Assured Guaranty Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 28, 2025

Key Takeaways

  • Assured Guaranty reported record year-end highs for adjusted book value per share of $170.12 and adjusted operating shareholders’ equity per share of $114.75, while repurchasing 11% of its outstanding shares under a $500 million buyback program.
  • New business production remained robust with PVP exceeding $400 million across U.S. Public Finance, non-U.S. Public Finance, and Global Structured Finance, including a four-year high of $270 million in U.S. Public Finance originations.
  • Fourth-quarter adjusted operating income fell to $1.27 per share from $5.75 a year ago, primarily due to the absence of prior-year tax law credits and fair value gains, along with increased loss expense on certain municipal and healthcare exposures.
  • In Q1 2025, the company will recognize a pre-tax gain of approximately $103 million following the successful conclusion of litigation with Lehman Brothers International Europe.
  • Assured’s remaining Puerto Rico Electric Power Authority exposure is in extended court-ordered mediation despite a First Circuit ruling upholding its security interest in PREPA revenues, leaving the ultimate resolution timeline uncertain.
AI Generated. May Contain Errors.
Earnings Conference Call
Assured Guaranty Q4 2024
00:00 / 00:00

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Operator

Good morning and welcome to the Assured Guaranty Limited Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. My name is Ezra and I will be the operator for today's call.

Operator

Call. Please note that this event is being recorded. I would now like to turn the conference over to our host, Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead.

Robert Tucker
Robert Tucker
Senior Managing Director of Investor Relations & Corporate Communications at Assured Guaranty

Thank you, operator, and thank you all for joining Assured Guaranty for our fourth quarter and year end twenty twenty four financial results conference call. Today's presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them except as required by law.

Robert Tucker
Robert Tucker
Senior Managing Director of Investor Relations & Corporate Communications at Assured Guaranty

If you're listening to a replay of this call or if you're reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors. This presentation also includes references to non GAAP financial measures. We present the GAAP financial measures most directly comparable to the non GAAP financial measures referenced in this presentation along with a reconciliation between such GAAP and non GAAP financial measures in our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guarantee Limited Rob Balenson, our Chief Operating Officer and Ben Rosenblum, our Chief Financial Officer.

Robert Tucker
Robert Tucker
Senior Managing Director of Investor Relations & Corporate Communications at Assured Guaranty

After their remarks, we will open the call to your questions. As the webcast is not enabled for Q and A, please dial into the call if you'd like to ask a question. I will now turn the call over to Dominic.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Thank you, Robert, and welcome to everyone joining today's call. Assured Guarantee produced many significant achievements in 2024, our fortieth year in business and our twentieth year as a publicly traded company. We earned adjusted operating income per share of $7.1 and created significant future earnings from strong financial guarantee originations. Once again, we reached record year end highs for adjusted book value per share of $170.12 adjusted operating shareholders' equity per share at $114.75 and shareholders' equity per share at $108.8 We continue to build value for both the short guarantee shareholders and policyholders. AGO's common stock share price rose 20% for the year to $90.01 And in our capital management program, we repurchased 11% of the common shares that were outstanding at 12/31/2023, while meeting our 2024 target of repurchasing $500,000,000 of our shares, further managing our excess capital.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

In new business production, PVP across our three financial guarantee businesses a row. U. S. Public Finance originated February in PVP, its highest annual total in four years and both non U. S.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Public Finance and global structured finance saw a strong production and built solid pipelines for 2025 and beyond. We ensured the winner of the bond buyers overall 2024 deal of the year and the healthcare financing, Northeast Regional and Innovative financing category winners. Rob will tell you more about our participation in these exceptional transactions when he reviews our production results in a few moments. We expanded our geographic reach and pursued further opportunities in Australia, New Zealand and Asia by opening an office in Australia and one in Singapore. We made further inroads in Continental Europe and continue to view it as an area of opportunity.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

As we mentioned on several previous earnings calls, we completed the consolidation of our two primary insurance subsidiaries into one by merging Assured Guarantee Municipal into Assured Guarantee Inc, thereby creating a more efficient capital structure and a larger insurer with a more highly diversified insured portfolio, larger capital base and greater claims paying resources. This is one of several strategic moves that we made in recent years that better positioned us for growth, profitability and corporate efficiencies. The inception to date return on our alternative investments, including funds managed by SoundPoint and AHP was approximately 13% through year end. Regarding our one remaining unresolved Puerto Rico exposure, PREPA, the Title III court has ordered the parties to continue mediation and extended the time for them to resolve their differences. Additionally, the First Circuit has confirmed that bondholders are secured by an unavoidable security interest in PREPA's past, current and future net revenues and twice denied rehearing petitions by the FOMB asking the court to reconsider such ruling.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

