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Assured Guaranty Limited (NYSE:AGO)

Q1 2012 Earnings Call

May 11, 2012 7:00 AM ET

Executives

Robert Tucker – Managing Director, IR and Corporate Communications

Dominic Frederico – President and CEO

Rob Bailenson – CFO

Analysts

Geoffrey Dunn – Dowling & Partners

Brian Meredith – UBS

Matt Howlett – Macquarie

John Helmers – Swiftwater Capital

Andrew Kleinberg – Glickenhaus

Frank Danley – Dolton Partners

Operator

Good day, and welcome to the Assured Guaranty Limited First Quarter 2012 Earnings Conference Call and Webcast. (Operator Instructions).

I would now like to turn the conference over to Robert Tucker, Please go ahead, sir.

Robert Tucker

Good morning and thank you for joining Assured Guaranty for our First Quarter 2012 Financial Results Conference Call. Today’s presentation is made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. It may contain forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results, future rep and warranty settlement agreements and 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’re listening to the 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 recent presentations, SEC filings, most current financial filings, and for the risk factors.

Turning to the presentation, our speakers today are, Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; 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.

Dominic Frederico

Thank you, Robert, and thank you all for joining Assured Guaranty for our first quarter 2012 earnings call. During the quarter, once again Assured Guaranty delivered positive operating results in a tough macroeconomic environment. We have done this consistently during both the recession and choppy recovery through a successful combination of running new business and executing alternative strategies to create shareholder and policyholder value.

I am also pleased to announce that is one of the main components of those alternative strategies, we have finalized a settlement with Deutsche Bank that I had alluded to on our prior call. Deutsche Bank is the second major financial institution that we have settled within a little more than a year. This agreement further strengthens our balance sheet by providing a substantial cash payment and provide certainty related to RBS developments due to a loss sharing arrangement on future claims.

With this agreement, we have now reached favorable settlements with respect to approximately 37% of the remaining par outstanding of our troubled obligations and Assured Guaranty’s legacy residential, mortgage, insured portfolio. A critical statistic relative to our capital adequacy or financial strength, which should have a significant positive impact for Moody’s and S&P’s rating evaluations.

Two other prominent alternative strategic events occurred in the first quarter. First, we completed our transaction with Radian Asset Assurance in which we reassumed $12.9 billion of par previously ceded to Radian, assumed an additional $1.8 billion of par of Radian Direct Public Finance exposures and agreed to acquire the bond insurance company, Municipal and Infrastructure Assurance Corporation which gives us additional flexibility to respond to future challenges or opportunities in the financial guarantee industry.

And in other similar transaction, we reassumed $6.2 billion of par of insured public finance business from Tokio Marine. These two transactions captured $20.9 billion of par insured and an amount equal to 124% of our 2011 production, a remarkable result that significantly mitigates the impact of reduced new business activity in the current market.

In terms of our new business production, total first quarter 2012 PVP increased 7% over that of the first quarter of 2011. And looking at our public finance activities, including the business assumed in the Radian transaction, PVP increased by 54%. Further, we materially increased the total municipal par amount we assured in the first quarter of this year versus last year’s comparable quarter, up 118% when including the direct assumed par in the Radian transaction and up 37% excluding the Radian assumption.

In the municipal new issue market, we insured 12% of all new municipal transactions and 5% of the par sold during the first quarter of 2012. More importantly, in our target market, which is new U.S. municipal issues of single-A underlying credit quality, we insured 37% of the transactions sold and 18% of the par sold in the quarter, both of which are higher levels than in the first quarter of last year.

These results confirm the continuing fundamental demand for bond insurance and we accomplish them with continued downward pressure on our ratings, average yields at all time lows, and tight credit spreads.

Additionally, current market conditions have created an environment remaining investors are unwilling to give up even the slight amount of yield and therefore our foregoing insurance, while at the same time issuers are still able to borrow at a historical – a historic low rates. Despite these pressures, we continue to maintain new issue premium rates in line with those of a year ago, while improving the average credit quality of our new direct originations insured from A minus to single A flat.

