Good morning, and welcome to the Assured Guaranty Ltd. Third Quarter 2022 Earnings Conference Call. My name is Bailey and I'll be the operator for today's call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to our host, 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 2022 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're listening to a replay of this call, are 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. Turning to the presentation, 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'll 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. We continue to build shareholder value of Assured Guaranty during the third quarter and first 9 months of 2022. As of September 30, 2022, Assured Guaranty's adjusted operating shareholders' equity per share of $91.82 and adjusted book value per share of $137.87 were both record highs. Adjusted operating income per share of $2.11 for the third quarter and $3.88 and for the first 9 months represented increases of 369% and 49%, respectively, compared with last year's periods. New business production continue to be strong in the third quarter with $95 million of PVP so its substantially the same as in the third quarter of last year and our best quarter so far this year. This year's third quarter was our best third quarter in international public finance and second best in U.S. public finance in more than a decade. We believe there's been a permanent shift in the market toward a greater appreciation of our value proposition as the pandemic, the volatility in the markets and the global economy, geopolitical unpredictability and climate-related natural disasters have reminded investors of the vulnerabilities of their investments. Municipal bond yields, which had risen dramatically in the first half of this year, continued to climb in the third quarter with the benchmark yield for 30-year AAA geo bonds finishing at 3.9%. Credit spreads remain tendered and have been typical over the past decade, although they have widened somewhat over the course of the year. While interest rates increases and credit spreads widening are promising facts, U.S. municipal bond issuance volume has not kept pace with last year's. There have been fewer refundings this year, where in past years refundings have helped drive high total new issue volumes during the year of ultra-low interest rates.…

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report strong adjusted operating income in third quarter 2022 of $133 million or $2.11 per share. This represents a 369% increase on a per share basis compared with the third quarter of 2021. As a reminder, in the third quarter of last year, we refinanced $600 million of long-term debt, which resulted in a $138 million loss on the extinguishment of higher coupon long-term debt. Third quarter Insurance segment adjusted operating income was $159 million compared with $214 million in the prior year. These results include strong and relatively predictable scheduled earnings generated by our financial guarantee contracts and fixed maturity investment portfolio, offset by some fair value movements and other investments. In terms of premiums, third quarter 2022 net earned premiums and credit derivative revenues were $92 million compared with $114 million in the same period of last year. The decrease relates primarily to $13 million of net earned premiums on certain transactions in the third quarter of 2021 that did not recur and lower accelerations and updates to debt service assumptions in the third quarter of 2022. Refundings were $12 million in the third quarter of 2022 and compared with $15 million [ph] in the third quarter of 2021, which is consistent with our expectations. Deferred premium revenue on the investment-grade exposures has been approximately $3.5 billion for each of the last eight quarters, as our new business production has replenished the normal amortization of the in-force book of business. As Dominic mentioned, financial guarantee new business production was strong in the third quarter of 2022 despite reduced primary market issuance. Higher interest rates and a more active secondary market contributed to a stable level of deferred premium revenues. Net investment income from…

Hey, thanks. A couple of questions here first. I'm just curious, Dominic, there was a disclosure by MBIA that they're undergoing some strategic evaluation of Barclays. I'm just curious your kind of thoughts on whether that would make a good strategic fit with AGO, any opportunities there?

Well, Brian, thanks for the question. We heard that same comment in the market as well. Obviously, we've been continued - as one of our strategic objectives is always to consolidate the other remaining model lines. And like any other opportunity, we'll look at it if given the opportunity and see if it makes sense and whether we can meet the credit terms of our credit underwriting standards, and need to look [ph] at what else is in the portfolio.

Great. Thanks. And then second question, I'm just curious, to look at the dividend capacity out of the insurance top right now, it's relatively low. Maybe give us kind of the views of maybe a special dividend, particularly, could you get one HTA ultimately comes through and everything finally gets done?

