Assured Guaranty Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

Key Takeaways

  • Record equity metrics: At mid-2023, adjusted operating shareholders’ equity per share reached $95.64 and adjusted book value per share hit $144.21, both all-time highs for the company.
  • Robust new business: First-half PVP totaled $203 million—the second largest H1 amount since 2009—driven by diversified wins across U.S. public finance, international infrastructure and global structured finance.
  • SoundPoint and AHP transactions: Closed the contribution of Assured IM to SoundPoint (30% stake) and sale of Assured Healthcare Partners, positioning asset management to be immediately accretive and fee-generative.
  • Puerto Rico exposure: Increased Q2 loss reserves by $49 million, primarily for PREPA, as negotiations stall and the company commits to litigation and Title III plan confirmation to protect its bondholder rights.
  • Strong Q2 operating income: Adjusted operating income rose to $36 million ($0.60/share) from $30 million ($0.46/share) a year ago, led by higher net investment income and fair value gains on Puerto Rico instruments.
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Earnings Conference Call
Assured Guaranty Q2 2023
00:00 / 00:00

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Operator

Good morning, and welcome to the Assured Guaranty Limited Second Quarter 2023 Earnings Call. My name is Glenn, and I'll be the operator for today's call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on the telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference call 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 and Corporate Communications at Assured Guaranty

Thank you, operator, thank you all for joining Assured Guaranty for our Second Quarter 2023 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're reading the transcript of the call, please note that our statements made today may have been updated since this call.

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

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 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
Dominic Frederico
President and CEO at Assured Guaranty

Thank you, Robert, and welcome to everyone joining today's call. At the halfway mark of 2023, Assured Guaranty's adjusted operating shareholders' equity per share and adjusted book value per share are at the highest levels in our history, $95.64 and $144.21, respectively. New business production for the first half remained strong, consistent with recent years' results. It was diversified across U.S. public finance, international infrastructure, and global structured finance. First half PVP of $203 million is the second-largest amount of total first-half PVP since 2009, and the second time that first-half PVP exceeded $200 million during that time period. In July, we completed our transaction with Sound Point Capital Management involving Assured-IM, and separately, we sold Assured Healthcare Partners.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

I will discuss both transactions in a few minutes. For the first half of 2023, Assured share of the insured primary municipal bond market was 63%, up from 56% in the first half of 2022. We guaranteed 290 new issues, totaling $9.8 billion of primary insured par sold. This par amount was fairly consistent with the first half of 2022, despite the total market par being down by approximately 14% in the first half of 2023 compared with the first half of 2022. Our secondary market par written for the first half of the year was $280 million, bringing our total insured par sold to $10.1 billion in the primary and secondary markets. We continue to see higher demand for bond insurance than we did before the pandemic.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

First half 2023 insured par market penetration of 9% was higher than the 8.8% in the first half of 2022. Significantly higher than the 5.9% of 2019's first half. Total insured penetration for the second quarter was 10.1% for the highest penetration rate since 2009. Additionally, market demand for bond insurance increased significantly in the second quarter of 2023, up 72% from the first quarter of 2023. Assured Guaranty saw an 86% increase in insured par sold in the second quarter of 2023 compared to the first quarter of 2023, ensuring $6.4 billion in the second quarter of 2023, 28% higher than the same period last year.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

During the second quarter, we also continued to benefit from institutional investor demand for our insurance as we guaranteed $4 billion of par on 13 transactions that each utilized $100 million or more of Assured Guaranty's insurance. This brought the total number of such transactions during the first half of 2023 to 21 transactions for a total of $5.5 billion. International Public Finance produced $36 million of PVP during the first half of 2023, up from $30 million in the first half of 2022. Second quarter activity includes a guarantee on a U.K.-regulated utility. Our pipeline of potential international public finance transactions includes a significant number of transactions that we consider likely to close later in 2023. Global Structured Finance direct PVP was the largest first half amount since 2009, producing $68 million of PVP.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

