for example those were whole business revenues, tax credits and consumer debt. And let me provide some insight into the ability of our insured portfolios to weather today’s unique economic circumstances. We have continued to take a deep dive analytically into our highly diversified universe of insured exposures especially in the sectors we view as the most potentially vulnerable to the consequences of the pandemic, such as mass-transit, stadiums and hospitality, among others. What we found is that the underwriting we did has led to credits we have insured and the structural protections we have required in order to be able to guarantee those transactions that work the way they were intended. We again modeled performance of transactions in vulnerable sectors under economic stress test, assuming no federal assistance gamble was already authorized before September as well as significant reductions in future revenues. Having updated that analysis, we remain confident that we do not expect first time claims arising from the pandemic that will lead to material ultimate losses. On some transactions that were already classified as low investment grade, prior to the pandemic, we did make module reserve adjustments. As of now, we have paid no claims that we believe were due to credit stress arising specifically from COVID-19. Last week, KBRA wrote that it used the pandemic as primarily a potential liquidity event for Assured Guaranty. It expressed that view in its ratings affirmation and released for our insurance companies last week, which were AA plus for AGM, MAC in our UK and French subsidiaries and AA for AGC. We take an active role in managing risk at the transactional level. This year, we have worked with some of our insured issuers to take advantage of low interest rates to reduce or defer their debt service over the near-term through refinancings. These transactions also typically benefit us by accelerating or premium earnings and generating new premium on refunding bonds that we insure. I won’t say a lot about Puerto Rico today, because the new Commonwealth administration will be starting soon and the composition of the Oversight Board is in flux. Sub board members have resigned and new board members joined and others maybe reappointed or replaced. I will just repeat that achieving a consensual restructuring without further delay is the best thing that could happen for the people of Puerto Rico. The recently announced release of $13 billion in federal assistance, up to improve the conditions for reaching such an agreement. The integration of BlueMountain Capital, which we acquired last year, is progressing. In September, we have re-branded it, Assured Investment Management and rolled out the new branding on the newly launched investment management website. These changes reflect the close alignment of our investment management business with our overall corporate strategy. Assured Investment Management currently manages $1 billion of our insured company’s investable assets. Throughout the company, we are actively developing synergies between our insurance division credit underwriting and surveillance skills and the investment management division’s ability to structure and market investment products. We want our investment management business to grow as we continue to leverage our capital through this strategic business diversification. I believe that Assured Guaranty is in good position both in the market and financially. I expect a strong finish for 2020. Our U.S. public finance, international infrastructure and global structured finance businesses, a strong pipelines of potential originations, Assured Guaranty is fortunate to be a company designed from the ground up to be resilient and succeed in difficult times, which we proved during the previous recession. As the effectiveness of our remote operations and the diligence and commitment of our employees have made it possible for us to perform well and operate safely in challenging times allowing us to continue to working towards protecting investors in securities we insure during uncertain economy, assisting issuers in funding public services and manage their fiscal challenges and building a greater value for Assured Guaranty’s shareholders. I will now turn the call over to Rob.