We remain committed to a fair and consensual resolution for all PREPA stakeholders and are determined to enforce our rights as a secured creditor. We are well positioned for success in 2025 and The U. S. Municipal bond market has started the year with a very strong new issue volume. Some analysts project that 2025 volume will rival or even exceed the annual record volume of 2024.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Another important achievement and another example of Assured defending our legal rights, in early February twenty twenty five, we successfully concluded litigation with Lehman Brothers International Europe who will recognize a pre tax gain of approximately $103,000,000 in the first quarter of twenty twenty five. Then we'll discuss this further in a few minutes. During our forty year history, we have proven over and over the value and reliability of our guarantee and the resilience of our business model, even through some extraordinarily difficult global economic environments and geopolitical events. We believe we have untapped business opportunities around the world as well as the financial strength and talented people to successfully pursue these opportunities over the coming years and decades. I will now turn the call over to Rob to provide more details about our production results.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Thank you, Dominic. Business production across our three main business lines, U. S. Public Finance, non U. S.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Public Finance and global structured finance continued to perform well in 2024. As Dominic mentioned, PVP across our three financial guarantee businesses topped $400,000,000 for the second year in a row and was appreciably higher than the $375,000,000 in 2022. In U. S. Public Finance, we had a very strong year, reaching $270,000,000 in PVP.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Results were primarily driven by continued recognition of the value of our guarantee across the credit spectrum and the use of our insurance on some very large infrastructure transactions combined with a record year in overall municipal par issued, which exceeded $500,000,000,000 for the first time. Bond insurance continued to be in strong demand in 2024, with the industry's annual penetration rate at 8.3% of par issued. This was the fourth consecutive year when industry PAR penetration reached 8% or higher. Assured Guaranty achieved a fourteen year high for annual new issue insured PAR sold, ensuring more than $24,000,000,000 during 2024, the most since 2010. Assured Guarantee insured 58% of the total insured par issued in 2024 as we continued our leadership position in the industry.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

We insured nearly 800 new issued transactions for the year. We finished the year with an excellent fourth quarter, capturing 61% share of par insured in the primary municipal bond market. Total insured municipal par sold reached 10% penetration of the municipal bond market during the fourth quarter. For Assured Guarantee, fourth quarter primary market insured par increased by 37% year over year to $7,400,000,000 During the year, assured guarantee wrapped par amounts of $100,000,000 or more on each of 48 municipal transactions. This tied our 2021 all time high in this category and included six deals with more than $500,000,000 of AG in short parm as we helped launch several of the market's largest and most high profile transactions.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

We believe this indicates that institutional investors increasingly place greater value on our guarantee. Among our largest transactions in 2024, '3 were honored at the bond buyers deal of the year ceremony. These included the overall 2024 deal of the year, the BrightLine Florida passenger rail project issue, where we insured $1,100,000,000 of par. This transaction also won in the innovative financing category. The Northeast Regional deal of the year was awarded to the JFK International Airport new Terminal 1 project where we insured a total of $1,600,000,000 8 hundred million dollars in June 2024 and $800,000,000 in December 2023 and the healthcare financing winner issued by the Westchester Medical Center Health Network serving Westchester County, New York, where we insured $259,000,000 of par.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

These transactions were noteworthy for their underlying credit profiles, par amounts and use of insurance to expand and diversify the bond buyer base and to enhance the overall liquidity of the transaction. Also in 2024, we saw an increase in the use of our insurance among AA credits defined as those credits rated in the AA category by S and P and or Moody's on an uninsured basis. Year over year, we insured 27% more of these policies for 38% more par, reflecting a total of 103 policies and approximately $4,400,000,000 of insured par. Non U. S.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Public Finance contributed $67,000,000 of PBP in 2024, a very solid result. In 2024, non U. S. Public finance PBP included secondary market guarantees of several UK regulated utilities and airport transactions, as well as the annual renewal of certain liquidity guarantees. Our strong 2024 production results also included $65,000,000 of PVP generated by our global structured finance business.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

