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Assured Guaranty Ltd (Bermuda)Â (AGO 1.65%)
Q1Â 2019 Earnings Call
May. 10, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Assured Guaranty Ltd. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Head of Investor Relations and Communications. Please go ahead, sir.
Robert Tucker -- Senior Managing Director, Head of Investor Relations and Communications
Thank you, operator, and thank you all for joining Assured Guaranty for our First Quarter 2019 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'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.
The 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 Ltd.; and Rob Bailenson, our Chief Financial Officer. After their remarks, we'll open the call to your questions. (Operator Instructions)
I will now turn the call over to Dominic.
Dominic Frederico -- President and Chief Executive Officer
Thank you, Robert, and welcome to everyone joining today's call. In the first quarter of 2019, Assured Guaranty once again established new per share highs for shareholder equity, operating shareholder equity, and adjusted book value. We continue to be the leading municipal bond insurance Company and made further progress in building the markets for our financial guarantees in the international infrastructure and structured finance markets. In terms of new business production, our diversified underwriting strategy once again proved its value during the quarter. Each of our financial guaranty businesses, U.S. public finance, international infrastructure finance, and global structured finance made a meaningful contribution. For U.S. public finance, municipal bond yields declined throughout the first quarter of 2019 and fell more rapidly after the Fed announced an indefinite halt to interest rate increases. Lower yields limit demand for our guarantee as some investors forgo the extra security in favor of achieving more yield.
The yield decline was most pronounced at the long end of the curve where the negative effects of our premiums is greatest because they are calculated as a percentage of total debt serviced over the life of each transaction. Some of the yield pressures due to the strongest net quarterly inflows to the municipal bond mutual fund since that data was first collected in 1992 possibly because people preparing their federal tax returns were realizing that taxes at municipal bonds are one of the few remaining tax strategies after assuming the tax deductions were eliminated or capped by the 2017 tax law changes. Also during the quarter our credit spreads narrowed, particularly in the A, BBB categories where we insured the majority of our transactions. The spread between A and AAA 30-year munis ended the quarter at 43 basis points, the tightest level in 11 years.
Under these conditions, insured primary market penetration for the industry was approximately 5% of par volume and 16% of the deal count. However, as in recent quarters, more than half of the A-rated transactions utilized bond insurance in spite of the market pressures brought by low interest rates and tight spreads. In terms of the overall municipal par issued in the first quarter, the 22% year-over-year growth was deceptively large because volume in the first quarter of 2018 was suppressed by arrest issue bonds during the uncertainty about a pending tax reform that prevailed near the end of 2017. Using the first quarter of 2017 as more a typical reference point, first quarter volume in 2019 would be down 13% on that basis. During the quarter, Assured Guaranty led the municipal bond insurance primary market with 56% shares of both insured par issue and insured transactions sold. Additionally, our secondary market business performed well with secondary market par insured increasing 74% compared with last year's first quarter results. In total, we insured $2.4 billion of U.S. public finance par. Our primary market business includes the largest insured green bond transaction to date, where we insured almost $180 million of New York MTAs transportation revenue green bonds, which were issued with third-party climate bond certification. We look forward to adding value to more certified green bonds, which is a way we can help municipalities lower the cost of reaching their environmental impact goals. We also closed another significant healthcare transaction, guaranteeing $81 million of taxable Massachusetts Development Finance Authority bonds for Tufts University Medical Center for the Wellforce Health System.
In the international infrastructure finance, we have now recorded new business premiums in 14 consecutive quarters, which attest to the expanding understanding of and interest in our guarantees on the part of both investors and issuers outside the United States. On March 31, we announced an innovative GBP135 million debt service reserve guarantee for the Law Schroeder Group. Guarantee replaced existing bank facilities, which was the first of its kind for a large U.K. water and sewerage company. We believe this product will be attractive to similar companies who could benefit from a long-term alternative to bank liquidity facilities that are subject to annual renewal.
Brexit remains a wild card, but not one we expect to have a major impact on our future opportunities. We have strategies in place to deal with a number of Brexit scenarios, including a hard Brexit, and we are in various stages of executing these plans as events unfold. Our global structured finance business produced solid first quarter results, generating $6.6 million of present value new business production or PVP. Transactions we insured included a large collateralized loan obligation and secondary market wraps to hold business securitizations. We also insured an aircraft residual value insurance transaction. We see additional opportunities in these sectors this year as well as in the life insurance sector. Since the beginning of the year, we have seen several developments in Puerto Rico. Reassuringly, general fund revenue result for the 9 months ended March 31 were 8% above the revised projections in the most recent certified fiscal plan from October 2018.
