Q3 2019 Earnings Call
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Now, let's turn the conference over to Robert Tucker Senior Managing Director Investor Relations and Communications. Please go ahead Sir.
Thank you operator, and thank you all for joining assured guaranty <unk> third quarter.
2019 financial results conference call today's presentations made pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act a 1995.
Presentation may contain forward looking statements about our new business in credit outlooks market conditions credit spreads finance 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. There for you should not place undue reliance on them and 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're reading the transcript up the call. Please note that our statements made today may have been updated census call. Please refer.
For the industry information section of our web site for most recent presentations on FCC 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 with 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 assured guaranty dotcom turning to the presentation our speakers today our dominant frederico.
[noise], President and Chief Executive Officer, assured Guaranty limited and Rob Bailenson, our Chief Financial Officer.
Next we'll open the call to your questions at the webcast is not able for Q1 day. 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 welcome to everyone. Joining today's call. The third quarter of 2019 was assured guaranty's best third quarter for new business production since 2000 with.
$81 million of Pvp.
During the quarter. We also continued our capital management program that Rob will provide you the details on that shortly.
We're also focused on completing the acquisition of Blue Mountain Capital management, which we closed on October the first.
Strategic accomplishments provides rather the diversification mitigates enterprise risk to the generation of fee income and further advances our capital management objectives by deploying trapped capital in high return investments.
The strong new business results as well supported by all three of orphan is guaranteed businesses U.S. public finance international infrastructure Finance and global structured finance, reflecting the advantages of our diversified financial guaranteed business strategy.
The largest portion of the third quarter Pvp came from U.S. public finance with 46 million a PBP U.S. finance production was up 39% from third quarter 2018, even to.
But the up with the largest ensure in public finance transaction since 2010, and 700 million in short taxable portion.
6.5 billion health care issue common spear health, which is the bond buyers 2019 health care deal with the year.
Including that transaction. In addition to think southern municipal bonds, which we guarantee the $100 million are more principal are probably more people I'm sure sold was 61% higher and ensures third quarter than in last years.
Our competitive advantage, ensuring a larger transactions and those in specialized sectors, such as health care, along with our broad acceptance by institutional investors help us maintain our leading position over the 58% share of the primary and this will bond insurance market.
While market conditions served unconstrained bond insurers ability to drive savings on certain transactions insurance penetration is still move to 5.7% for the third quarter from 5.1% in the prior year third quarter.
Total insured par grew faster than total market issues.
Good day versus the same period last year industry insured par volume is also increased at a higher rate than the market as a whole and the growth in Sri guarantees insured BARDA has outpaced the in the industry's wrote [noise].
[noise], given the low rate and tighter spread environment. We attribute this superior performance to greater awareness and appreciation of assured guaranty's value proposition [noise].
Part of both institutional and individual investments.
Well, we are the leading financial guarantee insurance company U.S. public finance.
Where are the only one serving as.
Well I mean in the international in structured finance markets. This diversification allows us to exploit favorable opportunities in multiple mark [noise].
We have now generate international PBC in 16 consecutive quarters, even though many infrastructure transactions on 1005, your favorite topic [laughter] uncertain [noise].
Several years [laughter] performance under our belt it is clear the value of orphanages guarantees.
[noise] outside the United States [noise].
Recently in preparation for Brexit, we established a new play subsidiary assured Guaranty, Europe , which will allow students to someone can more easily and if the United Kingdom is no longer for European Union provides us a platform on the continent.
And our global structured finance business, we executed that commitment to ensure a $420 million life insurance reserve financing transaction for major U.S. insurance company during the third quarter.
We also continue to ramp asked that asset backed securities in the secondary markets further establish our trading value without important mark.
Additionally, we continue to pursue opportunities me aviation sector, including residual value transactions to our specialty insurance subsidiary assured Guaranty Erie overseas limited, which saw lets say plus rating from A.M. best reaffirmed in July .
In addition to producing strong originations during the quarter, we're very optimistic about the finished guaranteed business. We will complete by the ended the year.
So for the fourth quarter, we've added more than $70 million a PDP.