Interestingly in the first quarter, 7% of our public finance insured par was for issuers rated in the AA category by Moody’s. This proves the bond insurance can add value even when it doesn’t elevate in Assured ratings. This is because investors’ value Assured Guaranty selection, underwriting surveillance and the certainty of payment our guarantee provides.

I believe this is a critical fact that Moody’s must consider as they continue express their concern about future demand for financial guarantee insurance. In structured finance, we continue to work with large financial institutions to provide credit protection for selected assets and we close another transaction during the quarter.

In international business, we’ve made progress in our objective to replace other guarantors on outstanding infrastructure transactions following our successful fourth quarter and back replacement transaction. We except to see increased production from both of these areas over the course of this year.

Turning to our ratings, on March 20th, Moody’s placed Assured Guaranty in subsidiaries ratings under review for possible downgrade. And week later, Moody’s published credit opinions on AGM and AGC with financial strength rating score cards reflecting a strong AA rating for each of those companies. On April 26th, Moody’s published a very negative industry outlook on the financial guaranty industry setting low insured volume and meaningful remaining risk from legacy portfolios for an industry that they say “has not recovered from the financial crisis.” It’s true that some of the other bond issuers have not recovered from the financial crisis, but that does not apply to Assured Guaranty.

We have not just as Moody’s writes survived the financial crisis, but have demonstrated our resourcefulness, financial strength and ongoing viability. Moody’s action as it relates to Assured Guaranty is not supported by facts in light of our strong earnings, increased capital, the reduction in our insured leverage, another rep and warranty settlement resulting in 37% of the par outstanding on troubled RMBS transactions, now subject to favorable settlement agreements and our penetration in the A rated issuer market.

On April 13th, we published a response to the Moody’s announcement that is available on our website. The statement explicitly measures Assured Guaranty’s performance relative to each of Moody’s financial guaranty insurance industry metrics. I urge you to read it. It shows that by applying Moody’s own financial strength rating score card to Assured Guaranty’s financial guaranty subsidiaries, we have met Moody’s own criteria for strong AA ratings, just as Moody’s itself concluded in their March 26, credit opinions.

The review of Assured Guaranty that Moody’s announced on March 20th sets concerns about origination volume and future margins as reasons for a potential downgrade. We continue to question the relevance of these two factors in evaluating the financial strength of an insurance company especially when that is in an industry with significant deferred revenue. We cannot comprehend what new business prospects have to do with the probability of our default or our ability to pay claims on our existing portfolio. Future views of business activity or profit margins are directly related to an equity investors’ evaluation, which I do not believe is what the market expects from Moody’s or is relevant or beneficial to our policyholders.

The Assured Guaranty companies currently have recorded approximately $6 billion of deferred revenue, would provide the solid base of future earnings that offer strong protection against any financial disruption caused by temporary lack of current production due to a lower interest rate environment and tight credit spreads. We are well-positioned to address current market opportunities prudently and are not pressured to ensure risks outside of our strict requirements.

In the industry outlook, Moody’s also expressed the concern that the stress municipal issuers may choose to strategically default on assured debt obligations. However, they provide no data to support such a broad claim and we have seen no evidence supporting such a trend in our portfolio or across the industry.

Moreover, Moody’s own recent report of municipal defaults does not support this assertion. I encourage all of you to listen to the replay of the Moody’s call, which discussed their published outlook. Many of the callers question the use of market share and the ratings criteria and they’re in big U.S. assertion on the selected insured defaults.

Despite the significant challenges we faced since the onset of the great recession, Assured Guaranty has implemented effective strategies to provide value to issuers and to (inaudible) commitment to bond holders. Our claims-paying resources increased by almost 17% since the end of 2007 ending first quarter 2012 at over $13 billion despite our paying over $4.3 billion in assured claims over that period.

