Good morning, and welcome to the Assured Guaranty Limited Fourth Quarter and Year-End 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 sir.

Thank you, operator, and thank you all for joining Assured Guaranty for our fourth quarter and year end 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 outlook, 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 a 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 in 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. Assured Guaranty's insurance production, loss mitigation and capital management strategies combined to deliver outstanding results in 2021. We had many notable accomplishments during the year. We earned $470 million of adjusted operating income, 84% more than in 2020 and we more than doubled adjusted operating income per share to $6.32 per share. We brought all three of our measures of shareholder value to new highs. Over the year shareholders equity per share grew 9% to $93.19. Adjusted operating shareholders' equity per share increased 13% to $88.73 and adjusted book value per share rose 14% to $130.67. We repurchased 10.5 million common shares or approximately 14% of our shares outstanding at December 31, 2020 at an average price of $47.19. Those repurchases totaled $496 million and with the addition of $66 million of dividends, we returned a total of $562 million to shareholders. Through strong new business production in each of our financial guaranty markets, U.S. public finance, international infrastructure financial and global structured finance we generated a total of $361 million of PVP in 2021. Direct PVP exceeded $350 million for the third consecutive year, compared with an average annual direct PVP of $210 million from 2012 to 2018, making the last three years our best in more than a decade for direct new business production. With a more than 60% share of new issue insured par sold we lead the U.S. public finance bond insurance industry to its highest penetration, market penetration in a dozen years. And taking advantage of exceptionally low interest rates, our U.S. holding company issued a total of $900 million, a 3.15% 10-year and 3.60% 30-year senior debt to refinance $600 million of debt with higher coupons ranging from 5% to almost 7%. As a…

Thank you, Dominic, and good morning to everyone on the call. I'm very pleased to report that our fourth quarter 2021 adjusted operating income was $273 million or $3.88 per share, a significant increase over the adjusted operating income of the fourth quarter of 2020, which was $56 million or $0.69 per share. The primary driver of the increase in fourth quarter 2021 total adjusted operating income was the insurance segment where adjusted operating income increased 154% over fourth quarter 2020 from $109 million to $277 million. Much of this benefit came from our loss mitigation strategies, particularly for our Puerto Rico exposure. After many years of negotiation, and other loss mitigation efforts, we are close to resolving $1.4 billion in gross par associated with our Puerto Rico GO, PBA, CCDA, and PREPA exposures. The increased certainty of the settlement in Puerto Rico is, improved economic output, combined with the increased value of our actual and expected recoveries under the settlement agreements, were the primary drivers of the $186 million economic benefit in the fourth quarter of 2021. During the fourth quarter of 2021, we sold a portion of our Salvage and Subrogation recoverables, associated with certain matured Puerto Rico GO and PREPA exposures, resulting in proceeds of $383 million, thereby realizing some of our expected recoveries early. In 2022 we continued to sell portions of our GO, PBA and PREPA Salvage and Subrogation recoverable, resulting in additional proceeds of $133 million. The prices at which we crystallized these recoveries as well as observed market pricing for other similar instruments, and the forward interest rate environment, are reflected in the updated assumptions of the value of the remaining recovery bonds, and contingent value instruments that we project receiving in the various Puerto Rico settlements. Other components of the insurance segment…

Thank you. [Operator Instructions] And our first question today comes from Thomas McJoynt-Griffith at KBW. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions here this morning. So first, does the international insurance portfolio have any exposure to areas that would potentially be at risk of an ongoing conflict in Eastern Europe?

No, we have no exposure to the Ukraine or Russia. We do have exposure in Hungary, but it's small and it's vastly amortizing.

Okay, thanks clarifying that. And then next I have a few questions around the contingent value instrument. So first, were the marks related to the CVI that you already have received as well as CVIs that are contemplated of receiving in the future with unfinalized settlements? And then second, does the CVI get market every quarter based on things like actual tax receipts in Puerto Rico or is it the updated fiscal outlooks there? Can you just kind of walk through those pieces?

So, number one, we've not received any CVI yet, so remember all those restructurings are still in the future with the first one being the general obligation and related credits, but we would actually receive instruments starting on March 15. You know, the CVI is a long duration instrument. It's predicated on sales tax volumes over many, many years. So you've got to make an assessment of what you think that present future value is, relative to current performance and any other expectations you might add. So that number is a mark for mark number will fluctuate based on the long-term view of value. And obviously, as they -- we know they've already substantially exceeded the early benchmarks relative to that revenue. Obviously, we think that security is a solid investment or solid returning value.