Thank you, Dominic and good morning to everyone on the call. This quarter, we have continued to make progress on our strategic initiatives. In our insurance segment, our strong premium production is replenishing our unearned premium reserves offsetting the amortization of the existing book of business, which will be accretive to future earnings. In terms of capital management year-to-date as of September 30, we repurchased 11.4 million shares, which is well over our initial plan of approximately 10 million shares. As for our third quarter 2020 results, adjusted operating income was $48 million or $0.58 per share. This consists primarily of $81 million of income from our insurance segment, a $12 million loss from our asset management segment, and an $18 million loss from our corporate division, which is where we reflect our holding company interest expense as well as other corporate income expense items. Starting with the insurance segment, adjusted operating income was $81 million compared to $107 million in the third quarter 2019. This includes net earned premiums and credit derivative revenues of $130 million compared with $129 million in the third quarter of 2019. The decrease was primarily due to lower net earned premium accelerations from refundings and terminations offset in part by an increase in scheduled earned premiums due to higher levels of premiums written in recent periods. In total, accelerations of net earned premiums were $80 million in the third quarter of 2020 compared with $38 million in the third quarter of 2019. Net investment income for the insurance segment was $75 million compared with $89 million in the third quarter of 2019, which do not include mark-to-market gains related to our Assured Investment Management funds and other alternative debt investments. As we shift to alternative investments and continue our share repurchase program, average balances in the fixed maturity portfolio have declined. As of September 30, 2020, the insurance companies had authorization to invest up to $500 million in funds managed by Assured Investment Management, of which, over $350 million had been deployed. Income related to our Assured Investment Management funds and other alternative investments are recorded at fair value in a separate line item from net investment income. The change in fair value of our investments in Assured Investment Management funds was a $13 million gain in the third quarter 2020 across all strategies. These gains were recorded in equity and earnings of investees along with an additional $7 million gain on other non-Assured Investment Management alternative investments with a carrying value of almost $100 million. This compares to only $1 million in fair value gains in the third quarter of 2019. Going forward, we expect adjusted operating income will be subject to more volatility than in the past as we shift assets to alternative investments. Loss expense in the insurance segment was $76 million in the third quarter 2020 and was primarily related to economic loss development on certain Puerto Rico exposures. In the third quarter of 2019, loss expense was $37 million also primarily related to Puerto Rico exposures, but was partially offset by a benefit in the U.S. RMBS transactions. The net economic development in the third quarter of 2020 was $70 million, which mostly consisted of $56 million in loss development for the U.S. public finance sector, particularly Puerto Rico exposures. The asset management segment adjusted operating income was a loss of $12 million. The impact of the pandemic continues to challenge the timing of distributions out of our wind-down funds and of new scale of issuance. Additionally, price volatility and downgrades have triggered over-collateralization provisions in CLO transactions that resulted in the third quarter 2020 management fee deferrals of approximately $3 million. In the third quarter 2020, AUM inflows were mainly attributable to the additional funding of the CLO strategy under the intercompany investment management agreement, which we executed last quarter. These represent assets in our insurance company subsidiaries’ fixed maturity investment portfolios. Our long-term view of enhanced returns from the Assured Investment Management remains positive. We believe the ongoing effect of the pandemic on market conditions and increased market volatility may present attractive opportunities for Assured Investment Management and for the alternative asset management industry as a whole. Adjusted operating loss for the Corporate division was $18 million for the third quarter of 2020 compared with $28 million for the third quarter of 2019. This mainly consists of interest expense on the U.S. holding company’s public long-term debt as well as inter-company debt to the insurance companies that was primarily used to fund the BlueMountain acquisition. It also includes Board of Directors and other corporate expenses and in the third quarter of 2020 it also include a $12 million benefit in connection with the separation of the former Chief Investment Officer and Head of Asset Management from the company. From a liquidity standpoint, the holding company currently have cash and investment available for liquidity needs and capital management activities of approximately $82 million, of which $20 million reside AGL. On a consolidated basis, the effective tax rate may fluctuate from period-to-period, based on the proportion of income in different tax jurisdictions. In the third quarter 2020, the effective tax rate was a benefit of 32.7% compared with a provision of 16.3% in the third quarter 2019. The tax benefit in the third quarter of 2020 was primarily due to a $17 million release of reserves for uncertain tax positions upon the closing of the 2016 audit year. Turning to our capital management strategy, in the third quarter of 2020, we repurchased 1.9 million shares for $40 million for an average price of $21.72 per share. Since the end of the quarter, we have purchased an additional 1.7 million shares for $46 million, bringing our year-to-date share repurchases as of today to over 13 million shares. Since January 2013 our successful capital management program has returned $3.6 billion to shareholders, resulting in a 61% reduction in total shares outstanding. The cumulative effect of these repurchases was a benefit of approximately $25.43 per share in adjusted operating shareholders’ equity and approximately $45.48 in adjusted book value per share, which helped drive these important metrics to new record highs of $73.80 in adjusted operating shareholders’ equity per share and over $108 million of adjusted book value per share. Finally, in connection with the capitalization of AGM French subsidiary, AGM’s third quarter 2020 investment income increased due to dividends received from its UK subsidiary, which increased AGM’s 2020 dividend capacity to its holding company parent. However, as always future share repurchases are contingent on available free cash, our capital position and market conditions. I’ll now turn the call over to the operator to give you instructions for the Q&A period.

Thank you. [Operator Instructions] Today’s first question comes from Tommy McJoynt with KBW. Please go ahead.

Hey. Good morning, guys. Thanks taking my questions.

Good morning.

So when you mentioned on Slide 7 in your presentation that the stress case scenario that you guys look at through January of 2022, could you walked through some of those assumptions in terms of how stress that model gets? And then how do you kind of think about beyond the next 14 months perhaps as you kind of move beyond January 2022?

