Q4 2021 Assured Guaranty Ltd Earnings Call
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Good morning, everyone.
Welcome to the assured Guaranty limited fourth quarter and year end 2021 earnings conference call.
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I would now like to turn the conference over to Robert Tucker Senior managing director of Investor Relations and corporate communications.
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Thank you operator, and thank you all for joining assured guaranty for our fourth quarter and year end 2021 financial results Conference call.
Today's presentation is made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
Hi.
The presentation may contain forward Dave.
Outlook.
The credit spread financial right.
Loss reserves financial results or other items that may affect our future results. These.
These statements are subject to change due to new information or future events. Therefore.
Therefore, you should not place undue reliance on them as we do not take any obligation to publicly update or revise them, except as required by law. If you were listening to a replay of this call or if you're reading a 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 web.
Site for our most recent presentations and SEC filings, most current financial filings and for the risk factors.
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 assured guaranty Dot com.
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'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.
Secured guarantees insurance production loss mitigation and capital management strategies combined to deliver outstanding results in 2021.
<unk> had many notable accomplishments during the year.
We earned $470 million of adjusted operating income.
84% more than in 2020, we more than doubled adjusted operating income per share to $6 32 per share.
We brought all three of our measures of shareholder value to new highs.
Over the year shareholders' equity per share grew 9% to $93.19 adjusted operating shareholders' equity per share increased 13% to $88 73.
And adjusted book value per share rose, 14% to $130.67.
We repurchased 10 5 million common shares for approximately 14% of our shares outstanding at December 31, 2020 at an average price of $47.19 those repurchases totaled $496 million with the addition of $66 million of dividends. We returned a total.
$562 million to shareholders.
Through strong new business production in each of our financial Guaranty markets U S public finance International infrastructure Finance and global structured finance, we generated a total of $361 million of Pvp in 2021.
Direct pvp exceeded $350 million for the third consecutive year compared with an average annual direct P. V. P of $210 million from 202012 to 2018.
Making the last three years, our best in more than a decade for direct new business production.
With a more than 60% share of new issue insured par sold we led the U S public finance bond insurance industry to its highest penetration market penetration and it doesn't years.
And taking advantage of exceptionally low interest rates, our U S. Holding company issued a total of $900 million of 315% 10 year, and 360% 30 year senior debt to refinance $600 million of debt with higher coupons, ranging from 5% to almost 7%.
As a result annual debt service savings will be $5 $2 million through the next maturity date or.
Our financial Guaranty production was well diversified across all of our markets U S. Public finance Pvp up $235 million included a second best direct production and at least a decade surpassed only by the previous year's results are $79 million of international infrastructure P. B P marks the fourth year out of the last five that we've exceeded 70.
5 million of direct Pvp in that sector global structured finance Pvp of $47 million was the second best in direct production since 2012.
Our markets and economic environment offered both opportunities and challenges during 2021 .
Issuance of U S municipal bonds reached a record par amount of $457 billion in 2021.
This partly reflected investors increased demand protecting us on paper and expectation with higher tax rates and continued limitations on state and local tax deductions at the federal level.
Additionally, issues, where he issuers, we're eager to take advantage of extremely low municipal interest rates to refinance bonds issued in the past if higher rates would.
With the option to execute tax exempt advanced refundings still off the table. Many issuers also turned to the taxable market to replace higher coupon tax exempt debt.
Total insured market volume increased to eight 2% of par issued the highest annual rate over the past 12 years and up from seven 6% during 2020 and five 9% during 2019 we.
We believe this increased penetration in 2021 indicates that the risk of unpredictable move elements, which was brought down by the onset of the COVID-19 pandemic in 'twenty 'twenty has made a lasting impression on investors who have also seen that assured guaranty has the underwriting and risk management skills to construct an insured portfolio that experienced.
Minimal claims from the economic disruption caused by the pandemic most of which have already been reimbursed.
The $37 5 billion of insured par in 2021 represented a 10% annual increase on the heels of a 43% increase to prior year, resulting in a 57% growth of the insured market in just two years since 2019.
Assured guaranty's production was a leading force behind this growth as we enjoyed over 58% of new issue insured par sold in 2020 and more than 60% in 2021 our highest annual market share since 2013.
Our 23 billion of insured new issue volume in 2021 was almost $3 billion more par we insured in 2020 and was generated by more than 8000 individual transaction.
An important trend in recent years has been the use of our guarantee to help lot long some of the municipal bond market's largest transaction.
Which indicates growing institutional demand for the security.
Relative price stability and significant market liquidity, our guarantee can provide.
Guaranteed $100 million or more on each of 48 large issues launched in 2021 up from 39 transactions in 2020 and 22 in 2019.
Significantly we continue to add value on credits with underlying ratings in the double aid gallery from one of her both of S&P and Moody's ensuring a 109, such double eight transactions totaling more than $3 $5 billion of insured par.
U S public finance forms the largest part of our uniquely diversified financial Guaranty strategy. Our three pronged strategy also targets insurable transactions in both infrastructure finance outside the United States and structured finance throughout the world.
This helps us in times in one market or another shows temporary weaknesses and it drives great results in years like 2021, when we are thriving and all three of our markets.
