Q4 2020 Assured Guaranty Ltd Earnings Call
Good morning, and welcome to the assured Guaranty Ltd fourth quarter and year end 2020 earnings conference call.
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Thank you operator, and thank you all for joining assured guaranty for our fourth quarter and year end 2020 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 are for.
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.
You were listening to a replay of this call or if you're 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 recent presentations on FCC filings, most current financial filings and for the risk factors. This presentation.
<unk> also includes references to non-GAAP financial measures, we present, the GAAP financial measure 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 assured guaranty dotcom turning to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer of assured Guaranty Ltd, 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 would 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.
Jordan every circumstances, a 'twenty 'twenty tested assured guaranty's business model operations and people. Once again, we delivered remarkably strong results in a year on work by a public health crisis and economic crisis volume.
For the financial markets, the tumultuous social and political environment.
Per well for the technological and organizational challenges of operating remotely and safely during the COVID-19 pandemic non flu.
Florida showed the dedication and capability, we achieved strong results.
Most importantly, we saw the clear success of our efforts over many years for several and insured portfolio would perform well on a severely distressed global economy.
Year's challenges made our 2020 accomplishments all the more impressive.
Our new business production totaled $389 million of direct Pvp exceeded by 75 million for.
The direct Pvp reproduced in every year, but one since 2010.
So exception was the $553 million of direct Pvp, we produced in 2019, making the last two years direct production of our best in a decade.
<unk> results continue to rely on the base for future earnings for years to come.
On our core business U S municipal bond insurance, we guaranteed more than $21 billion of par in primary and secondary markets generated $292 million of Pvp, both 10 year records for direct production.
We again set new per share records for shareholders' equity and adjusted operating shareholders' equity with totals at year end of $85 66 70.
$78.49 respectfully accurately.
During the year, our adjusted book value per share exceeded $100 for the first time at $114 87 year end adjusted book value per share reflected the greatest single year increase since our IPO $17 88.
And the second highest growth rate of 18%.
We retired a total of $16 2 million common shares mainly through highly accretive share repurchases on an average price of $28.23.
We spent 11% less in 'twenty 'twenty to repurchase to repurchase 41% more shares than in 2019.
We returned a total of $515 million to shareholders through repurchases and dividends, we also repurchased $23 million of outstanding debt.
Our Paris based subsidiary assured Guaranty yesterday was awarded ratings with double a by S&P and double a plus by KBR.
And under wrote its first new transactions, allowing us to seamlessly continue our continental European operations in the wake of Brexit.
We also transfer on a portfolio of transactions insured by our UK subsidiary.
French company.
And we successfully integrated our asset management business in its first full year of operations and rebranded it assured investment management.
2020 was a profitable year, where you're on $256 million and adjusted operating income for $2 97 per share on our.
Most compelling news in 2020 was our performance in U S public finance where conditions were volatile.
Benchmark 30 year AAA municipal market day to interest rate began the year of two point on 7% jumped in March as high as $3 three 7% bottomed out in August at a historic low of one 7%.
In early spring and vessels were shocked by the potential scale of the pandemic economic impact.
Simple barcodes experienced massive outflows at that time few analysts if any were predicting that 2020 with the $452 billion municipal bonds issued the greatest annual par value on our volume on record.
Actually by the Federal Reserve has helped to stabilize for financial markets on maintaining short term interest rates near zero.
For even federal loan programs.
These included for <unk>.
$500 billion municipal liquid facility.
Which reassured the bond market by providing battery backup source of liquidity for states and municipalities.
Investors return to the municipal market with a heightened focus on credit quality, creating value stability and market liquidity all concerns that drive demand for our bond insurance.
And investment grade credit spreads widen significantly for its on especially for Triple B credits as a result bond insurance penetration rose to seven 6% of par volume sold in the primary market.
A full percentage point above the past decades previous thought.
Assured guaranty led this growth with a 58% share of insured new issue parcel.