To add some perspective, the Commonwealth previously disclosed that for the 8 months ended February 28, revenues were up more than 5% against the October revised projection and almost 33% against the original projection in June 2018's fiscal plan. Additionally, the government announced that a number of private sector jobs now exceeds the level before Hurricane Maria, and according to the Puerto Rico Economic Development Bank, the unemployment rate declined from 10% to 8.8% between March of 2018 and March of 2019, a 12% annual decrease.
In early May, we joined an amended restructuring support agreement with the Puerto Rico Electric Power Authority along with a group of uninsured PREPA bondholders, the Commonwealth and the Oversight Board. We believe the settlement outlined in the new RSA can be the foundation for an effective consensual plan of adjustment that assures reliable electrical power for the people of Puerto Rico. And we are committed to continuing to work cooperatively with PREPA and the other stakeholders along the path to plan confirmation. There is an important distinction between Assured Guaranty and other creditors in the restructuring process. We have the ability to add value to the securitization exchange bonds we receive by potentially attaching our guarantee to them. When we insured these bonds, we believe this could materially improve Assured Guaranty's overall recovery onto the transaction as well as generate new insurance premiums. For that reason, our economic results could differ from those reflected in the RSA.
Additionally, by ensuring the replacement bonds, our economic interest would continue to remain in line with that of the debtor over the long term, and we would both benefit from the debtor's improved fiscal solvency and long-term economic success. There is more work to be done to achieve the plan of adjustment based on the PREPA RSA, and other credits still need to be addressed. We believe strongly in our collateral and legal rights across all of our Puerto Rico exposures, and we'll vigorously enforce these rights if consensual deals are not reached. In another matter, Puerto Rico's Oversight Board is appealing the First Circuit's decision following the PROMESA's procedure for reporting Board members is unconstitutional. It's impossible to know whether the high court will agree to take the case. Meanwhile, there is the possibility that the President will appoint and the Senate will confirm all or some of the existing members. We believe Senate hearings will be good place to air the differences between Congress' intent in passing PROMESA and the actual performance of the Board, whose actions have frequently worked against the law's expressed goals of respecting constitutional priorities and contractual liens.
One of the Oversight Board's most troubling actions is an attempt to have some of the Commonwealth yield bonds declared invalid and to call back previously distributed principal and interest from bondholders, on the grounds that those bonds were issued in violation of the constitutional debt limit. Some might argue that we should accept the invalidation because our exposure to the bonds in question is much smaller than our exposure to the unchallenged GO bonds, and it could increase the likelihood of a full recovery on the rest of the GOs and perhaps better recovery on some of our other exposures. That view is not only bad business but also an atrocious disregard for the rule of law. Our position is that all of the general obligation bonds should be provided a 100% recovery.
Because of the constitutional requirements, they must be paid before all other government expenses, and there is more than adequate funds to service the debt. Furthermore, considering the representations and disclosures the Commonwealth presented when it issued the challenge bonds and considering that early acceptance has been to proceeds, we consider any challenge much less invalidation of those GO bonds illegal and immoral. It is very dangerous to allow municipality to borrow money with all the disclosures and legal support required to the time of issuance and then turn around and say, "Sorry, we lied, and because we lied, we won't pay your debt service." There are multiple Supreme Court cases going back to the 19th century that says you can't do that and for obviously good reasons.
The point is surely known by the highly compensated lawyers and consultants in which the Commonwealth is showering hundreds of millions of dollars of local taxpayer money. So their position is merely a negotiating ploy that, among other things, is intended to drive down the market value of the bonds in order to try to justify less than a 100% recovery. The Commonwealth and Oversight Board are also trying to persuade the courts to reverse the historical treatment in bankruptcy of special revenue bonds. The authors of the relevant bankruptcy provisions enacted in 1988, and the entire municipal bond market understood that it is mandatory, not optional, for special revenue payments to continue uninterrupted throughout bankruptcy. Yet the Title III Court and the First Circuit Court have ruled otherwise with serious potential consequences for the stability of the special revenue bond market.
The contingent effect of the unwillingness of the Commonwealth and Oversight Board to repay Puerto Rico's debt is already becoming evident. Rating agencies are reexamining and in some cases, changing revenue bond ratings based on the increased uncertainty about the security arrangements for special revenue bonds. And more generally, the market must now reevaluate what full faith and credit really means and reconsider how much yield is required to compensate for political risk, the possibility that officials will be unwilling to pay the general obligation commitments made by their predecessors.