We continue to see opportunities with banks, insurance companies, pension funds, and asset-backed investor clients across sectors including pooled corporate and fund finance. In July, S&P reaffirmed our AA financial strength rating with stable outlook for our financial guarantee companies, citing both our very strong financial risk profile and very strong business risk profile in its annual review of Assured Guaranty. Its report describes many strengths supporting our AA ratings, including S&P's view that we have excellent capital and earnings with a meaningful capital adequacy buffer. You can read the entire report on our website at assuredguaranty.com. In July, we completed the transaction with Sound Point Capital Management, in which we contributed substantially all of Assured-IM, and we engaged them as the sole alternative credit manager for AGM and AGC in return for a 30% interest in the combined entity.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

As we have said, we are highly optimistic about this new venture with Sound Point Capital Management and believe it'll be immediately accretive to our bottom line. In July, Assured Guaranty sold all its equity interest in Assured Healthcare Partners LLC. Assured Guaranty will remain a strategic investor in certain AHP managed funds, while retaining its carry interest in existing AHP managed funds and has received other consideration. Regarding the Puerto Rico Electric Power Authority, PREPA, is our last remaining non-paying Puerto Rico exposure. As we have said all along, we remain committed to negotiating a fair and reasonable settlement that will protect and enforce our legal rights as bondholders through litigation and the Title III Plan confirmation and appeal process as necessary. Given the uncertainty in this global economic environment, it's good to reflect on the proven resiliency of our company.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

In the first year of the pandemic, we saw investor appetite for bond insurance increase. That heightened interest has been maintained in development so far this year. Continue to remind investors that the future is often volatile. We have succeeded through decades of economic cycles by delivering on our own commitments to reduce borrowing costs for issuers and protecting against shortfalls in investors' principal and interest payments, while proving our resilience through disciplined risk management and responsible stewardship of capital. This resilience has positioned us to thrive as business and market conditions are creating more intense with the use of financial guarantees. We believe that we have never been better prepared to serve our clients, protect our policyholders, and create value for our shareholders. I'll now turn the call over to Rob.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Thank you, Dominic, and good morning to everyone on the call. I am pleased to report second quarter 2023 adjusted operating income increased to $36 million, or $0.60 per share, from $30 million, or $0.46 per share in the second quarter of 2022. In the second quarter of 2023, the largest components of adjusted operating income were the insurance segment, which contributed $106 million of adjusted operating income, and the corporate division, which had a net loss of $50 million. In the comparable prior year period, the insurance segment generated income of $55 million, which was partially offset by the corporate division's net loss of $35 million. Higher investment income and fair value gains were the most significant contributors to the increased insurance segment adjusted operating income.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Net investment income increased by $24 million, which was driven mainly by higher short-term interest rates and average balances. We also had fair value gains on Puerto Rico contingent value instruments of $40 million in the second quarter of 2023, compared with losses of $18 million in the prior year. Lastly, we had a fair value gain of $5 million on our alternative investments in the second quarter of 2023, compared with a loss of $34 million in the second quarter of 2022. As of June 30th, 2023, the fair value of investments in Assured-IM funds was $350 million. From inception to date, the annualized return on the Assured-IM funds was 10.1%, which is in line with our long-term expectation for these investments.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

These Assured-IM funds will now be managed by Sound Point or Assured Healthcare Partners. We will, we will remain strategic investors in these funds and will commit additional amounts to Sound Point as the alternative investment manager for our U.S. insurance subsidiaries. Net earned premiums and credit derivative revenues increased to $88 million in the second quarter of 2023, from $86 million in the second quarter of 2022. Deferred premium revenue remained steady at approximately $3.7 billion. Accelerations were under $10 billion in the second quarter of 2023 and 2022, as the funding activity remains muted due to the higher interest rate environment.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Loss expense in the second quarter of 2023 was $44 million, and economic loss development was $49 million, mainly due to increases in reserves for certain Puerto Rico exposures. On the insurance regulatory front, I'm happy to report that New York and Maryland successfully completed their five-year joint examinations of AGM and AGC, our two U.S. insurers, and issued clean examination reports with no adverse findings or adjustments. The AGM and AGC examination reports are publicly available on the New York and Maryland regulators' websites. The results of Assured-IM were reported in the asset management segment and were about break even in the second quarters of both 2023 and 2022.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