Furthermore, we have recovered over $2.9 billion of losses on RMBS Securities produced over $1.7 billion of operating income, insured over $75 billion of municipal bonds in the last three years, signed two loss sharing agreements that mitigates future RMBS losses and significantly reduced aggregate leverage since the second quarter of 2009 reducing our insured portfolio exposure by approximately $96 billion. The $96 billion overall reduction included $85 billion in structured finance of which $11 billion was U.S. RMBS. These strength and achievements especially during the recent global crisis are indicative of a strong AA rated company.

And turning to our RMBS loss mitigation efforts, Bank of America and Deutsche Bank have set a good example for rep and warranty providers by reaching into negotiated agreement. And fortunately, other rep and warranty providers such as Credit Suisse have been unwilling to negotiate resolutions of these same disputes.

Of course, we are also continuing to pursue other opportunities to limit future losses through servicing interventions. On transactions where we’ve already transferred servicing or impose special servicing contracts, we continue to see significantly better collateral performance and industry norms.

Before I turn the call over to Rob, I’d like to reemphasize that we are confident about the strength of our financial resources, the benefits of our product for both issuers and investors and our strategies for building shareholder value.

I will now turn the call over to Rob Bailenson for more details on the first quarter financial results.

Rob Bailenson

Thanks, Dominic and good morning to everyone on the call. As always I refer you to our press release and financial supplement for explanations and reconciliations of the non-GAAP financial measures that I will reference in my commentary.

Before I begin my discussion of the quarterly financial results, I would like to give you more detail on the Deutsche Bank agreement, which was signed earlier this week. Because we anticipated reaching a settlement with Deutsche Bank that is consistent with the final economic terms of the agreement, substantially all of this rep and warranty benefit was incorporated into our last development in 2011.

In connection with this settlement, we’ve received $166 million in cash and going forward, Deutsche Bank will participate in a loss sharing arrangement. Their obligation under the loss sharing arrangement is collateralized by assets and an amount necessary for Assure to receive full rating agency capital credit under their stress loss scenarios. A deal with Deutsche Bank is another major accomplishment in our loss mitigation strategy. Of the $1.6 billion total net rep and warranty benefit recorded $840 million is not collateralized and covered by loss sharing arrangements, which leaves only $790 million of rep and warranty benefit that is not yet covered under a contractual arrangement.

Turning now to the financial results, it’s worth noting that despite challenges in the global economy, in the first quarter of 2012, we earned $71 million of operating income with $0.38 per share. Adjusted book value increased to $49.37 per share and operating shareholders equity increased to $28.83 per share.

Our first quarter results were impacted by three items. The first two items were the assumption and reassumption agreements with Radian and Tokio Marine, which resulted in total payments to the company, up $210 million. These agreements increased our adjusted book value by a $139 million and resulted in after-tax commutation gains of $54 million.

The revenue generated by these two agreements are equivalent of almost three quarters of our 2011 new business premium production. The third item that affected our quarterly results is related to the developments in Greece. Sovereign debt that we insured was assumed in the acquisition of FSA. First quarter 2012 operating income include $189 million of losses incurred related to our guaranty of Greek debt, which represents a full limit loss and puts this issue behind us. This was the largest single component of the $212 million in total economic loss development.

U.S. RMBS contributed $17 million to the total economic loss development in the first quarter. Because early-stage delinquencies for certain classes of U.S. RMBS insured obligations continued to improve slowly, the company increased its expected losses. This increase was substantially offset by improvements in the benefit for reps and warranties and the effective increased discount rates. The effective increased discount rates on the first quarter loss development was a decrease of approximately $41 million.

As we’ve discussed in the past, the development attributable to changes in the risk-free rates used to discount losses is not indicative of any credit improvement or impairment, nor is it reflective of our own investment yields. The other major drivers of operating income are generally in line with our expectations. Premiums in credit derivative revenues declined consistent with the amortization of par and on un-premium reserve.