$21 billion of U S public finance par, we insured in 2020% to 30% more than in 2019 and included taxable and tax exempt transactions for both primary and secondary market for.
Planning Pvp was up 45% year over year.
Many issuers took advantage of low interest rates refund existing issues and many cases using taxable bonds for advanced refunding.
Correspondingly taxable issues widen the investor base and non traditional investors, both domestically and internationally.
These investors could particularly benefit from our guaranty cause of our greater familiarity with the municipal bond structures and credit factors, we insured six $8 billion of par on taxable municipal new issues in 'twenty 'twenty up from $3 billion in 2019, $1 5 billion in 2018.
We also guaranty to $5 billion of bar, new issues that had underlying ratings in the double a category for them.
On S&P or Moody's, which was 1 billion more than in 2019.
While investors had no reason to see default risk on such high quality credit and he believes the risk rating downgrades that increase in all rating categories. This gave investors an additional incentives to prefer our insured bonds or uninsured bonds or demonstratable cases, where after an obligor, whose bonds. We had ensured solid underlying ratings downgraded where its credit is good.
This distress ensure bond southern markets that are better than the obligor is comparable uninsured bonds.
Increase in institutional demand for our guaranty was evident in 39, new issues up from 22 in 2019, where we provided an insurance on a $100 million are more for these included one of our largest U S. Public project finance transactions for many years $726 million of insured refunding bonds issued.
Yankee Stadium L. L C.
Our production in healthcare finance made a strong contribution towards talk during 2020, as we guaranteed $2 $7 billion of primary market bar on 25 transactions.
As the only provider of bond insurance on the healthcare sector, Jared Guaranty rat and nine 7% of all health care revenue bond for a issued in 2020.
Additionally, we Gary tea for $164 million on health care par across 39 different secondary market policy.
Another highlight was our reentry after seven years into the private higher education bond market.
We ensured a total of $690 million of bar for Howard Drexel and Seton Hall universities.
For Howard universities, we insured two issues totaling $320 million in par insured par.
Our international public Finance business produced 82 million of Pvp during 2020, even though a number of opportunities were delayed due to the pandemic conditions. However, the pandemic also has a positive effect on widening credit spreads we executed significant transactions.
Including three solar energy transactions in Spain vs student accommodation financing for Kingston University in the United Kingdom.
And have developed a strong pipeline for 2021.
On a worldwide structure finance business, we executed a diverse group of transactions in the asset backed securities.
<unk> capital management, and other structured finance sectors generated $16 million of Pvp during 2020.
Even though a pandemic conditions constrained on marketing activities, we were able to lay the groundwork for a variety of potential transactions in 2020.
The efficacy of our underwriting and risk management was evident in the overall performance of our insured portfolio, whose credit quality changes little even as necessary efforts to control it and stomach disrupted the economy.
Our parks closure to credit you view as below investment grade declined by $531 million, a 6% decrease and ended the year at less than three five per cent of net par outstanding.
Our surveillance professionals reacted to the early news of the pandemic by properly identify the insured portfolio sectors, most likely to weaken valuing the vulnerability of each of these sectors obligations, reaching out directly to issuers in many cases.
In general what we found was reassuring we are paid only relatively all first time insurance claims. We believe are due at least in part of credit stress RASM specifically for COVID-19, We currently project for <unk>.
Reimbursement of these claims.
U S municipal bonds make up about three quarters of our insured portfolio as a class are well structured to protect bondholders with most of our transactions containing covenants that require issuers to reduce tax rates fees or charges to ensure there are adequate for loves to meet debt service requirements and many also required the maintenance of a debt service reserve funds was up.
For a year's worth of debt service coverage.
<unk> generally improve their financial condition in the decades since the great recession, which further prepare them to handle the market disruption caused by the bad debt.
Regarding Puerto Rico, we announced earlier this week that we have agreed to conditionally supportive of revised G. O a public building authority as planned support agreement with the oversight board and other creditors in Puerto Rico on the P. B E.