Assured Guaranty is prepared to take every case as far as necessary to preserve the security arrangements and laws that underpin the municipal bond market and specifically our legal rights under our insurance policies. All the rating agencies that follow us have published opinions that our Puerto Rico exposures are manageable, including Moody's about 2 weeks ago. And we have few, if any, other credits in our insured portfolio that are truly problematic. Our claims-paying resources remain near $12 billion even as our net par exposure has declined 63% since 2009. We are in very strong financial position, and we'll continue to provide financial protection to our insureds. Looking at our pipeline of probable business and our other strategic objectives, we feel confident that 2019 will be a rewarding year. We estimate that the trend in our declining par exposure will reverse in the near term as we're being in insuring businesses of higher rates than our insured exposure amortizes. We have and we'll still have significant excess capital that we will continue to manage through share buybacks and dividends. And we continue to look for appropriate alternative investments to diversify our corporate profile.
I will now turn the call over to Rob.
Robert Tucker -- Senior Managing Director, Head of Investor Relations and Communications
Thank you, Dominic, and good morning to everyone on the call. The company's results were strong in the first quarter of 2019 as we once again reached record high operating shareholders' equity and adjusted book value per share of $62 and $86.95, respectively. These milestones demonstrate the ongoing value created for our shareholders through various strategic initiatives. Dominic just reviewed our new business production and the progress we have made on resolving our Puerto Rico exposure. And I will cover our share repurchase program later on. But first, I will review the first quarter 2019 operating results. In the first quarter, operating income was $86 million or $0.82 per share compared with the $155 million or $1.33 per share in the first quarter of 2018.
Lower net earned premiums from refundings and higher loss adjustment expenses were the primary drivers of the variance. Net earned premiums were $118 million in the first quarter of 2019 compared with the $145 million in the first quarter of 2018. As expected, after the passage of the 2017 Tax Act and consistent with the amortization of our insured portfolios subject to call, accelerations due to refundings and terminations declined to $26 million in the first quarter of 2019 compared with $52 million in the first quarter of 2018. First quarter 2019 loss and loss adjustment expenses are higher than first quarter 2018, mainly due to higher U.S. public finance losses, offset by lower losses in our RMBS. As we have said in the past, loss and loss adjustment expenses reported income in any given period differs from economic loss development due to (technical difficulty)
Operator -- Senior Managing Director, Head of Investor Relations and Communications
Pardon me. It seems like the speaker has went silent.
Robert Bailenson -- CFO & CAO
So it seems like we had some -- our mics cut out. So I'm going to repeat the last paragraph. First quarter 2019 loss and loss adjustments expenses were higher than the first quarter of 2018 mainly due to higher U.S. public finance losses, offset by lower losses in RMBS. As we have said in the past, loss and loss adjustment expenses reported income in any given period differs from economic loss development due to the consideration of unearned premium reserve in the calculation of loss and loss adjustment expenses under GAAP accounting rules. Total economic loss development was a benefit of $2 million in the first quarter of 2019, which primarily consisted of a $65 million benefit in U.S. RMBS, offset by increased loss and loss adjustment expenses for certain Puerto Rico exposures.
The benefit in RMBS was mainly related to a general increase in excess spread and the improved performance of second lien transactions. The economic development attributable to changes in discount rates was a benefit of $4 million in the first quarter of 2019. In terms of strategic initiatives, we have continued to repurchase shares in order to efficiently manage our capital position. During the first quarter of 2019, we repurchased 1.9 million shares for $79 million at an average price of $41.62 per share. Since the beginning of 2013 and through the end of the first quarter, we have repurchased a total of 96.5 million shares. The cumulative effect of these repurchases was a benefit of approximately $15.84 per share in operating shareholders' equity and approximately $27.83 in adjusted book value per share. Since the end of the quarter, we have repurchased an additional 853,000 shares at an average price of $46.25 for a total of $40 million, bringing the current year-to-date share repurchases to $119 million or 2.8 million shares.
Cumulative repurchase since 2013 represent about half of the shares that were outstanding at the start of the program. As of today, our remaining share repurchase authorization is approximately $279 million. We currently have approximately $260 million in cash and investments available for liquidity needs and capital management activities at the holding companies. -- insurance regulators to approve the release of capital from our insurance subsidiaries in order to fund share repurchases. For example, as a first step, we saw and in March, we received approval for a $100 million dividend from MAT to its also parent companies, AGM and AGC. This MAT dividend will ultimately be recorded as statutory net investment income for AGC and AGM, which is expected to increase the normal dividend paying capacity for AGM by $61 million for 2019 and for AGC by $39 million for 2020.