Further demonstrating the diversity of our business in 2021, we guaranteed financings of the Spanish solar power facilities, and U K higher education and health care projects. Additionally, we worked with the U K water company to extend the debt service reserve guarantee which is a unique product we developed as an alternative to bank liquidity facilities. We also provided.
Number of secondary market guarantees.
Our European business was historically based in the U K, which previously allowed us to do business throughout the European Union, we have long been active and where we continue to believe there are plentiful and diverse opportunities our Paris subsidiary, which we opened in 2020 to serve continental Europe more effectively, especially now that the UK has left the European Union further grew.
<unk> business or win rate originations in 2021.
In global structured finance and important part of our business is to provide institutions like banks and insurance companies with tools to optimize the capital utilization of their asset portfolios.
During the year, we guarantee large insurance securitizations and significantly increased our CLO activity, our guarantee yourself cielo is attacked attract new investors, who might otherwise be discouraged by the higher capital requirements on uninsured C. L. O's.
We are seeing more opportunities to help investors reduced the capital consumed by both existing structured finance exposures and new investments.
The new business, we wrote across all of our markets in 2020 , one enabled us to increase the year end net par amount of our insured portfolio for the first time in many years, we believe the trend going forward will be to continue increasing the par amount of our insured portfolio and increase our store a deferred premium revenue, which will further stabilize and grow our future earnings.
We have continued to reduce the risk in our insured portfolio and believe we can continue to do so as we continue to write new investment grade business.
The below investment grade portion of our insured portfolio declined to barely more than 3% as of December . So December 31st 2021, almost half of our below investment grade net par exposure to Puerto Rico, and we expect that with the court approved settlement pertaining to the G O and certain other credit schedule do occurred on March 15th of this year.
Figure should drop below 2.5% and continue to fall as more of our Puerto Rico settlements are executed.
After years of twist and turns related to the restructuring of Puerto Rico debt decisive progress occurred in 2021.
We and the other creditors along with the Commonwealth agreed to support the final revision of the oversight Board's restructuring plan for the central government.
The title III Court approved in January of this year as a result, the Commonwealth government's exit from bankruptcy is expected to begin in mid March.
The title III Court also laid the groundwork for favorable consideration of additional agreements that support certain other Puerto Rico restructurings, such as for highways and transportation authority.
All of this means that Puerto Rico's long away to resolution of its unpaid dead is proceeding well and the island is positioned for years of fiscal stability. According to the oversight board's latest physical player.
In addition to our success in the financial guarantee business in 2020 . One we also made significant progress towards our goals for the asset management business. Our overall investment performance was strong. It was one of the top 20 five's collateralized loan obligation managers by assets under management were well positioned to participate in the CLO market the reached a record level of bench.
Issuance.
During 2021 we launched six new CLO, representing $2 $5 billion of assets under management more than double what we issued in 2020, and we converted and non fee, earning AUM fee, earning AUM by selling substantially all of the CLO equity still held by assured I am legacy bonds, where we had been Rebating management fees.
Through these efforts, we increased CLO management fees in 2000 $21 million to $48 million from $23 million in 2020.
Additionally, we reset our refinance 10-C O lives in the United States and Europe .
And the asset backed sector, we closed a continuation fun holding in auto finance investment.
Digitally the health care portfolio managed by assured health care partners continue to grow as capital was deployed.
Looking back on the year, we believe much of assured guaranty's success reflected the market's growing appreciation of the reliability of our financial strength and the security we provide investors while also delivering financial benefits in first class service to bond issuers and other clients the responsibility embodied in our careful underwriting disciplined risk management and tie.
There was lost mitigation.
Proven resilience of our financial Guaranty business model, and our strategic approach to capital management to protect policyholders and create value for shareholders.
In our view, there's heightened recognition of our guarantees value could help to drive demand higher as interest rates rise, we expect market conditions in 2022 and beyond to be very different from those of 2020 one as the fed strives to contain inflation, the economic and social impact of the COVID-19 received <unk>.
Developing geopolitical events continued to disrupt markets.
It's about governments prepare for the end of extraordinary federal support.
Rising interest rates widening credit spreads and the accompanied volatility tend to increase financial guaranty demand.
We believe assured guaranty is better positioned for the long term success than at anytime in our history.
Our financial strength has never been stronger the credit challenges in our legacy insured portfolio are largely behind us our markets are large opportunities diverse our human capital exceptional and our business model proven through decades of economic cycles, we look forward to fulfilling the high expectations of our policyholders clients and shareholders.
Now I'll turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call.
I am very pleased to report that our fourth quarter 2021, adjusted operating income was $273 million or $3 88 per share a significant increase over the adjusted operating income of the fourth quarter of 2020.
Which was $56 million or 69 per share.
The primary driver of the increase in fourth quarter of 2021 total adjusted operating income was the insurance segment, where adjusted operating income increased 154% over fourth quarter of 2020 from $109 million to $277 million much of this benefit change.
Our loss mitigation strategies particular for our Puerto Rico exposure.
After many years of negotiation and other loss mitigation efforts, we are close to resolving one $4 billion in gross par associated with our Puerto Rico G. O P. B a C D E and PREPA exposure as.