Includes premiums from 195 million pound transaction for the glass Calvert City Council and they 500 million dollar insurance Company reserve transaction and a $362 million uninsured bonds for the New York State through way authority.
And we have additional significant transactions in the pipeline for year end 2019 [noise].
Another positive note that's appear from stumbling Whitney [noise].
Guarantee subsidiaries with a stable [noise].
On the revised bond insurance rating methodology is really in July .
Regarding Puerto Rico, the actual financial picture continues to improve [noise].
Lastly for [noise].
Somebody else.
I think alfalfa southern government [noise] certain public right [laughter] point $4 billion up from $515.5 billion, a monthly earlier [noise].
At September 30, total includes 8.3 billion Oh, well paying off one is I just got alone.
The treasury single account far more than enough to cover the current annual contractual base.
Please go ahead.
Excluding the general obligation. So can rigorous constitution says must be paid before any other sub.
That well see what Supreme Court, but fair to lower court ruling that follows on from festive lean on local government revenues interventions, where it gets pension system [noise].
We could serve as an important development, even though we are not among the pension bubble.
Because it upholds the ruble wall and respect for contractually in Puerto Rico, something the oversight Board has continued to ignore and all of his proposal.
Currency last month, you're the executive director of the oversight Board testified to college that quote printers that their at risk of being removed from the scene well likely not provide Puerto Rico in the future with access to funds that are definitely going to be needed to continue investing the capital that restructure the Iowa.
And so not only the bondholder themselves, but future investments on the island, both equity and that will take no it'd be fearful of investing into an environment like that.
She was making the same point that we another market participants I've been making all along.
Walls, and rice cannot be ignored and if you try the consequence will make future borrowing difficult if not impossible.
Acknowledging that reality, we're hopeful that the recently sworn in governor Wando, that's when we'll support solution to the island's financial troubles and ensure the island has ended I said sort of capital market.
Positive economic growth despite associated with capital investment [noise].
Governor supported the Puerto Rico Electric power authorities restructuring support agreement is critical to transforming and modernizing electrical system on the island to enhance economic growth.
Well she is thinking I left out of stance towards afford that our predecessor. She also appears to want a rational consensual equally greed resolution every store the island's financial credibility.
Building.
Against all the work of rebuilding Puerto Rico.
Four to work with hurting when she needs both [noise].
Hopefully this will lead to a better frame adjustment than as opposed to plan going forward as filed.
And our view the proposed plan is premised on a number of terms that assured guaranty believes violates Puerto Rico law, It's constitution information.
It nor did ignores constitutionally supported leads and priorities and was the bulk in the absence of consensual discussions with the island's long term and largest creditors.
At its core it's based on a plane support agreement or its creditors creditor signatories generally purchase their bonds. It didn't discounts and represent only a small fraction of the outstanding debt the plant support agreement from ports to restructure.
Well what would the one about how best we should think I'm sure. It gets eliminated as we move forward [noise].
Now that we have completed acquisitions Blue Bell [noise].
It's hard to overstate the transformational in nature of this transaction [noise].
Okay Weird.
Yes, yes.
International public funding structure by that point.
Now in addition word provider of alternative asset management services [noise].
No problem qualified investors.
Yes, they actually acquisition date, we had 8.8 billion and assets under management or the 18 largest global manager of skill.
This acquisition airplanes, they should do significantly diversified a roughly.
The love the risk.
Overall income generation [noise].
For the funniest guaranteed business come from risk based premiums that requiring an incremental allocation of capital with each transaction and congrats.
Management fee base and the scrip of our investment is largely limit the purchase price and working capital, we've already committed or incentive to commit.
Both segments rely on the deep credit expertise that it's the hallmark of assured guaranty and.
And then tell me experience and business relations body segment.
Potentially powerful synergies that can strengthen our company for the long term.
That's funny enough [laughter] for revenue, we also expect [noise].
[noise] friends.
Yes, it's related to some of our access capital over operating subsidiary that cannot be dividend now from capital management.
I'll now turn the call a rough.
Thank you Dominic and good morning to everyone on the call.