In July 2023, Assured-IM, excluding AHP, was contributed to Sound Point in exchange for an equity interest in the combined Sound Point Assured-IM entity, and our entire equity interest in AHP was sold to an entity owned by its managing partner. The transformation of our asset management business from fully integrated subsidiaries to a minority stake in a larger Sound Point Assured-IM combined entity, is expected to be accretive to future earnings and provide a stream of income based on asset management fees, and will also provide a wider array of alternative investment opportunities. Going forward, our investment in Sound Point will be accounted for under the equity method, which will simplify the presentation of the asset management results.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

We are also in the process of evaluating all the consolidation conclusions for the Assured-IM CLOs and funds as a result of the Sound Point and AHP transactions. We expect that we will be able to deconsolidate some of these entities. The resulting changes will be reflected in the third quarter financial statements. Expenses associated with the Sound Point and AHP transactions were $24 million in the second quarter of 2023. This was the primary driver of the increase in corporate division adjusted operating loss, which is where most of these expenses were reflected. Adjusted operating income includes the effect of consolidating VIEs, which was a loss of $18 million in the second quarter of 2023, compared with a gain of $10 million in the second quarter of 2022.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

The net effect of VIE consolidation is primarily a function of changes in fair value of these entities and insurance losses and benefits associated with the FG VIEs, including the Puerto Rico Trust. In addition to advancing our key objectives in asset management and alternative investments with the Sound Point and AHP transactions, we continue to focus on our other long-term strategic initiatives to grow the company and enhance shareholder value. In the insurance segment, we have had diversified sources of new and assumed business, which are accretive to key book value metrics. On the loss mitigation front, we continue to maximize our economic benefit by strategically selling the recovery bonds we received last year as part of the resolution of the majority of our Puerto Rico insured exposures.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

As of the end of last week, we had sold approximately 99% of the recovery bonds in the investment portfolio and 34% of the contingent, of the CVIs. Based on our fair value, we have approximately $14 million in recovery bonds and $340 million in CVIs remaining in our investment portfolio. With respect to our capital management strategic initiative, we resumed the share repurchase program in the second quarter. We currently have $158 million of remaining authorization. In addition, our UK subsidiary paid a dividend of GBP 100 million, or $127 million, to AGM, and we have a capital plan to distribute additional excess capital from our UK subsidiaries over the next 2 years. This year's U.K. dividend provided $100 million in additional AGM dividend capacity in 2023.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

At the holding company level, we currently have cash and investments of approximately $90 million, of which $43 million resides in AGL. These funds are available for debt service and corporate operating expenses, or for the use in the pursuit of our strategic initiatives, including potentially redeeming debt and/or repurchasing shares to manage our capital. Adjusted operating shareholders' equity and adjusted book value per share reached new records of over $95 and $145, respectively, due to positive adjusted operating income and strong new business production results for the quarter, demonstrating the value of all of our initiatives. I'll now turn the call over to the operator to give you the instructions for the Q&A period. Thank you.

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your questions, please press star then two. If you are using a speakerphone, please pick up the headset before pressing the keys. At this time, we will pause momentarily to assemble our roster. We have our first question comes from Tommy McJoynt from KBW. Tommy, your line is now open.

Tommy McJoynt
Tommy McJoynt
Director of Equity Research at KBW

Hey, good morning, guys. Thanks for taking my questions. So I'll start off with the big question. Now that New York and Maryland audits are complete with clean bills, can you talk about the next steps toward requesting special dividends that have been mentioned before? Are there kind of in-process plans to sort of seek out specials from various subsidiaries, or are you just targeting just AGM or just AGC? Can you just kind of walk through how that works?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

With the clean audits now, Tommy, we're able to proceed with these requests for special dividends, which we plan on doing. We'll do it to any company that has excess capital. As you've seen, we paid the dividend from the AGUK subsidiary, so we have the same plan for the other subsidiaries as we look at their capital positions. Now with the audit behind us, we're now free to do that.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

We plan to do that within this next second half of the year.

