Good morning, everyone, and welcome to the Assured Guaranty Ltd. First Quarter 2023 Earnings Conference Call. My name is Bruno, and I'll be the operator of today. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference call 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 first quarter 2023 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, 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 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. Assured Guaranty’s new business production was outstanding in the first quarter of 2023. In terms of PVP, it was our most successful first quarter in over a decade. We closed $112 million of PVP in the quarter, up 62% from first quarter of 2022 and double the first quarter average for the previous 10 years. We benefited from the strong start to the year for both Global Structured Finance, which drove its largest amount of first quarter PVP in over a decade; and International Public Finance, the first quarter PVP was the best in five years. Adjusted operating income per share came in at $1.12 for the first quarter. As of March 31, our key non-GAAP valuation measures again reached record levels on a per share basis with adjusted operating shareholders' equity at $94.58 and adjusted book value of $143.4. Shareholders' equity per share at quarter end was $88.7 compared to $85.80 for the previous quarter. Significantly, on April 5, we announced that we reached an agreement with Sound Point Capital Management, which, when implemented will combine the asset management portfolio as of Assured Investment Management and Sound Point to create what we expect to be the CLO's market's fifth largest asset manager by AUM. Our first quarter production results showed the strategic execution of our uniquely diversified three-pronged business approach, which includes the U.S. public finance, international infrastructure and global structured finance markets. In the first quarter, the largest contribution to PVP came from Global Structured Finance, which contributed $60 million of PVP, primarily from an insurance securitization and in excess of loss guarantee of a minimum amount of build rent and a diversified portfolio of real estate properties. We're also active in whole business securitizations in the subscription…

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report first quarter 2023 adjusted operating income of $68 million or $1.12 per share. This compares to adjusted operating income of $90 million or $1.34 per share in the first quarter of last year, which included a $63 million net benefit associated with the Puerto Rico settlements that occurred last March. Largest component of adjusted operating income was the Insurance segment, which contributed $117 million of adjusted operating income in the first quarter of 2023 compared with $133 million in the same period of last year. Excluding the benefit for Puerto Rico settlements from last year's results, Insurance segment adjusted operating income increased due to higher net asset values for alternative investments, higher investment income and the release of a litigation accrual. Investment results from both the fixed maturity and the alternative investment portfolios performed very well in the first quarter of 2023, with total income from investments of $110 million compared with $58 million in the first quarter of last year. The available-for-sale portfolio generated net investment income of $82 million in the first quarter of 2023, up from $63 million in the first quarter of 2022. Higher income from floating rate assets as well as higher interest rates and average balances in the short-term portfolio were the primary drivers of the increase. Equity and earnings from alternative investments, predominantly generated by the AssuredIM CLO and Healthcare funds was a gain of $30 million in the first quarter of 2023 compared with a net loss of $1 million in the first quarter of last year. Annualized returns for the AssuredIM funds were 10.7%, which is in line with our long-term expectation for these investments. With respect to premiums and losses, the variance in both…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Thomas McJoynt from KBW. Thomas, your line is now open. Please go ahead.

Hey. Good morning, guys. Thanks for taking my questions. You did call out a number of – thanks, yeah, you did call out kind of a number of seemingly kind of one-off pieces like the litigation accrual release, the U.K. tax assessment and some of the Sound Point transaction costs. So a lot of moving pieces there, but some of them weren't quantified. So could you put any numbers around those just as we try to think of kind of the magnitude of the impact on the quarter?

I would just say, Tommy, looking at expenses, the one-time items are approximately $15 million, and the release of the litigation accrual was about $20 million.

Got it. Thanks. And then just as a reminder, in the Asset Management segment, can you remind us, are most of the performance fees that you guys recognized loaded into the first quarter? So just like a higher seasonally, that's normally what has been the case or anything kind of unique there?

No, not loaded at all, Tommy. Whenever they're realized, then we recognize them. Unless there's a tax distribution, then you have to recognize something for the tax distributions. But typically, they don't recognize to realize, and that's any time we sell the asset.

Okay. You also called out in excess of loss guarantee on a minimum to build rent on a diversified portfolio of real estate properties. You, of course, have a lot of different mechanisms through which you guys lend your guarantee as long as it's the right price. Is this type of transaction new? I'm not sure I've heard of it before. And basically, do you plan to branch off into these types of transactions as you look for new growth sectors?

In our structured finance, Tommy, it's becoming more bespoke than it used to be standardized. Remember, in the old days, it's basically mortgage business, credit cards, auto loans, and those businesses now go out without insurance. So you got to be a little bit more creative. This is an internally rated AA transaction, highly subordinated protection in the deal. It's a mixture of all sorts of properties, including residential, multifamily residential, office space, retail space and industrial space. And it's a really great portfolio. If we see other opportunities like this, we'd be more than happy to take them.

And a lot of these transactions, Tommy, benefit the client for capital relief. So capital relief transactions are significant in the structural finance.

And this is done for a financial institutions.

Okay. Got it. Makes sense. And then just actually last one, if I could sneak it in here. Does your thinking still believe that in the second half of the year you should have that five-year audit completed? Do you think the opportunity to pursue special dividends becomes more likely? Is that still the right timing that we should be thinking about?

Yes.

Separate two issues there, Tommy. One special dividend, one share repurchase. We anticipate starting to do share repurchasing now after the call, after we clear blackout, because we've now got uncertainty over certain of the obligation that we were preparing for relative to Sound Point transaction and some other things that we were holding money for, so that will start. And then special dividend will be requested sometime this year. The amount of capital that we could retire this year will be predicated based on availability and special dividend.

And we do expect the audit to be done in July.

Great. Thank you both.

Thank you.