I will now turn the call over to the operator to give you the instructions for the Q&A period. Thank you.
Questions and Answers:
Operator
(Operator Instructions) And our first question today comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
Yes good morning. I guess first question. Can you give any additional color on the economic development with respect to Puerto Rico in the quarter? Was there any residual COFINA in it? Was there any true-up related to the PREPA RSA or is it just general exposure development that we're seeing in the $61 million?
Robert Bailenson -- CFO & CAO
As you know, Geoff, we respond to all information after the quarter end. And so in the case of the First Circuit upholding, Judge Swain's ruling on special revenues, we reacted to that information because we expected that will then cause any court or any court validation to be taking a longer time and therefore, because timing is going out further for recoveries as well as continuing to pay losses, we adjusted our probabilities for any GO or HDA credit. On the other side, the RSA actually would benefit, and we adjusted our probabilities with respect to PREPA. But net-net, we had an increase in reserves at economic loss development in Puerto Rico.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
And no COFINA in there? That was done in Q4?
Robert Bailenson -- CFO & CAO
No. That was -- there was nothing for COFINA.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
OK great. That's helpful thanks. And then can you give any additional color, whether it be a range or percentage or anything like that in terms of what the various fees and economic opportunity unwrapping the bonds might do in terms of reducing your loss? Obviously, I don't think the par amortization or the amortization scheduled for the new bonds is out. But on the surface, you're looking at 20%-plus type of hit on PREPA. You put the other stuff in there, I think you said in your release, it should be a lot lower economically. But can you frame that up any better for us?
Dominic Frederico -- President and Chief Executive Officer
Sure. If you think about it, the way that RSA is structured, Geoff, is they're really providing by the surcharge a level of debt service, so a fixed amount of payment into the new bond structure. So if you can think about the new bonds being issued, say, at 5.25% on the A bonds and like 7.5% on the B bonds and the way it's structured in these surcharges to provide cash flow to service that debt. So you will get -- given amount of par relative to that interest rate against the debt service payments that are being provided.
If you then go out and insure those bonds, you lower the interest rate. Therefore, you will increase the principal amount of the par that you will be received or will be able to be serviced through the fixed charge going through the surcharge on the electric bills. So it's a pickup of par that would then further improve your recovery against the bonds that you're retiring and then two, you get paid a premium relative to the insurance of the new bonds as well. So if you think about a 50 basis point improvement in the interest rate, what does that then do to a fixed stream of cash flow relative to the new par that debt service will be able to provide for. That's how you think about the economics being improved.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
I guess, a pointed question. Do you think this could be a single-digit relative write-off for you? I guess, that's a no comment?
Dominic Frederico -- Deputy Chairman, President & CEO
That's a no comment. And remember, as we look at this much like COFINA, we have the option. So it's at our option, and we're going to look at, a, what the government is at that time with other covenants or requirements we're going to be made through the operational kind of independence in the operational efficiency of the utility. So we can always do uninsured or do an insured, it's going to be our choice, much like COFINA where we still hold those bonds, and we still have the option of insuring them to further improve the economics or not depending on how we feel about the government and it's behavior.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
And then just a quick number question. Rob, do you have a breakout of primary versus secondary for R and PVP?
Robert Bailenson -- CFO & CAO
Yes. I knew you were going to ask that. You are consistent, Geoffrey. So primary, we had $10.1 million PVP for 1 point -- about $1.678 billion of par. And in secondary, we had $21.5 million of PVP for $338 million of par.
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
Thank you.
Operator
And our next question comes from Allen Weinstein (ph) with Elliott Investments. (ph)
Unidentified Participant
Gentlemen thank you for taking my question. Dominic, I wanted to thank you again for your comments about GO issuance post 2012. It's about time that someone stood up for the rights of municipal bond holders, and I very much appreciate your comments about the validity and claw-back attempt on GO issuance. So thank you for that. My question has to do with getting over the hurdle with PREPA and combining your interest with MBIA. Currently, MBIA, as you know, trades at about 35% of adjusted book value. Have you given any consideration to partnering or making some kind of acquisition where you could control the outcome of PREPA by controlling MBIA's holdings?
Dominic Frederico -- Deputy Chairman, President & CEO
Well, as you know, our goal is to combine or consolidate the entire remaining financial guaranty industry, which we've done in a very accretive way to the ultimate book value and bottom line of the company as well as continue to improve the perception of our insurance policy by improving the rating on those specific bonds that we wind up acquiring through the acquisition of the company and, therefore, the insurance that they provide. As you know, we look at everybody all the time. We continue to evaluate opportunities. As we move along resolving more Puerto Rico's exposures, which tend to be one of the bigger -- when you think of us in the acquisition world, number one, we have to look at is what is the capital structure of the target. Are there three mouse at the table, two mouse? Is there just equity? Is there surplus notes? Is there preferred stock? Is there deferred payment obligations?