As we have said all along we supported Consensually negotiated and comprehensive approach to resolving Puerto Rico's current financial challenges we have.
<unk> supported disagreement with the express understanding that the affected parties will work with us in good faith to make this agreement part of a more comprehensive solution one that respects, our legal rights and ultimately achieves the goal of bringing the title III process to adjusted and Expeditious conclusion.
We'll continue to work diligently and constructively towards a resolution of any remaining issues for the G. O on the PVA credits as well as other Puerto Rico credits, such as highway and transportation bonds Convention authority bonds and others.
This effort is taking place in mid encouraging economic news significant federal assistance has been on la.
Commonwealth revenues continue to exceed your expectations underlying the oversight for its fiscal plan, resulting in aggregate Commonwealth balance is tripling over the last three years to more than $20 billion at year end 2020, and reaching as high as almost $25 billion in mid year.
Our total net par exposure to Puerto Rico decreased in 2020 by $545 million.
Moving $372 million on water and sewer bonds.
Redeemed without any claims having been made on our policies.
Turning to asset management, our corporate strategy for a new business for entering the business was to diversify our business profile.
By building a fee based revenue source that complements our risk based premium revenues utilizing our core competency of credit evaluation.
Sure investment imagine it also gives us a new house platform to generally improve investment returns to generate improved investment returns.
Our asset management subsidiary accomplished a number of strategic objectives during 2020.
Sure I am issued two new Clo's opened a European CLO warehouse during the year. We also created a specialized investment advisor did not launch new health care opportunity funds.
It's planned strategy of unwinding certain legacy funds short I am sold CLO equity positions in those bonds to third parties.
Even though assured I am assets under management and the wind down funds were reduced by $2 $4 billion as total AUM change very little declining by less than 3% to $17 $3 billion share.
Guarantee insurance companies.
Allocated $1.1 billion of investment.
On the investments for assured I am to manage of which almost $600 million was funded as of year end.
As of October one 2020, we were pleased to learn that assured guaranty would become a component of the standard and Poor's. All cap 600 index. We believe there are thousands of passive and active small cap mutual funds on exchange traded funds. The tracker benchmark debuted this index or there for likely to hold our share is for a long term.
These investors appetite for our share so as reflected in a 31% increase on our share price the week following the announcement.
For share price continued to grow ending the year of 44% higher than in on October the first almost doubling through February 25 2021.
<unk> inclusion in the index change the composition of our shareholder base to be somewhat more heavily weighted towards the index index focused asset managers, including our second and fourth largest shareholders, which together hold approximately 20% of our shows and you're right.
Times like these are no substitute for our financial strength experience and judgment.
These are qualities that are enabled ensure guaranty to stand the test of time for more than three decades of market cycles and unexpected economic shocks. There are attributes that enable us to help borrowers in public finance infrastructure on structured finance markets as well as financial institutions pension funds insurance companies retail investors to navigate the current account.
We are optimistic about 2021 on the whole U S municipal revenue fared much better than the market originally feared for the pandemic. They remain under stress, but we believe few investment grade credits will default least of all of those that we have selected to insure.
We are confident in the quality of our insured portfolio, our financial strength on our financial liquidity.
Many investors have a renewed appreciation of our value proposition.
There's infrastructure spending increases in our markets to address deferred needs and provide economic stimulus. We expect to continue find opportunities to assist issuers managing their financing cost longer term. We believe 2020 was a pivotal year, there's likely to leave a lasting impression the great value of our guaranty provides when something.
Unexpected and distressing.
COVID-19 occurs.
We continue to work to create value for a thriving financial guaranty business and a growing asset management arm, we will never lose sight of our roles as stewards of capital, where we are committed to managing efficiently protect policyholders reward our shareholders. There for our clients I'll now turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call let me start by highlighting this year.
Achievements against our long term strategic initiatives.