The increased certainty of the settlement and Puerto Rico as improved economic outcomes.
Combined with increased value of our actual and expected recoveries under the settlement agreements were the primary drivers of the $186 million economic benefit in the fourth quarter of 2021.
During the fourth quarter of 2021, we sold a portion of our salvage and subrogation recoverable.
Proceeded with certain mature, Puerto Rico G O and PREPA exposures.
Doping and proceeds of $383 million, thereby thereby realizing some of our expected recoveries early and.
In 2022, we continued to sell portions of our G. O P b, a and PREPA salvage and subrogation recoverable, resulting in an additional an additional proceeds of $133 million.
Prices at which we crystallize these recoveries as well as observed market pricing for other similar instruments and the forward interest rate environment are reflected in the updated assumptions of the value of the remaining recovery bonds and contingent value instruments, and we project receiving and the various Puerto Rico settlements.
Other components of the insurance segment also performed well in the fourth quarter of 2021.
Total income from investments, which consists of net investment income on our fixed maturity portfolio and equity in earnings.
Sure I am funds and other alternative investments was $111 million, an increase from $94 million in the fourth quarter of 2020.
Collectively the investments and assured I am funds and alternative investments generated $44 million in equity in earnings of Investees in the fourth quarter of 2021.
Paired with $24 million in the fourth quarter of 2020.
With the increase mainly attributable to a large fair value gain on our specific investment in a private equity fund.
As a reminder, equity in earnings Investees is a function of mark to market movements attributable to the short I am funds and other alternative investments. It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period to period.
Our fixed maturity and short term investments account for the largest portion of the portfolio generated net investment income of $67 million in the fourth quarter of 2021.
Compared with $70 million in the fourth quarter of 2020.
As we shipped fixed maturity assets into alternative investments net investment income from fixed maturity may decline.
However over the long term, we are targeting enhanced returns on the alternative investment portfolio of over 10%, which exceeds our project projected returns on our fixed maturity portfolio.
In terms of premiums schedule that earned premiums decreased slightly in the fourth quarter of 2000 $21 million to $91 million compared with fourth quarter 2020 of $94 million.
Premium earnings due to refundings and terminations.
We're $20 million in fourth quarter 2021.
Compared with $65 million in the fourth quarter of 2020, when two large transactions we funded.
The asset management segment, adjusted operating loss was $3 million in the fourth quarter of 2021.
Compared with $20 million in the fourth quarter of 2020.
The improvement in asset management segment results is primarily attributable to increased management fees and the strategies, we launched since the 2019 Blue Mountain acquisition and a nonrecurring impairment.
Lease right of use asset of $13 million in 2020.
Asset management fees on a segment basis were $21 million in the fourth quarter of 2021, compared with $20 million in the fourth quarter of 2020.
Higher fees from health care opportunity funds and cielo has more than offset the decrease in fees from wind down funds as distributions to investors continue.
As of December 31, 2021.
The wind down funds was $582 million compared with $1 $6 million as of December 31, 2020.
In the fourth quarter of 2021, the effective tax rate was 15, 1% compared with 12, 7% in fourth quarter of 2020, which included the release.
Of a reserve for uncertain tax positions. The overall effective tax rate on adjusted operating income fluctuate period to period based on the proportion of income in different tax jurisdictions jurisdictions.
Overall, the fourth quarter capped a year of successful execution of our strategic initiatives.
These achievements are reflected in our 2021 full year adjusted operating income of $470 million, which includes a loss on extinguishment of debt of $175 million pre tax or $138 million after tax.
Despite the debt extinguishment charge full year 2021, adjusted operating income represents an 84% increase compared with 2020 adjusted operating income of $256 million.
The primary driver of this increase was the insurance segment with $722 million, but adjusted operating income in 2021, compared with $421 million in 2020.
The 2021 insurance segment adjusted operating income includes a benefit of $221 million, which primarily consists of a benefit of $146 million for U S public finance exposures and $84 million for U S. R MBS exposures.
U S public finance benefited from the increased recovery assumptions for Puerto Rico exposures that I mentioned earlier in the U S. Our MBS benefit is primarily a function of home price appreciation.
Economic loss development, which excludes the effects of deferred premium revenue, what's the benefit of $287 million in 2021 across the whole portfolio.
Loss expense in 2020 was $204 million and was primarily attributable.
To Puerto Rico.
On a full year basis total income from the investment portfolio was $424 million in 2021.
Paired with $371 million in 2020, the investment returns on a portion of the portfolio invested in short I am.
Demonstrates an important component of it.
The benefits of the asset management segment.
Not only as a fee, earning business, but as an investment advisor for insurance segments assured I am funds.
Which the insurance subsidiaries inverse generated gains of $80 million in 2021, compared with gains of $42 million in 2020.
The gains were across all strategies.
Particularly health care, Clo's and asset base and generated a year to date return of 28%.
The third party alternative investments also generated gains of $64 million in 2021.
But $19 million in 2020.
These gains more than offset reduced net investment income on the available for sale fixed maturity portfolio, which was $280 million.
In 2021 down from $310 million in 2020.