Okay, thanks. And when you do receive the CVI come March 15, will you be able to monetize it immediately? And also, speaking of monetization, the fully satisfied claims that you did monetize in the fourth quarter and again in the first quarter, how much additional fully satisfied claims are there that you'd be able to do the same now?

Okay, so these are complicated questions. So in terms of the monetization, you have to have the right structure, and you have to be able to convert the existing exposure into a security that can be sold into the marketplace, so that's not for all of Puerto Rico. And as we looked at those opportunities to monetize it was really based on our view of value. It's a kind of benchmark relative to expected value. It allowed us to risk manage some of the Puerto Rico exposure, obviously you know the driving around fairly substantial balances related to this principle credits or transportation and general obligation. It also allowed us to do a better cash management strategy relative to the settlement obligations we have, coming March 15 when we have to settle the old bonds as we receive the news, so that's number one. Your second question. And then first question, obviously we can't really at this point in time, there's still a lot of uncertainty in terms of value. In terms of the CVI, we hope that it will start to trade as soon as it's issued, but that really relates to the market and demand in the marketplace with the security and what prices are available. These are the things that we continue to watch, monitor, and will manage as we see opportunities unfolding in the future, based on all these variables; you have variables of interest rates, you have variables of further geopolitical unrest. You have variables of market’s perception of Puerto Rico, in terms of their willingness to pay. So, there’s a lot of balls in the air that will ultimately dictate value. But obviously, the best value you’re going to have, is the one that the market is willing to provide, once these securities are issued and the market is established.

Let me just add Tommy that when we sold our subrogation rights this quarter, I mean fourth quarter and first quarter, that will include what we were going to get on March 15 when this is consummated, which consists of new GO bonds, CBI and cash. So, we sold those before we actually are getting them in March 15, so we have subrogation rights to the extent that that par has been paid. So effectively, we've been selling those CBIs through selling our subrogation rights. And then on March 15, we will get an additional, say rough numbers, $1.5 billion of cash, new recovery bonds and CBI, and we will look to execute and sell them and maximize our economic benefit over time.

Right, yes, that will make sense. And then lastly, could you just walk through the most likely timelines for the resolution of HTA and PREPA? I know you mentioned that you expect Puerto Rico to be resolved by the end of this year. Can you just put a little finer tune on the actual timing throughout the year? And then how do any strategic actions such as acquisitions or capital actions like special dividends factor into that expected timeline?

Let's get to the timelines of Puerto Rico. So, we really expect and of course, these are dates that could slide, obviously, as we've seen happening in the general obligation, that doesn't get to now March, and it could have been done by the end of the year. So, we look at transportation, our expectation is a third quarter resolution. PREPA, you saw the request for immediate mediation, but we still think that drags on a little bit and maybe that's fourth quarter, but between third and fourth quarter for transportation and PREPA we expect it to be resolved by the end of the year. And then you're right, once we're free of this burden, because obviously it's been a significant drag on the company relative to people's perception, not economic reality as you can see in the current quarter, the benefit we realize based on our perceived value of settlements around predominantly general obligation, it at least then gets back, which then provides us that opportunity to start to re-engage on further capital management opportunities, principally special dividends to kind of accelerate the capital management that we've been doing. So, it opens up a whole host of opportunities for us as we finally get Puerto Rico behind us in the rear-view mirror, which we believe economically is there, but we still have the legal technicalities of having to go through the process of the exchange, et cetera, as Rob pointed out.

Okay. I appreciate all the comments.

No problem.

Ladies and gentlemen, our next question comes from Jackie [ph] [indiscernible]. Please go ahead.

Hi, guys. Can you hear me okay?

Yes, hi Jackie.

Hi, Jackie. How are you?

Hi, guys. I’m good. Thank you so much for your time this morning. I just had two quick questions. One of them I think Dominic might have just answered, but on the sold, the supplicated assets that that you sold, the proceed I’m assuming are not available for the for capital redeployment but will be withheld to satisfy the claims that you expect on March 15. Is that kind of what you indicated?

Yes.

Okay. So, we shouldn't be penciling that in as excess cash now.

We have a significant liquidity event on the settling of the old bonds where we get the new bonds, the cash and the CBI. So, we got to pay first, before we receive second. So, this allows…

Got it.

We took the opportunities in the portfolio to basically form that for short-term cash. These sales allow us to further alleviate some of that cash responsibility.

