Q3 2022 Assured Guaranty Ltd Earnings Call
Good morning, and welcome to the assured Guaranty limited third quarter 2022 earnings Conference call. My name is Bailey and I'll be the operator for today's call all participants will be listen listen.
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I'd now like turn the conference over to our host Robert Tucker Senior managing director Investor Relations and corporate Communications. Please go ahead.
Thank you operator, and thank you all for joining assured guaranty for our third quarter 2022 financial results Conference call. Today's presentation is made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095. The presentation may contain forward looking statements about our new bids.
And credit outlooks market conditions credit spreads financial ratings loss reserves financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them.
Except as required by law.
If you were listening to a replay of this call <unk>.
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 presentations and SEC filings, most current financial filings and for the risk factors.
Turning to the presentation.
This presentation also includes references to non-GAAP financial measures, we present, the GAAP financial measures most directly comparable to the non-GAAP financial measures.
Referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures and our current financial supplement and equity Investor presentation, which are on our website at 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'll open the call to your questions as the webcast is not enabled for Q&A. Please dial into the call if you'd like to ask a question I will now turn the call over to Dominic.
You Robert and welcome to everyone joining today's call.
To build shareholder value of assured guaranty during the third quarter and first nine months of 2022.
As of September 32020 to assured guaranty's adjusted operating shareholders' equity per share of <unk> $91 82, and adjusted book value per share of $137 87 says were both record highs adjusted operating income per share of $2 11 for the third quarter and $3 88.
For the first nine months represented increases of 369% and 49% respectively compared with last year's periods.
New business production continued to be strong in the third quarter with $95 million of Pvp.
It's substantially the same as in the third quarter of last year, and our best quarter. So far this year.
This year's third quarter was our best third quarter in International Public Finance and second best in U S public finance in more than a decade, we believe theres been a permanent shift in the market towards a greater appreciation of our value proposition.
The pandemic.
Pandemic, the volatility of the markets and the global economy, geopolitical unpredictability and climate related natural disasters have reminded investors of the vulnerabilities of their investments municipal bond yields which had risen dramatically in the first half of this year continued to climb in the third quarter with.
But the benchmark yield for 30 year AAA Geo bonds, finishing at three 9% credit spreads remain tighter than had been typical over the past decade, although they've widened somewhat over the course of the year, while interest rates increases in credit spreads widening are promising facts you had some initial U S municipal bond issuance volume has not kept pace with last year's.
There have been fewer refundings this year, where in past years Refundings have helped drive high total new issue volumes during the year of ultra low interest rates.
Additionally year to date demand has been curtailed by approximately $92 billion in net outflows from municipal bond funds and Etfs.
Even with the reduced issuance volume this was the third consecutive year in which ensured volume in the primary market exceeded $21 billion. During the first time nine months you'd have to go back to 2009 to see a higher insured volume.
At seven 8% of par issued.
Industry penetration rate was the second highest in over a decade for the first three quarters.
For assured guaranty year to date strong demand for our secondary market municipal bond insurance.
The impact of lower overall issuance in the secondary market. We wrote more insured part of the first three quarters of 2022 than in any first nine month period of the last decade or $2 $2 billion of secondary insured par totaled more than 11 times out of last year's first three quarters.
With fewer opportunities to purchase insured bonds in the primary market investors have evident we'd been seeking the security and other benefits of our guarantee to the secondary market, which we believe is assigned to fundamental demand that is likely to be reflected in the primary market as volume returns.
Holders of uninsured bonds me also one insurance because it has the potential to stabilize the market value of a position compared to the uninsured position should the credit come under financial stress.
Our secondary market policies command comparatively higher premiums that made an important contribution to our strong pvp this year.
Assured guaranty remains the market leader for bond insurance insuring, approximately 56% of all primary market insured pars sold during the first nine months of 2022.
In total our insured pars sold in the primary and secondary markets was $15 $1 billion. The third largest amount we've enjoyed during the first nine months of any year in the last decade.
