Good morning, and welcome to the Assured Guaranty Limited Third Quarter 2021 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Thank you, operator, and thank you all for joining Assured Guaranty for our third quarter 2021 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're reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most recent 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 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'd 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 a successful third quarter of 2021, Assured Guaranty's new business production generated $96 million of PVP. This is our second highest result for a third quarter in the last decade. At the 9-month mark, our year-to-date PVP totaled $263 million, which puts us on pace with last year's outstanding production. The business was well distributed across our U.S. public finance, international infrastructure and global structured finance markets for both the third quarter and 9 months. In terms of shareholder value, as of September 30, 2021, on a per share basis, shareholders' equity, adjusted operating shareholders' equity and adjusted book value all reached record highs of $88.42, $82.89 and $122.50, respectively. Year-to-date, Assured Guaranty has earned $197 million of adjusted operating income, about the same as in last year's first 3 quarters, notwithstanding a $138 million after-tax loss on debt extinguishment. This accelerated recognition of an expense resulted from the voluntary early redemption of certain senior notes. These redemptions and the issuance of lower coupon debt will reduce next year's debt service by $5.2 million. Rob will provide more detail on the debt issuance later. During the third quarter, total municipal bond issuance was strong with $121 billion of new part issue, the second highest third quarter volume in a dozen years. For the first 3 quarters, new part issue of $343 billion exceeded debt over the comparable period in 2020, which was a record year. Insurance penetration continued its upward trend, reaching 8.5% for both the third quarter and 9 months, the highest level for a third quarter in any 9-month period in more than a decade. This was achieved even though the interest rate environment remained challenging, although benchmark yields moved a bit higher during the quarter, they…

Thank you, Dominic, and good morning to everyone on the call. This quarter, we continue to make great progress on our capital management strategies. After issuing $500 million of 10-year senior notes at a rate of 3.15% in May, I am pleased to report that AG U.S. Holdings issued another $400 million of 30-year senior notes in August at an attractive rate of 3.6%. Most of the proceeds of these debt offerings were used to redeem $600 million of long-dated debt obligations, and the remaining proceeds were designated for general corporate purposes, including share repurchases. The redemptions included $430 million of debt we assumed in 2009 as part of the FSAH acquisition, with coupons ranging from 5.6% to 6.9%, and remaining terms of approximately 80 years, as well as $170 million of AG U.S. 5% senior notes due in 2024. These debt refinancings had several benefits to the company. First, we reduced the average coupon on redeemed debt from 5.89% to 3.35% which will result in a $5.2 million annual savings into the next debt maturity date. We expect continual annual interest savings after that, though the amount of such savings will depend on the interest rate environment and the refinancing decisions we make at the time. Second, we reduced our 2024 debt refinancing need from $500 million to $330 million. And lastly, the debt proceeds we borrowed in excess of those used for redemptions will provide flexibility to execute other strategic priorities, including share repurchases without significantly affecting our leverage or interest coverage ratios. These debt redemptions resulted in a pretax loss on debt extinguishment of $175 million or $138 million on an after-tax basis, consisting of 2 components: first, a $156 million acceleration of unamortized fair value adjustments that were originally recorded in 2009 as part of the…

The first question comes from Geoffrey Dunn with Dowling & Partners.

Let's see. First question, with respect to the Puerto Rico development, what were the key factors that prompted the favorable development? Is it largely more what happened after the end of the quarter with the bill being passed and the oversight board agreeing to the amended burdens? And maybe getting some more clarity on timing, or was there more to the quarter that prompted your refinement?

Yes, I guess you're talking about the reserve change in the quarter for Puerto Rico?

Yes, and for public finance.

Yes. So at the end of the day, the majority of public finance in Puerto Rico, but it was all mechanical, Geoff. So if you think about how we set reserves and scenario analysis and probably wait, that's the same just as more facts became apparent about the exact structure of the deal, for instance, like the GDBs now the judge agreed that they were subordinated there for the not in the calculation of secured creditor. It was more changes of those mechanical natures than anything else. So we still have our scenario modeling, we still our probability waiting. So this is just a mechanical change to reflect what we think is going to be the final version of that potential PSA.

Okay. And as you're getting more -- well, I guess, as you're getting more clarity on Puerto Rico, what are your thoughts to exploring a special dividend out of the operating subs to support that $500 million annual target? Not necessarily needed for this year but for the coming year.

We've always said, Geoff, when we think it's the proper time where we'll seek special dividend approval, we think you're correct in assuming that we get the first Puerto Rico deal done as of year-end and then funded through January. Obviously, we didn't deal with the new bonds that we get within that settlement period. I think that puts us in very good shape to be able to go to the states and ask for special dividends. So I think we're just following the course of our strategy that we think exposed long ago. But as you clear up these conditions of what are uncertainties and make them certain, I think it allows us that opportunity and we're -- obviously if we want to keep our current pace of share repurchase, we would need a special dividend, as you all know. So our thinking is, let's get the PSA done for the general obligations and then let's move forward from there.