Our next question comes from Giuliano Bologna from Compass Point. Giuliano, Your line is open. Please go ahead.

Hello. Good morning and congrats on another great quarter. One thing I'd be curious about related to the asset management transaction is you had some goodwill intangibles related to the Blue Mountain (ph) deal. And it sounds like the commentary implies that this will be a flat, if not, positive from a book value perspective. Is it fair to assume that the fair value of the equity stake should exceed -- at least meet or exceeded the goodwill intangibles related to the Blue Mountain deal?

Yeah. That's a good assumption.

And then thinking about the earnings, obviously, if you recognize it as an equity method investment, would it just flow through as kind of below the line item or just another income line on a net basis? And related to that, would you get distributions from the partnership quarterly or annually? Is there any sense of the timing there?

It will be equity income and our investment in Sound Point, one item. And there’ll be an equity income, as I said, for our investment in the funds. And we will get distributions from Sound Point up into the holding company.

That’s great. Very helpful and I’ll jump back in the queue.

Thanks Giulio.

Our next question comes from Jordan from Philadelphia Financial. Jordan, your line is now open. Please go ahead.

Thanks, guys for taking my question and [indiscernible]. You said Dominic a minute ago that you expect to start buybacks as soon as the quiet period ends. Can I push that a little more on the last call, you said you would be able to do without a special dividend, you may not be able to do quite $300 million, but near $300 million in special dividends without a special buyback. Is that still the plan for this year?

I don't think we've ever given a number, to be honest with you, Jordan. Obviously, we will do as much as we can based on availability and based on other...

Well, $300 million in dividend paying capability or near that in the past, and you said we should have close to that this year.

[Multiple Speakers] do with the money, Jordan. We've got the debt refinancing and we've got to think about whether we want to pay the debt off for refinancing. We've got some other things we got to do in terms of truing up the balance sheet with the ultimate merger with the Sound Point. So there's some other calls on cash that we've got to look at as well. So as we figure out the availability, the amount, ex and with the special dividend, we will then start and continue to do our execution of our strategy of retiring capital. As we've always said, it's still a very high priority in the company. And as we know, we've got some clarity where we're at today, we can start to buy back some shares. And like I said, the amount that we'll buy back this year will be predicated on the special dividend and these other factors that we're considering.

And we do expect, as I said in my -- I do -- we do expect to buy back shares as part of our capital management strategy.

And any prediction of the series?

I'd say I was shocked last night. And we're in Bermuda, so we're -- now we're ahead. So it was a little late to stay up for the game. But I was shocked at they won last night, that's for sure. But it's a continuation of the great Philadelphia sports story. Eagles, Philly, now Sixers. Can't get any better than that.

Our next question comes from Brian Meredith from UBS. Brian, your line is now open. Please go ahead.

Thanks. So a couple of them here for you. First one, I'm just curious, the kind of one-timers we had in the quarter. Did any of this affect the Insurance operations? Just looking at the $67 million of Insurance operating expenses, trying to figure out is there a run rate or is there anything onetime in that number? .

One thing would be there is the acceleration based on shares that were given to him, retired eligible employees, would be the acceleration in the expense line.

And also the onetime items also included the VAT, value-added tax, expense that I talked about. But in total...

[indiscernible] the insurance ops. Okay.

Yeah. But like I said, in total for the entire company was $15 million of onetime items.

Got you. Thanks. I was just trying to figure out kind of a run rate underwriting profitability, kind of thinking about the Insurance operations. Second question, I'm just curious, more for, I guess, a regulatory accounting perspective, does alternative investment income count with respect to the test on dividends out of the Insurance operations with respect to investment income?

Yeah. So think of it this way, the assets that are on the insurance companies' books, the balance sheet, the investment alternative investments, the higher returns to increase investment income in those companies, and therefore, increase our dividend capacity if that's a limiting factor. The GAP management fees are outside, the Insurance company structures, that's free cash flow that's created for the company.

As distribution -- as we distribute, the returns from the alternative investments from AGUS, up to Insurance commitments, as Dominic said, that will increase the dividend capacity of the Insurance companies.

Great. That's helpful. And then, Dominic, last question just quickly here on PREPA. I mean you did talk about it, the court decision with respect to, I guess, revenues versus net revenues. May be you could just talk about that in plain English for some of us. What does it mean as far as potentially getting settlement here and rights and stuff?

Remember, any utility has to pay their expenses, right? So you're basically led to the net revenue opportunity to pay back debt. If you remember in the Jefferson County, they try to stop the kitchen sink into the expenses of the water authority, and we were able to get that and kind of resolve without any impairment. Obviously, the judge seems to be making social decisions about legal decisions, that's fine. That's why there's court of appeals, and there's other avenues for us to pursue. They seem to want to press for mediation, which obviously makes some sense. We don't have the fight when it comes to confirmation time. But at the end of the day, I don't not seeing a whole lot of daylight here, so I think litigation is the course of action that we're going to take. And we're more than happy to basically protect our legal rights in this matter as a revenue bond for special legal entity outside the Commonwealth's balances.

Do you think -- and so I guess the other thing just on PREPA, I guess, I think you've talked about this before. It does -- you don't have to sell a PREPA in order for you to get more comfortable with taking special dividends, it's simply just getting this audit done, correct?

Yeah. If you remember, Brian, as we talked about, when we were first getting special dividend, that was just when Puerto Rico filed for bankruptcy. So we were able to get dividends when buyer amount was up for grabs, just down to one exposure, which we believe may be economically defeat to our reserving process on the books, really makes it no brainer relative to the state, I believe.

Great. Makes sense. Thank you.

Thanks, Brian.

We currently have no further questions. So I would like to hand the call over back to Robert Tucker. Please go ahead. .

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.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.