Lower average balances in the fixed maturity portfolio reinvestment yield and income on loss mitigation securities were the primary drivers of the year over year variance.
Total net earned premiums and credit derivative revenues were $430 million in 2021, compared with $504 million in 2020.
Putting premium accelerations of $66 million.
$30 million respectively.
And the asset management segment, we have continued to make great progress in 2021.
We raised new third party capital in our CLO healthcare and asset based strategies, we increased fee, earning cielo as you went through the issuance of $2 8 billion in CLO and the sale of CLO equity out of the legacy funds and we continue to liquidate assets in the wind down funds.
The improvement in the asset management segment operating loss from $50 million in 2000 $20 million to $19 million. In 2021 was primarily attributable to an increase in management fees from $59 million in 2000 $20 million to $76 million in 2021.
Higher freight piece from cielo and opportunity funds more than offset the decline in fees from wind down funds.
The increase in equity opportunity fund fees was primarily attributable to the new health care funds launched in late 2020, which raised additional third party capital in late 2021.
The corporate Division had adjusted operating loss of $263 million in 2021, including a loss on debt extinguishment of $175 million.
Or had been $38 million on an after tax basis.
Which resulted from a $600 million of debt redemptions that Dominic mentioned earlier.
This charge is simply an acceleration of expenses that would have occurred over time.
In the prior year corporate division adjusted operating loss was $111 million.
The debt redemptions were financed with proceeds from the issuance of $900 million in new 10 year, and 30 year debt, which resulted.
And reduced average coupon.
Redeemed debt from $5 89 to $3 three 5%.
And $170 million reduction in our 2020 for debt refinancing need.
In addition, the debt refinancings generated annual debt service savings of $5 2 million until the next maturity date and provided flexibility to continue share repurchases.
We weren't able to accomplish all of this without significantly affecting our debt leverage or interest coverage ratios.
The additional $300 million of proceeds from the debt issuance and debt issuances were used primarily for share repurchases in.
In the fourth quarter 2021, we repurchased three 7 million shares for $192 million at an average price of $51 47 per share.
This brings full year 2021 purchases to $10 5 million shares were $496 million, which represents 14% of the total shares outstanding at the beginning of the year.
The continued success of this program helped to drive our per share book value metrics to record highs.
As of December 31, 2021.
Subsequent to the quarter close we repurchased an additional one 7 million shares for $91 million.
Since the beginning of our repurchase program in January 2013, we have returned $4 $2 billion to shareholders under this program, resulting in a 69% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit above a $37 and adjusted operating shareholders' equity per share and $65 and adjusted book value per share, which helped drive these metrics to new record highs.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $274 million.
Of which $124 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives.
And our business well repurchase shares to manage our capital.
This week the board of directors authorized the repurchase of an additional 350 million common shares.
Under this and previous authorizations the company has now authorized.
Purchased $364 million of its common shares. In addition, we declared a dividend of 27 per share, which represents an increase of 13, 6% over the previous dividend of 22 per share.
As we look to 2022 and beyond we are optimistic that our largest single exposure, Puerto Rico will be substantially resolved by the end of this year.
The interest rate environment will be more conducive to new insurance business production.
And that the asset management segment and alternative asset strategies.
We will continue to contribute to the company's progress.
Towards this long term strategic goals.
I'll now turn the call over to the operator to give you the instructions for Q&A period. Thank you.
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 first star then two.
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Well pause for just a few moments to assemble our roster.
Okay.
And our first question today comes from Tobey I'm enjoying Ww. Please go ahead.
Hey, good morning, guys. Thanks drew.
My questions here this morning.
So first.
Does the international insured portfolio had any exposure to areas that would potentially be at risk given the ongoing conflict in eastern Europe .
No we have no exposure to the Ukraine or Russia, we do have exposure in Hungary, but it's a.
Small and it's Fastly amortizing.
Okay, Thanks for clarifying that and.
And then next thing a few questions around the contingent valued instrument makers.
They finished where the are the marks related to the CVI.
You already have received as well as DB is contemplated up receiving them in the future with them and finalize the settlement.
And then second does the C V I get Mark to market every quarter based on things like actual tax receipts in Puerto Rico or is it the updated.
Physical outlooks, there could you kind of walk through those pieces.
Well so number one we have not received any C. B I yeah. So remember all of the restructurings are still in the future with the first one being the general obligation and related credits, where we'd actually receive instruments starting on March 15.
You know the C V is a long duration instrument, it's predicated on sales taxes volumes over many many years, so you're going to make an assessment of what do you think that president future value is relative to the current performance and any other expectations you might add so that number is a mark to mark number will fluctuate based on the long term.
You have value and obviously as they we know they've already substantially exceeded the early benchmark relative to that revenue. Obviously, we think that security is a.
Solid investment are solid returning value.
Okay. Thanks, and then when you do receive the CVI kind of March 15th will you be able to monetize it immediately and also speaking monetization. The fully satisfied claims that you did monetize in the fourth quarter and again in the first quarter, how much additional fully satisfied and are there that you'd be able to do the same.
Okay. So these are complicated questions. So.