Okay. So I’ll start with the answer. So we looked at each of the various sub-categories of the high-risk and the medium-risk, so it would break down transportation versus student accommodations. And typically what we did was we took a look at 2019 revenues and then reduced them substantially for 2020 and then depending on the credit like in airports and transportation, further reduced them in 2021. Having obviously not a clear view of where we expect the impact to finally subside relative to the virus, hopefully that’s sometime in the first quarter with the advent of the vaccination. Learning with the help of ‘19 revenues, reduction for ‘20 and in some cases further reductions in 2021, we assume no government intervention in terms of additional relief packages passed. And as we’ve always said, as we looked at our credit portfolio in total, in most cases the credits were in great shape prior to the pandemic, so the economy was strong, they were very healthy relative to revenues that were funding the debt service and other obligations. Two, we then we further have protections in terms of debt service reserve on those accounts. Three, as we’ve always said, municipalities have many vehicles and many options at their management in terms of how they handle their disbursement. So things like capital expenditures could be deferred, maintenance projects could be deferred, obviously, they could do things relative to staffing as well as raising revenues. So as we look across that analysis and as I said, stress ‘20 and then ‘21 again and even in some cases going into 2022, we’re very comfortable with the quality of the underwriting, we’re very comfortable with the performance of the portfolio and we really expect no material losses with whoever and maybe some liquidity claims as we go through the next maybe 6 months.

Okay, that’s helpful. And then switching over, looking at the balance sheet, it’s a bit of a tricky topic, so when I think about what you guys have reserves on liability side, kind of net of the salvage number, so that declined about $260 million quarter-over-quarter. Could you just remind me mechanically again kind of what drives the salvage? And then just kind of how you think about that net reserves number and change in the quarter-over-quarter and then just kind of reserve adequacy more broadly?

I guess to start with that, what drives the salvage is based on our reserve assumptions and to the extent that we expect to receive claims that we have already paid, you’re going to get a salvage asset, that’s just basically how that happens.

So predominantly the continued payment of the Puerto Rico debt service, because the control board has authorized no debt service work, we will call the general obligations of Puerto Rico government itself. Minus what we believe is continued further deterioration in our reserving based on the GAAP analysis of scenario analysis and probability weighting. So one is the payments going out each quarter or in each year relative to Puerto Rico, they’ve made absolutely no debt service over four years minus what we think is going to be the true loss that we might have to realize relative to how GAAP makes this account for reserves, and therefore the rest become a subrogation asset.

Okay, okay, that makes sense. And then just last one, switching over to investment income, so the addition of the alternative assets kind of changed a little bit, just from a modeling standpoint how should we think about the run rate of investment income? And then is it right to think about those alternative asset kinds of fair value gains and losses as being a bit lumpy?

Rob, do you want to take that?

Yes, sure. Well, yes, I would say the investment income line is the run rate, I think is pretty similar to what you’re seeing now. However, as you know, interest rates are at historically low levels and as some of our investments mature, we have to reinvest at very low rates in our fixed income portfolio. So for now, I think, the run rate for investment income should be similar in addition to which our loss mitigation bonds that we bought and previously helped mitigate the reduction of investment income because we bought them and keep them as investment and they actually, generally have much higher yields. With respect to the investment and alternative investments, you’re absolutely correct that the fair value of those coming – the fair value coming through that line equity in investees will be more lumpy. However, over the long-term, we expect returns in the low-double digits, between 10% and 12% for all those strategies.

Yes, but the volatility is going to be a little more because of the mark-to-market, but you got to look at the investment over the long-term and we expect the realization to be in terms of returns. And as Rob said, except for the muni strategies, we expect that low-double digit return on all the other strategies that we deployed in Assured Investment Management.

Okay, that makes sense. Thanks, guys.

And our next question today comes from Brock Erwin with CleverInvesting. Please go ahead.

Hi, guys. Thanks for taking my question. I’ve been a long time shareholder of the company and I would just like to say that, overall, I am very pleased with the company’s capital allocation strategy. I do understand, though, that the buyback program, in particular, is contingent on the special dividend, as Rob mentioned last quarter and about the share repurchases slowing down. That being said, I’m sitting here looking at the financial position of the company and it’s strong and if anything, I would like to see share purchases – repurchases accelerate not slow down. I know you’ve been contemplating some alternative financing to fund the buyback program, but regardless of how you are able to acquire the funds, it seems like there should be a way that you can do that, maybe some ways you can get creative with that. So – and if you could comment on that that would be great.