Well, I'll let Rob answer the specifics. But yeah, we, obviously, look at other all means in terms of meeting our cash flow requirements to the holding company to allow us to operate or execute our strategic objectives, one of them which is capital management. Obviously, as Puerto Rico continues to wind down, we get down to basically one exposure which is PREPA. And remember, the regulators were giving a special dividends even with Puerto Rico back in a day and then, obviously, COVID hit and changed things dramatically. So we think the environment is getting in the right structure for us to go back to the market or go back to the regulators and have the discussion about special dividends. Obviously, if we want to achieve further strategic objectives, that's important for us to be able to accelerate or increase our cash flow to the holding company.

And then, Brian, as you look at Page 12 of the equity investment presentation, you can see the remaining capacity at AGM and AGC, but that's just for this year. So that will be replenished in the next year. So remember, it's either 10% of policy or surplus or your net investment income. So that will be replenished. In addition to Rich [ph] AG Re will have more capacity going into next year as well. So - and obviously, we're always looking to increase that dividend capacity through possible dividends from our U.K. operations. And so we continue to try to maximize our dividend capacity with our operating subsidiaries.

Got you. And then Dom, I want to go just quickly back to my first question. Just curious from your perspective, is there the ability for AGO to do a transaction for all of MBIA? Or would you be purely focused on national if something was possible?

Well, that's pretty stuck into, Brian. So at the end of the day, we really - at this point, we've looked at the portfolio from a reinsurance perspective over time. But obviously, we'd have to do a complete update of our understanding of what's in each of the organizations and see what makes sense. And if there's something that makes sense, then, obviously, we would consider it.

Great. Thank you.

No problem.

Thank you. [Operator Instructions] The next question today comes from the line of Tommy McJoynt from KBW. Please go ahead. Your line is now open.

Hey. Good morning, guys. Thanks for taking my question...

Good morning, Tommy.

Good morning, Tommy.

Good morning. Yeah. So I won't ask to say specifically about your interest in NBI, but just perhaps from your seat, kind of a unique standpoint, do you think that other multiline insurance companies might have interest in an asset like that? I guess said another way, is it possible that other insurers could aim to enter the bond guarantee market, I guess with the positive outlook of higher rates and wider spreads? Or is the stigma of Puerto Rico really likely to keep some entrants away from this market?

Well, speaking from a third-party perspective, I don't this stigma Puerto Rico make any difference at all at this point in time. I think it's a credit that's getting its way to resolving. Obviously, based on the creditworthiness of the government and the activities and it's actions was making difficult for them going forward to get further bond insurance supplied to another day, but that's for another day. So I don't think Puerto Rico matters at all. I think it really looks at the regulatory environment. So remember, when you get into this business, you not only have regulators, you have rating agencies, which are two very high hurdles. And if the company is willing to climb those hurdles and they would take a look at it. But for us to try to speculate on whether a P&C company or a title company or a life company, once again, the financial guarantee business. And we welcome the competition. I think Assured is very well positioned relative to the marketplace, to our standing with our clients and the performance that we've done and the track record that we make, which is not easy to duplicate at this point in time. Plus, we've only taken this business, you need a track record, you need earnings and use a deferred revenue source to really make a sense for the capital in play. So if you say that these companies that have left big enough to establish that benchmark or that foothold to allow you to go forward in the business. Like you said, it's not for us to determine us as just to determine whether it's attractive to us or not. And that we see competition and we see competition.

Got it. Thanks. I guess on that topic of thinking about regulators and rating agencies and dealing with both, I guess, on the topic of a special dividend and the potential size of it, do rating agencies look at it really differently than regulators might? I know you guys were trying to work on coming up with an updated figure of the - I think it was an S&P report kind of estimating how much excess capital you had in excess of a AAA rating that was, I think, last out in 2019. So just any update on that and really just kind of thinking about how regulators look at it from the perspective versus rating agencies?