This included $4.8 billion of par from 'twenty, one U S public finance transaction that each involved at least $100 million of insured par.
During the third quarter of 2022, our insured pars sold in the primary and secondary markets totaled $3 $4 billion of which $480 million of secondary market par.
We are pleased we were pleased to continue to add value with double a credits, where we believe investors see our guarantee on high quality credits as a mitigating a various risks.
During the third quarter, we insured $683 million of par on 24 primary and secondary transactions with double a underlying ratings in aggregate for the first nine months of 2022 we insured more than $2 $3 billion of par on 103 primary and secondary market transactions that either S&P or Moody's or both.
Had assigned double a underlying ratings.
Outside U S public finance, our international public Finance business had its best third quarter since 2009, producing $37 million in Pvp, bringing its year to date pvp to $67 million.
We guarantee.
These transactions and the transportation airport water and other utility sectors, we have good prospects for a strong finish to the year, including local authority dead and other transactions.
In global structured finance, we are currently processing mandates in such areas as subscription finance diversified payment rights whole business, Securitizations and portfolio capital management for banks and insurance companies.
Our new business production benefits from our strong financial strength ratings last mile Kroll Bond rating agency affirmed the double a plus ratings it applies to our U S U K and European insurance subsidiaries and.
In February portrait AG on the AGM and AGC KBR, a highlighted the company's substantial claim paying resources ability with Stan KBR as a conservative stress scenario losses, and our skilled management team.
Also last month, the Portway go Puerto Rico Highway and Transportation Authority settlement and plan of adjustment was approved by the district Court in Puerto Rico, and the plant is expected to be implemented before year end.
Solving HCA reduces our total remaining insured Puerto Rico net par exposure to about one half of 1% of our total insured portfolio.
With regard to PREPA, if they're mediation had reached an impasse accorded allowed certain litigation to proceed while directing further mediation to continue resume concurrently.
The PREPA bonds have robust credit protection creditor protections, but as always we preferred to resolve the matter consensually are possible as we have attempted to do for many years.
Overall, our insured portfolio has improved significantly in the last five years with below investment grade exposure diminishing from four 8% of insured net par outstanding at September of 2017 to two 5% today as a result of our loss mitigation efforts and it's important to remember that only a portion of the P. I G exposure is ever likely to produce.
Actual losses.
As many of you know we acquired the asset management business in October of 2019 with games of one diversifying our revenue sources by adding a fee based revenue stream and to getting an in house platform to increase our investment returns through alternative investments, we refurbished affirmative now almost fully wound down their legacy bonds that we wish to exit.
In terms of our key objectives as of September 30th our asset management business and more than $17 $5 billion of assets under management.
Actually all of which is fee earnings in.
In comparison at the end of 2019 with a comparable amount of AUM less than half was for Germany.
We also made progress on our second objective since we've been investing in assured I am funds those investments are generating an annualized internal rate of return of over 10%, which is markedly higher than any other insurance segment investment.
Keep in mind. These investments are mark to market on the income statement.
And we will therefore show more volatility than our fixed income investments. However, the current marks do not change our expectation of our ultimate returns.
Capital markets have continued to experience volatility.
In October the 10 year treasury yield at about 4% for the first time since 2008 and last week. The open market Committee added another 75 basis points to the fed funds rate.
In the municipal market the benchmark yield on tax exempt AAA 30 year, Joe Oh Gee was also exceeded 4% last month a level last seen in January of 2014, and the Muni market yields are roughly 260 basis points higher than where the average in 2021.
Given the current environment of higher interest rates and what appears to be a weakening economy, we would expect to benefit from further spread widening in the perpetual and a potential return to municipal insurance volume to higher levels.
The current demand for our municipal bond insurance should increase.
And I can tell you that so far in October in the fourth quarter I mean, it's one market so greater insured penetration while assured guaranty increased its market share down more frequent opportunities to ensure transaction with larger part a mouse.