Well, as we say, we agree with you. Share repurchases is the most accretive transaction the company can do, especially at the rather unique value that the current shareholder or the stock is performing at based on the true book value and adjusted book value of the company. You are exactly right that we have a certain amount of dividend capacity normally coming out of the share – or the dividends coming out of the operating subsidiaries and we normally enhance that with special dividends that obviously needs the state approvals of both Maryland – or either Maryland or New York. Obviously, in a COVID world with the uncertainty that that provides special dividends are obviously not something being contemplated very readily by the regulators and at the same time, we are still paying Puerto Rico losses. So that also takes a dollar for dollar hit of our capital and we like to keep a cushion to make sure we protect the ratings of the company. Having said that, as you pointed out, we are exploring other alternatives to the extent that we think we can get something accomplished creatively that will allow us to further enhance share buybacks, but with the limiting factors of Puerto Rico special dividends and what those other alternatives are and the impact they would have relative to ratings, etcetera. So everything is being considered, we appreciate the comment we understand and obviously view at the exact same way and it’s just as we work through the various alternatives we’ll come out with decisions in the near – in the short-term.

And as said earlier, the capitalization of our French subsidiary increased our investment income at AGM, which increased our dividend capacity for this year.

And thank you. Our next question today comes from Giuliano Bologna with Compass Point. Please go ahead.

Good morning and thanks for taking my questions.

Hey, Giuliano.

I guess, just starting out on a little bit of a similar topic, you’ve already deployed a fair amount of capital into some of the Assured Guaranty Investment Management funds and you are going to continue deploying that capital. You should have some like upside to your investment income if you – as you realize low-double digit returns, just trying to think about the impact that that could have on dividend capacity and if that is credited toward investment income, when it comes to the dividend test?

Actually, Giuliano, until that money is dividend up from the investment subsidiary called AGAS as we call it, which is owned by the insurance companies. It will not increase the dividend capacity, but we’re look – we are exploring as that investment income increases in those alternative strategies dividending up from our investments subsidiaries to our insurance subsidiaries, which would increase the investment income capacity and therefore increase our dividend capacity.

That makes sense. And is there kind of a standard schedule that that’s going to roll through on or is it based on how the different vehicles that you are investing in?

We are working on a dividend policy from that company right now. And we haven’t determined yet what the number is going to be, because right now we’re still ramping up investing in those funds as well.

That makes sense. And then just on a little bit of a different topic, obviously, when we look at a lot of the revenue bond exposures usually have debt service reserve funds that cover you for, call 12 months so obviously significant stress before you would trigger claim payments. So in terms of like what portion of the Muni portfolio has debt service reserve funds and kind of what the average debt service reserve fund looks like from a duration perspective?

I think if you go through the disclosure we have shown and composition of the portfolio by Muni credit basically think of anything with a revenue stream typically has reserve funds volume, obviously general obligations typically don’t.

That makes sense. And the only other thing I think from – just from a focus perspective, a lot of focus kind of goes back for Investment Management and the Insurance company, but one of the things I was curious was just trying to think about the relative kind of capital allocation not necessarily looking at the investments in the funds, but just looking at kind of the relative capital allocation that’s attributed to the Investment Management segment relative to the total capitalization of the business.

Remember, the total capitalization of the business was its purchase price, from now it should be self funding relative to its capital needs. The other side of it is when additional money went into it infused into the Asset Management, but as an investor, like any other investor obviously, the goal of the Assured Management was to diversify our revenue stream, we will move away from basically risk revenue to risk free revenue fee income and at the same time enhance the returns of our portfolios, which we are doing, as you can see based on the current quarter and we expect that as we continue to deploy additional strategies, which we have developed have not announced yet as we will see the fruition of certain transactions as we continue to roll this thing out, will further benefit the overall value that it provides to the company. And as well lastly the diversification or the opportunity that it provides us in the marketplace under the now single branding of Assured for both asset management and financial guaranty across the entire universe.

That makes sense. And I think, kind of, what I was trying to think about was looking at Investment Management, you probably have somewhere in the ballpark of $200 million of capital that’s invested, which is just a nominal fraction of your total capital from an investment perspective...

That’s right.

From a focus perspective, just try to think about the relative contribution at least at this point, while you are turning around the Investment Management platform. Obviously, it has a nominal basis. So that’s just anything about that. Yes. We are...

Yes, that specific portion of the whole capital investment asset management investment change dramatically and as we said COVID and the ability to dispose of the run-off portfolio as well as launch new strategy has kind of delayed the asset management by about a year. So, obviously, we look to look for profitability in 2021 and I will look for profitability in 2022 that’s kind of the metrics we are looking at. But in terms of capital, it really doesn’t take additional capital and as you said, we paid very little for the company and got basically $18 billion of assets under management, a new diversification of our business strategies, new opportunities to deploy our own portfolio to our own resources, which we are not paying a third-party for, which is also kind of like while we’re still recognizing enhance yields.