Tommy McJoynt
Tommy McJoynt
Director of Equity Research at KBW

Okay, got it. When we think about the residual amount of capital that's, you know, inflowing, that might be available for buybacks or potentially the debt redemption, just coming out of the insurance subsidiaries, what, what are the annualized cash expenses at the hold co level? Like, I guess, interest, dividends, corporate expenses, and then just kind of like a minimum liquidity buffer that you like?

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Yeah, that's exactly right. If you look at page,

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

it's in the presentation, Robert.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

In the equity presentation?

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Yeah, equity presentation. The short it says the short guarantee overview, Tommy. In there we say that we have, we have annual net expenses of $50 million, annual dividend distributions of $66 million, and annual debt service of $82 million. If you add all that up, those are the, those are the uses of, of, of, of funds for the holding company.

Tommy McJoynt
Tommy McJoynt
Director of Equity Research at KBW

Any minimum liquidity buffer? You talked about having $90 on hand right now.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Yeah, we generally keep, that's generally what we keep as our liquidity buffer. It's generally six months worth of debt service.

Tommy McJoynt
Tommy McJoynt
Director of Equity Research at KBW

Okay, got it. Then just lastly, the, some debt due next year that you guys have, have talked about potentially redeeming. Can you walk through some of the puts and takes about whether, you know, how you're thinking about your, you know, existing debt to, to capital leverage right now? How comfortable, you know, your rating agencies are with that, that threshold, and kind of why you might consider redeeming it?

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

We're actually constantly evaluating whether or not we should redeem it, whether or not we should refinance it. It all depends on whether or not we feel that it's appropriate. If we want to go and refinance it, it's all about price, execution. If we think it's more appropriate to redeem, then we'll go redeem. Right now, if we could refinance at appropriate rates, then we would want to do that. We have a number of quarters before we have to evaluate that.

Tommy McJoynt
Tommy McJoynt
Director of Equity Research at KBW

Got it. Thank you.

Operator

Thank you. We have our next question. It comes from Brian Meredith from UBS.

Brian Meredith
Brian Meredith
Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS

Yeah, thanks. I, I'm wondering if you could dive a little bit into the Puerto Rico, loss development, kind of what happened there. Maybe if you can just kind of frame, you know, what's the potential additional Puerto Rico loss? I mean, there's going to be a cap, obviously, to what your debt service is on PREPA and stuff.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Brian, like we've always said in the past, we have to react to any new information on any exposure we've got that we believe has a probability of a claim. Obviously, there's been some new information on PREPA. We have to update our scenarios. We have to then adjust our probabilities and look at what the reserve change is going to be. Obviously, PREPA, you know, the offers currently on the table are insulting, to say the least. Obviously, our view is litigation is the path that we're going to take, and there's been nothing that changes my mind that I've seen so far in the marketplace. We just go along with the information provided to us and adjust our models accordingly. My view is that this is a litigation situation anyway.

Brian Meredith
Brian Meredith
Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS

Is the loss solely just, the additional reserves solely PREPA related?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Predominantly PREPA.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Predominantly.

Brian Meredith
Brian Meredith
Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS

Okay, great. A second question. I'm just curious, I read through the S&P report, and maybe I just missed it, but is there a kind of capital buffer over and above the triple A level that you all have now?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Of course, we keep that capital buffer above the AAA. I think the last number we gave you was in the $1.6 billion or $1.8 billion number.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

1.8, 1.8

Brian Meredith
Brian Meredith
Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS

1.8 now? Okay.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Remember, yeah, but remember, S&P notches us down. Even though we're at 1.8 excess capital at triple A, we still only call it the double A company, which is beyond insulting as well.

Brian Meredith
Brian Meredith
Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS

Got you. All right. Thanks, all. Appreciate it.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Thank you, Brian.