In addition, Geoff, remember, with these debt offerings, we increased our flexibility with the cash that we have available, in addition to which, as we stated last quarter, the reorganization of MAC and the unwind of MAC provided us a benefit, which will increase our dividend capacity next year, so that will give us more flexibility as well and reducing the need to ask for significant special dividend.

Okay. And then last one, if and when we get to the full Puerto Rico resolution, what are your thoughts about targeting more than $500 million annually as a steady goal?

Geoff, obviously, I think in our strategic vision, we want to be efficient managers of capital. So to the extent that we can use the capital, we don’t see opportunities to put it to work in other areas than obviously the most accretive transaction we could do today and remains that way is share repurchase. So we would continue to look at share repurchases as a primary strategic objective, but we make those decisions basically at the time. When we look at availability, ratings, market opportunities, excess cash and obviously, the accretiveness of the share buyback.

The next question comes from Jordan Hymowitz of Philadelphia Financial.

Question is now that you're no longer a melting ice cube and now that no longer Puerto Rico is blowing you up, it seems like a lot of the marginal business is not only you gaining more share and not only is the market growing, but you're growing a more profitable business, specifically the structure, the European. Can you discuss the marginal profitability of some of those businesses? And could they work to expand your overall profitability as a company as a result?

I think you're right. As we look at our business opportunities and the fact that we're the only company that stayed diversified across all 3 aspects of financial guarantee, and you're correct in making your assumption in today's marketplace where spreads and rates are, the structured finance and the international infrastructure business has a lot higher capital return than the U.S. public finance, although we said minimum targets for all of them, right? And at the end of the day, I can't give you exact numbers, but I will tell you that the structured finance and international make about a 60% higher return in U.S. public finance, and we calculate return on a deal-by-deal basis. Our biggest challenge to true profitability, however, is really the excess capital. And the drag that, that creates on ROEs is significant. And obviously, we've got to continue to manage to really make profitability a key result of our organization, even though the deals per se are probably on their own. And as I said, we said minimums, and we track that religiously. We've got to deal with excess capital. And I think we're finally turning the curve here in terms of where the business now starts to grow. We think we've hit the bottom in terms of production and growth in under premium reserve and we're now starting to see the benefits of the hard work that all of our business people have done relative to ground generating investor acceptance, recognizing the value of the product and it's getting now more acceptance worldwide. Plus, we also have goals of expanding internationally. Right now, we're still too much of a U.K. dominant international player and there's got to be market opportunities significantly throughout the rest of the Continental Europe as well as in certain markets, let’s say, Asia and the Far East.

And you said just repeat that the other business of 60% higher profit margins and your core business, I believe, is targeting at least a double-digit return on equity, correct?

Correct.

The next question comes from Tommy McJoynt with KBW.

Just want to go back real quick to the math for the buybacks and especially thinking of next year, so if you could just elaborate a bit on the puts and takes between the reorganization of MAC, some of the new debt you've taken on dividend capacity. Just where buybacks could shape out and let you without a special dividend? If you could just kind of walk through that now.

Rob, do you want to take that?

Yes. Well, we generally -- I always say that we have about -- Tommy, we have about $250 million to $300 million without a special dividend. The MAC benefit if I recall correctly, is roughly kind of give us another $100 million. So we'll be at about $400 million without even a special dividend depending on -- and that would be depending if we don't have any other cash-enhancing transactions. So that's where we're at for next year.

Okay. That's helpful. And then switching over real quick. The RMBS benefit in the quarter, was that lower just driven by home price appreciation?

Yes. The RMBS -- yes, it was driven by home price appreciation, so better performance on transactions that had previously charged off loans, so if you have previously charged off loans and your home price is increasing, you have equity in your home. You're able to actually generate a benefit when either the home is sold or the borrower realizes, I've got equity, and we're going on actively to be able to reach out to these borrowers with our special servicing contract we have with our surveillance group and telling these borrowers to remind them that they have equity in the home and that we still have a lean on this. And so as they sell, as home prices increase, and as also people start prepaying. If they start prepaying on this, they would pay off their loans, and they -- and then we would get the benefit of those previously charged-off loans. So yes, that's primarily increased and continued increase in home price appreciation, will continue to see benefits going forward.

You answered the second part of my question there as well. And then just lastly, when do you expect the Asset Management segment to report its first full year of operating profitability?

Well, as we said, we continue to make substantial progress. And honestly, the growth fee turn is going to be when we finally get rid of the legacy funds and the administrative expenses regarding how we have to administer those funds, and we hope that, that will be done by the end of this year -- I’m sorry, the end of 2022.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Tucker for closing remarks.

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

This concludes today's conference call. Thank you all for attending. You may now disconnect your lines. Have a great day.