I'm pleased to report that non-GAAP operating shareholders equity and adjusted book value per share increased two new record high $64.48 and $90, an 18 cents respectively.
non-GAAP operating income in the third quarter, 2019, $77 million or 79 cents per share compared with $161 million or $1.47 cents per share in a third quarter 2018.
Operating income in the third quarter of 2018 benefit and then from a nonrecurring $31 million game on our investment in PMC bond funds, Inc. and a lower effective tax rate.
Pretty income in the third quarter of 2019, and lower net earned premiums and higher loss expense.
Net earned premiums were $123 million in third quarter of 2019, compared with $142 million <unk> third quarter of 2018.
Net earned premiums in the quarter are consistent with the portfolio amortization schedule.
Acceleration it didn't refundings and terminations of $37 million in third quarter, 2019, compared with $40 million in a third quarter of 2018.
[noise] third quarter 2019 loss expense was $40 million compared with $18 million <unk> third quarter up 2018.
In both periods the expense was primarily related to economic loss development on certain Puerto Rico exposures.
Offset in part by an economic benefit related to U.S. RMBS.
Net economic loss development and a third quarter of 2019 $20 million. This included $55 million in loss development on public finance exposures.
Mainly attributable to Puerto Rico.
Which was partially offset by a 30 million dollar benefit I structured finance transactions.
I mean from RMBS exposures.
First lien U.S. RMBS experienced the benefit of $27 million driven by higher excess spread due to lower LIBOR rates.
The economic benefit in a second lien RMBS transactions was $13 million and was primarily attributable to improve performance on the underlying collateral.
In fact, some changes in discount rates on economic development was not material <unk> third quarter 2019.
As a reminder, lots expense report in the operating income in operating income in any given period differs from economic loss development due to the consideration to fund our Premier reserve in the calculation of loss and only under GAAP accounting rule as well as the inclusion of economic development related to EQT. She via is in economic development.
The effective tax rate in the third quarter of 2019 was 16% compared with 7% in the third quarter up 2018.
We intend to effective tax rate fluctuate from period to period based on sports event them and different tax jurisdictions.
In terms of strategic initiatives, we have continued to repurchase shares in order to efficiently manage our capital position.
During the third quarter of 2019, we repurchased 3.4 million shares were $150 million at an average price of $44, an 11 cents per share, bringing our cumulative repurchases since the beginning of 2013, who the ended the third quarter 202 million shares this represents 53%.
The shares never outstanding at the start of the program.
The cumulative effect of these repurchases for the benefit of approximately $17.
89 cents per share in operating shareholders equity and approximately $30.86 adjusted book value per share.
Since the ended the quarter, we have repurchased an additional 1.3 million shares at an average price of $45. A 98 cents for a total of approximately $59 million.
And then current year to date share repurchases to approximately $399 million or 9.1 million shares.
We currently have approximately $308 million in cash and investment at the holding company.
We have remaining authorization purchase a $209 million in common shares and expect to achieve our goal of $500 million in the share repurchases and share repurchases. This year.
Over the coming months, we'll be continues to be continuing to work I need to Green Blue Mountains operation.
The Blue Mountain acquisition represents a significant step in diversifying diversifying our revenue stream and enhancing investment returns.
We plan to make my first investment implement fine by the ended the year I'll now turn the call over to our operator, given instructions for the Q in a period. Thank you [noise].
Yes. Thank you well now begin the question and answer session to ask a question you mean press Star then one on your Touchtone phone.
Hey, Speakerphone, please pick up your handset before pressing the he's just trying to question. Please press Star then too.
At this time, we'll pause momentarily to assemble the roster.
And the first question comes from Bose George with KBW.
Hey, guys. This is Tom Im joined on for Bose.
Hi, guys I'm just wanted to ask what sort of assumptions are changed I guess related to Puerto Rico. This during the quarter weather was a expectation on timing of recoveries or dollar size of any recoveries that were there any changes during the quarter.
Yeah.
So we just you know.
We look at the plant of adjustment we saw that when we look at that point I'm, just made up of the assumptions and Atlanta adjustment and we consider that to be you know new information and based on that new information, we adjusted a one of our scenarios.