Operator

Thank you. We have our next question comes from Geoffrey Dunn from Dowling & Partners. Jeffrey, your line is now open.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

Thanks. Good morning,

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Good morning, Jeff.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

As, Rob, I think you mentioned, or, or Dominic, that you, you would request special dividends from any company with excess capital. How do you think about true excess capital, now that the business is growing again, and the fact that, you know, you're, you're being held to a AAA capital standard as a AA company? I have to imagine that that $1.8 billion buffer is not necessarily all excess. I, I want to say, go back 20 years ago, AAA companies might have retained $500 million-$800 million cushion. Is that the right way to think of what is true excess capital across the companies, or is there a different framework to consider?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Remember, we've got a lot of regulators in our business, so you not only do you look at S&P, but you also have to look at the states, you have to look at the other agencies. I think the excess capital position of the S&P number is a fairly good number, and growth, by and large, itself, will not significantly impact that. You remember, as we write business, we get the benefit of the unearned premium reserve as part of the capital calculation, so the business is not that dilutive to capital excess. I think we'd lose about maybe 12%-20% of the PVP would be, or of the business written in terms of additional capital. It's not a big number. To get excess capital, we have, like I said, to go through all the measurements by all the entities.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

There are different hurdles that you have to meet. There are different buckets that get counted. We look at all companies and go through the entire process of evaluating this criteria to see what excess capital, you know, we have, and therefore what can be dividend out to help us do the capital management program that we've been implementing.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

That'll be part of the discussion with the regulator. You know, we start with, Jeff, with the 1.8. We want to keep a cushion of, of a number, based upon what we believe is appropriate. You know, in years past, the number would have been higher because of the volatility of Puerto Rico, and now maybe we can lower that buffer as, as such. You never want to be in a situation where you actually, you know, jeopardize ever, you know, a downgrade can put you in a situation where you, you drop below that AAA level. A cushion is, we're going to always keep a conservative cushion.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

Okay. Then obviously, the, the excess capital has been a challenge to the ROE. I'm wondering, your, your previous target for buyback was $500 million annually, supported by specials, and that was, you know, picking away at that excess capital issue. Does the clearing of the 5-year audit allow you to consider being more aggressive with trying to correct the size of the company and, and, and rightsize that ROE? Is it a, you know, more of a, a long measured race here?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

No, I think it's kind of a combination of both, Jeff. We will continue to evaluate what's the best course of action to take, and if we see the opportunity to accelerate, we can still meet all the requirements that we have relative to regulation and rating agency will do that. Obviously, where the stock trades versus where the book value are, is a huge advantage for us in terms of accretion to the bottom line, accretion to the book value numbers, et cetera. We look for every opportunity to accelerate if we can. We've been following that process for a lot of years. We've gotten to where we've gotten. We see what the results have been.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Now it's time to really put the rest of the strategic plan together and really correct the company as we now clear the audit, have Puerto Rico basically behind us in the rear view mirror. We've got good growth opportunities across all of our business units. We've got an asset management down now. It's functioning profitably. I think we're in a great position to do exactly that.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

Okay, and then my last question. I'm sorry.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

I just wanted to just emphasize what Dominic just said at the end. Everyone, everyone should focus on the fact that we had an asset manager that was basically 0, break even, right, right around that. Now we've combined with Sound Point, that is profitable and will be accretive, day one. That's a significant part of our growth opportunity.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

Okay. My last question is, you had some migration on your BIG list. It looks like one credit in particular went from 1 to 2. Can you elaborate on, on what is occurring with that, that healthcare exposure?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Yeah, as we talked about, we've seen some stress in the healthcare marketplace, and therefore, we've looked at our healthcare credits and take appropriate actions where we saw fit. Remember, most of those credits are still highly protected, and therefore, we've got opportunities from workouts, other, you know, measures that we take to save the credit, very few result in the payment, but we've got to be mindful of how we look at our internal ratings.

Geoffrey Dunn
Equity Analyst and Partner at Dowling and Partners

Okay.

Operator

Thank you. With our next question comes from Jordan Hymowitz from Philadelphia Management. Jordan, your line is now open.