Okay, great. And then just, sorry…

Jackie I just want to also add that, just remember we sold those subrogation rights at significantly higher values than we expected with respect to our reserve analysis and that's why you're seeing a significant benefit to our Puerto Rican reserves.

Right. So, that was going to be my second question Rob, so the benefit that we saw for the Puerto Rico reserves, that incorporates the full expectation of where we sat on December 31, that's not just a reflection of those sales, is that correct?

Yes, that's correct. It's a reflection of a couple of things. We look at all possible scenarios as you know we look at all the news that happened in the quarter. We looked at the fact that the judge accepted the plan of adjustment. We looked at this as a benchmark and then we then, we look at that and we sort of extrapolate or it instructs us to look at the other exposures. The GOs that are coming, that we’re getting on March 15 and also transportation and PREPA and we put appropriate interest rate sensitivities with respect to inflation adjustments, that’s all taken into account in our future, loss reserves related to Puerto Rico.

Great. And then, Dominic, I know you've talked about this many times over the years, but could you just refresh our memory now that we may actually be seeing some rising rates in terms of, what are the key benchmarks that you watch in terms of new business production and both on maybe whether it's the 10-year, the Fed, I think it's 10-year? And then also on spreads, just like when you would anticipate, I know we've seen some pretty strong demand already, but you would really anticipate to start to see municipalities really coming back to market in size?

Well, Jackie, the long awaited it may be starting to come to fruition of rising interest rates, which we've been predicting going on back to 2011, but it actually finally came to realization. But what we look at, to answer your question is predominantly the 10-year treasury. We look at overall rates and more importantly, the economic condition surrounding the rate environment, because remember, the credit uncertainty, the global political uncertainty widens our markets and creates opportunity for the business irrespective of interest rates. But obviously, as interest rates rise, typically the credit spreads widen as well because they're kind of related, one is an aggregate, one is a percentage of that aggregate. So, uncertainty is a key driver, but we look at the 10-year treasury as kind of the biggest benchmark since most of our bonds have a 10-year call on them. That's kind of the rate that we look at. So, as we look at the potential movement in that rate, obviously you've seen the penetration starting to grow anyway across our markets relative to the use of insurance and the acceptance of the institutional investor. So, we believe that the rise in interest rates further enhances, if not exacerbates, those opportunities. So, we watch the 10-year treasury spreads overall, rates overall and then the other kind of surrounding economic whereas inflation, whereas growth versus recession, where is the geopolitical environment because all those things feed into the calculation.

Got it. And is there a number Dominic, in your head, where you think it really is a step function change in demand or is it more a sliding scale?

Jackie, I’ve been sliding that number for you. I can’t tell you how many years. So, right now probably, how can you place a 5-year, 3-year or 3% 10-year treasury.

Got it. Okay, thanks. I figured I'd do that, but I wanted to ask.

Yes. But Jackie, remember, all movements along that curve will significantly enhance demand. Remember, the market has gotten so used to refinancing on very low rates, it's kind of a need they’re going to need to continue to feed and the only way they'll be able to get there they’re comparable terms in a rising market is to use more insurance, which is obviously great news for us. Obviously, we think at a 3-year, 10-year treasury it’s a panacea. Right? A very different market relative to growth opportunity and the production that we would book, it would be substantially different than what we currently experience.

Great. Thank you, guys for your time. I really appreciate it. Hope you are all doing well.

Thank you, Jackie.

Thank you.

And the next question today comes from Michael Simple, a private investor. Please go ahead.

Good morning, gentlemen, and congratulations.

Thank you, Mike.

Yes, a few questions. You noted the bond refinancing which you affected in Q3 of last year and how you refinanced $600 million but raise an additional $300 million, which went towards share repurchase. I'm just curious. In the previous decade, the share buyback was affected by a request for a special dividend from your regulators. And in this instance, it appears that maybe you didn't go that route and instead opted to raise holding company debt to fund that additional buyback that was above and beyond your as of right. I'm just curious, do I have that correct? And if so, what motivated you to go that route rather than your traditional annual request for a special dividend?