The transactions were primarily in insurance securitizations, bank balance sheet relief, subscription finance and the guarantee of a diversified real estate portfolio. As part of our new business growth strategy in Australia, for example, we insured a transaction in 2024 for a bank, which provided protection on an approximately $600,000,000 core lending portfolio. We continue to pursue both public finance and structured finance opportunities in Australia. All three of our major financial guaranty businesses are providing solid contributions to our bottom line, and we continue to look for opportunities by expanding our geographic reach and exploring new product opportunities. In addition to building our business further in our U.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

S. And U. K. Markets, we are pursuing opportunities in Australia, New Zealand, Continental Europe and Asia. I will now turn the call over to Ben to discuss our detailed financial results.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Thank you, Dominic and Rob, and good morning. I am pleased to report fourth quarter twenty twenty four adjusted operating income of $66,000,000 or $1.27 per share. By comparison, in the fourth quarter of twenty twenty three, we reported adjusted operating income of $338,000,000 or $5.75 per share, which included $2.00 $8,000,000 in non recurring benefits related to tax law changes in Bermuda and New York State. The Insurance segment contributed $98,000,000 of adjusted operating income in the fourth quarter of twenty twenty four compared with $339,000,000 in the same period of last year. The most notable item driving the quarter over quarter variance is the prior year benefit related to Bermuda tax law changes of 189,000,000 In addition, the fourth quarter of twenty twenty three included an after tax fair value gain of $25,000,000 on Puerto Rico contingent value instruments or CVIs that we received in 2022 as part of the resolution of most of our Puerto Rico exposures.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Comparable amounts in the fourth quarter of twenty twenty four were negligible. Since 2022, we've been strategically reducing our CVI position. And as of 12/31/2024, we held only 21% of the original notional amount we received or 123,000,000 on a fair value basis. Lastly, loss expense increased from $7,000,000 in the fourth quarter of twenty twenty three to $31,000,000 this quarter, mainly due to lower expected recoveries on certain long dated U. S.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Public finance transactions and increased losses on certain insured healthcare transactions. Loss expense is based on both the amount of economic development in a reporting period and the amortization of the deferred premium revenue. In the fourth quarter of twenty twenty four, net economic loss development was $17,000,000 primarily attributable to certain healthcare and UK regulated utility exposures. Turning to net earned premiums and credit derivative revenues. In the fourth quarter of twenty twenty four, we reported an increase to $107,000,000 from $86,000,000 in the fourth quarter of twenty twenty three.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

This was attributable to both an increase in accelerations due to refundings and an increase in scheduled net earned premiums. Our deferred premium revenue remained strong at $3,900,000,000 as a result of the new business production. In addition to the Insurance segment, our participation in the asset management business is an important strategic initiative in terms of diversifying our stream of earnings. SoundPoint has been working steadily towards maximizing the synergies with the Assured I'm business we contributed to them in July of twenty twenty three. In the corporate division, adjusted operating loss was $34,000,000 in the fourth quarter of twenty twenty four compared with $16,000,000 in the prior year, which included a $19,000,000 benefit related to New York State tax law changes.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

In terms of our investment results, the company's portfolio of increasingly diverse assets continues to perform well with a stable stream of interest income from the fixed maturity portfolio complemented by income from alternative investments. On a consolidated basis, net investment income from our available for sale fixed maturity and short term investments was $93,000,000 in the fourth quarter of twenty twenty four compared with $95,000,000 in the fourth quarter of twenty twenty three. The available for sale fixed maturity and short term investment portfolio primarily consist of these three types of investments. The largest component mainly consists of investment grade long term debt securities and short term investments. Income from this portfolio is relatively predictable, but may vary based on short term interest rates.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Net investment income from these securities was $71,000,000 in the fourth quarter of twenty twenty four, which is in line with the $70,000,000 of income in the fourth quarter of twenty twenty three. We also have another portfolio consisting of loss mitigation securities, which are bonds that we insured and later purchased at a discount to mitigate losses, and other securities, including those we acquired in the resolution of previously troubled insured exposures, such as the 2022 Puerto Rico resolution. In recent years, we have not been actively purchasing loss mitigation securities and have sold most of our Puerto Rico securities. We expect this portfolio to continue to amortize down. Net investment income on these investments was $11,000,000 in the fourth quarter of twenty twenty four compared with twenty four million dollars in the fourth quarter of twenty twenty three.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Lastly, in the fourth quarter of twenty twenty four, approximately $263,000,000 in CLO equity tranches that we previously held in a consolidated SoundPoint fund were transferred to the available for sale fixed maturity security portfolio. Net investment income on CLO securities was $11,000,000 in the fourth quarter of twenty twenty four. The company considers these sound point managed CLO equity tranches to be a component of the alternative investment strategy. Our partnership with SoundPoint continues to promote our alternative investment strategy with the goal of increasing the company's overall investment returns. In addition to the income from CLO equity tranches in the fixed maturity portfolio, earnings from our alternative investments were $24,000,000 in the fourth quarter of twenty twenty four compared with $22,000,000 in the fourth quarter of twenty twenty three.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