Jordan Hymowitz
Managing Partner and Managing Principal at Philadelphia Financial Management

Hey, guys, a couple of different questions. One, on page 38, for a lot of the past decade, there's been the story that AGO is a melting ice cube. In page 38, this is the first time that the PVP has actually increased. Could you say emphatically at this point that the declines will have stopped given the strong production and the company is growing again?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

We think the opportunity for growth is as good as it's been over the last number of years, and we're optimistic about what the year looks like and what next year looks like. The unearned premium reserve is growing, PVP is getting higher. As you point out, I'm not going to say emphatically and absolutely, nobody can say that on another kind of power or that crystal ball. At the end of the day, we're as optimistic as we've ever been relative to the market opportunities that we see across all of our business units. As Rob mentioned, we also now have a functioning asset management division as well, that it will create opportunities for both the insurance and investment side.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Jordan, we're seeing on financial guarantee, the great pipelines in U.S. public finance, global structured infrastructure, global structured finance, and international infrastructure. All of our three, three legs in the financial guarantee business, we have very strong pipelines.

Jordan Hymowitz
Managing Partner and Managing Principal at Philadelphia Financial Management

In addition to growing again after years of shrinking the flat, if you look at page 48, your below investment grade %, below investment grade percentage is the lowest level it's been in over a decade at this point. Not only are you growing it with, with better credit quality, that alone should give the regulators more confidence than not less confidence to improve a buyback or a special dividend. Is that a reasonable way to think about that?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

I think everything's reasonable in today's marketplace, including below investment grade, Puerto Rico, growth opportunities. You know, the other noise in the company that will be basically dealt with, the audit dealt with, et cetera. However, I'm getting a little sensitive to the melting ice cube or the continued rundown of the business. Remember, we were one company that bought 4.5 other companies. We had 5.5 other companies earning business to a highly redemptive market for, you know, early redeems. That caused the earnings to spike. We've been running consistently good business over a number of years, but because we had 5.5 companies in our unearned premium reserve, it looked like we were declining, but we couldn't have written in business any faster than we did.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

That offset of 5.5 companies earning and 1 company writing in a depressed market, which caused a drop in the volumes in terms of our unearned premium and the unearned premium reserve. I think as you've said, we've kind of corrected the ship now, and now that most of that has run off or been redeemed, it's now time to start focusing on growth across all of our business units.

Jordan Hymowitz
Managing Partner and Managing Principal at Philadelphia Financial Management

The final question is, you know, given the, the delayed or back end part of the buyback, you weren't sure if you could hit the $300 base, much less the $500 buyback. Without commenting on what you will or won't do, do you think you have, with the special dividend from the U.K., the capacity to at least do the $300 million this year?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

We can't comment on that, but remember, everything's predicated on special dividends, and we're 1 down, 2 to go.

Jordan Hymowitz
Managing Partner and Managing Principal at Philadelphia Financial Management

With the 1 down, do you have the capacity to do the $300 million?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Like I said, do the math. We won't publicly state that or not.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

I mean, I mean, we did obviously, you know, we got the $100 million. I said in my commentary that it, it, it helped. It increased our dividend capacity by $100 million. And we are going to look for a special dividend.

Jordan Hymowitz
Managing Partner and Managing Principal at Philadelphia Financial Management

Okay, thank you.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Thank you, Jordan.

Operator

Thank you. With our last question comes from Giuliano Bologna from Compass Point. Giuliano, your line is now open.

Giuliano Bologna
Giuliano Bologna
Managing Director at Compass Point

Thank you. Congrats on great performance again. One thing I'd be curious about is maybe following up on Jordan's train of thought. It looks like you're, as of right, dividend or your dividend capacity in the back half of the year or for the balance of 2023 came up by, you know, $77 million or $7 million or $75 million ballpark at AGM, and there's also an increase at AG Re. You're up about $100 million there for the back half of the year versus where you were last quarter. You also had kind of a back half-weighted schedule.