In 2020, we had strong Pvp result, particularly in the U S public finance sector, which replenished enough deferred premium revenue to offset scheduled amortization and refundings.
We also retired $16 2 million shares mainly through share repurchases.
Which helped to boost adjusted book value per share to a new record of over $114 per share.
In our asset management business, we increased fee, earning AUM from $8 billion to $12 $9 billion or 62% across CLO opportunity and liquidity strategies.
As of year end 2020 assured guaranty insurance companies.
One 1 billion of invested assets that is managed by assured investment management of which $562 million is through an investment management agreement and $522 million is committed to assured investment management funds, which had a total return of 15, 6% on the investment balances.
Yeah.
Turning to our fourth quarter 2020 results adjusted operating income was $56 million for 69 cents per share compared with $87 million for 90 per share in the fourth quarter of 2019.
The contribution from our insurance segment for fourth quarter, 2020 was $109 million compared with $133 million in fourth quarter 2019.
Loss expense was higher than fourth quarter 2020, primarily related to our Puerto Rico exposures, our earned premiums and income from the investment portfolio of both increased on a quarter over quarter basis.
Net earned premiums and credit derivative revenues increased $30 million to $159 million in fourth quarter 2020.
Paired with $129 million in fourth quarter 2019.
These amounts include premium accelerations of $65 million and $39 million respectively.
Total income from the insurance segment investment portfolio consists of net investment income and equity in earnings and debt these totaling $94 million in fourth quarter 2020.
And $84 million in fourth quarter 2019.
Net investment income represents interest income on fixed maturity and short term investment portfolio and with $70 million in fourth quarter 2020, compared with $85 million in the fourth quarter of 2019.
The decrease was primarily due to lower average balances in the externally managed fixed maturity investment portfolio due to dividends paid by the insurance subsidiaries and were used for AGL share repurchases and a shift of investment to assured investment management funds and other alternative investment.
Well as lower short term interest rates.
Equity and earnings on that these represents our investment in assured investment management funds.
As well as earnings from our strategic investments.
This component of investment earnings is more volatile and the net investment income on our fixed maturity portfolio and will fluctuate from period to period.
And fourth quarter of 2020 equity in earnings was $24 million compared to a negligible amount in fourth quarter 2019.
As of December 31, 2020, the insurance subsidiaries investment and assured investment management funds with $345 million compared with only $77 million as of December 31, 2019.
Insurance companies have authorized have authorization to invest up to $750 million and assured investment management funds of which over $493 million has been committed including $177 million.
That has been yet to be funded.
In addition, the company has a commitment to invest an additional $125 million per se in unrelated alternative investments as of December 31, 2020.
As we shift assets into these alternative investments average balances in the fixed maturity investment portfolio and the related net investment income may decline.
For the long term, we expect the enhanced returns on the alternative investment portfolio to be approximately 10% to 12%.
Which exceeds the returns on our fixed maturity portfolio.
On the asset management segment.
Adjusted operating income was a loss of $20 million compared with a loss of $10 million.
In fourth quarter 2019.
The additional net loss was mainly attributable to $5 million in placement fees associated with the launch of new health care strategy and.
An impairment an impairment of lease of a right of leases as right of use asset of.
$13 million related to the relocation of assured investment management offices too.
<unk> 16, 33 Broadway assured Guaranty's primary in New York City location.
Our long term view on the asset management segment remains positive based on our recent success and increasing fee, earning AUM by 62% and launching a $900 million health care strategy with significant third party investment in.
In addition, we believe the ongoing effect of the pandemic on market conditions may present attractive opportunities been assured investment management.
And for alternative asset management industry as a whole.
Adjusted operating loss for the corporate Division was $28 million in the fourth quarter of 2020.
Compared with $32 million in the fourth quarter of 2019.
Our corporate division mainly consists of interest rate expense.
On U S holding companies debt.
It also includes board of directors and other corporate expenses and fourth Corp. Fourth quarter 2019 also included transaction expenses.
I was sitting with the Blue Mountain acquisition.