In terms of the monetization you have to have the right structure and you have to be able to convert the existing exposure into a security that can be sold into the marketplace. So that's not for all of Puerto Rico and as we looked at those opportunities to monetize it was really based on our view of value. It's a kind of a benchmark relative to expectation.
Good value.
It allowed us to risk manage you know some of the Puerto Rico exposure, obviously, you know would be dragging around fairly substantial balances related to this principle credits with transportation and general obligation. It also allowed us to deal with it or cash management strategy relative to the settlement obligations, we have coming March 15th and way up there. So it'll be old bonds as we received the news. So that's number one your second.
A question on the first question.
You know obviously, we can't really are at this point in time, there's still a lot of uncertainty in terms of value in terms of the C. V. I, we hope that it will start to trade as soon as its issues, but that really relates to the market and demand in the marketplace with the security and what prices are available. These are the things that we continue to watch monitor and we'll manage as we see opportunities going folding in the future base.
All of these.
The variables you have variables of interest ratio variables of.
Further you know geopolitical unrest your variables the market's perception of Puerto Rico in terms of their willingness to pay so theres a lot of balls in the air that will ultimately dictate value, but obviously the best value you're going to have is the one that the market's willing to provide once these securities are issued and in a market is established.
Now let me just let me say I told me that.
You know when we sold our subrogation rights this quarter, I mean fourth quarter and first quarter.
That and that will include what we were going to get in more on March 15th when this is consummated, which which is consists of a new.
New G L bonds CBI and cash.
So we sold those before we actually are getting them in March 15th because we have subrogation rights to the extent that part that part has been paid.
So.
Effectively we've been selling those <unk>.
Through selling our subrogation rights.
And then on March 15th we will get an additional say rough numbers $1 5 billion of cash new recovery bonds in CVI and we will.
Look to execute and sell them and.
And maximize their economic benefit.
Overtime.
Right right, yes that makes sense and then last.
Could you just walk through law, most likely timelines for the resolution like H D E and SAP I know you mentioned that you expect Puerto Rico to substantially to be resolved by the end of this year can you just put a little finer tuning of natural timing throughout the year and then how do you any strategic actions, taking acquisitions or capital actions like special dividend.
All factor into that expected time line.
So let's get to the timelines of Puerto Rico, So really express and of course. These are data that could slide obviously as we've seen happening in the general obligation, but it doesn't get too you know no margin could have been done by the end of the year.
We look at transportation, our expectation as a third quarter resolution PREPA you saw the request for immediate mediation, but we still think that drags on a little bit maybe that's fourth quarter Bud between third and fourth quarter for transportation and breath of we expect it to be resolved by the end of the year.
And then you're right. Once we were free of this burden because obviously, it's been a significant drag on the company relative to other peoples perception not economic reality as you can see in the current quarter.
Okay.
Benefit we realized they just won a perceived value of settlements around predominantly general obligation.
At least then gets that which then provides us that opportunity you can start to reengage on further capital management.
Opportunities principally special dividends to kind of accelerate the capital management that we've been doing so it opens up a whole host of opportunities for us as we can.
Finally get Puerto Rico behind Us in the room here, which we believe economically there, but we still have the legal technicalities of having to go through the process or the exchange et cetera, as Rob pointed out.
Okay.
I appreciate all the comments on it.
No problem.
Ladies and gentlemen, our next question comes from Jackie you have them all at one moment. Please go ahead.
Hi, guys can you hear me okay.
Yeah, Hi, Jack.
How are you hi, guys. Good. Thank you so much of the time. This morning I just had two quick questions. One of them that I think Dominic might have just answered but.
On the sold separately.
The separate gate it assets that you sold the proceeds I'm assuming are not available for capital redeployment will be withheld.
To satisfy the claims that you expect that March 15th is that kind of what you indicated yes.
Yes.
Okay. So we shouldn't be penciling that and there's excess cash we'll have a weird ability.
Significant liquidity a ban on this doubling of the old bonds, where we get the new bonds to caching to Steve Yes. So we got to pay first before we received second so this allowed us it took a lot of opportunities in the portfolio to basically form that for short term cash. These sales allow us to further alleviate some of that cash responsibility.
Okay, Great and then just Oh, sorry, Jack asked what else I, just one else add that you know just remember we sold those subrogation rights.
Significantly higher values than we expected with respect to our reserve analysis, and that's why you're seeing a significant benefit to our portfolio to our Puerto Rico reserves.
Right. So that was going to be my second question, Rob said the benefit that we saw from the Puerto Rico reserves that incorporates the full expectation of where we sat on December 31st that's not just a reflection of those sales is that correct yes.
Yes.
That's correct. It's a reflection of a couple of things you know we look at all possible scenarios as you know when we look at all the news that happened in the quarter you know.
We looked at the fact that.
The judge accepted the plan of adjustment adjustment, we looked at the south because it adds as a.
As a benchmark and then we then that.
That that we look at that and we sort of extrapolate or it instructs us to look at the other other exposures.
The G OS that are coming that we're getting.
March 15th and also transportation and PREPA.
And we put appropriate interest rate sensitivities with respect to inflation adjustments.
That's all taken into account in our future.
Loss reserves related to Puerto Rico.
Great.