We also believe that in volatile global markets. Many participants in infrastructure and structured finance are likely to have good reasons to employ the perceval tools, we offer to manage the risk.
Our outlook is positive as we continue to focus on our core principles of disciplined risk management excellent customer service and prudent capital management that is optimized for the benefits of our policyholders clients and shareholders I will now turn the call over to Rob.
Thank you Dominic and good morning to everyone on the call I am pleased to report strong adjusted operating income third quarter 2022.
$33 million or $2 11 per share. This represents a 369% increase on a per share basis compared with the third quarter of 2021 as a reminder, in the third quarter of last year, we refinanced $600 million of long term debt, which resulted in a 138.
Loss on the extinguishment of higher coupon debt.
Third quarter insurance segment adjusted operating income.
<unk> was $159 million compared with $214 million in the prior year. These results include strong and relatively predictable scheduled earnings generated by our financial guarantee contracts and fixed maturity investment portfolio offset by some fair value movements and other investments.
In terms of premiums third quarter of 2022, net earned premiums and credit derivative revenues were $92 million compared with $114 million in the same period of last year.
The decrease relates primarily to $13 million of net earned premiums on certain transactions in the third quarter of 2021, and did not recur and lower accelerations and updates to debt service assumptions in the third quarter of 2022.
The findings were $12 million in the third quarter of 2022 compared with $15 million.
In the third quarter of 2021, which is consistent with our expectations.
Deferred premium revenue on the investment grade exposure has been approximately $3 5 billion for each of the last eight quarters as our new business production has replenished the normal amortization of the in force book of business.
As Dominic mentioned financial guarantee new business production was strong in the third quarter of 2022, despite reduced primary market issuance higher interest rates and a more active secondary market contributed to a stable level of deferred premium revenue.
Net investment income from the available cell and short term investment portfolio was also relatively predictable stream of income and was consistent on a quarter over quarter basis at $69 million.
As Dominic also mentioned the economic environment characterized by market volatility and rising interest rates impacted several components of adjusted operating income adjusted operating shareholders' equity and adjusted book value.
The largest component of the quarter over quarter variance for the insurance segment's adjusted operating income is the fair value movement attributable to investments.
Typically fair value losses related to alternative investments in the third quarter 2022 of $11 million compared with gains of $33 million in the third quarter of 2021.
This includes investments in assured I am funds, whose inception to date Mark is a pre tax gain of $107 million, representing a 10, 3% annualized return.
This is in line with our targeted return demonstrating the value of our investment diversification strategy to enhance overall returns.
With respect to the Puerto Rico contingent value instruments. The company received these instruments in the first and third quarters of 2022 under the Geo PBA plan and HTS support agreements and we now manage these recoveries as trading securities.
In third quarter of 2022, the related fair value loss was $8 million on a pretax basis, primarily due to rising interest rates.
Economic loss development, which was a net benefit of $72 million in the third quarter of 2022 was also affected by the rising interest rate environment. As it included a benefit of $25 million related to higher risk free rates used to discount expected losses.
The economic benefit was mainly driven by a $95 million benefit and use our MBS, which has several components, including a benefit related to the purchase of a loss mitigation securities bear.
On assumed RMB as well, we shared proportionately and our ceding companies Rep and warranty settlement and.
And additional benefits related to updated second lien default assumptions higher recoveries on charged off charged off second lien loans and improved performance in certain other transactions.
The net effect of economic loss development and the amortization of related deferred premium revenue resulted in a benefit and loss expense of $75 million in the third quarter of 2022.
The asset management segment's adjusted operating loss was $3 million in the third quarter of 2022.
An improvement over last year's adjusted operating loss of $7 million. The more favorable results were due to higher asset management fees compared with third quarter of 2021 as the increase in fee, earning opportunity fund AUM more than offset the decline in AUM associated with the wind down funds.
And lower segment operating expenses.