Net investment income was down slightly due mainly to higher prepayment speeds and lower reinvestment yields. The pre-tax book yield on the investment portfolio was 3.96% at March 31, 2012, compared with 4% at December 31, 2011. Operating expenses were relatively flat year-over-year. The first quarter of each year includes accelerated vesting expenses, the long-term incentive compensation warrants that are granted at the beginning of each year. For each of the remaining quarters of 2012, I expect operating expenses to be between $50 million and $55 million.

The effective tax rate on operating income varies from quarter-to-quarter due to the amount of income in different tax jurisdictions and was 18% for the first quarter of 2012. I expect our operating effective tax rate for 2012 to be between 20% and 24%.

I will now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Geoffrey Dunn of Dowling & Partners. Please go ahead.

Geoffrey Dunn – Dowling & Partners

Thanks, good morning.

Dominic Frederico

Good morning, Geoff.

Rob Bailenson

Good morning.

Geoffrey Dunn – Dowling & Partners

On the Greece loss, you obviously took a full limit loss there, has that already been settled with the counter party or is there room for negotiation as that counter party doesn’t want the long term exposure to AGL?

Dominic Frederico

Well, it has not been settled. There is always room for negotiation but understand, they are not going to have the long term credit of AGO because we’re going to call the bond and settle that 100%.

Geoffrey Dunn – Dowling & Partners

Okay. And then second on Moody’s, is there back and forth discussions going on between AGO and Moody’s or is this kind of they put out what they put out and it’s kind of a battle just to even see the capital models et cetera. Is there other active helpful discussions or is it kind of some of the things we’re seeing in the past?

Dominic Frederico

No, Jeff, I would tell you that as Moody’s has to go through their rating process, there is a tremendous amount of dialog as we exchange information, respond the questions and provide more clarity. Number two is they start to provide us capital information in terms of how they assess the risk in our portfolio. We obviously go through our own verification and make sure they’ve got the deal structure right, the par amounts right, et cetera and that dialog continues ad infinitum and is ongoing as we speak today.

Geoffrey Dunn – Dowling & Partners

Okay, great. Thank you.

Operator

Our next question comes from Brian Meredith of UBS. Please go ahead.

Brian Meredith – UBS

Yes good morning. A couple of quick questions here for you. The first one Robert, if you could just tell a little bit any P&L or balance sheet impact from the Deutsche transaction in the second quarter?

Rob Bailenson

That will really depend on whether we do anything with loss reserves, there was a slight change in our benefit to our loss sharing at a different layer to structure that theoretically could have some minor implications for change in the number, but historically as we enter into these negotiations Brian, we have a very conservative number book prior to engaging in detailed negotiation and settlement discussions.

As those discussions progress, we typically look at what is the value of the offer on the table and began to make sure that we’re catching up our accrual or our credit against where the negotiations are by enlarge at any point in time. So, as these things and, of course, as you’ve seen in the Deutsche Bank case, as they drag on for a quite a long time, more around terms and conditions in the legal agreement as opposed to the financial sharing structure on losses, we continue to update or revise our estimated recovery.

Brian Meredith – UBS

Got you. Any other that you’re close on?

Rob Bailenson

I’ll leave that as it is.

Brian Meredith – UBS

Okay. And I’m just curious when you extended the curve a little bit here, what is that due with respect to your capital question for S&P, did it matter much?

Dominic Frederico

It really does and as you look at the results and we kind of publish them. I think it’s well covered and obviously there is a lot of public information; you can make a lot of different arguments as to the extension or not in a quest of especially across the different aspects of (inaudible). We obviously tried to maintain a very conservative position, because we don’t know and obviously the recovery has taken a lot longer than anyone ever and envision especially the U.S. real-estate market and therefore we continue to monitor closely.

We have a very disciplined approach to how we look at the reserves. They’re very much predicated or keyed-off of early stages of delinquencies and you can kind of follow this from home or keep score at home or keep score at home or they say the old ball game in terms of the numbers that we put up. But relative to S&P, this is not a significant activity, because remember they are assessing us based on their stress loss levels. And obviously that’s not affected by any changes in our reserves.