Dominic I know you've talked about this many times over the years, but could you just refresh our memory now that we may actually be seeing some rising rates in terms of what are the key benchmarks that you're watching in terms of new business production and both on maybe whether it's the tenure of the fed I think it's a 10 year and then also on spreads just like when you went in.
Tends to pay that now we've seen some pretty strong demand already but you would really anticipate to start to see.
Municipalities really coming back to market in size.
Well, Jackie the long awaited and maybe starting to come to fruition of rising interest rates, which had been predicting going all way back to 2011, when it actually finally come to realization.
But when we look at your answer your question is predominantly 10 year Treasury, we look at overall rates and more importantly, the economic conditions surrounding the rate environment, because remember the credit uncertainty the global political uncertainty.
Widens on markets it creates opportunity for the business irrespective of interest rates, but obviously as interest rates rise typically the credit spreads widen as well because they're kind of related and no one's in aggregate once a percentage of that IV. So uncertainty is a key driver, but we looked at the 10 year Treasury was probably the biggest benchmark.
Well you know bonds at a 10 year call on them, that's kind of the rate that we look at it. So as we look at the potential movement in that rate, obviously, you've seen the penetration is starting to grow anyway across our markets relative to the use of insurance and the acceptance of the institutional investor. So we believe that the rise in interest rates further enhances if not exacerbate.
Those opportunities. So we watch that 10 year treasury spreads overall rates overall, and then the other kind of surrounding economic wears inflation, whereas you know growth versus recession, whereas the geopolitical environment is all of those things feed into the calculation.
Got it and is there a number dominated in your head. When you think it really is a step function change in demand or is it more a sliding scale.
Yeah, I've been slogging that number for you I can't tell you how many years. So right now my hope in place with three year, a 3% 10 year Treasury.
Got it okay. Thanks, I figured I'd do that because I wanted to ask.
Remember all long haul movements, along that curve will significantly enhance the man.
Well remember that the market has gotten so used to refinance is going very very little right. It's kind of a need they're going to need to continue to feed and the only way they're going to go to get there the comparable terms in a rising market as you use more insurance, which is obviously great news for US obviously, we think that a three year 10 year Treasury, It's a fantasy right.
Very different market relative to growth opportunities and the production that we would book it would be substantially different than what we currently experience.
Great.
Great. Thank you guys for your time really appreciate it hope you're all doing well.
Thank you Becky.
Okay.
Question Today comes from Michael Temple, a private Investor. Please go ahead.
Good morning, gentlemen, and congratulations.
Thank you Mike.
Yes, a few questions.
Did the bond refinancing, which you affected in Q3 of last year.
And how are you.
Refinanced $600 million and raised an additional 300 million, which went towards share repurchase I'm just curious.
In the previous decade the.
The share buyback was affected by.
Our request for a special dividend from your regulators.
And then this is since it appears that maybe you didn't go that route and instead opted to raise holding company debt.
To fund that additional.
Got it.
Buy back that was above and beyond your as of right.
Just curious do I have that correct and if so what motivated you to go that route.
Rather than your traditional <unk>.
A request for a special dividend.
That's a great question, Michael So the special dividend you know obviously, we look at a lot of things, but one of the things that is really predicated on the special dividend is our relationship with the regulators and the regulator's view of the company.
So because of not so much Puerto Rico, but the uncertainty from Covid, even though obviously COVID-19 didn't have a significant impact on the company in terms of the performance of the insured portfolio, we thought it would be wiser.
You know that's the states still grappling with other issues for other companies kind of across a broad spectrum that we'd be.
Smarter to delay that and really get to a point, where whenever we go to the state they're just gonna shake our hands nod their heads and let us walked out of the room as opposed to sit there and kind of rub their chins and say well you have to worry about that the word though so we think with both COVID-19 hopefully behind us and Puerto Rico behind us to stay would really be in the law.
To better position and feel a lot more comfortable with the approval of any special dividend request. So we haven't had the special dividend request in the last two years.
Probably more than that and obviously we've found other means there's still accomplish our goals of capital management.
And obviously my Mike.
Go ahead, Rob I'm, sorry, I'm, sorry go ahead finish down.
And then I was going to say if you looked at 2022, we still think we can accomplish our goals without a special dividend special dividend will just further enhance our opportunities for capital management.
We said as I said I think we're gonna be in a great position relative to that specific request as we go through the year resolve the rest of the Puerto Rico finally get that off the books and therefore, obviously also have COVID-19 finally burn out so to speak and you know leave us back to a normal lifestyle.
And Michael about the debt Refinancings, you know we looked at you know where rates were on the 10 and 30 year curve and so well we can execute last year and one you know you're always looking at your cost of capital and and the makeup of your capital and wanted to get the cheapest form and by executing that first 10 year at <unk>.
315, and the second 30 year at 360, <unk> lowered our cost of capital significantly in addition to which saves us money open.
As we stated in our call and we didn't increase our we didn't.
Significantly.
Very small we increased R.
Our leverage ratios and our coverage ratios remain very strong. So it was a very opportunistic and very strategic move by the company to go out and execute that and use that as excess funds for capital management without changing those ratios.
Understood.
In hindsight.
Hugh you chose the perfect time to issue such a high.
And along with it so congratulations on that.