Giuliano Bologna
Giuliano Bologna
Managing Director at Compass Point

Is it fair to think about, you know, you're, you know, deploying, you know, a little bit more in the back half, plus that $100 million that you, that you're getting before thinking about the special dividends from, you know, potentially AGM or AGC? Is that a good way to think about, like, think about your buyback capacity or how that could, you know, at least scale up based on what we know today?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

It's a way to think about it, Giuliano. Obviously, we said it was back end weighted, and we've got a lot of other plans, especially special dividend requests from the U.S. regulators that will significantly enhance that. Remember, you also have the volume issue in terms of how much stock you can buy back on any given day. We might actually run out of limit of what we can buy back relative to the, you know, trading days volume. That could be a problem, you know, we expect to have significant funds to be able to look at capital management as one of our key strategic objectives.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Yeah, and, and when we were saying it back-end loaded, we would take into account that we were expecting to get this dividend from the UK subsidiary. That's why it was back-end loaded. Don pointed out a really important point. You know, you get this towards the end of the year, you know, based on you can only buy back a certain based on your volume, what you trade during the day. The good news is, if we get it, it's going to help us going forward with our, you know, capital management program. It just might bleed into the next year.

Giuliano Bologna
Giuliano Bologna
Managing Director at Compass Point

Got it. That's very helpful. Then thinking about the special dividends, I realize that, you know, there's probably no, you know, perfect timeline to think about, but I'm curious when you think about, you know, making requests for special dividends, is that usually, you know, a relatively quick turnaround in terms of, like, weeks or a few months, or, you know, can it stretch out over a few quarters?

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Well, time is of the essence, so we're going to try to put as much, you know, pressure as we possibly can. As you said- as you've said, clearing the audit was the real criteria. Then getting this clean audit opinion with no adjustments proposed, I think gives us an opportunity to really take advantage of that strong audit result. Of course, the excess capital position and the company's position with the regulators anyway, I think we're in good shape relative to getting this special request. Obviously, time is of the essence in getting it into the states.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Well, obviously, remember, you know, we're going to do our best to put a plan in place. Obviously, we do have to deal with the regulator, it's their schedules. We can only control what we put in front of them.

Giuliano Bologna
Giuliano Bologna
Managing Director at Compass Point

That's very helpful. One, one last one, or is around kind of new business. You obviously, you know, looks like you did a decent reinsurance transaction in the quarter. I'd be curious about 2 things. You know, is there a good pipeline of reinsurance opportunities, you know, similar to that or, you know, that look, that, you know, resemble that reinsurance transaction out there? Also, I'm just curious about thinking about the cadence of new business. You know, it seems like it's picking up, and I'd be curious, you know, how you feel about the pipeline. Do you think it's going to continue to show up? I realize it's not going to be perfectly linear on a quarter-to-quarter basis.

Dominic Frederico
Dominic Frederico
President and CEO at Assured Guaranty

Well, we continue to look for opportunities across all of our markets, both direct and reinsurance business, and that doesn't change. Obviously, it goes through our, you know, underwriting standards before we accept a piece of business. That's the philosophy, and we'll continue to follow that. If there's business out there on both either the reinsurance side or the direct side, we're more than happy to entertain it. As we've talked about, our direct business pipelines are very, very strong, so we're very, you know, optimistic about the rest of the year in terms of what we're able to achieve from a PVP point of view, driving that unearned premium reserve higher and higher.

Giuliano Bologna
Giuliano Bologna
Managing Director at Compass Point

That's great. I really appreciate the time and the questions, and I will turn it back in the queue. Thank you.

Rob Bailenson
Rob Bailenson
CFO at Assured Guaranty

Great. Thank you, Giuliano.

Operator

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

Robert Tucker
Robert Tucker
Senior Managing Director of Investor Relations and 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

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

Executives
    • Dominic Frederico
      Dominic Frederico
      President and CEO
    • Rob Bailenson
      Rob Bailenson
      CFO
    • Robert Tucker
      Robert Tucker
      Senior Managing Director of Investor Relations and Corporate Communications
Analysts
    • Brian Meredith
      Managing Director and Financials Research Sector Head and Global Insurance Strategist at UBS
    • Geoffrey Dunn
      Equity Analyst and Partner at Dowling and Partners
    • Giuliano Bologna
      Managing Director at Compass Point
    • Jordan Hymowitz
      Managing Partner and Managing Principal at Philadelphia Financial Management
    • Tommy McJoynt
      Director of Equity Research at KBW
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