On a consolidated basis, the effective tax rate may fluctuate from period to period based on the proportion of income in different tax jurisdictions.
In fourth quarter 2020, the effective tax rate was a provision of 12, 7% compared with the benefit of three 5% in fourth quarter 2019.
The benefit in fourth quarter, 2019 was primarily due to the favorable impact.
For the new regulation related to base erosion and anti abuse tax.
Moving on to the full year results adjusted operating income was $256 million in 2020, compared with $391 million in 2019.
The variance was mainly driven by the insurance segment and asset management segment, adjusted operating income, which declined $83 million and $40 million, respectively on a year over year basis.
Please note asset manager management full year results are not comparable between 2020 and 2019 as 2020 includes a full year of operating results. While 2019 includes only one quarter as the Blue Mountain acquisition occurred on October one 2019.
The insurance segment had adjusted operating income of $429 million in 2020, compared with $512 million in 2019.
For your insurance results were lower primarily due to a large benefit in our RBS exposures in 2019 that did not recur in 2020.
Partially offset by a commutation gain in 2020 on the re assumption of a previously ceded portfolio.
Net earned premiums and credit derivative revenues were $504 million in 2020, compared with $511 million in 2019 include.
Including premium accelerations of $130 million in.
$130 million respectively.
Also noteworthy is that public finance schedule. The earned premiums increased 5% in 2020 compared with 2019.
The corporate Division had adjusted net loss of $111 million in both 2020 and 2019.
Turning to our capital management strategy in the fourth quarter of 2020, we repurchased four 3 million shares for $126 million.
On an average price of $28 87 per share.
This brings our full year 2020 repurchases to $15 8 million shares for $446 million at an average price of $28.23.
So far in 2021, we have purchased an additional one 4 million shares for $50 million.
Since January 2013, our successful repurchases.
Our successful repurchase program has returned $3 $7 billion to shareholders, resulting in a 63 per cent reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of approximately $29 32 per share and adjusted operating shareholders' equity and $51 48, and adjusted book value per share, which helped drive these metrics to new record highs of $78.
49, and adjusted operating shareholders' equity per share and Dodge and $14 87 tenths of adjusted book value per share.
Yeah.
From a liquidity standpoint, the holding company currently has.
Cash and investments of approximately $204 million of which 130 million <unk> hundred $33 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives.
Expand the asset management business or.
Repurchase shares to manage our capital.
I'll now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two if you are using a speakerphone. Please pick up your handset before pressing the keys.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Tommy Mcdreamy with K B W. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
So I just wanted to ask if you if you could discuss some of the changes.
All around kind of what changed over the past year in terms of the economic condition for the recall or whether it be the terms of the plan of adjustment.
That led you to join in and supports this this plan support agreement.
Versus not supporting the loan back in February of 2020.
Yeah.
Okay. So we supported the current agreement and obviously these things you know have a lot of discussion a lot of consideration and we look at our legal rights. We look at the timing of litigation, we looked at the value of the settlement of.
The overall recovery rate here is it a area that we find acceptable. However, it is conditioned on further activity on a go.
Green man on the transportation, the HCA bonds because of the intricacy of the Clawback credits relative to funds available for the general obligation of the Commonwealth debt.
Two critical components that we cannot separate.
There were you know willing.
Willing to accept the existing recovery relative to their obligation of P. B a to us it's very important that we get clarity on an agreement on the H T. A because of the intricacies of the two credit. The one positive note I would say is that the amount of recovery on the yeah.
Oh, and PBA bonds falls within our reserve.
So obviously that means we'd have no financial impairment from accepting the deal as currently structured but that's got a long way to go in terms of whether it ultimately gets ratified and supported and approved now.
And as I said, it's still conditional DHEA credits.
Right and you said, it's fully reserved and more on <unk>.
Can you say when there wouldn't be any reserve release or what kind of incrementals.
Well on the recoveries on that.
