Good morning, and welcome to the Assured Guaranty Second Quarter 2018 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, Investor Relations. Please go ahead.

Thank you operator. And thank you all for joining Assured Guaranty for our 2018 second 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 a 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, 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 the reconciliations 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 will open the call to your questions. As the webcast is not enabled for Q&A, please dial in to the call if you would like to ask a question. I will now turn the call over to Dominic.

Thank you, Robert, and welcome to everyone joining today’s call. In the second quarter of 2018, Assured Guaranty recorded its highest quarterly gross premiums written and present value of new business production, or PVP, since the acquisition of AGM in 2009. Gross premiums written totaled $393 million, and PVP totaled $454 million, largely because on June 1st we closed the previously announced reinsurance transaction with Syncora. This makes it four consecutive years in which we increased our future earnings power by executing one of our core strategies of acquiring the insured portfolios of our former competitors. AGC assumed substantially all of Syncora’s insured portfolio, and AGM commuted the reinsurance on a book of business it had previously ceded to Syncora. We will also, for a fee, administer the reinsured book on behalf of Syncora. Unlike our other legacy monoline transactions, this one has limited impact on current-year earnings, but the $391 million of PVP it contributed will benefit future income and enhance the value of the company for many years. At the midpoint of 2018, Assured Guaranty’s value per share is higher than ever, whether measured by our shareholders’ equity per share of $60.52 or our key non-GAAP measures, operating shareholders’ equity and adjusted book value, which are $58.60 and $82.83 per share, respectively. Our capital management program continues to be an important strategic objective and a driver of shareholder value. Year-to-date, we have repurchased 8.3 million shares at a total cost of $300 million, at an average price of $36.11 per share. With our Board’s new $250 million share repurchase authorization, we are currently authorized to repurchase another $298 million of shares. In terms of new business, direct new business production has been constrained this year by reduced municipal bond issuance, which is due in part to lower refunding…

Thank you, Dominic, and good morning to everyone on the call. As Dominic mentioned, we had another successful quarter. We posted our highest PVP in 10 years due largely to the Syncora transaction, which also contributed to the increase in ABV. Unlike our previous business combinations where we acquired legal entities and recognized both immediate bargain purchase gains and future earnings, the Syncora transaction was structured as a reinsurance and commutation agreement. As such, the net premium earnings related to this transaction will be recognized over the expected term of the acquired book of business. The consideration for the Syncora transaction was $411 million comprised of $363 million in upfront cash, and approximately $48 million in present value of future installments, discounted at 6%. In exchange, we assumed $11.3 billion in new par and reassumed $1.2 billion of previously ceded par. Of the consideration, $391 million was attributable to PVP on the assumed component, and $20 million was attributable to the commutation component. The assumed business included 15 below investment-grade transactions with net par of $336 million and expected losses of $83 million, assuming a 6% discount rate that is consistent with the PVP discount rate. On a GAAP basis, which uses risk-free discount rates, the corresponding expected loss is $131 million. Substantially all of the assumed expected loss relates to RMBS transactions. While the reassumption component resulted in a small upfront commutation loss, it is a net positive to ABV as the reassumed book contributes to our future premium earnings stream. The cumulative effect of this transaction was a benefit to ABV per share of $2.25. The reinsurance structure is yet another way in which we have been able to achieve our objective of acquiring legacy financial guaranty exposures. Turning to our quarterly results, second quarter 2018 operating income…

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Bose George of KBW. Please go ahead.

Hi, good morning. I just had a follow-up question on the other comments earlier on the agreements earlier this week between PREPA and some of the bondholders. Just given it was whatever, 30-ish percent of the bondholders, what happens next? Do they like – what – is there a certain threshold after which it goes to the court? And is there a level where you have to do something about it?