On an inception to date basis, alternative investments have generated an annualized internal rate of return of approximately 13%. On a full year basis, 2024 adjusted operating income was $389,000,000 or $7.1 per share compared with $648,000,000 or $10.78 per share in 2023. Our prior results included a $175,000,000 after tax gain associated with the SoundPoint and AHP transactions and the $2.00 $8,000,000 in tax benefits I mentioned earlier. These large non recurring benefits in 2023 were lower loss expense and increased net earned premiums in 2024. Our full year tax rate on adjusted operating income was 19.2%.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

The effective tax rate is a function of taxable income across jurisdictions and varies from period to period. The strong results in 2024 reflects the cumulative effect of our long standing strategic initiatives across all aspects of the business. First, we continued to write new business across all markets in accordance with our strategy to grow our deferred earnings, And we continue to work with troubled issuers to resolve underperforming exposures. We have also successfully diversified earnings through our asset management segment and improved investment results via our alternative investment strategy where the annualized returns have consistently exceeded returns on the fixed maturity portfolio. And lastly, we have continued to return value to shareholders through our successful capital management strategies.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

In 2024, we paid $68,000,000 in dividends and the Board of Directors recently approved a 10% increase to our quarterly dividend per share from $0.31 to $0.34 We also merged our U. S. Subsidiaries and paid $400,000,000 in special dividends from these subsidiaries to the holding companies, which is an important step in order to meet our share repurchase goal for the year. This program continues to be one of our most accretive strategies. In 2024, we repurchased 6,200,000.0 shares for $5.00 $2,000,000 at an average price of $81.28 per share.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

This represents 11% of the shares that were outstanding as of 12/31/2023. Since the beginning of our share repurchase program in 2013 and through 12/31/2024, we have returned $5,400,000,000 to shareholders under the program and retired over 150,000,000 shares, ending the year with 50,500,000.0 shares outstanding. As of today, our remaining authorization is approximately $276,000,000 and our holding company cash and investment balances are approximately $352,000,000 of which $53,000,000 resides in AGL. Share repurchases, along with adjusted operating income and new business production, collectively contributed to new records for adjusted operating shareholders' equity per share of over $114 and adjusted book value per share of over $170 While adjusted operating income varies from period to period, the consistent quarterly increases in these book value metrics reflect how the successful execution of all our strategic key initiatives build shareholder value over the long term. Looking forward to the first quarter of twenty twenty five, I want to highlight the successful conclusion of a long disputed claim brought against us by Lehman Brothers International Europe or LBIE in 2011.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Following the exhaustion of LBIE's appeals, we will be recognizing a pretax gain of $103,000,000 in the first quarter of twenty twenty five, which represents the full satisfaction of the judgment in our favor and includes reimbursement of attorneys, fees and expenses along with the accrued interest. I'll now turn the call over to our operator to give you the instructions for the Q and A period.

Operator

We will now begin the question and answer Our first question comes from Marisa Lobo with UBS. Marisa, your line is now open. Please go ahead.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Thanks. Good morning. Thanks for taking my question. I was hoping you could review the recent developments on Thames Water. And what near term developments are you looking for to look at your reserve provision? And also any developments on Southern Water as well?