It's a great question, Michael. So special dividend, obviously, we look at a lot of things, but one of the things that is really predicated on the special dividend is our relationship with the regulators and the regulators view of the company. So because of, not so much Puerto Rico, but the uncertainty from COVID, even though obviously, COVID didn't have a significant impact on the company in terms of the performance of the insured portfolio, we thought it would be wiser as the states still grapple with other issues for other companies kind of across a broad spectrum that we'd be smarter to delay that and then really get to a point where whenever we go to the state, they're just going to shake our hands, nod their heads and let us walk out of the room. I supposed they sit there and kind of rub their chins and say, well, you have this to worry about, that to worry about. So we think with both COVID hopefully behind us and Puerto Rico behind us, the state would really be in a lot better position and feel a lot more comfortable with the approval of any special dividend request. So we haven't had a special dividend request in the last two years, probably more than that. And obviously, we found other means to still accomplish our goals of capital management and obviously to your point, go ahead, Bob, I'm sorry.

I'm sorry, go ahead, finish now.

Then I was going to say as we look to 2022, we still think we can accomplish our goals without a special dividend. Special dividend would just further enhance our opportunities for capital management. And we said, as I said, I think we're going to be in a great position relative to that specific request as we go through the year, resolve the rest of Puerto Rico, finally get that off the books and therefore, obviously also have COVID finally burn out, so to speak, and leave us back to a normal lifestyle.

And Michael, about the debt refinancings, we looked at where rates were on the 10 and 30-year curve and saw what we could execute last year. And one, you're always looking at your cost of capital and the makeup of your capital and want to get the cheapest one. And by executing that first 10-year at 315 and the second and third year at 360 lowered our cost of capital significantly in addition to which it saves us money as we stated in our call. And we didn't increase our -- we didn't significantly or very small, we increased our leverage ratios and our coverage ratios remain very strong. So it was a very opportunistic and very strategic move by the company to go out and execute that and use that as excess funds for capital management without changing those ratios.

Understood. No, I mean, so in hindsight, you chose the perfect time to issue such amount of debt. So congratulations on that. A couple of other questions. As I listen to the benefits of the Assured alternative platform and the returns that is provided to the portfolio, that's all well and good. But I just wonder if you are able to provide guidance. I know in the previous call that you had indicated that while trends were improving you didn't think you were going to reach run rate profitability until perhaps Q3, maybe Q4 of this year. I'm just wondering with the turmoil in credit markets does that get pushed back into next year? And finally, are you at the stage where you can provide meaningful guidance as to what we could expect run rate revenue, profitability to be to look like once you do finally cross that threshold and put all the, so to speak, one-time losses behind you that have marked the performance to date?

Okay. So in terms of asset management, as we said on the call, I think we made tremendous progress across all boundaries of that specific operation. And if we look at it total contribution to the firm, it's a huge net positive to us. So the benefit of having it there with the ability to do the alternative investments and the returns that we've been able to realize through our own management has been substantial and therefore help to really make that a worthwhile proposition. If you look at the operations itself, we thought we'd be able to get to breakeven by the end of this year. We lost $3 million in the quarter and remember, that still includes depreciation and amortization. So if you look at cash on cash, it's positive, number one. Number two, what's really the secret sauce there in terms of turning the corner is two things. One, we still got to grow AUM against our fixed expenses relative to being a public company in the asset management space. And obviously, we grew AUM this year. We've got other plans that we have not made public to further enhance the growth in AUM in 2022. So that should help with the equation of profitability. Number two, if the expense is relative and the distraction of the legacy funds and hopefully by the end of 2022, we will no longer have any legacy funds. So I think getting rid of the legacy funds and the growth of assets will turn that to profitability, the continued use of it as a manager of our own alternative investments has been hugely beneficial and profitable for us. And that's a scale business. We need to get more scale. So we've got strategies to increase the scale and the breadth of the operations and as we execute them through 2022, we look for a very positive result. Once we get to those new asset classes and new fee management propositions we'll be able to provide further direction. But as we launch them, obviously, there's a lot of uncertainty at the beginning and as you get further performance, you are going to get more comfortable on expectations.

Michael, I just want to add for the Group. I'm getting text that I might have said something incorrectly. So just to be clear, we declared a dividend of $0.25 per share. If I said $0.27, I don't remember saying it, but it's $0.25 per share, and we over last -- the previous dividend was $0.22 per share, a 13.6% increase. Thanks.

And then just one final question, sort of a followup to the question you had from the Putnam team. Let us work with the assumption that spreads are 50 basis points wider in the new issue space, again, just choosing that as an arbitrary figure given the run-up in interest rates and the widening in credit spreads. In an environment where new issuance is 50 basis points wider for issuers, theoretically how much of that do you think you can capture in terms of enhanced underwriting spread where it's a win for them and it's clearly a win for you?