Brian Meredith – UBS

Great, thank you.

Operator

Our next question comes from Matt Howlett of Macquarie. Please go ahead.

Matt Howlett – Macquarie

Okay guys. Thanks for taking my question. Dominic, on the R&W benefit, the $800 million or just short of the $800 million that you haven’t collected yet, is that – can we assume that basically evenly split between the likes of UBS and Credit Suisse, or there other major parties in there?

Dominic Frederico

There are two major parties that are in a whole host of minor parties and I think the smallest ads that we might have up for any given party might be in the $10 million range. So, it is spread across probably 68 more counterparties, but two of them are major and then you got two kind of sub-major ones. Obviously, one is this – one that we’re going to quote on June 11, Flagstar Bank. So, it’s diverse the one represents I guess more than 50% of the asset today if I had to guess.

Matt Howlett – Macquarie

Great, got you. And then in terms of loss mitigation, you obviously – the settlements have been the biggest driver those we – could it go beyond and I think you guys talked about you paid out over $4 billion in claim over the last several years. And could it go beyond that? Could you end up recovering some of that back overtime? Could you – do you still have the ability to buyback the bond debt at a discount rate and as well as changing servicing like you said?

Rob Bailenson

Yeah, all the above and remember even in the Deutsche Bank settlement, we received $160 million of cash this week which theoretically represents reimbursement of previously paid and incurred losses that went through our P&L.

Matt Howlett – Macquarie

Got you.

Rob Bailenson

So, there is further opportunity for collecting some of that 4.0 billion, plus billion dollars of paid losses number one. Number two, we continue to look into the market as another way to mitigate the fees losses by buying back the insurance securities when they’re offered for whatever reason at discounts and obviously we were active in that market. I think, as of, we entered the first quarter, we brought back about $1.7 of that risk on a par basis a bit about $800 million for it, gross. So, that would imply a $900 million saving.

Matt Howlett – Macquarie

Got you. Great.

Dominic Frederico

Also, as a part of our loss mitigation, we still are continuing to look at servicing enhancements to drive down or to improve the performance and we really haven’t as I said in previous calls, scratched the surface of service reliability. We’ve been going after the originator and securitizer as our first line of recovery, but obviously as you look to the market today and you were a lot of litigation is involved a lot of evolved service reliability.

Matt Howlett – Macquarie

Got you. That’s another opportunity to look at that side of the equation. And then, you just switching and re-begin, how the conversation – I know you obviously wanted to be AA (inaudible) company, but have you talked to them about just a segment of the company, about my act from Radian that could possibly just be AA or splitting the company at par – are you looking at that and then assume there must be some – even if you go to Single-A or A1, you must be a pack back to AA. They much tell you how you can get back there other than just waiting for the industry to turnaround?

Dominic Frederico

Couple of statements. One, I’m still highly confident in the ratings of the company to be at a minimum AA and I see no rationale that would cause an answer to be beyond that. To the extent that Moody’s continues to make an issue out of market share, well under any company scenario in today’s market of where the insurable marketplaces, where interest rates are, where people are still able to basically borrow at historical low rates, where spreads are the amount of business opportunities going to be muted in this economy, but it doesn’t stay that way forever and you really need to rate through a cycle as opposed to just burry yourself in the middle of one.

So first and foremost, I believe that the rating should be comparable to strong AA and that’s exactly how we grade out. As a part of that then it really doesn’t become a capital issue. So, you can say was there a recovery back unless we’re going to see real interest rates return to the market. We see more ratings migration to put more issuers down to our insurable range of single A, high BBB – we’re going to be stuck in this kind of low production environment, but thankfully for the company, we have the ability to look at other ways to enhance economic value and this quarter is a great example of how we can creatively as Rob talked – we took three quarters of our premium from last year in two transactions. We took 124% of the par.