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Sure. So let's start with Thames Water and we'll take it from there. So obviously, let's start with our The UK water sector is an essential service obviously and those water utilities are monopolies in their service areas. So that it's a good fact to start. The UK government has stated that they really don't plan to nationalize the water utilities and frankly, they don't really seem to have the room in their budget to do so.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

And they would like to see additional investment. So I think the macroeconomic background for The UK water sector looks pretty good. When you drill down to Thames specifically, our debt is at the senior operating level. So again, it's an area that we feel pretty good about. They've made progress in their recent in the final regulatory determination recently.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

So again, an improvement in their underlying financials and they have stated along with some of the other UK water utilities that they are going to go through the competition and market authority and appeal that. And obviously the past is never predictive of the future, but historically that there's been success when companies have appealed that. So we do feel pretty bullish about that going forward. And frankly, obviously our reserving means that we have to look at all possible scenarios. So when we look at the scenarios, we do feel really good about this.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

We think that these they will come out really well. But obviously, we do have some pessimistic scenarios that result in a loss. We are looking forward to see how the Competition Market Authority plays out and how this plays out frankly in the public markets and we are there to help support any restructuring that needs to be done, but we do feel we're going to get out of here with no loss.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

So to emphasize, we're at the operating company level, not the HoldCo level. Number two, rates are adequate to pay debt service but not to provide for CapEx additional capital improvement. So it's a capital issue not an operating issue. Three, they're going to appeal the rate that was granted to them and the appeal process has been fairly successful for the water companies in terms of succeeding in the appeal process. And they're not that far off between the requested rate and what the current rate or the challenge rate could be.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

So when you look at it all and in fact they're secluded, it looks like a pretty good situation for us.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Got it. Thanks for that. And the timeline to the CMA process? When you have questions.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

That takes a while.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Okay.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Yes. I would say probably best guess would be after 2025, maybe beginning of twenty twenty six.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Remember, in terms you did sign the liquidity agreement. So that'll be able to take away the short term issue of them running out of cash or having a vested in a cash position even with the capital expenditures. So that really puts a lot of relief into the system as well.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Got it. Thank you. And could you discuss if the California wildfires had any impact on your exposure?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

So we're going through the portfolio more times than I can count, and we don't see really any exposure to the California wildfires. Do you mean the status we have are kind of in good position? No one's missed a debt service. No one plans on missing a debt service payment. So at the end of the day, it's a tragedy without question, but it doesn't seem to have any effect on the municipal performance.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Great. And finally, just looking at the level of non U. S. Structured finance par written this quarter, $2,100,000,000 came in well ahead of our expectations. Could you give us more color on the geographies that drove it and expected returns for these new exposures?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

The geography is still dominated pretty much by The U. K. However, because of our geographic expansion, we're seeing opportunities now. And we've actually recorded transactions that Continental Europe as well as Australia. We're looking all around in Asia and the Far East for other opportunities.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Yes, we're seeing a lot of opportunity in Australia. A lot of the non U. S. Global structured finance is going to be in Australia, as we see going forward. We did a very large transaction for a core loan portfolio for an Australian bank on an excess position that's in the Non U.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

S. Structured finance sector. And we feel really, we're very excited about it. And just to give you a little color on that structured finance business that we're shifting to is more shorter dated, will earn more quickly. So when you're looking at PPP totals, we have other this business is more repeatable.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

And so you'll have business rolling into the next years as opposed to these large life insurance capital relief transactions, which have to be constantly renegotiated. So, you'll see a repeat, more repeatable performance, in structured finance.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

And much like our public finance, it has a steady stream of flow business. We're trying to create flow business in the other areas of the company as well. And the fund finance represents a flow business for us in the structured area. And as Rob says, you can't record PBP on the same basis you would on the municipal side based on an expected life of the program. You can only record it on the years you got actual contracted agreement, but these things tend to automatic not automatically, but renew annually.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

So you're understanding PPP, but you're building up a stronger earnings portfolio and a quicker earnings profile.

Marissa Lobo
Marissa Lobo
Analyst at UBS Group

Got it. Thanks for that. That's it from me.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

You're welcome.

Operator

Thank you very much. Our next question comes from Jordan Yimowitz with Philadelphia Eagles Capital Management. Jordan, your line is now open. Please go ahead.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

Thanks guys. The only thing that makes me happier than following you guys for nineteen years at this point is seeing the Eagles win the Super Bowl twice in my lifetime. I have a couple of questions. First of all, you said the average premium written was 1.26%, that's up from 1.23%, and I believe it was below 1.2% a year or so ago. So hypothetically, if everything would be put on at this rate, what would your return on equity be? I mean, it would be like 11%, twelve %, is that reasonable?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

On the business rate, yes.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Yes. Yes.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

The ROE or the return on the business is really based on mix, right?