As of September 32022, we have only about $200 million of AUM in our wind down funds.
Paired with $800 million of AUM.
As of September 32021.
And opportunity funds as of September 32022 was $2 billion.
Up from $1 $6 billion as of September 32021, due to fund raising in our health care strategy.
Foreign exchange rates also moved significantly in the third quarter and while the strengthening U S dollar relative to the British pound does not have a material effect on adjusted operating income and can have a material effect on GAAP net income as well as all of our non-GAAP book value metrics.
The effective tax rate is a function of taxable income across tax jurisdictions.
It varies from period to period in the third quarter of 2022, the tax provision included $20 million benefit attributable to our return to provision adjustments.
With respect to our capital management objectives, we repurchased one 8 million shares for $97 million in the third quarter of 2022.
Subsequent to the to the quarter close we repurchased 785000 shares for $42 million as of now the remaining authorization to repurchase shares is $261 million.
Continued share repurchases along with our positive adjusted operating income new business production and favorable loss development has increased operating shareholders equity and adjusted book value per share to new records of over $91 and $137 respectively.
Quarterly operating results vary from period to period that consistent quarterly increases in this book value metrics reflect how the successful execution of our key strategic initiatives build shareholder value over the long term.
Since the beginning of our repurchase program in 2013, we have returned $4 6 billion to shareholders under this program.
<unk> in a 17% reduction in total shares outstanding.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $127 million of which $75 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to either expand our business of repurchase shares to manage our capital.
2022 has been a year of great progress, particularly in terms of our Puerto Rico exposure.
Aside from PREPA, our remaining exposure to defaulting, Puerto Rico credits are covered under the HG plan for which we aren't waiting for which we are waiting the effective date to be announced.
And third quarter, we received $147 million in cash and $672 million and original notional contingent value instruments as part of the pending <unk> settlement.
Our exposure to Puerto Rico salvage assets in the form of recovery bonds and CBI.
Also been declining as opportunities arise to sell those securities.
During the third quarter, we sold approximately 20% of par our notional value of the amounts received under settlement agreements for a total reduction of 48% on a year to date basis. In addition, $87 million of the CBI has paid down subsequent to quarter end.
As we look forward to the fourth quarter and beyond we remain optimistic that the interest rate environment will benefit new issuance new insurance business production.
And asset management and alternative asset strategies will continue to contribute to the company's progress towards this long term strategic goals I'll now turn the call over to our operator to give the instructions for the Q&A period. Thank you.
Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two if youre 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 the line of Brian Meredith from UBS. Please go ahead. Your line is now open.
Hey, Thanks, a couple questions here first.
Just curious Dominic there was it.
Those are by MBIA that they're undergoing some strategic.
Evaluation Barclays I'm, just curious your kind of thoughts on whether that would make a good strategic fit with AGL any any opportunities there.
Well, Brian Thanks for the question, we heard that same comment in the market as well obviously, we have been continue as one of our strategic objectives was always to consolidate the other remaining model lines and like any other opportunity. We will look at it given the opportunity and see if it makes sense and whether we can meet the credit terms of our credit underwriting standards.
What else is in the portfolio.
Great. Thanks, and then second question I'm, just curious if I look at the different capacity out of the insurance off right now it's relatively low.
Maybe give us kind of at the views if maybe a special dividend, particularly could you get one when HCA ultimately comes through in everything finally gets done.
Yes.
Well, let Rob answer the specifics, but yes, we obviously look at other all means in terms of meeting our cash flow requirements of the holding company to allow us to operate or execute our strategic objectives, one of them, which is capital management, obviously as Puerto Rico continues to wind down and we get down to basically one exposure which is proper.
And remember the.
The regulators were giving us special dividends, even with Puerto Rico back in the day, and then obviously COVID-19 hit and that changed things dramatically. So we think the environment is getting in the right structure for us to go back to the market will go back to the regulators and have the discussion about special dividends. Obviously is we want to achieve further strategic objectives, that's important for us to be able to.