Obviously, we have ways to respond. So most importantly with $6 billion of deferred revenue, we can sit here and kind of be very prudent and where we put our capital to work in this marketplace where you should be a little cautious and they afford to go chase market share, we make absolutely no sense. So, when you look at this whole ratings issue, if it was a capital issue, we’d solve it. If it was a portfolio issue, we’d solved it. Give us something quantitative and I think the company has shown its (inaudible) in terms of how it can address any challenge. But if it’s something that is truly – something indicative more of the market and the marketplace and place to our prudent underwriting standards, well there is nothing we’re going to be able to do about that. And hopefully the market will continue to make their voices heard to Moody’s regarding this fascination with market share that really should not apply.

Matt Howlett – Macquarie

Got you. That’s helpful. To follow then on the – are there any regulatory bodies like New York State Insurance Commission or they sort of monitoring development (inaudible) them or somewhere in Washington on the lack of transparency for Moody’s?

Dominic Frederico

I think like anything else we would be not doing our duties if we’re not reaching out to (inaudible) all potential regulatory bodies to ensure that they are aware of the activity that’s going on. So, you can assume that those conversations are taking place.

Matt Howlett – Macquarie

Great. Thanks, Dominic.

Dominic Frederico

You’re welcome.

Operator

Our next question comes from John Helmers of Swiftwater Capital. Please go ahead.

John Helmers – Swiftwater Capital

Hi, guys. Thanks for taking my questions. Just a following up on the last question. I don’t think it’s just on the Dominic. Is there any added flexibility related to the purchase of the Radian vehicle because it does seem like there is – you might even do better than AA without having any of the legacy issues and again I don’t understand fully the constraints, but given as you said the capitals no issue and given the massive discount that the stock trades, the NAV currently, why not – if you that’s a – if you have that flexibility, why not focus on buying back the stock more actively and then use capitalize with a certain amount it’s a new entity at a level that you would think would be indisputable by Moody’s?

Dominic Frederico

Well – we have two valuable franchises in the healthcare where we very much like and support and believe we’re deserving very high ratings. Be that as it may, to your question, sure one of the reasons why we enter the Radian transaction in addition to the recapturing of this business and building up further economic value was of course having a 30 plus license company all dressed up and ready to go and that still remains a strategic option of the company, but I will caution you once again, if Moody says this is market share, that company starts out with zero.

And it will not be able to generate much more market share and potentially very much less than we’re currently being able to achieve with the two absolute strongest franchises in this industry. Two franchises that still garner strong AA ratings in a market were very few financial institutions have such a high rating. So, if its market share a new company with great capital, a pristine balance sheet and a purely clean portfolio still doesn’t get me there.

John Helmers – Swiftwater Capital

So there would be no benefit from the, obviously the backing of the two entities that like – I mean we both agree should be AA. So, I guess what you’re – would hope is that you could get the benefit of the one and the benefit of the other?

Dominic Frederico

The one thing we’ve left out, remember, right now we are talking specifically based on our Moody’s view of rating and rating criteria. That doesn’t mean that the new company would have to carry a Moody’s rating and that’s all I will say on that issue.

John Helmers – Swiftwater Capital

Noted, understood. And then, and I assume that on buybacks which seem clearly to be compelling at these prices, you are waiting on clarity from Moody’s before you more aggressive with your excess capital?

Dominic Frederico

I think we’d like to wait on clarity but as we get further information relative to the capital adequacy and this does not become a capital issue, obviously then that leaves us with a different decisions.

John Helmers – Swiftwater Capital

Thank you very much.

Dominic Frederico

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Andrew Kleinberg of Glickenhaus. Please go ahead.

Andrew Kleinberg – Glickenhaus

Good morning, and thank you for taking my call. I’d like to revisit my question from six months ago. It’s what I call the AGO quandary, which is within operating book value over $20 and adjusted book value over $45 and the stock price of $13 and change why not go into runoff and make extremely accretive stock buybacks? Your response back in November was well, it goes back to the (inaudible) question in terms of what we are trying to achieve. We are trying to achieve what we believe is a long-term value creation.