Okay.
And then switching over to a investment income I understand last quarter, you guys had the 14 million dollar benefit.
It is what happened this this quarter more of a good run rate number and then how do you think about kind of Andrew coming onboard and how that could change your approach to kinda positioning the portfolio and what that could do for for asset yield.
Well as you know you had the benefit of the revised has to be guideline Roth capital charges on invested assets.
Brings us in line with the PNC unlikely substantially lower capital charges for assets really ready to below.
At the same time, we happened to buy Blue Mountain bring on Andrew and his qualified team of investment professionals. So is the perfect opportunity for us to take a look at the minutes of assets in the portfolio understanding the new capital requirements, because obviously, we want to protect their rating and get to have the excess capital available for us to continue the package.
Capital Management program. So as we speak the two plans are coming together, we will look at diversifying the portfolio look for higher yield, but even on risk. They you know a valuation to increased returns remembers as these assets are owned by the insurance companies increasing the returns are those assets increases the investment income in the insurance.
Operations would spend increases the dividend capacity, which further supports the capital management. So they get the perfect opportunity as appropriate time with the appropriate transaction, that's going to allow us that flexibility. So we're looking staging you know the commitment of assets into the asset management business for diversification investment alternatives.
The idea of enhancing deal well the same time protecting whereas if we take into capital in the ratings as a company. We've spent a good significant yield improvement from this new process and just I want also mentioned that we would keeping our balance is a relatively short because we added after the purchase of Blue Mountain.
So.
That's been income for this quarter was lower than [noise].
As Andrew puts money to work and Optimizes the portfolio I expect that number to rise.
Okay makes sense and then just last one on a on Blue Mountain There was news that bad the hedge fund there was closed in October .
With that that planned or there was that kind of expected and I know them for the focus is definitely more on being a a large cielo manager, but how much do you think that earnings decline with without the hedge fund.
Well I'd be the hedge fund for US was not strategic and obviously you can appreciate the mortgage.
Overall, how there's an issue relative to its but.
Okay.
It is because of the dedication liquid investment philosophies around certain asset classes sewage Blue mountains been historically, we've already brought a successful in love to be done money in energy and I think will ultimately result in a better overall result, both for the asset management side in terms of fee generation as well as the return side for the answer.
Do we committed to those specific strategies. So we look at it today, it's very focused on Freeport strategies. They have great success in a long track record of you know basically preferred woman.
[noise] three for us going forward.
[noise], Okay. Thanks, guys.
You're welcome.
Thank you and then next question comes from Rob them with a capital returns.
Hi, good morning.
They run Dominick <unk> Dominick during all your prepared remarks, and a little bit into Q1 day. The static is a really horrible.
The Great Island in Bermuda sell communication capabilities, Yeah, you might want us to after class and we record your portion.
But on the substantive side I had a question about blue mountain and a little bit of sort of is there a seasonality element or are there any sort of incentive fees that are part of its.
Its income stream.
I'll start off of that and see if it warrants any follow up.
So this is Andrew Palestine, Iraq I'm thinking on your question.
They're typically are some incentive fees, which are somewhat seasonal and cyclical in terms of their cash receipt. They are a accrued as we go a if there are expected to be paid a in a in the year in which were a growing them.
Consistent with what Dominic said earlier, our focus going forward well be on a investment vehicles, which I have last incentive fees. A then vehicles that we've managed in the past. So all the other three strategies that that Dominic referred to a one.
The three will have substantial incentive fees and the incentive fees will be generally a long dated and back ended up so I wouldn't expect to see that a in the early stages of funds why but rather a as time passes so over the short term run we expect the with the strategy.
We're deploying him as they said that historically plays back to the strength and Blue Mountain, we're really focusing on management fees, because that's a repeatable repairing solid income that really allows us to hey make money. The management company. While also still allows us to have higher returns on investment portfolio because of the fact that the performance fees or could we back in.
Loaded that's the strategy for the future not for the Karen as we love to really go fee income and assets under management in the short term as he said either roll out the platform further diversifies abilities.
