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Assured Guaranty's (AGO) CEO Dominic Frederico on Q1 2018 Results - Earnings Call Transcript

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Assured Guaranty Ltd. (NYSE:AGO) Q1 2018 Earnings Conference Call May 4, 2018 8:00 AM ET


Robert Tucker - Senior Managing Director of Investor Relations

Dominic Frederico - President and Chief Executive Officer

Robert Bailenson - Chief Financial Officer


George Bose - KBW

Joshua Esterov - CreditSights

Geoffrey Dunn - Dowling & Partners


Operator Good morning. And welcome to the Assured Guaranty First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations. Please go ahead, sir.

Robert Tucker

Thank you, operator. And thank you all for joining Assured Guaranty for our 2018 first quarter 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.

If you are listening to a replay of this call, or if you are 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

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Comments (4)

sumark profile picture
If the fiscal plan is so flawed that a mere adjustment to the Medicaid reimbursement program should add approximately an additional $6 BN in revenues (management said the plan includes 6 years of Medicaid expenses but only 2.5 years of Medicaid revenues coming from Washington), it is mind boggling that the stock remains so deeply discounted to book value.

Could it really be as simple as having the Promesa Board or the Judge straightforwardly order the PR government to add another 3.5 years of Medicaid revenues to the plan, which is approximately $6 BN, per AGO management on the call?

Somehow, even this "simple" adjustment doesn't appear to be so easily achieved as judged by the stock's continued malaise in the mid-30s while other PR headlines swirl.

However, there is no denying the confidence management has that momentum may soon switch to the side of creditors in several of the outstanding legal matters.

One thing that continues to persuade me that the ultimate PR restructuring will be reasonably good for AGO and other creditors is the outcome that was struck consensually in the case of GDB bonds.

GDB--Government Development Bank....PR settled at 55 cts with bondholders. Interestingly, these bonds were debentures, with virtually no covenants or liens to protect bondholders. Throughout the first quarter of 2018, PR was literally pleading poverty, as evidenced by the earlier fiscal reports that began this year with DEFICIT projections, instead of the now roughly $6 BN surplus.

Yet, in the midst of the period when PR was claiming extreme poverty, they voluntarily agreed to pay GDB debenture holders 55 cts/dollar. Frankly, they could have/should have told those bondholders that they would only pay them 5/10/15/20/30 cts on the dollar. Instead, they paid 55 cts.

Are we to believe that secured bondholders aren't entitled to receive a premium to 55% which was made to unsecured holders of GDB debt?

For now, it appears that any big positive PR breakthrough is still many months away. However, at $36/share, it appears that AGO stock more than adequately discounts a very bad outcome in PR. And, while everybody's attention is focused on PR PR PR, AGO continues to deliver in its core business.

Two key highlights

1. The Syncora deal was another accretive deal, and AGO recorded a gain to its ABV of nearly $2/share.

2. Not discussed on the call, but found in the Equity Presentation that was posted on the website, was the company's PVP margin. Again, company recorded a rather punk number in terms of new business underwritten in the quarter, down 30% in light of the new tax changes.

But, what the company did not discuss was the fact that its margins expanded tremendously. Underwriting spread was 277 bps, up significantly y-o-y versus the 211 bps in 2017.

For perspective, this figure was 138 bps in Q1 2016.....So, in just two years, AGO has doubled its margin on new PVP underwriting.

To me, this demonstrates the pricing power AGO has as the industry's leading underwriter, with a 62% market share and whose only competitor, Build America Mutual (BAM), has approximately just 5% of the claims-paying resources of AGO, which means that BAM effectively cannot compete at all for any of the larger underwriting commitments.

Again, this fact is completely obscured because AGO is all about Puerto Rico Puerto Rico Puerto Rico. But, at a time when domestic banks and other financial services companies are suffering CONTRACTING Net Interest Margins (NIM) due to the extraordinary flattening in the US yield curve, AGO is putting up EXPANDING margins, albeit on small volumes, for now.

Still, this augurs well, in my mind, for the future. Management did say that it hopes/believes that it will see its book of business begin to expand perhaps by 2019/2020. If it comes to pass that AGO can demonstrate that it has finally established modest growth in its core business (remember, too, that management believes its UK/European business will continue to grow quite nicely) and if Puerto Rico is finally resolved by that time (hopefully at prices between 50-80 cts/dollar), I would submit that AGO stock will be re-priced significantly from here.

Nevertheless, the stock remains dormant as Puerto Rico continues to swirl.
MKD2 profile picture

Excellent description, thank you.
Conviction Capital Research profile picture
Thank you for the insight.
Eoghan O' Connor Byrne profile picture
Great explanations around BIG exposure, claim ratio of 1.7 is not bad at all. Buybacks continuing, let's see what happens in PR, Frederico seems confident.
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