We believe based on our preferred position in the market, our ability to demand pricing in terms that’s an opportunity that one doesn’t walkway from easily and we believe our goal of attaining double AA rating stable through the end of this year is achievable, but like any other strategy that’s subject to continued reevaluation and we will reevaluate it at the appropriate time. We do see the same thing you see in terms of accretive opportunities relative to the stock price against both operating and adjusted book value and we try to affect those transactions when we think it’s appropriate, but at this point in time and we have plenty of time to make further evaluations and decisions, if that changes into the future, we still think this the best course of action.

Dominic Frederico

Andrew that’s a great answer. Thank you very much. Hopefully, you’re quoting me, but I actually like you when you reply it that way so...

Andrew Kleinberg – Glickenhaus

Okay. It is you from back in November.

Dominic Frederico

I said a lot, but it’s when somebody else reads my own....

Rob Bailenson

Well, you are more articulate than you realized and maybe sometimes when you hear it back over the phone it comes through, but since that response was given, the very time consuming and seemingly never ending battle with rating agencies has continued and the possibility of having to appease them is very worrisome to shareholders in terms of optimizing capital, optimizing capital and missing opportunities. Secondly, the penetration of the muni market, which was over 50% in 2007 has not gotten much better from the level that’s less than a quarter of that now. And now there is a new entrant into the business and another supposedly on the way.

Third, the new lines of businesses that you want to replace the muni shortfall, appear to be riskier lines outside of the traditional experience and where the historical default data is not as benign as exemplified by today’s Greek write downs. My two part question today is, at what stock price does going into run off trump your current long term value creation strategy? Whether it’s $10, $5 or $2, for $2 you could buy the whole company for $400 million. What price is it? And just as importantly as CEO of this firm, will you be able to make the very difficult decision to go into run off, if it’s in the best interest of shareholders despite it not necessarily being in your own best interests?

Dominic Frederico

Well, I’ll take the second quarter first.

Andrew Kleinberg – Glickenhaus

Okay.

Rob Bailenson

So, as a significant personal shareholder, where a significant amount of my wealth is tied up in this security or the stock of this company, I have the same interest you do and my children definitely have the same interest you do. So, I don’t think of it any differently than you do. The second thing is, when you say at what price you’ll go on the run off, I hate to tell you this, but I don’t think there is any price that you would ever consider write-off or run-off rather.

That doesn’t mean, that you will not downsize the capital relative to the business opportunity and we have to be cognizant of that challenge that we face and we have to make sure that we are planning a proper amount of liquidity, free cash, et cetera that we can affect that strategy, because all of us understand that in this marketplace of where opportunities are, you’re not going to be able to right enough new business to support the capital base and we focus on that thing called ROE.

We all struggled with the size of the E and we all appreciate that E has to come down overtime and when is the most opportunistic and accretive opportunity to do that. We deal with share repurchase authorization out there today that we can use, and obviously we look over to those opportunities to when we’re going to start executing on that share repurchase.

I think what you’re saying, what we’re saying is pretty much the same. It’s a matter of timing, execution and degree. We say in a market where interest rates are today, if anyone believes that the interest rate environment that we have today is going to last forever, then you’re exactly right. This market will be a $40 million to $60 million a quarter market and that’s our – led going forward in, hey, that would be okay, writing about $200 million to $250 million as long as your capital base makes sense relative to that.

And at that level, if you look at who is our client today, well, you have to say to yourself, over the last say two years we’ve gone through nothing but ratings issues and ratings challenges. Yet, there is a core level of issuers that have still come out and bought the insurance. Why, because they need that second name on their issuance based on their size or recognition in the market, to be able to get that access. That hasn’t changed. It’s been very resilient.