That makes a lot of sense. Thanks for answering my questions. And I will jump back in the queue.

Thanks, Giuliano.

Thanks, Giuliano.

[Operator Instructions] Our next question comes from Brian Meredith with UBS. Please go ahead.

Yes, thanks. A couple – maybe we can simplify this a little bit. I mean there’s a lot of things you guys are doing to try to get dividend capacity out to the holding company for share buyback, maybe just simply what would it take to get back to your $500 million share repurchase level in 2021?

The special dividend.

You need a special dividend.

Well, I will let you do something about the borrowing, issuing another type of share – per share, obviously there are other ways to get there, but principally the easiest way since we have excess capital in the operating companies is just to get to stay either Maryland and New York to experience a special business.

Got it.

Just so you remember, Brian, that this year we – because of the capitalization of French subsidiary, we are going to get closer to that number, because that increased our dividend capacity by about $100 million rough numbers.

Got it, got it. And the $237 million sitting at AG Re, the restrictions around that or is that – do you want to keep a certain amount of money there?

Yes, yes. AG Re is our – when it comes to insurance leverage it’s the most levered and we do keep a significant out of cushion, because a lot of its assets are unencumbered based up on insurance trust for the reinsurance for AGM and AGC.

Got it. Makes sense. And then lastly, maybe dive a little bit more into kind of what’s going in Puerto Rico, you did take your provisions up, I know you commented a little bit more about it Dominic, why the provision this quarter and what was going on that kind of drove that? And then, maybe Dominic you can comment a little bit about the elections, that are going on right now and what that could potentially mean for Puerto Rico?

Well, I would say, if there is a whole lot of different tributaries to that river that’s for sure. So in Puerto Rico in general, remember, we are very focused on what we have to do from a GAAP perspective relative to setting scenarios and then probably waiting. You did have the blow out of the control boards most recent offer that was rejected by that creditor group that’s been working with them to try and negotiate a settlement for the general obligation. So because of the blow out, which once again show no debt service, which we think push-backs potential timing of recovery, we have to look at our scenarios and then look at the probabilities and change them as we believe that that external third-party verifiable information would provide. So that’s kind of where we get to relative to reserves. However, that doesn’t change our view that basically, we have got very strong legal rights, we have not had a real day in a real court of then for certain fringe kind of disputes and we are hoping that the recent revenue ruling that will be appealed in October and hopefully heard by the Second Circuit in first quarter of 2021, gets us some clarity. Number two we do have the whole issue of the control board and obviously, the last member added by the President seems to be a person focused on constructive resolution and paying debt service at some level, which is very different than the existing control board’s behavioring if you read the headlines over a week or so ago you walked out of a meeting, just so you didn’t get a quorum that couldn’t vote on something that was once again ignoring creditors right. So I think that potentially have to resolve itself before I have any clue. Number three, as you point out, we’ve got elections that are too close to call in both locations and it does change a little bit the complexion if the election goes one way you can say well, jeez, this should be good relative to further eight municipalities, including Puerto Rico. There is this issue of statehood over Puerto Rico, which we get data they need not to argue that’s a Medicaid and Medicare reimbursements got go significantly up, which really changes the complexion of the budget of the Commonwealth, so there is potential really good guy out there. Number four, remember we saw that pharmaceutical bill banging around, which makes absolute sense so you say even in a disputed world of government, they should all be able to agree that we should bring all the manufacturing of both pharmaceuticals and pharmaceutical equipment on to U.S. shores, so that we can ensure our ourselves of the manufacturing of that when another crisis hit. So, I think, there is a lot of events out there and the election could flip them one way or the other, but I think there is a common stream there. Do we expect another relief package? Sure, we do. What does it look like who knows depending on who is calling the ball. If the Puerto Rico electric resolved and there seems to be a more pro state flavor to this election than has been in the past with more of the citizenship voting that has a huge potential impact. As I said, we still believe in our strong renewal rates. We are still going to, obviously, fight for our legal rights and the recognition of the respecting of the constitutional priorities and contractual liens, which we think are critical to us getting a substantial amount of our money back and that’s what we’re going to continue to fight for. But you’ve got these other things that are flying around toward litigation, release, etcetera and elections that will swing this thing left right and sideways, but I think the path is still pretty much forward.

Makes sense. Thank you.

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference over to Robert Tucker for any final 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, this concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines. Have a wonderful day.