Accelerate or increase our cash flow to the holding company.
And then Brian as you look at page 12 of the.
The equity Investor presentation.
You can see the remaining capacity at AGM and AGC.
That's that's just for this year, so that will be replenished in the next year, So I'll remember it.
It's either 10% of policyholder surplus or your net investment income.
So.
That will be replenished. In addition to <unk>, we will have more capacity going into next year as well so.
And obviously, we're always looking to increase that dividend capacity through possible dividends from our.
From our UK operations, and we continue to try to maximize our dividend capacity.
With our operating subsidiaries.
Got you and then I wanted to just quickly back to my first question just curious from.
From your perspective is there the ability for AGL to do a transaction for all of MBIA, where would you be purely focused on national if something was possible.
Well, that's pretty speculative Brian so at the end of the day, we really at this point that we've looked at the portfolio from a reinsurance perspective over time, but obviously, we'd have to do a complete update of our understanding of what's in each of the organizations and see what makes sense and if there's something that makes sense, but obviously, we would consider it.
Great. Thank you.
No problem.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of tell me, but joined from <unk>. Please go ahead. Your line is now open.
Hey, good morning, guys. Thanks for taking my good morning Tommy.
Good morning.
Yeah, So I won't ask specifically about your interest in MBIA, but just perhaps from your seat kind of a unique standpoint do you think that other multiline insurance companies might have interest in an asset like that I guess said another way is it possible that other insurers could aim to enter the bond guarantee market.
I guess, what the positive outlook of higher rates and wider spreads or is the stigma of Puerto Rico really likely to keep some entrants away from this market.
Well speaking from a third party perspective.
Puerto Rico makes any difference at all at this point in time I think it's a <unk>.
Credit is getting its way to resolve that.
Obviously based on the credit worthiness of the.
Government activities and its actions would make it difficult for them going forward to give further bond insurance supply than either done, but thats for another day. So I don't think Puerto Rico matters at all I think it really looks at the regulatory environment. So remember when you get into this business not only of regulators rating agencies, which are two very high hurdles in it.
The company is willing to climb those hurdles that they would take a look at it but for us to try to speculate on whether a P&C company or a title company or a life company or begin the financial guarantee business.
We welcome the competition I think assured is very well positioned relative to the marketplace to our standing with our clients and the performance that we've done in the.
Truckload.
Which is not easy to duplicate at this point in time, plus as we always said in this business you need a track record earnings.
Deferred revenue source.
It really makes sense to put the capital in play. So you say that these companies that are big enough to established benchmark or that foothold to allow you to go forward in the business.
Like I said, it's about for us to determine it also has just been determined whether it's attractive to us or not.
And then we see competition that we see competition.
Got it thanks.
I guess on that topic of thinking about regulators and rating agencies and dealing with those.
I guess on the topic of <unk>.
Special dividend and the potential size of it do rating agencies look at it really differently than regulators might.
I know you guys were trying to work on coming up with an updated figure of the I think it was an S&P report kind of estimating how much excess capital you had in excess of a AAA rating.
I think last out in 2019.
Any update on that and really just kind of thinking about how regulators look at it from the perspective versus rating agencies.
Well I think the regulators.
The rating agencies do do have different perspectives right. Obviously the rating agencies are more based on the stress loss scenario regulators have a lot more criteria. They have a different capital model than the rating agencies do and yet as a financial.
Financial Guarantor, Youll, probably responsible for both.
In terms of the excess capital. So we anticipate the question so.
So the numbers come down over the last two years due to our success I'm reading our prepared remarks.
With me on this so the numbers come down over the past two years due to our successful capital management program.
Basically resolutions related to Puerto Rico, and we're very comfortable that we have substantial excess capital. The last time. We gave you. This information was for year end 2019, where we had approximately $2 6 billion of S&P AAA excess capital very important noted stronger the AAA basis.