Well, I think the regulator rating agencies do have different perspectives, right? Obviously, the rating agencies are more based on a special scenario. Regulators have a lot more criteria. They have a different capital model than the rating agencies do and yet as a financial guarantor you are probably responsible for both. In terms of the excess capital, so we anticipated the question. So the numbers come down over the last 2 years due to our - I'm reading our prepared remarks, so bear with me on this. So the numbers come down over the past 2 years due to our successful capital management program, basically resolutions related to Puerto Rico, and we're very comfortable that we have substantial excess capital. The last time we gave you this information was for the year-end 2019, where we had approximately $2.6 billion of S&P AAA excess capital, very important to note, it's on a AAA basis. However, between then and the year-end 2021, we repurchased $1 billion of our common shares, $1 billion worth of common shares, paid approximately $140 million in dividends, paid over $700 million of par debt service, excluding settlements, invested over $500 million through AGS and other high cap charge investments. And despite using this $2.14 billion of capital, our S&P excess AAA capital is still $1.8 billion as of year-end 2021. So hopefully, that gives you your answer.

Yes, that's what we're looking for. Thanks for having that prepared for us.

No problem.

And then just last question and I think it looked like in the slides that the industry's U.S. public bond insurance penetration actually looks like it dipped a little bit in the third quarter, just if I base see the penetration in the first half and compare it to what it was for the first 9 months. So it looks like it declined a bit sequentially, which is a bit surprising given the backdrop. Any sense of what drove that?

Yeah. I mean remember, that's very relative to who's in the marketplace at any given period of time. And of course, the market volume is way, way down. So the issuers that are in the market are probably the more liquid issuers that are probably going to lease bond insurance lease. I think as you see the statistics for the complete year, you'll get a very different answer relative to the penetration rate. It's still kind of flat with the prior year, which is still way above years 4 to 5 years ago. So we're making progress in penetration. We think with the rising interest rates, the widening of credit spreads, the economic uncertainty, we think demand is now positioned to really start to increase substantially. And we'll hopefully see that in the fourth quarter when we give you our fourth quarter and year-end statistics.

Great. Thanks for answering those questions.

No problem.

Thank you. The next question today comes from the line of Jackie Cavanaugh from Putnam. Please go ahead. Your line is now open.

Hi, guys. Can you hear me, okay.

Yeah, we can, Jackie. How are you?

Hi. Thank you so much for taking my question. I guess just a follow-up to the prior question, and thanks for going through the different capital sources. But does the regulator or the rating agencies care at all about the AOCI marks? And does that impact their analysis or the way they might think about a special or the capital excess just given the magnitude of the marks? Thank you.

The market doesn't affect on statutory capital and it doesn't have an effect on rating agency capital. Obviously, it will be a discussion that we talk about with rating agencies, but it doesn't go - it doesn't affect surplus or rating agency capital.

Okay. Great. So they're sort of agnostic to it, just like the Street kind of looks through it?

Look through it is not part of their model. So one looks at claims paying resources, one looks at speciality [ph] capital which is both actions [indiscernible] doesn't affects the street capital...

As BD [ph] talks with our surplus and our capital and then rating agencies just obviously - I mean the regulators will look at surplus. And as Dominic said earlier, there are other regulatory tests that we need to talk about with them and deal with them when it comes to getting special dividends.

Got it. Okay. I know you've told me that before, but I just wanted to confirm, given the magnitude of the mark. So thank you very much.

You are welcome.

Well, the marks are the marks and at the end of day, it doesn't change our economic outlook and returns on those assets. Obviously, some adjustments will affect certain parts of the balance sheet. But over time, we would think - we believe that things will return to basically normal, and the mark should start to reverse.

Great. Thanks, guys.

You are welcome.

Thank you. The next question today comes from the line of Geoffrey Dunn from Dowling & Partners. Please go ahead. Your line is now open.

Thanks. Good morning. Dominic, I don't remember the years where you discussed this, but in the aftermath of the great recession, you speculated at where the municipal bond market could ultimately recover to under kind of the new model of being a AA, et cetera. I want to say we're like 25% penetration, but part of that recovery was based on rates going up and spreads going out. So obviously, that's happening now and those that will be sustained. But in your vision of where the muni bond market for FG goes or even the global market for [indiscernible] goes, what else do you think needs to happen other than what we've been seeing on spot rates and spreads to reach what you think could be a fully recovered sustainable financial guaranty business model going forward?