Well, that's another good question. So if you think about it, if you go back to when there were seven AAA companies competing for the business, you captured typically for premium purposes. And remember, our premium is our rate, which is a percentage of the spread, times the debt service. So when you have a widening of spreads and increase of rates, hey, the basis for which your calculation goes up, and then, of course, the widening and spreads also increases what you're able to chart, so it's a win-win. So if you go back to say, 2004, 2005, maybe you were getting anywhere between 10% and 20% of the spread. Today, we get between 40% and say, 60% of the spread. So if you do your math and say, okay if the par is X, the debt service is Y, that spread goes up 50 basis points, and I can on average capture 50% of the increase of 50 basis points, that's 25 basis points across the entire debt service spectrum, you can get an idea of what that means relative to premium. It's a good number.

Thank you. Ladies and gentlemen, our next question today comes from Jonathan [indiscernible] with Deutsche Bank. Please go ahead.

Yes, good morning guys. Thanks for taking the question. So I just want to go back to the debt liability management one more time. So you guys obviously had very good success with that in 2021 lowering your coupons, getting the interest expense lower. You still have a number of contingent preferred securities outstanding that lack modern LIBOR fallback language. So I guess my question is two part; one, do you have any plans to address or do additional debt liability management perhaps on those securities to deal with the LIBOR language? And then two, if not, how do you see things playing out in the back half of 2023 around the LIBOR language in coupons on those securities?

Well, every time we see a date the end of LIBOR continues to be extended. So I guess we'll hold that as it is. And number two, the contingent security financing is incredibly cheap. So other than working around the legal logistics of the LIBOR language, this is a very cheap form of capital.

Yes, it's our cheapest form of capital at this point and it's perpetual, and it's dollar per dollar credit for the rating agencies.

Yes, we're going to look to refinance any more debt we still got some 5 percentage out there, what Rob, 300 and…?

Yes, we have $330 million that's coming due in 2024.

Great, thank you.

You are welcome.

And our next question today comes from Geoffrey Dunn at Dowling. Please go ahead.

Thanks, good morning.

Hey, Geoff.

Hi Geoff.

If we fast forward a year and Puerto Rico is off the liability side and maybe you have some residual assets to manage, then the story becomes then about new business and capital management and asset management, kind of going back to the way things were 15, 20 years ago. And obviously, the capital management is a big headwind when you're posting single-digit ROEs on a GAAP basis, and we can assume that the underlying FG business is double digit. So Dominic, can you help us triangulate how that business should be run and back to the question of really rightsizing that platform, rough idea, what is the underlying targeted ROEs of a largely mini business and financial guarantee and anything else you can kind of point us to there, try to help us get an idea of what the excess management need is going to be once you get past the credit headwind?

Hi Geoff, that's a complicated question. I'll give it my best shot and I'll probably get a lot of head shake if you must, my stand as I answer this question because all will be concerned about what I say. So let me first give you a commercial. So my commercial is as follows. We've had to play defense in this company since the day we went public. If you think about it in 2004 we were split rated, we were the smallest financial guarantee company out there. We were struggling for market share. Moody's gave us a market share of minimum to upgrade us. So we struggled those early years to get recognition and acceptance. We finally break through, and I can't remember the exact date, but I think it was in 2008, we finally get all three AAAs, which everybody else had. So we're now on a competing platform with them, and it gets taken away from us in three months because of the financial crisis. So now we're into the financial crisis and of course, everybody had a huge expectation of the doom of Assured Guaranty, which obviously, we knew better even though nobody believed us, at the end of the day, we had full confidence in the ability of the company because we knew our books better than anybody else knows our books and trust me, we knew where our exposures where and we knew how to get around them. So we fight that for a number of years. So I said, okay, finally, we got that behind us. We took advantage of it. We bought our competitors at very steep discounts, really enhanced earnings, but we created a portfolio that included the 5.5 companies we bought plus our own writing new business in a very…

Okay, and can you remind, what was the last estimate under the S&P modeling over last July, full year excess capital against AAA? And…

I'm sorry Geoff, it was 2019, it was $2.6 billion.

And fair to say that the underlying financial guarantee business is a double-digit return so far?

We calculate our [indiscernible] on every transaction we do as summary for the year. If I told you the exact results I'd have to shoot you, but they are very, very positive.

Okay, thank you.

You are welcome.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the call back over to Robert Tucker for closing remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.