This is a fluid situation, we react to you know public information, we liked to Iraq to other information that we might have available to us, but I was on.
I can tell you the reserve for the current recovery for.
E V O in the Commonwealth bonds are within our reserve in other words, we had more reserve up and obviously, what the severity rate for the Solomon here is.
Okay great.
And I believe it was with a one day other than restructuring agreements for English prep, but you have the ability to ramp the new bonds.
I'm kind of improve your general economic per ton.
Do you expect on Speaker case with Eaton <unk> provided on those negotiations go.
Well once again, you got to look at for specific terms regarding the new securities and help well protected and whether their bankruptcy prove whether they fall into a true sale remote entity, whether you can assure the cash flows.
The one thing I will tell you as we look at this there's a lot of moving pieces right and especially when you think about the G. O N P. B a contingent value security now what its value is going to be hard to determine initially so you've got to take a very conservative views of that but at the end of the day you know these type of instruments to make.
So the.
The ability to further.
Sure or put a wrap on etcetera, a little bit concerning there for we would only do it in very very specific cases and right now in terms of the G. O in the PVA, we'd have no plans to wrap any of that.
Okay.
Okay got it all makes sense.
And then lastly, just.
Hi crush for your question, we can always make a lot more value in terms of recovery by wrapping it of course, it would solve a lot higher value, but at the end of the day, we really need to gauge the behavior of the Commonwealth its legislators et cetera, even our own government.
Treatment of creditors, whether you would ever want to get involved further for any insurance relationship with your you know with the economy.
Yes, definitely I think about it at that.
And then just last one switching over to T D.
The asset management segment.
Sorry for all you've called out on a few items in the quarter. So it looks like operating net income excluding <unk> was about $18 million and it was worth a bite them would've been pretty close to breakeven.
Do you feel like it.
Breakeven on something else on happens sometime in 2021, or just kind of what's your what's your outlook for run rate on income.
Well I think we've made tremendous strides on the asset management on although the pandemic probably cost us a year of activity you know when you think about specifically one of the critical things we need to accomplish we need to get rid of the legacy investments they're stuck on the legacy hedge fund was the weak carried expenses related to the continued support and servicing of those you know those specific of that.
Net sensitive rewarding we're paying back the L. P for funds that are still remaining there for that cost us money and time number two we obviously couldn't launch as many new opportunity funds or new.
I said, you know management solicitation that we would've liked to have done and it affected both our CLO business and the regular flow of business, but that's now back on track and obviously, we had some very positive movements in that area through the end of 2020, and obviously going into 2021.
Number three we had to sell out more of the CLO equity that was held in the funds because that caused the rebate situation on other funds under management and as we said on the call the amount of funds under management through which we know can collect fees on it is up over 60%. That's a significant revenue changer for us going into <unk>.
2021, so when you think about getting rid of the expenses with legacy funds, attracting new funds under management to generate more management fees converting more of the existing portfolio to fee, earning versus fee rebating as well as raising new funds.
In the areas of where we think we have expertise.
Provide us huge optimism and opportunity for 'twenty 'twenty, one and we try to look at that business now kind of on a quarterly basis, and we expect to achieve profitability in that business by the fourth quarter.
One other thing I want to mention is just to be clear the capital placement fees that we had disclosed would have to be expensed immediately under GAAP and the earnings from that obviously would come in over time as the new funds are launched and piece become over time, but under GAAP accounting the cash.
Placement fees have to be Expensed upfront.
And that's a that's a positive thing because it shows that we're actually growing AUM and growing your funds.
Got it I think it's really like just the 13000 piece was more of a one time non that's a onetime item, but you might see capital placement fees in the future, which would mean that we're successful on launching a new assets under management.
Great that makes sense.
Okay. Thanks, guys.
That's.
The next question comes from Joshua <unk> with Credit Suisse. Please go ahead.
Hey, good morning, Thank you for taking my question.
On the demand side overall.