One word, Geoff, one word, stability. So rates are getting to an area where we're very comfortable, it's going to really further increase demand for municipal insurance. But it's got to stay over time, right? We can't get the rates go up like a balloon and down like a pop balloon. If these rates will hold and if the Fed and the treasury stay constant, then I think it creates that absolutely conducive market for growth for us. And we started to do some analysis, right? So a couple of cute little tit bits of information not particular away from me. So, I don't see it. So the one I'll tell you is the 1% rise in interest rates is worth 10% on PVP. So think about a 1% rise in interest rates, 10% on PVP. So that's just keeping everything else constant. Thank you, Robert. To give you an idea, we look at debt service on the same amount of par. Remember, we get paid based on rate times debt service. So 2021 debt service resulted in 135% of par. 2022's debt service resulted in 193% of par because of the change in the interest rates. We get paid based on debt service. So things about that impact will have on future premium, not only will we calculate as PVP, but we get to earn over the future periods. And in a rising interest rate environment, you're not happy refunding. So we're not going to get this acceleration that Rob's future periods of earnings. Now the earnings will be stable over time, will grow according to the PVP growth year-over-year, and that is interesting year year-over-year. So we are very optimistic as we look at the market today and the only we hope for stability, that its stable at this rate, rating stays that way for a period of time, a few years at least before there is panic in the streets and they start lowering rates again.

And Geoff - Just think, Geoff, and the second, as you saw, we - the secondary was very strong over the last couple of quarters and is generally a leading indicator to the primary as well. And so if you get stability and less volatility, the issuance will pick up in the primary market.

Yeah. So a little fact that we look at the secondary market activity, and that's typically a forerunner of primary market activity. And to give you an idea of secondary market activity in the current year 9 months to depict, we written $60 million of PVP in the secondary market compared to $4 million last year - $60 million versus $4 million. And that's typically a precursor, an indicator where the primary market is going.

Okay. And then it's been - it might be probably 1.5 decades since financial guarantee companies really talked about the different hurdle rates across - return hurdle rates across muni structured in international. But as you weigh potential M&A, I'm just curious if you could share some sort of range on hurdle rates on new business so we can get a gauge of what type of return on an M&A opportunity might be compelling enough for you to look at versus retaining the capital for buyback and growth?

When you look at it on that basis, Geoff, you have to say the return on an M&A basis got to be north of 15 because we think the capital return on the buyback of stock is in the 11% to 13% range. We're writing new business anywhere between, say, 8% to 11% depending on the transaction. And depending on the service of business. So international would have a higher than that, great. But obviously, international is not the major part of our business, U.S. public finance. When we look at rate returns on a transaction-by-transaction basis plus for the quarter. But remember, that's also on regulated capital, not being capital that's to absorb the company. So the excess capital has gone by calculation. So the real returns are less than that, but I can call the profit center for writing business and regulatory capital enhanced returns, and they're not responsible for the excess capital in the company. So as we look at that hurdle rate for the M&A, it's got to be north of 15%.

Okay...

If that makes sense credit wise and everything else developed for the organization. I'm sorry, Geoff.

Right. And then just financially, is there any kind of return leverage preference between reinsurance versus now like acquisition?

The open the [indiscernible] acquisition had a lot of benefits, right? That got us the portfolio rerated board in the investor base, which we really don't need anymore, but that would report to us back in the day like the FSA transaction. And then we got a huge discount in the capital and the capital was substantial to get a discount on. Now the capital basis they are a lot smaller, so the discount, if there are any, is not going to be the same value to us that it used to be. So for us, we're agnostic from reinsurance through acquisitions, both of them will provide the portfolio we want at the risk rating we want at the premium level that we want.

Okay. And my last question, do you recall the discount, the statutory capital that you paid for FFA?