A couple of other questions.
As I listened to the benefits of the assured.
Alternative.
Good for them and the returns it has provided to the portfolio, that's all well and good.
But I just wonder if you are able to provide guidance I know in the previous call that you.
You had indicated that while trends were improving.
You didn't think you were going to reach run rate.
<unk> ability until perhaps Q3, maybe Q4 of this year.
I'm, just wondering with the turmoil in credit markets.
Does that get pushed back.
Into next year and finally.
Are you at the stage, where you can provide.
Meaningful guidance as to what.
We could expect run rate revenue profitability to be able to look like once you do finally cross that threshold.
And put all the.
So to speak one time losses behind you.
Mark the performance to date.
Okay. So in terms of asset management as we said on the call I think we've made tremendous progress across all boundaries of that specific operation and if we look at it total contributions of affirm its a huge net positive to us so the benefit of having it though with the ability to do the alternative investments and the returns that we've been able to realize.
Management has been substantial and therefore help to really make that a worthwhile proposition. If you look at the operations itself, we feel we'd be able to get to break even by the end of this year, we lost $3 million in the quarter and remember that still includes depreciation and amortization. So if you look on cash on cash it's positive number one number two it's really.
The secret sauce, there in terms of turning the corner is two things one we still got to grow a U M against our fixed expenses relative to being a public company in the asset management space and obviously, we grew a M. This year. We've got other plans that we have not made public to further enhance the growth in AUM in 2022, so that should help with.
The equation of profitability number two is the expenses relative and the distraction of the legacy funds and hopefully by the end of 'twenty 'twenty. Two we will no longer have any legacy funds I think getting rid of the legacy bonds and the growth of assets will turn that to profitability. The continued use of it as a manager of rone.
Turning to investments, that's been usually beneficial and profitable for us.
And that's a scale business, we need to get more scale. So we've got strategies to increase the scale and the breadth of your operations and as we execute them through 'twenty 'twenty. Two we look for a very positive result, once we get to those new asset classes, new fee management problem propositions will be able to provide for the direction, but as we launch them, obviously theres a lot of uncertainty at the beginning and as you get further performance.
If you did I'm more comfortable on expectations.
Yeah.
Oh My God.
Michael I, just want to add for the group I'm getting a text that I might have said something incorrectly. So just to be clear we declared a dividend of 25 per share. If I said 27, I don't remember, saying it but it's 25 cents per share.
And we over last the.
The previous dividend was <unk> 20 per share a 13, 6% increase.
Yeah.
And then just one final question.
Yeah.
Well, it's sort of a follow up to a question you had some the putnam.
Team.
Let us.
Work with the assumption that.
Spreads are 50 basis points wider in the new issue space.
Again, I'm, just using that as an arbitrary figure given the run up in interest rates and the widening in credit spreads.
In an environment, where new issuance is 50 basis points wider for issuers.
Theoretically.
How much of that do you think you can capture.
In terms of our enhanced underwriting spread where it's a win for them and it's clearly a win for you.
Well that's another good question. So if you think about it if you go back to when there were seven AAA companies competing for the business you captured typically for premium purposes, and remember our premium as our rate, which as a percentage of the spread times did that surface.
So when you have a widening of spreads and an increase of Reis se the basis for what your calculation goes up and then of course, the widening of spreads.
It also increases would you were able to chart. So it's a win win so if you go back to say Oh, four or five you know me.
You were getting anywhere between 10 and 20% of the spread.
Today, we get between 40 and 60% of the spread so if you do your math and say okay.
The part that services why that spread goes up 50 basis points on average capture 50% of the increase of 50 basis points, that's 25 basis points across the entire good services that can be you can get an idea of what that means relative to premium.
It's a good number.
Yeah.
Thank you, ladies and gentlemen, our next question today actually from Jonathan Oh, well.
Deutsche Bank. Please go ahead.
Yeah morning, guys. Thanks for taking the question.
So I just want to go back to the debt liability management, one more time. So you guys. Obviously had very good success with that in 2021, lowering your coupons getting the interest expense lower you still have a number of contingent preferred securities outstanding that lack modern LIBOR fallback language. So I guess my question.
It's two part one do you have any plans to address or do additional debt liability management, perhaps on those securities to deal with the LIBOR language and then two if not how do you see things playing out in the back half of 2023 around the LIBOR language in coupons on those securities.
Well every time, we see a date for the end of a LIBOR continues to be extended so it gets a little hole Brad as it is and number two the contingent security financing is incredibly cheap so other than working around the legal logistics of the LIBOR language. You know this is a very cheap form of capital.
Yeah, its our cheapest form of capital at this point.
And its perpetual on its own and it's dollar for dollar credit for the rating agencies.
So we're not gonna have to refinance any more debt, we still got some five per centers out there was around 300 and yeah. We have we have and we have $330 million that's coming due in 'twenty four.
Great. Thank you.
Youre welcome.
Our next question.
From Jefferies.
Please go ahead.
Thanks, Good morning.
Yes.
If we fast forward a year in Puerto Rico is now.
Off the liability side, and maybe you have some residual assets to manage.
The story becomes then about new business and capital management and asset management kind of going back the way things worked 15 20 years ago.
