Good morning, and welcome to the Assured Guaranty Limited Third Quarter 2023 Earnings Conference Call. My name is Elliot, and I will be your operator for today's call. All participants will be in listen-only mode. [Operator Instructions]. Please note that this event is being recorded. And 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 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 are listening to a replay of this call or if you're reading the transcript of the call, please note that the statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures and our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com. Turning to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you'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 value for Assured Guaranty shareholders and policyholders during the third quarter and first nine months of 2023. Adjusted book value per share of $148.3 and adjusted operating shareholders' equity per share of $99.18, both reached record highs at the end of the third quarter. New business production has been strong this year with significant contributions from U.S. public finance, international infrastructure finance and global structured finance. For the fourth consecutive year, our PVP for the first three quarters reached or exceeded $240 million, coming in at $249 million for 2023. In July, we completed our transaction with Sound Point Capital Management and Assured Healthcare Partners, which resulted in a $241 million pretax gain net of expenses. We now continue our asset management diversification strategy to our 30% ownership interest in Sound Point. The earnings from that stake will be reflected for the first time in our fourth quarter reporting, furthering our strategy of generating fee-based earnings to complement our risk-based financial guarantee earnings. We also expect enhanced returns on our investment portfolio based on a broader range of alternative investment options with Sound Point. More generally, these changes will also result in a streamlining some of our financial disclosures. Rob will expand on this in a few minutes. In capital management, during the third quarter, we completed our current debt restructuring efforts by refinancing $330 million of our senior obligations due next year. We also picked up the pace of our share repurchases, buying $64 million worth of shares in the quarter. And last week, our Board of Directors increased our repurchase authorization by $300 million. Before I go into greater detail about the quarter and year-to-date results, I want to tell you about two important…

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report third quarter 2023 adjusted operating income increased to $206 million or $3.42 per share. This represents an increase of 55% and 62% respectively, compared with the third quarter of last year. The increase was primarily driven by the gain on the Sound Point and AHP transactions of $190 million, which is net of transaction expenses and deferred taxes. The Sound Point and AHP transactions were strategic milestones towards our goal of increasing fee-based and alternative investment earnings in order to grow the returns of the company, while diversifying sources of income. With the Sound Point transaction, we will own a 30% interest in an asset manager with historically strong AUM growth that provides an array of alternative investment options. In keeping with our commitment to invest a total of $1 billion in Sound Point managed alternative investments within two years, we committed $150 million to two Sound Point funds in the third quarter and another $100 million since the end of the third quarter. Including funds managed by Sound Point, AHP, and others, as of September 30th, 2023, we had $630 million in alternative investments. Our inception to date annualized returns across all alternative investments is 12%. Before I get into a discussion of the third quarter, I wanted to highlight a few financial reporting changes resulting from the Sound Point and AHP transactions. First, while we are still reporting an asset management segment, it now primarily consists of our 30% share of Sound Point earnings net of any amortization of intangible assets associated with the Sound Point investment, because all Sound Point reporting is on a one quarter lag. Our share of Sound Point results will be first reported in the fourth quarter.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. First question comes from Tommy McJoynt with KBW. Your line is open.

Hey, good morning guys. Thanks for taking my questions.

Good morning.

Good morning.

Looking at the gross written premium and the PVP in the quarter, there was a sizable decline. And while I understand the structured finance side can be lumpy. Should we read anything into this such as a pullback or a tightening of credit from your underwriting standpoint? Or is this simply a function of what the market gave you and you're really trying to write as much new business as you can?

It's really a function of mix of business in the quarter. There was a rapid start decline in the BBB issuance in the quarter, which obviously is where we -- most of our put in. So that affected what we were able to write. So we wrote a lot of what I'll call, down the middle of the road, flow business, highly rated. Now the rates that are available to us in the marketplace.

Okay, got it.

And Tommy, as we said, as Dominic said in the fourth quarter, we're seeing a strong flow in public finance.

Got it. Okay. And then switching gears on the capital standpoint, is your leverage position, your debt-to-capital, a constraining factor that could inhibit you from doing more buybacks at some point? And when you and perhaps your regulators look at the opportunity for buybacks and what that could mean for your debt-to-capital ratios. Do you look at a capital number that includes or excludes the other comprehensive income, given the swings that we've seen there?

Well, the regulator would look at excluding other comprehensive income looking on a statutory basis. And we look -- we generally look at our debt-to-capital ratios with respect to the rating agency constraints. And yes, it's true that as you -- if, in fact, you somehow shrink your capital that you also have to de-lever. But with our refinancing that we did this year and that we're able to push our maturity of five years, we have flexibility going forward of what we can do in capital management.

Yes. At this point of time, it's not a constraint.

But it's always something that we look at.

Okay. Got it. And then just last question. What's your initial understanding of the potential tax regime changes in Bermuda and how that could impact your business? And to the extent that the effective tax rates do increase there, do you think that your business could pass through those rate increases in order to maintain returns?

Yes. And at the end of the day, as you know, the global minimum tax is going to be effective in 2024. So because Bermuda had a no tax jurisdiction, we would have had to pay whatever income that Bermuda makes 15% would go to the U.K. because we're a U.K. tax resident. So if Bermuda initiates tax, and we just would not have to pay that tax to the U.K., we would just pay that tax to Bermuda. And yes, we believe that, obviously, would be profitable. And also, just remember, it's still significantly lower whatever tax significantly lower than the U.S. And there's a significant amount of capital here in Bermuda that earns at a lower tax rate, and we constantly evaluate and do tax planning based on that.