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Yes. It's Dominic saying the return on the ROE is based on mix of business. I just want to give you some numbers, Jordan. So, looking at ROE, public finance is generally in the 8% to 10% range. Structured finance is going to be somewhere between 1218% and international infrastructure is somewhere between 1520%.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

So that mix of business change, that's where the ROE is going to be coming from, from that mix.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

And remember, this is a business.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

Right. It used to be an 8% business. So what used to be an 8% to

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

10% business four years ago because it was almost all domestic is now with the current mix probably a low double digit mix on average fare?

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Yes. As you shift yes, as you shift into more structured finance and, international infrastructure, that's correct. But remember, public finance is always going to be a significant portion of your business mix.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

So looking at a different way, if it was, say, $11 -twelve dollars versus $8 -nine dollars -five years ago, and another way of saying is, once you right size the capital, you could be earning $10 plus per share.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Yes, probably in that range. But again, you have to I think you got to separate two things. You got to separate out the amount of business being written and the amount of business being earned, right? So it does take a while for the business to come in in the ROE. What I'd say is, I think if we right sized our capital, we'd probably be at low double digit return company, right?

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

So that would make sense. And then you got to look at how much business you're writing to achieve that low double digit return to know exactly what your dollars per share earning is going to come out of that.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

It's really important. I'm going to push it all of you. Remember, we're writing business in today's current market, which means today's current interest rates and today's current credit spread. Those things do change. So, there's favorable markets in some cases and less favorable markets in other cases. And therefore, you got to remember, it's only one year's contribution.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Our earned premium is made up of twenty years of contribution of different rates, different returns etcetera. So it's a mix of business. But you're looking at the current market yields of today's business which doesn't mean necessarily it's the same market you're going to see through the rest of 2020.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

And it's also important to note that in public finance, we're still capturing like on average like 70%, sixty % to 70% of that spread savings. So you're still providing significant value. And the other lines of business structure finance and international infrastructure are less sensitive to changes in credit spreads.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

I understand all that, but I remember in 2019 and 2020 arguing with people that you could make $7 a share and people said that will take forever and now you're there and I'm just looking what the next leg up is since we plan to be here for a long time. My second question is interest rates have fallen a lot in the past month and there's a $6 difference between dated book and operating book, which I believe is all AOCI. So won't a fair amount of that AOCI be reversed plus you'll get the $2 from Lehman this quarter. So could it be gap between adjusted book or operating book, I'm sorry, and stated book be much closer this quarter if the quarter ended today?

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

First of all, interest rates are going to bounce around quite a bit. So a lot of this is unrealized gains and losses that come through on securities that we have. So it's not really tangible. I mean, you could move it up or down. It doesn't really matter.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

Obviously, you're right about the Lehman Brothers to get 100,000,000 in and that's we're just under 50,000,000 shares outstanding right now. So that is $2 a share. So you would pick up that $2. Retax, right. You would pick up $2 per share for doing that.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

Got it. Okay. Thank you very much. And I'm looking forward to see if you might be interested in dying some of the Delaware River green for next season.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

We're always looking at sporting the Eagles.

Jordan Hymowitz
Portfolio Manager at Philadelphia Financial

Thanks.

Robert Bailenson
Chief Operating Officer at Assured Guaranty

Thanks, Jordan.

Operator

Our next question comes from Tommy McJoynt with KBW. Tommy, your line is now open. Please go ahead.

Tommy McJoynt-Griffith
Director at Keefe, Bruyette & Woods (KBW)

Thanks. It's tough to follow-up some good Eagles banter. But a couple of the questions have been on various specific credits. So we have The UK Water, California Wildfire. I'll ask about another one.

Tommy McJoynt-Griffith
Director at Keefe, Bruyette & Woods (KBW)

With the Department of Government Efficiency, you know, really going after and perhaps disrupting the D. C. Market, can you talk about your exposure there, whether it's any public works projects or, municipalities around there that might be impacted?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Yes. I can't think of any significant exposure we have in the DC market. That would be subject to any potential issue relative to the government programs currently going on? I mean, we look at the portfolio pretty clearly. We have a toll road maybe, but that usage, so I'm not concerned about that.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

The airport? And we probably have the airport as well.