However, between then and the year end 2021, we repurchased $1 billion of our common shares $1 billion worth of common shares paid approximately $140 million and dividends paid over 700 million appeared that service excluding settlements invested over $500 million III I guess, another high cap charge investments in display.
Using this to one 4 billion of capital our S&P excess AAA capital is still $1 $8 billion as of year end 2021.
So hopefully that gives you your answer.
Yes that is a that's what we're looking for thanks for having that prepared for US no problem and then just.
It's just that.
Last question then.
It looked like in the slide that the industry is U S public bond insurance penetration actually it looks like it dipped a little bit in the third quarter, just if I base see the penetration in the first half and compare it to what it was for the first nine months.
So it looks like it declined a bit sequentially, which is a bit surprising given the backdrop and any sense of what drove that.
Yeah, and remember that's very relative to who is in the marketplace at any given period of time and of course the market volume is way way down. So the issuers that are in the market are probably the more liquid issuers that are probably going to lose bond insurance lease I think as you see the statistics for the complete year, you'll get a very different answer relative to the penetration rate is still kind of flat with the prior.
We're just still way above.
Four years five years ago, So, we're making progress in penetration, we think with the rising interest rates the widening of credit spreads. The economic uncertainty. We think demand is now positioned to really start to increase substantially and we will hopefully see that in the fourth quarter. When we give you our fourth quarter and year end statistics.
Great. Thanks for answering these questions.
No problem.
Thank you.
The next question today comes from the line of Jackie <unk> from Putnam. Please go ahead. Your line is now open.
Hi, guys can you hear me okay.
Yes, we can Joe how are you.
Hi, Thank you so much for taking my question I guess, just a follow up to the prior question and thanks for going through the different capital sources, but does the regulator or the rating agencies care at all about the OCI marks and does that impact their analysis of the way they might think about a special or the capital.
Access.
Just given the magnitude of the Mark Thank you.
The market doesn't affect on statutory capital and it doesn't have an effect on rating agency capital.
Obviously, it will be a discussion that we talked about with rating agencies.
It doesn't go it doesn't affect surplus or rating agency capital.
Okay great.
They are sort of agnostic to what you think the street kind of let's do it.
Well look <unk> is not part of their model. So one looks at claims paying resources. One of those is venture capital, which it doesn't John substrate job, where it doesn't affect statutory capital S&P starts with our surplus in stock capital and rating agencies. Just obviously I mean, the regulators will look at look at surplus.
And as Dominic said earlier, there are other regulatory tests that we need to.
Tom.
Deal with them when it comes to getting special dividends.
Got it.
Okay. I know you told me that before but I just wanted to confirm given the magnitude of the mark. So thank you very much.
Welcome to the Mark served the marks.
It doesn't change our economic outlook of returns on those assets.
Adjustments will affect certain parts of the balance sheet.
Over time, we would think we believe that things will return to basically normal and the market should start to reverse.
Great. Thanks, Scott.
Youre welcome. Thank you.
Thank you.
The next question today comes from the line of Geoffrey Dunn from Dowling and partners. Please go ahead. Your line is now open.
Yes.
Thanks, Good morning.
Good morning, Jonathan.
I don't remember the years, where you discussed this but you know in the aftermath of the great recession, you speculated at where the municipal bond market could ultimately recover too.
Under the new model of being a double way et cetera, I wonder if they were like 25% penetration.
Part of that recovery was based on rates going up and spreads going out.
So obviously, that's happening now and who knows what will be sustained but and your vision of where the muni bond market.
<unk> goes or even the global market for financial Guaranty goes.
What else do you think needs to happen other than what we've been seeing on rates and spreads too.
Reach.
What you think could be a fully recovered sustainable financial guarantee business model going forward.
One word Jeff one word stability.
So rates are getting into an area, where we're very comfortable is going to really further increase demand for municipal insurance, but it's got to stay over time right. We can't get the rates go up like a balloon and in Dallas.
Popped balloon.
If these rates will hold.