Got it. Thank you.

We now turn to Giuliano Bologna with Compass Point. Your line is open.

Good morning and congratulations on another successful quarter. It's great to see the continued strong performance.

Thank you, Giuliano.

One thing, I was curious I ask and I may have missed this during prepared remarks. I'm curious if there's any commentary about special dividends or how do you think about your ability to [indiscernible] at this point or and then also how do you think about topping off capital holding company on kind of a go-forward basis that way?

Well, Giuliano, I'm pleased to report that we filed applications with both regulators for a special dividend approval. So we're now just in waiting mode, which we're optimistic of this to be approved. So that's part of the capital management strategy, part of the capital buyback strategy. So we're doing exactly what we said we would do.

That's great. And then one thing I would be curious on the new business front, the higher interest rate environment obviously drives lot, but it's not linear the way it flows through. I'm curious when you think about market penetration rates on the M&A side. And where that could go over the next couple of years, obviously, assuming we stay at a higher for longer environment.

Well, as I said in my comments, penetration rates are at all-time high relative to the last, say, 10 years. to give you some really startling statistics. As we said, in the quarter, there was not a lot of BBB issuance because I think there's a wait and see in terms of the interest rate marketplace and going to finance side and then have the opportunity to look later on the life that the rates are a lot lower. But to give you some statistics in the third quarter on a transaction basis, 84.7% of all BBB issuance took insurance, 84.7%. That means only 15% of the BBB issuance did not take insurance. That's a tremendous statistic for the insurance industry. I think it's reflective of the higher rate marketplace. Our problem is we just need more volume in the market to really drive more premium growth, which we can see in the future. As Rob mentioned, we're having a great fourth quarter start. We expect the fourth quarter to be spectacular on the pulp finance side as well as our other marketplaces as well.

That's very helpful. I realize it's very early in the process with the Sound Point transaction. I'm curious just even from a high level, do you expect contribution to be positive starting next quarter because you referenced you get the first full quarter.

Absolutely, we own 30% of a $50 billion asset manager, Tom, you said I'm sorry, Giuliano. So we expect it to be positive all the way through. We wouldn't have done it otherwise.

That's very helpful. I appreciate it. And I will jump back into queue.

Thank you.

Thank you.

[Operator Instructions] We will now turn to Geoffrey Dunn with Dowling & Partners. Your line is open.

Thanks. Good morning.

Good morning, Geoff.

Dominic, I was wondering if you could just talk about how the market for new business has evolved in the last two years? Obviously, we've had a lot of movement on rates and spreads, but can you give either qualitatively or quantitatively how the market has changed over the past two years with respect to penetration rates, pricing terms, conditions? I mean, net-net, it seems like it all should be positive, but obviously, it gets distorted from what we see with mix change and all that stuff. So wondering if you could just dig a little bit more into that.

Well, Geoff, I would say it's all positive except for one thing, which is issuance. So let's talk about it. So number one, interest rates are higher that's a real benefit to our business across the board, both what we can charge for premium in addition to many people would seek insurance now to try to save some financing costs. Issuance has been, A, the municipalities has been wash with the release that they got through the pandemic. So they run out of their checkbooks, which has taken quite a long time, so we didn't have any need to finance. And then two, because of the volatility in the marketplace and the interest rate environment, people are a little concerned that there's always a prediction that rates are going to come back down to where they should wait to finance in six months or nine months until they get a better rate. So I think we've got conditions that support the growth of the business and support the insurance industry through the interest rate process. Like I said, they haven't had a need to borrow, but we know in the municipality world, it's not a matter of if, it's only a matter of when and when is coming. And because of the higher rates, we think we're in great shape to make significant production gains across the board. Spreads, a question of, the market tend to be a little bit volatile. They're a little tight now, but we expect them to widen out as well, which will further benefit production. So I think it's a tale of two stories. The interest rate environment helps, but the issuance market is lower because of the cash that came out of the pandemic release as well as the fact that people are looking for better rates to finance.

And if I remember, we were seeing change penetration rate two years ago and now you -- I think you said 8.5 year-to-date?

Right, and like I said, if you break it down between the where we're actually strong in the marketplace in the A and the BBB. So to give you another statistic, I told you, 84.7% of BBB transaction scrapped insurance, 59.5% of the A transaction scrap insurance. So think of it both in the BBB and A space well over 50% penetration rates, which is what I had predicted 1,000 years ago based on penetration rates that I expect based on us being AA rating and what's available in the market. And also, the fact that we're in the other two markets of structured finance and international infrastructure really provides us further support and a little stability in the earnings that we can see and the production that we can make. And of course, as you know, the returns on those businesses are even higher -- significantly higher than the domestic public finance business.

And then one last follow-up, given what you just said about BBB and A penetration, you also indicated that you're gaining traction in AA. So is your view that it's an 8% to 10% type of penetration rate? Or is it still -- I think years ago, we talked about maybe recovering at 15%. What's your view on the ultimate penetration?

I still think we can get to 50% of the 50%, which is 25%. That's my view, and I still stick to it. And as I said, if I look at the BBB and the A penetration, we're there, we just need to get more participation than AA. Now I think we'll get to the numbers. So I think easily over 10% in a normalized marketplace. If we continue to see high interest rates and spreads wide now that penetration rate will grow as well.

Okay, thank you.

Thanks, Geoff.

This concludes the question-and-answer session. I would now like to turn the conference back over to our host, 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 and have a great day.