Please be funded more of a part of strategy down the road as I said, we really want to focus on fee income Asinine [noise].
Just to just make a crystal clear from [laughter] [noise].
From <unk>.
Andrew's comments [laughter] Q1 is 2020, we shouldn't see Oh, they I hope before but we shouldn't see a a bump in and reported income from his business.
Because it's generally been accrued during the course of the year.
[noise] no so.
For GAAP purposes were hospital accrued performance fees as part of GAAP income.
So to the extent, we haven't done will be as Andrew says your crude into your that you're going to get paid. It. So there is no expectation building up into financial seemed that theoretically could get reversed because of some changing market conditions are some you know market correction.
That's why is it said, we're looking more at the management fee side of the business that fees that are recurring contracted and continue to you know apply every quarter quarter to quarter, regardless of performance as we will get performance opportunities there longer term. We have one strategy does you the ones that but as I said, we're on a GAAP basis, taking a conservative approach.
And not recognizing accruals for those we'll probably give you that parents radically is just the disclosure item, but it will not be in the GAAP financial statements.
Okay and towards your any guidance for what may be crystallize at the end of this calendar year that could be reported either it's a in Q1 of 2020 or Q4 of 19.
As a result to Blue Mountains performance year to date 19.
Well.
Said, so if you think about Blue mountain in two pieces right one the remainder of 2019.
Where we have you know a lot of the what I'll call you know acquisition transaction expenses and some other items not running obviously the runoff for write down of the hedge fund et cetera. So we'll have a lot of noise in the fourth quarter relative to be asset management business. As you look to 2020, it's really going to be how much assets under management how much fee.
Can we can generate again see expenses and what kind of profitability and that they said, we expect the ongoing operations to be profitable it accretive because the overall assured guaranty.
Okay. Thanks, that's it for me your work.
Thank you and the next question comes from really I know, Rob along with a B M.
Yeah, Hey, Jay.
Hi, good morning, and congrats on a.
The quarter.
Thank you. Thank you ma'am.
I I, just kind of jumping back on the Bloom I'm topic.
Are there any opportunities, especially with international exposure to provide more yield oriented investment vehicles to other kind of insurance companies are fixed income investors and leverage the wrap it up for guarantee you can provide.
Just thinking about the expansion opportunity because blue mountain has a fair amount of European exposure already.
Right Yeah, it's Andrew again, thanks for the question. We're certainly excited after the first six weeks starting our integration for the opportunities that we can achieve together through the synergies of the two companies and certainly one of the areas that we're focused on and have been spending time on is the opposite.
To the create a those kinds of a a return profiles for international investors and Ah, where we're partnering with folks from Blue Mountain and from a assured Guaranty's, London office I tend to think of a pretty good pipeline of those yeah think of it you know one of the things we had.
To do relative to our international infrastructure business.
You know that market, obviously went through tremendous dislocation through the financial crisis, and especially related to the behavior of our former competitors over there we had a rebuild the investor appetite in the investor marketplace and actually go out to each of those investors make sure that they would ultimately starts to buy insured paper debt as part of our desire to be.
Let's see gave me a player in international infrastructure, we've been doing a lot of work and the funny thing is now having brought in Blue Mountain Andrews folks the amount of contacts role with does.
Doors that they can open for us to me because other investors that weve critically wanted to get in front of now we get bought with them to products as well you know we I've always said that we really believe that this is a very synergistic transaction both in the U.S. public finance side, and especially in the international infrastructure side and we just on the most of this last week.
In London, specifically, you know launching our integration and strategies Oh for we think there's going to be a very bright future for both organizations.
And your eye, you mentioned insurance companies I would mention banks as well, we think there could be a a lot of.
Value that we can create together for bank relationships and bank clients across the Continental Europe and in the UK.
That's great.
And then during back to limit.
The as some new SMP methodology, and the new investment portfolio capital charges.
I live in the past you guys used together effectively 100% capital charge on triple abuse, and and also on some private investment vehicles.
Can you remind us of roughly what the triple B capital charges, and what private investment vehicles, <unk> <unk> and from a capital <unk>.
Yeah, the triple B, a capital charges approximately <unk>, it's down to only about 6%.