The fed and the Treasury stayed constant and I think it creates that absolutely can do some market for growth for us and we're starting to do some analysis right. So couple of cute little tidbits of information Robert took it away from me So I don't see it.
Yes.
So the one I'll tell you is a 1% rise in interest rates is worth 10% on Pvp.
So think about a 1% rise in interest rates, 10% LTV.
Just keeping everything else constant thank you Robert.
To give you an idea if we look at debt service on the same amount of par remember, we get paid based on rate times debt service.
In 2021 debt service resulted in a 135% of par.
2020, twos debt service resulted in a 193% apart because of the change in the interest rate we get paid based on debt service. So think about that impact will have on future premium not only what we calculate as pvp, but we get the earn over the future periods and in a rising interest rate environment may not have been refunding. So we're not going to get this acceleration that rob's future.
<unk> now the earnings will be stable over time will grow according to the Pvp growth year over year veteran industry in year over year over year. So we're very optimistic as we look at the market today and the only thing we hope for stability that is stable at this late rate even if it stays that way for a period of time, a few years at least before Theres panic in the streets and they start lowering rates again.
And Jeff when you look at the secondary.
So I was just saying Jeff in a second as you saw the secondary was very strong over the last couple of quarters and as generally a leading indicator to the primary as well.
Stability and less volatility.
Issuance volume pickup in the primary market. So a little fact that we look at it as a secondary market activity and Thats typically a forerunner of primary market activity and to give you an idea of the secondary market activity in the current year nine months to date.
$160 million of Pvp in the secondary market compared to.
Four 4 million last year, 60, and six versus four.
And that's typically a precursor of indicator where the primary market is going.
Okay.
And then.
It might be probably a decade and a half since.
Financial guarantee companies really talked about the different hurdle rates across our return hurdle rates across muni structured it international.
As you weigh potential M&A I'm just curious if you can share some sort of range on hurdle rates on new business. So we can get a gauge of.
What type of return on an M&A opportunity might be compelling enough for you to look at versus retain the capital for buyback and growth.
When you look at it on that basis, we have to say the return on an M&A basis has got to be north of 15.
Because we think the capital return on a buyback of stock is in the 11% to 13% range, we're writing new business anywhere between eight and 11% depending on the transaction and depending on the source of business. The international would have a higher than that.
But obviously international is not the major part of our business U S. Public finance when we look at returns on a transaction by transaction basis close for the quarter, but remember that's also on a regulated capital not the capital that we absorbed in the company. So the excess capital is behind that calculation. So the real returns are left in that.
I can pull that province center for writing business and regulatory capital enhance returns and they're not a responsible for the excess capital in the company. So as we look at that hurdle rate for the M&A, It's got to be north of 15.
Okay, and it's got to make sense of credit wise relative to the organization.
Im sorry, Jonathan and then just financially.
Any kind of return leverage preference between reinsurance versus an outright acquisition.
On the <unk> acquisition had a lot of benefits ready to guidance the portfolio re rated.
What are the Investor base, which you really don't need anymore, but that was important to us back in the day like the FSA transaction and then we got a huge discount on the capital and the capital with substantial to get a discount on that with capital basis or a lot smaller so the discount if any is not going to be the same value to us that it used to be so for us we're agnostic from reinsurance through acquisition.
That will provide.
Portfolio, we won at the risk rating, we won at the premium level that we want.
Okay and my last question.
Do you recall the discount the statutory capital that you paid for FSA.
Well the statutory Jeff I can tell you the book value right, we paid 37% 38.
37.
602, and then as we went through the transactions we got into the <unk> and then later transaction was volume that <unk> 30.
The portfolio has got smaller.
Less volatile there was less capital to be discounted. So there were bigger back in 2009.
I guess in October 2011, or 12, which way the 50% and then the ones in 2013 and 15, if they were the years if I remember correctly, we're probably in the 20% to 25% range. So yes.