So there are specific requirements within PROMESA in terms of how a by class can work. So first thing you have to have is 50% of the available class vote, more than 50 % vote. And then of the class that votes, you have to get 67% of the vote. Obviously, with the monolines holding roughly 31% of this class of vote, you can start to work the numbers and figure that it'll be very tough to have a vote of an adverse decision that we'd be able to carry with our positioning of having 31% of the total class. Number two, that still has to deal with our lien on the revenue of the utility. That has to be dealt with beyond betting on a specific debt class. So we believe our legal rights are very strong both relative to the revenue lien and then, obviously, our position as a significant percentage of the class that's currently resolving or trying to negotiate a settlement.

Okay, that’s helpful. Thanks. And then actually just switching over to the level of the refunding activity this quarter, is that now kind of a good run rate going forward, do you think?

I think it was still elevated this quarter from transactions that actually were advanced refund to last year but needed to actually find documentation to make sure that it was legally defeased. So I would say that the run rate will be slightly lower for the next two quarters.

And Bose, the easiest thing to do is go look back to 2008, 2009, 2007. Remember, these are typically refundings that are hitting the 10-year call. And if you remember, production volumes, they peaked significantly in 2008, started to decline in 2009 and then precipitously fall based on kind of the revised market of zero interest rates and 6% penetration. So always look backward in time to time you're looking forward.

Okay, that’s helpful. Thanks. And then actually just one on the Syncora transaction. The cash from that transaction, it goes to the insurance sub, right? It doesn't do anything for excess capital, is that, right?

Correct, it goes right into the AGC.

Okay, great thanks.

But it does increase the investment income…

But it does increase – well, yes, I was just going to say but it will increase its investment income, obviously, as it gets deployed. And if it increase its investment income, you will – you increase the available – the amount that we could divide out [ph] from the insurance company.

Okay, great. Thanks.

Our next question comes from Michael Temple, Investor. Please go ahead.

Yes, good morning. Couple questions. And obviously, Puerto Rico is front and center. I can more than appreciate your frustration and anger over the lunacy, if you will, of the PROMESA board. Back for all your frustration, the stock price has had a very nice run-up here in the last month or so in anticipation of or in reaction to the latest PREPA restructuring news. So a couple of questions arise. First, is this a template – even though you are far from having settled with the government, is this a template that would allow investors, analysts to look at your HTA exposure, PRASA, GO exposure and simply extrapolate that if PREPA is headed towards some kind of consensual restructuring and obviously that's going to take some time, that approximates the figures that have been bandied about or perhaps better, that similar recoveries could be in the offing in the coming 18 months or so for these other exposures that you have?

Okay, you're going to stop there or are you going to ask me the second part?

I figure that will give you a mouthful to reply to.

Okay, anytime you're talking about Puerto Rico, it always gives me a mouthful as you can well imagine. So let's go back. Look, the RSA, the original negotiated transaction relative to resolving PREPA's debt crisis way back when it was a template. This was kind of more or less the form, so let's not get confused. Although it sounds different, it takes virtually the same form in terms of the surcharge they put on electricity bills that allows for debt service repayment. And it's just the amount, the volumes and whether you get a Class I or Class II security and how secure those securities are. So the template has always been there relative to consensual negotiation. Obviously, as we look at the entire environment, what do we know? We know that PROMESA came out with the specific requirement to respect constitutional priorities and contractual liens. We also know that the board is supposed to fix or at least get a good handle on the financial activity prior to moving into solutions. What we have today is no fix whatsoever on any operation, both fundamental or financial, and yet we moved ahead and certified plans. And now with a 13-page qualified owner's opinion, tells you the accuracy of the financial statement, therefore, the basis for which these calculations are derived from is pretty weak. Yet the board still went on and certified, and a judge also accepted those filings in the court. So it tells you that something is not working. However, pressure is now building. You're getting court cases that are just – cumulative; I think the court cases today are over 50. So think of it. For a bill that was supposed to – or a law to really minimize the amount of legal activity, litigation and the…

Fair enough. Regarding capital management, given your confidence in the ultimate resolution to your favor with Puerto Rico, and given there's still relative undervaluation of the stock against the various metrics of shareholder value, I'm just curious, is there room or scope for the consideration of increasing your share buyback, especially in light of, as I said, even though you're not particularly happy with it, at least two somewhat positive steps forward with the COFINA and now the PREPA restructuring activities? And again, acknowledging that they're not what you think they should fully be.