Benjamin Rosenblum
Benjamin Rosenblum
Chief Financial Officer at Assured Guaranty

No. Just the I think Dominic's broadly saying we don't have a ton of exposure we're concerned about. We obviously there's some tangential exposure that's maybe there, but we're not sitting here really spending a lot of time at this point worrying about that right now.

Tommy McJoynt-Griffith
Director at Keefe, Bruyette & Woods (KBW)

Okay. Got it. And you also called out the healthcare side. Can you remind me, what's going on with, like, healthcare facilities in terms of, like, why some are seeing the financial troubles? I guess, I think about some of the voluntary care procedures coming back that that would help the healthcare facilities. Can you remind me what's going on there?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Healthcare, remember, is an operating risk, not really a financial risk. And you take the operating risk for a number of years. As we knew through COVID, there was a lot of pressure on all healthcare facilities in terms of loss of revenue that seemed to recover substantially once all the COVID restrictions were lifted. They started to get back healthy, then the government threw a ton of money at it as well. That also made it a little bit better.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

They've been facing high labor costs, which has really put some pressure on it. But once again, these are operating risk type of things that get managed pretty expertly. We bring in consultants. We get involved in detail with any troubled credit, and our experience has been exceptional in the health care area. But like anything else, if we downgrade a credit, we got to take take it through the reserve model.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

We have to do our possible scenario analysis and then allocate probabilities, and you wind up booking some losses that you never really realize.

Tommy McJoynt-Griffith
Director at Keefe, Bruyette & Woods (KBW)

Got it. And then this last question just on the somewhat around the PREPA side of things. I guess my question is really focused on the political side. I mean, The U. S.

Tommy McJoynt-Griffith
Director at Keefe, Bruyette & Woods (KBW)

Has seen a change in the White House, Puerto Rico saw a change in leadership. In your view, has this changed political landscape, been helpful to what might ultimately be necessary to get the backing to push PREPA toward a resolution? Or, should we not read too much into the change in the political landscape?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Well, it could. But at the end of the day, they've got a lot on their plate that they're trying to address. So I'm not expecting Puerto Rico to be one of their high priorities. They could put some pressure on the FOMB, which would be very helpful for us. But as we said, we're more than happy to play the litigation game. Libby is a great example. That was a claim that they, I think, owed us back to the end of the day. We claimed $26,000,000 to turn into $103,000,000 So if you want to play the long game, we're happy to play the long game.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

We've had our rights in terms of the revenue stream affirmed by the court. They challenged it twice. They lost twice. Some day they're going to have to come to the table and pay the bill. And however long it takes, could the government help?

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

Absolutely. Are we trying to get some help? Sure. We are. That's the nature of how we look at the business.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

We feel good about the new administration. We think the government is going to try to get involved, make PREPA a credit that can actually go into the market at some point in time. So therefore, that should help our cause as well. And as I said, the courts have backed us up 100%. But the appeals court, not the local court, of course, has backed us up 100%.

Dominic Frederico
Dominic Frederico
Deputy Chairman, President & CEO at Assured Guaranty

So we're very comfortable with our legal rights and we're going to continue to pursue them as we did in Libby and let the chips fall where they may.

Operator

This concludes the question and answer session. I would now like to turn the conference back over to our host, Robert Tucker, for closing remarks.

Robert Tucker
Robert Tucker
Senior Managing Director of Investor Relations & Corporate Communications at Assured Guaranty

Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.

Operator

This concludes today's conference call. Thank you all for attending. You may now disconnect your lines. Have a great day.

Executives
    • Robert Tucker
      Robert Tucker
      Senior Managing Director of Investor Relations & Corporate Communications
    • Dominic Frederico
      Dominic Frederico
      Deputy Chairman, President & CEO
    • Benjamin Rosenblum
      Benjamin Rosenblum
      Chief Financial Officer
Analysts
    • Robert Bailenson
      Chief Operating Officer at Assured Guaranty
    • Marissa Lobo
      Analyst at UBS Group
    • Jordan Hymowitz
      Portfolio Manager at Philadelphia Financial
    • Tommy McJoynt-Griffith
      Director at Keefe, Bruyette & Woods (KBW)
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