We continue to book roughly at same percentage of A-rated. What’s the challenge of today in terms of total volume is if you go back to 2006 when we were all AAA, there is only 7% of the market that was AAA at that time. So, theoretically they were the only people that were principally outside of an insurable opportunity. Today, that percentage is like 61%. It went from 7% to 61% of what then is really outside the insurable market.

Do I expect that to stay the same forever? Absolutely not. So, do I try to manage at the worst end of the cycle and make decisions and judgments or do I say, hey, there is a normal cycle out there, do we have the financial strength to continue to fly through this? Absolutely.

Do we continue to make reasonable returns on earnings? Absolutely. Do we need to start taking down the capital? Absolutely. And when does that need to start taking place, but as you read very eloquently, my response from last year, I don’t think we’ve given up any opportunities as we look at the company today. And what do we accomplish over the last year I think is significant. The buying back all of these insured securities, would you be able to do that? Maybe, maybe not.

If you’re providing the cash today, buyback of securities, maybe we don’t have enough cash to buyback these opportunities relative to the insured securities. And I’ll tell you we’ve done the analysis of what is more accretive and when you look at just the number I gave you, if you bought a $1.7 billion back for roughly $800 million, you embedded a $900 million gain and that’s pretty good for a shareholder and I think they’d be very happy if that’s how we’re using our excess cash at this point in time.

But, you’re right. We’re challenged by the market and therefore we have to continue to evaluate this. This is a very dynamic process and every day we’ve got to take a hard look at what is the opportunity of that day and what should be the best decision. But to say we’re not doing it or to elude that there is a better interest of the shareholder that maybe we’re ignoring I think that’s kind on unfair, because most of us here are pretty significant shareholders. And therefore, we do have that interest at heart.

Andrew Kleinberg – Glickenhaus

Thank you.

Operator

Our next question comes from Frank Danley of Dolton Partners. Please go ahead.

Frank Danley – Dolton Partners

Thanks for taking my call. Dominic, we’re long term shareholders and I just want to expand on the previous call for a moment. I think your team – you and your team have done an excellent job in navigating a very, very difficult environment and I can’t be more pleased with the way you’ve managed the company. We all know the company is significantly undervalued.

I was just wondering if you could frame or if you’ve had discussions with the board, I’m sure you have, frame the pros and cons of another alternative taking the company private. I know you’ve talked just previously about the runoff; I don’t think that’s viable because I think the environment will change meaningfully down the road.

But that could be a long way and shareholders are sitting here with the stock that security that significantly undervalued with an environment that doesn’t seem to get better from a regulatory standpoint or even from the rating agencies, just last night you see the over reaction in our opinion of the JP Morgan news. But that’s the world that we live in and it’s hard to see it changing any time soon, so if you could just talk about the pros and cons are taking at private or if that was ever an idea that’s been discussed with the board? Thank you.

Dominic Frederico

Okay. All I can say to you is as we look at the challenges and the opportunities and hopefully and we’re quite grateful for your comments. You have to consider that this management team is pretty good, pretty creative and pretty resourceful and that you would hope and hopefully that you believe in it that there is any stone that we do not at least turned over and examined very closely. So, I think much like the previous caller, it’s a dynamic process.

We try to be as creative as we can be and as resourceful as we can be and look at all possible alternatives. Some are at early stages of development, some are at later stages – there was a big discussion on the purchase of MIAC and how we view that, if you can understand obviously, there has been whole lot of work done here in getting that ready to launch if we determine the best course of action, who rates it, what type of rating could it get. In a similar way, you can consider that we’ve evaluated and continue to evaluate other opportunities, but obviously I am not at liberty to discuss any in-depth dialogue that we might have had on that topic.

Frank Danley – Dolton Partners

Thank you.

Dominic Frederico

Thank you.

Operator

And this concludes our question and answer session. I’d like to turn the conference back over to management for any final remarks they may have.

Robert Tucker

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. My number is listed on the press release. Thank you very much.

Operator

The conference is now concluded and we thank you for attending today’s presentation. You may now disconnect your lines and have a wonderful day.

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