And private equity capital charges will be about 60%.
Great obviously that a extends the opportunity pipeline from investment perspective, do you know have you guys any new comments about the $500 million you plan on investing into Blue mountain funds in the central timeline of that.
We haven't given you the break out of it you can assume that is they've now focused on threeq were strategy. So we are now as I said, if you look at the store woman's there. Obviously, that's what are significantly better than work are we getting in the portfolio and now the we're getting more reasonable capital charges <unk>, that's a bit it gives us the ability.
To put a lot more money to work and what's going to be truly value creation to the insurance operations, which creates an insurance income within allows greater dividend capacity. So it's going to fall the form of what do you know what the asset management strategy pairing with deploying.
That's great I really appreciate it. Thank you very much no problem.
Thank you.
The next [laughter], pushing I saw Geoffrey Dunn with Dowling <unk> partners.
That's good morning.
A broader job or Rob could you give me the breakdown of the primary secondary for public finance both par in PBC.
Sure.
The primary so PDP primary was 42 million.
And in par was 4 billion.
Roughly.
Secondary markets. The premium was 4 million in part was 194 million.
Okay and then.
How should we think about accretion for next year on on Blue Mountain I don't think we've really talked about any numbers today.
Said, it's expected to be accretive, but can you help us frame that up and can you give us some of the balance information that is up 930.
Well the balance it remains one of the the 18 billion of assets under management across multiple strategies as we look forward to the new year, we expect because of the wind down of the hedge funds I'll take that it's out of the portfolio. However, we do have growth strategies across the other three platforms. So the net and then we're going to be.
Overall in total assets under management.
As I said, we're really focusing on management fees.
So if you look at the ongoing operations I think their contribution on a return basis is gonna be very very right. It's off the bottom you really at the.
Upper end of what our projected schedule would look at however, we have noise in the run off business and some other.
Areas that we still are addressing I mean, we closed the transaction lots over the first.
Obviously, there's a lot of work being done on integration integration has a whole lot of technicalities are detailed analysis that have to be performed relative to as we look at the five common services between the two organizations. We've got to look at what those staffs look like what the ultimate Costar and then obviously a reallocation back so all we can really.
Focus on direct expenses at this point in time and the performance of those three strategies being very very accretive them profitable and we just have to work through the remaining well run down to the hedge fund as well the integration of the common services could see what the ultimate numbers, you're gonna be but obviously, we think we're on schedule and we think we're going to achieve the numbers.
We thought we'd do the original analysis other potential acquisition.
Okay I think in your supplement last quarter you outlined the.
Range of performance fees on the various funds.
How do we think about the overall margin on that.
Well, obviously, if you're thinking of the asset management business in general margins go from say, 20% to 40%.
Obviously as we look at really the definition of how do we assess sees what I'll call common services and what's going to be the rightsize number to those das that's going to put us between those ranges.
And remember Jeff there will be we did will be onetime restructuring charges also in 2020, there will offset some of that getting then you also the issue of the amortization an average danger. Both you know you know it's really how you want to look at it at the end of the day can give you Oh, we never have you will give you a pretty good.
Matt because we'll break down the various strategies the as it doesn't this trial is a good typical fee relationships to those strategies. So you get a pretty good idea, where the revenue with and then as I said no. One in terms of direct expenses were very comfortable we've got to work through these issues of integration on the common services to see what the ultimate organization I would as you know basically.
Allocation looks like I said, what the ultimate Marjah will do but obviously.
The more we improved margins the more money, we make the more performance we can show to the market because your margins higher that means the performance of the company is better the more assets. That's one on track. So this is all kind of related to obviously building to a really strong conclusion for us.
Okay. Thanks.
You're welcome.
Thank you and I was there are no more questions I realize you're trying to afford Robert Tucker for any closing comments.
Thank you operator, we understood. Thank you operator, we understand there was a bit of static on the line and we'll work to quickly get the transcript up.
If you do have questions. Please feel free to get US call. Thank you very much for joining us on todays call.
Thank you.
In France has now concluded. Thank you for any today's presentation may not a centralized.