And that would be so the discount with like 63% for appetite and just make sure we're clear.
We pay like 37% are in a blackout.
Got it okay. Thanks, guys.
Youre welcome.
Thank you.
The next question today.
Comes from the line of.
I know bellona from Compass point.
Please go ahead.
Your line is now what happened.
Another great quarter.
However, our performance, but I'd be curious is actually following up a little bit on the kind of correcting returning question when I think about the spread environment, obviously spreads have widened and so youre going to generics W. Baird.
You guys have increased I am curious.
Where returns have grown from a return on capital perspective on where business was before rates move higher versus kind of where it is now and where that could go.
I'm curious.
How much improvement potential there is from kind of a return on capital perspective for new business.
Alright, and a better operating environment.
Yeah, I think the improvement is reasonably Lord so if you're thinking about it giuliano so public finances, the largest book of the business right.
Obviously, the most compared to the end of the business.
More susceptible to.
Competition in the marketplace more from uninsured versus insured.
And if you look at it we do LNR transaction by transaction basis, I've got a room from the top of my head. So most quarters, we're trying to achieve a 10% minimum return and I think we get that most of the time, but there probably were some quarters, a one year ago or two years ago. They might have dipped below tend to like eight or nine.
And then also transaction they were competitive you might even go lower than the other transactions. We really added value we were able to go hire them given the average is.
As we look at the book today, I'd say remember, we're just at the beginning of seeing this enhanced flow business and rates in premium and spreads.
This quarter I think every business line was over 10%.
International is always over 10% would really be a positive.
But even in the domestic U S public finance if.
If I remember the number correctly it was north of 10, and like I said Thats. The very beginning stages of what we're seeing is a return of reasonable rates and spreads to the marketplace. We think spreads are a lot more widening to experience as the economy rolls forward to potentially a recession.
Could you just think of the basic math Giuliano.
<unk> said, you don't get paid on debt service of a financing or all of our lines of business into the higher interest rate and acquired the spreads you're getting paid more dollars, but the denominator of that capital charge is it stays the same so by definition you returns must come up.
Well this year in India.
Well hopefully.
And then we're not.
That's great I was referring to someone else on the market.
I was wondering if someone else in the market. If you look at their published financial statements.
I guess going back to another question on the kind of consolidation in the industry or the desire to consolidate the rest of the industry.
Be curious, obviously reinsurance can achieve effectively the same thing.
The remaining entities that are out there are running off.
We need to do large reinsurance yoga it gets smaller and smaller I'm curious if there is is there any preference for acquiring the legal entities. So you can expect to require capital at a discount to capital and also get the benefit of higher investment income to drugs and Bruce your dividend capacity.
Yes good.
Good question.
Barbara.
Yes, you hit it right on the head right. So reinsurance gets you a very highly rated well premium risk exposure that fits into your risk model and exceeds accepted by your credit underwriting standards as reinsurance what's missing when you get to the acquisition of the entire company two pieces one breath of customer we've already got that so we don't need that anymore, but.
In 2009 that was important to us and acceptance of the paper in the marketplace and then the third thing as you just pointed out the discount on capital, but these capital basis have shrunk substantially because of obviously refundings runoff et cetera. So the value of the discount even if you say that you can get a 30% discount on a very small capital base.
So for us the reinsurance gives us to pick the risk that we want meets our underwriting standards gets premium level that gives us that level of return that we targeted so one is better than the other to certain extent unless you get a really good value on the discounted capital.
That's very helpful. Thank you for taking my questions and I'll jump back in the queue.
Good to hear from you Julien Thank you Julianna.
Thank you.
This concludes our question and answer session I would now like to return the conference back over to our host Robert Tucker for closing remarks.
Thank you operator, and I'd like to thank everyone for joining us on today's call. If you have additional questions. Please feel free to give us a call. Thank you very much.
This concludes today's conference call. Thank you all for attending you may now disconnect your lines have a great day.
Yeah.
Okay.
Yes.
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