Overall PARP penetration it certainly been elevated but it's trended downwards over the last few quarters, albeit on a on a higher asset base, but as we get further along with regards to economic recovery, where do you see insured penetration kind of settling in a post pandemic type environment.
Well be introducing about penetration right. It's really relies on three factors and you know obviously, none of them within our control regretfully.
So one is spread or what is the view of the credit volatility in the market. So obviously, if the hit of the pandemic earlier in 2020 that was pretty high in there for you solve the demand for insurance Spike way way up.
Towards the early middle part of the year.
However, the other two components that have a huge impact on interest rates and spreads although they widen out they immediately tightened as we got towards the end of the year, except for the Triple B that still stayed reasonably what so as we think about penetration going forward. Obviously the numbers have started to go up a bit.
We had a 7% overall are a little over 7% overall penetration if you break that down though on look it'd be a rated issuers that penetration still way over 50%. These day can that migrate to a bigger part of the portfolio. We did more double way than we've ever done the car on your in terms of wrapping double a securities I think the trend is positive, but why are we still.
Staying on a very low interest rate on those zero interest rate environment with tight spreads I'd be happy with the penetration is starting to you know get up towards 10%.
If we ever got to a normalized environment and I get tired of saying that because I don't even know what that means anymore. Obviously, you could see significantly higher penetration rates, which will drive a strong financial guaranty business and as Rob said, you know what our core business, which is U S. Public finance U earned premium actually was up in the quarter, which means we're building that portfolio back again.
We're seeing growth the accelerated amortization.
We're refunding slowed down significantly in there for new business writings of mail really started that long term earnings value to the organization.
I appreciate that.
If I could get a second one in here and I recognize that it's a bit of an unfair question here to ask you to opine on something maybe a little bit outside your control, but what do you think about the likelihood of Puerto Rico's legislature proving this revised TSA.
Well, you know I'm not going to put on my lawyer has because it doesn't trade very well, but remember it seems like the board has the ability to force the government to follow ICH requirements relative to achieving the balance budget. So it's not been tested in court you have no idea, but ultimately you know.
Figures its way out, but there's been a lot of back end in terms of you know point counterpoint, obviously, we would hope that the Commonwealth because I think it does support the Commonwealth's long term aspirations relative to financial stability and growth. They do approve the deal through the legislature, but like anything else, but that's still up in the air.
Yeah.
Got it. Thank you very much appreciate your time.
Youre welcome.
As a reminder, if you would like to ask a question. Please press Star then one. The next question is from Brian Meredith with UBS. Please go ahead.
Yes, thanks, good morning, everybody.
A couple of questions here first one I'm Dominic.
The $70 million for Puerto Rico incurred provisioning or in the quarter was that at all related to somebody.
Some of the actions that are happening recently of Puerto Rico, and then just kind of on the follow on to that.
As things progress here in Puerto Rico should we start seeing that provision and kind of fall and maybe not see any maybe at some point this year.
Well it depends on how those ultimately settles out Brian.
As we've always said about the reserving policy follows the GAAP requirements decision got to consider all possible scenarios and probability weighted them.
The current activity in the quarter exactly does the relative to what we see happening. There also continues to work and the time value for money because the longer you don't get resolution the longer you're paying claims for the longer it takes to get a recovery that discount rate then obviously works against you.
So we just reacted to the information that's available.
Because the settlement is so conditional at this point in time and it's got too. Many other requirements. We've taken no changes relative to the proposed settlement. So make sure you understand what that means we've taken those.
Changes relative to the proposed settlement because at this point in time to two conditional so there for the activity. That's in the quarter reflects exactly what we've done in terms of information that was available to us.
At our scenarios and probability weighted.
And remember, Brian 70 million Youre talking about is what comes through the income statement and some of that isn't bad losses narrowed M. P GAAP, but the economic loss development for public Finance, just public finance was $52 million.
Okay great.
Makes sense and then the next one I'm just curious.