And obviously the capital management is.
There's a big headwinds when you're posting single digit ROE on a GAAP basis and.
We can assume that the the others.
G business is double digit so Dominic can you help us triangulate.
How that business should be run and back to the question of really right sizing for that platform.
Rough idea what is the underlying targeted ROE of a largely many business and financial guaranty.
And anything else you can kind of point us to that try to help us get an idea what the excess.
Management need is going to be once you get past the credit headwinds.
Well, Jeff that's a complicated question so I'll give it my best shot and I'll probably get.
What has shaken by our standards I answer this question because I'll be concerned about what I say, so let me first give you a commercial.
Well my commercial is as follows.
We've had to play defense in this company since the day, we went public.
Think about where we were split ready we were the smallest financial Guaranty company out there we were struggling for mortgage share Moody's gave us a market share of minimum to upgrade us. So we struggled those early years to get recognition and acceptance. We finally breakthrough and I can't remember the exact date, but I think it was in 2008, we finally get all three triple AIDS, which everybody else out. So we're now on a competing platform with.
And it gets taken away from us in three months because within enterprises.
Now we're into the financial crisis and of course, everybody had the huge expectation of the Doom of assured guaranty, which obviously, we can do better.
Even though nobody believed us the other day, we had full confidence in the ability of the company because we knew our books better than anybody else knows our books and Trust me, we knew where our exposures, where we knew how to get around them.
So we fight that for a number of years and they say okay. Finally, we got that behind US we took advantage of it we bought our competitors it very steep discounts really enhance stunning, but we created a portfolio.
That included the five and a half companies, we bought plus their own writing new business in a very imperative marketplace. So by definition you could not replace the volume of that earnings.
It's impossible you got basically six and a half companies' portfolios with one company writing ended up hard market, but anyway, we like that like we said, okay. We're going to finally get through the play we're proving people that we don't have the problems. The other guys are where their survivor and we're taking advantage of being a survivor and what happens Puerto Rico declares bankruptcy. So here, we are again back in our Firefly with $5 billion.
Exposure to Puerto Rico, So we had to fight that fight. Okay. Finally, we think we've got Puerto Rico behind us, even though the market was booming and believers that basically the thesis thing economically to our benefit okay. Fine we'll take the criticisms I was really tough because we didn't have too much Puerto Rico exposure, but a lot of it came through acquisition that we got paid very well for we're actually doing the email.
Nobody going back and recapture was pregnancy with the amendment that was and I think it's gonna be a pleasant surprise.
Then what happens we get it by the pandemic. So say okay. So from 2004, we've been in a battle the entire time as I look at 2022 with Puerto Rico very much looking like it's in a rear view mirror because of the settlements that have already been agreed and it's just a matter of execution and the pandemic finally residing our portfolio is well structured and diversified across <unk>.
Any you know obligations to which all of them. It was stood the test of recessions.
Natural disasters pandemics. So we feel really confident that for once we can now go on the offensive and defensive now as part of being defensive we kept a very large excess capital balance because you had to.
We had people predicting doom and gloom and if we were aggressive in those two years I'd say, where these people nuts, they're going to get rid of their capital cushion when they've got five end up going to Puerto Rico, you could your hands were tied well guess what deposits are coming off rent and we're gonna be allowed to aggressively manage the organization. So what are the challenges in the organization as you hit the nail right on the head R. O E well were more.
In the yard as best we can the market will really support us in further enhancing that but asset management is the key and that's what management is two things one grow the AUR b get rid of the legacy portfolios, which we're well on our way to doing we got new strategies coming out in 2022 that we haven't announced yet so we're working on the walk through financial Guaranty and through asset management.
It's D. J D is the biggest drag if you go back and take out the excess capital. The recipe continues do you know what they didn't require it we replace it ourselves, but if you take out our S&P excess capital number you'll find our ROE it becomes really competitive and really.
In today's interest rate environment, you know a high eight or nine ROE is not bad and of course with our episodic transactions like reserves you can obviously get into the double digits on a regular basis, which we have done so we manage the company well, but he is the challenge and we've got to look at that would be really hard and see whether there's other strategies to enhance.
Our opportunity to manage the cause if I can move the yard dropped the than I was when I get that all the way to access of the cost of equity and therefore, we then have a different valuation of this company. That's the goal. That's the objective we're working hard to get it done.
As you can look at this company's performance in the past, we typically do not fail when we set an objective for the organization.
Okay and can you remind what was the last estimate under the S&P model, probably last July for your excess capital against AAA.
And it was Tuesday under their belt.
I'm sorry, Jeff It was 2019, it was $2 $6 billion.
And fair to say that the underlying financial guarantee business is a double digit return profile.
We calculate our rovs on every transaction, we do a summary for the year. If I told you. The exact results I'd have to shoot you, but theyre very very positive.
Okay. Thank you.
Youre welcome.
And when I give them all the best.
Uh huh.
Oh, there's a question of a person.
Let's turn the call back over to Robert Tucker for closing remarks.
Thank you operator, I'd like to thank everyone for joining us on today's call.
Do you have additional questions. Please feel free to give us a call. Thank you very much.
Yeah.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.