Wow, the statutory capital - I can tell you the book value when we paid 37% to 38% - represent a 62. And then as we went through the transaction, we got into the 50s and then the later transaction was probably in the 20 and 30. So as the portfolios get smaller, they got less volatile, there was less capital if we discounted. So they were bigger back in 2009. I this it was like 2011 or '12, which was at 50% and then the ones in 2013 and '15, if they were the years if I remember correctly. We're probably in the 20% to 25% range.

Yes. So that was – so discount was like 63% for asset just to make sure we're clear if we pay like 37% of...

Got it. Okay, thanks, guys.

You are welcome.

Thank you. The next question today comes from the line of Giuliano Bologna from Compass Point. Please go ahead. Your line is now open.

Another great quarter on the performance. But what I would be curious is actually following up a little bit on the kind of pricing and returning question. When I think about the spread environment, obviously, spreads have widened, so you're going to generate savings there, your end customers have increases. I'm curious where returns have gone from a return on capital perspective on where business was before rates prior versus kind of where it is now and where that could go? Is that - I'm curious how much improvement potential there is from a return on capital perspective for new business in this kind of better operating environment?

Yeah. I think the improvement is reasonably lowered. So if you think about it, Giuliano, so public finance is the largest book of the business, right? And obviously, the most competitive end of the business, more susceptible to competition in the marketplace, more for uninsured versus insured. And if you look at it, we do it on a transaction by transaction basis, I'm trying to run from the top of my head. So in most quarters, we're trying to achieve a 10% minimum return. And I think we get that most of the time, but there probably were some quarters, say, 1 year ago or 2 years ago, they might have dipped below 10 to like 8 or 9. And then with some transactions that were competitive, you might even go lower and the other transactions where we really added value, you're able to go higher. I'm giving the average. As we look at the book today, I'd say - and remember, we're just at the beginning of seeing this enhanced flow of business and rates and premium and spreads. This could, I think every business line was over 10%. International is always over 10% and really be at high that it wouldn't be. But even in the domestic public finance, if I remember the number correctly, it was north of 10. And like I said, that's at the very beginning stages of what we're seeing is a return of reasonable rate spreads to the marketplace. We think stress have a lot more widening that to experience as the economy rolls forward to potentially a recession.

And if you just think of the basic math, Giuliano, as Dominic said, you're going to get paid on debt service or financing for all of our clients business, the higher the interest rate and required the spreads again paid more dollars, but the denominator of that capital charge it stays the same. So by definition, your returns must go up.

I was referring to someone else in the market, if you look at their published financial statements.

So I guess kind of going back to another question on the kind of consolidation trends in the industry or the desire to consolidate the rest of the industry. I'd be curious, obviously, reinsurance can achieve effectively the same thing. But as the remaining entities that are out there are running off. The opportunity to do large reinsurance field, I say gets smaller and smaller. I'm curious if there was any preference for acquiring the legal entities, you expect acquired capital at a discount of capital and also you get the benefit of higher investment income to boost for dividend capacity...

Yes. No, you hit it right on the head, right? So reinsurance gets you a very highly rated, well premium risk exposure that fits into your risk model and exceed accepted by your credit underwriting standards. That's reinsurance. What's missing when you get to the acquisition of the entire company, two pieces, one, breadth of customer, we've already got that. So we don't need that anymore. But back in 2009, that was important to us, an acceptance of the paper in the marketplace. And then the third thing, as you just pointed out, the discount on capital. But these capital bases have shrunk substantially because of, obviously, refundings runoff, et cetera. So the value of the discount even say I can give us 30% discount is on a very small capital base. So for us, the reinsurance gets us to pick the risk that we want, meets our underwriting standards. It gets a premium level that gives us that level of return that we targeted. So one is better than the other because certain extent as you get a really good value on the discounted capital.

That's very helpful. Thank you for taking my questions. I'll jump back in the queue.

Good to hear from you, Giuliano.

Yeah. Thank you, Giuliano.

Thank you. This concludes the question-and-answer session. I would now like to return the conference back over to our host, Robert Tucker for 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.

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