Given you know at least it looks like maybe we've got some progress on Puerto Rico going on right now and hopefully we're kind of in the.
Economic improvement as we look forward here.
What are the chances now or what are your thoughts around a special dividend.
How did the insurance options.
Yes.
It's a good question, Brian So honestly special dividends have gone to put aside by the regulators. Then you could appreciate for was remember we were doing special dividends, even with Puerto Rico. So it wasn't Puerto Rico. So much it was more of the pandemic.
I think as you look at 2021, and we would hope to get resolution relatively.
So it definitely depends on I can never forget that the economies back to a standard.
Activity that makes sense and gets rid of that kind of concern as well as we would hope to see further improvement or further advancement on the Puerto Rican front. So if you think about it we can get through both of those through the early part of 2021, and then I think the opportunity for special dividends increases significantly.
Absent that I don't see an opportunity for special dividends until late in the year, if any and then once again, it's going to be predicated both on Covid and Puerto Rico, plus Puerto Rico more Covid, you know getting some more significant final resolution and municipal economies back on there for you.
Makes sense. Thanks appreciate it.
Uh huh.
The next question comes from Geoffrey Dunn with Dowling. Please go ahead.
Thanks, Good morning.
Morning.
I wanted to get a little bit more understanding where on a couple of things first Rob I think you sort of a $5 million hit for those placement fees. Each time, you launch a new Farnborough strategy are we looking at a similar sort of hit.
Which case.
Can you give us some indication on some guidance in terms of how many new funds or initiatives, we could see in 'twenty, one or 'twenty two.
I can't give you guidance on what we could see in 'twenty 'twenty to 'twenty, one and 'twenty two but I can tell you that to the extent that we are not consolidating that fund the GAAP accounting rules will say if you are using a placement agent and you pay for those fees you have two even though you might pay them over time, you have to expense them upfront and the earnings for.
That will come in overtime as you raised those assets. So we will disclose every time, we have that and Ah and you'll be able to use that in your models, but.
If in fact, we do consolidate the fund.
Then you won't see that you see that in the segment, but you won't see that in consolidation because it'll come through as a reduction of equity.
But for right now for a fund that we don't consolidate those placement fees will be a one time item.
Flemming will also say Jeff is obviously, we continue to want to expand the asset management operation and obviously the assets under management as we build more of that in house, then you'll have less of a situation where you'll be paying placement fees. So the goal is longer term that take this in house and have our own.
On the solicitation operation within the company.
Right, Okay and then.
I wanted to better understand this.
This concept for the conditional agreement.
Its a conditional from purely in your view and you just voiced that word to progress in Puerto Rico.
Is it conditional understood from both sides and agreeing that it's you know you know, but theyre going to work with you. It's fine to say, it's conditional from your perspective, but I'm just I want to understand if.
They're actively agreeing to this conditional contract and actively ready to work with you guys.
I would say its the ladder its condition on both sides joke, because obviously, we think we're critical to getting any deal accepted you know in terms of restructuring.
We as well as the rest of the financial Guarantors. So that's you know N V. I a N ambac, we represent a significant component of the credit balances.
I think I've read in some of the information that we're the largest single credit or to Puerto Rico. So at the end of the day I think our participation is necessary if not critical and therefore, they've agreed to the conditionality that if we don't get when we do use proper treatment.
For the dealing of HCA and then we're out in for out so does that mean, probably N V. I a N M X out.
At a very different.
<unk> for them for us in terms of the.
The potential of further litigation delay and this has been on Wednesday is it closer to remember we still have cases in court that are going to be heard and we have the appeal in Boston now the revenue bonds. I mean, these things all have a huge impact direction and motivation for settlement. So.
I think the conditionality is appreciated on both sides of the table.
Yeah.
Okay, great. Thank you.
Welcome.
This concludes the question and answer session I would now like to turn the conference back over to Robert Tucker for any closing remarks.
Thank you operator, I'd like to thank everyone for joining us on today's call.
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.
Yeah.