So it's really the complex kind of view of the equity side. And then number two, we reunderwrite every credit in the portfolio and charge what we determin to be reasonable relative to today's both market conditions and capital charges. Puerto Rico tend to be one of the more contentious credits that you would look at in anybody's portfolio. So as those get resolved, it simplifies the underwriting side of our acquisition opportunity. We still have to deal with the capital side. So as we move along Puerto Rico and hopefully, there will be more activity as we go through the year, I think, it does provide a greater opportunity for Assured to continue its consolidation strategy. More importantly, as those companies start to reach kind of the final conclusion of whatever they're dealing with in their capital structure and portfolios, it then becomes a good opportunity for them to either reload their business purpose and in effect, go on to their new direction or liquidate the company and basically pay out their shareholders. So we think Puerto Rico in a lot of ways is a good accelerant to further opportunities relative to our consolidation goals.
Unidentified Participant
Thank you. Thank you I appreciate that.
Operator
And our next question comes from Bose George with KBW.
Bose George -- KBW -- Analyst
Yes good morning. Yes. Just one more on the PREPA RSA. Do you think there's a road map to get from the current level to the 67% that's needed if MBIA does not join in?
Dominic Frederico -- Deputy Chairman, President & CEO
Well, you need 67%, and that's currently written in the RSA agreement. It doesn't mean you have to stay there. So that's number one. Number two, they have voting rights to anywhere between 13% and 17%. The number continues to move. So you think about that still leaves 83% out there or 87% depending on your perspective, and you need 67%, and we've got, I think, something around 50% now. So your guess is as good as mine, but I'm sure the government will go back and do whatever's necessary to try to enforce this both to get over the necessary threshold or they'll change the threshold, one of the two. Remember, in the Title VI, it's a different voting requirement than in the Title III. So that's one thing you have to keep in mind before the plan adjustment requires a different voting calculation than the Title VI does.
Bose George -- KBW -- Analyst
So under Title III, it could end up being just a lower number that's required to get it over...
Dominic Frederico -- Deputy Chairman, President & CEO
Remember, Title III has to have a qualifying quorum to vote and then you need a majority of that qualifying quorum, right? So it's a different threshold. I think at 67% you need the quorum for vote and then majority of the vote of the 67% or whatever that number is that's above the 67%. That's Title III. Title VI on the voluntary restructuring, it's what they implied or what they provided for in the RSA that doesn't mean that can't be changed.
Bose George -- KBW -- Analyst
Okay. Great. That's helpful. And then, actually, just going back to Geoff's question, just on the potential quantifying the benefit. Can you just repeat your answer, the 50 basis points at the time. So we look at that...
Dominic Frederico -- Deputy Chairman, President & CEO
Well, you guys are the quants, right? So you can figure out what the -- if you have a given fixed amount of debt service and you lower the interest rate, take a number, 50 basis points, 75 basis points. How much additional par can be serviced by that level payment of debts there?
Bose George -- KBW -- Analyst
Okay. So look at the duration and present value that -- look at the benefit that way?
Dominic Frederico -- Deputy Chairman, President & CEO
Right, and then you'll figure out what the enhancement to par insured over the par value of the bonds against the original 67% and $0.10 on the B bonds and therefore, you can calculate what the ultimate recovery is.
Robert Bailenson -- CFO & CAO
As well as the premium, that's going to be charged in the transaction.
Bose George -- KBW -- Analyst
OK. That's great. On top of that, yes. Thank you.
Dominic Frederico -- Deputy Chairman, President & CEO
You're welcome.
Operator
Ladies and gentlemen, this will conclude the call. I'd like to turn the conference back over to Robert Tucker for any closing remarks.
Robert Tucker -- Senior Managing Director, Head of Investor Relations and Communications
Thank you, operator, and thank you all for joining us on today's call. I'd like to thank you for that. If you have additional questions, please feel free to give us a call. Thank you very much.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a nice day.
Duration: 32 minutes
Call participants:
Robert Tucker -- Senior Managing Director, Head of Investor Relations and Communications
Dominic Frederico -- President and Chief Executive Officer
Robert Bailenson -- CFO & CAO
Dominic Frederico -- Deputy Chairman, President & CEO
Geoffrey Dunn -- Dowling & Partners. -- ANalyst
Unidentified Participant
Bose George -- KBW -- Analyst