No. And remember that when we set out on the capital management strategy, we set an annual target. And we said that annual target is going to be based on external factors. And in these most recent years, we've also talked about that to achieve external target or this expected target, we will need the cooperation of a couple of parties and, most importantly, the New York DFS, to approve special dividends annually that allow us to top up the capacity of the operating subsidiaries' dividend capability so we get to the level that we're looking at. As we look at today, remember, first and foremost in the capital management strategy, in the defense of our high ratings so we're able to continue to still actively produce and negotiate and execute on our transactions in our core competency space of financial guarantees. Two, we do look at Puerto Rico as a potential benefit or detriment relative to those amounts and those arguments and especially when we get to special dividend. Three, as you know, we have other plans relative to capital usage, and we have to evaluate those, both in the portfolio acquisition as well as alternative investment space acquisition. So we set a goal annually. We work to achieve that goal annually. We examine all external conditions that would influence the annual target and we believe that annual target was the right amount and I think over history, it's proven itself to be pretty reasonable and I think it provides the appropriate shareholder value without trying to go into a acceleration in any one given year to the detriment of a potential future year.

Okay. And then final question. As you highlighted, the Syncora transaction now marks the fourth consecutive year in which you've made a strategic acquisition of a legacy competitor. Does the outlook continue to look reasonably good for continued such transactions? I know that there's not as many birds sitting on the fence anymore, but how would you assess opportunities going forward after completing the Syncora deal?

Well, I think there's something important the call over notice, right? So the Syncora deal represents another type of transaction we can use to acquire legacy portfolios. As you'd pointed out, typically we've done it through acquisition and acquisition has its own characteristics. As we look to the remaining portfolios, there are complications. Either there's credits we don't like, there's the complicated capital stream that really can't assess or be able to acquire. So this provides us another tool in our chest that allows us to continue the consolidation of the portfolios. And of course, as you know, there's at least two major portfolios left. We believe those companies are further along the line in realizing whatever the future plans might hold and how they have to deal with the regulatory capital requirements. So we think the environment is very fertile, very opportunistic. We continue to pursue those opportunities.

Thank you very much.

You are welcome.

[Operator Instructions] Our next question comes from Geoffrey Dunn of Dowling & Partners. Please go ahead.

Thanks good morning.

Good morning.

Dominic I want to understand the RSA, your settlement around this new RSA. It doesn't sound like a positive to me. It sounds like it's a weaker version of the original. It's moving forward without the fiscal reviews that you, as a company, have repeatedly suggest needed to be done. But the sentiment on The Street seems mixed, positive or negative. But to me, it's sounding negative from your commentary. Can I just clarify what your opinion is?

Sure. I would say it is not negative. So hopefully, that disarms that. So think of it, Geoff, they were 85% in unsecured type structure, they are now getting 67.7% in a secured type structure, and a 10% hub note. But the hub note, I have to tell you, when we looked through the information, it's based on the current projections and you know the government's been very, very conservative in their projections, they make the case look worse than it is. I have to say it's got some value. Also, it carries a high coupon rate. So at the end of the day, when you think about for us, we have to pay debt service with regardless of the proceeds we receive, it would have to go out. So there is some value there. So don't give me negative. And remember, if you try to value the 77.5% against the 85%, depending on the coupon and the value of the Class B share or whatever you want to call it, it's probably a push. So for them, God bless them if that's the deal they want, go ahead and take it. And I think that's a positive step. Any move towards a consensual settlement has to be considered positive based on the current stance of the board, who's been absolutely ignoring every requirement, every law, et cetera. So for some recognition that a bond holder, a secured bond holder has some right, God bless them, it's groundbreaking in my eyes, right. So I don't want to undersell it. And I think for those folks that take that deal, I'm sure they're very happy with the deal, and I could construct the fact that says this is probably as good if not similar to what they had been in the past. Now the government has made all sorts of claims, but be careful when you look at the claims. They're talking about debt service over a specific period of time. Every deal has always been putting debt service more to the back end. If it's expensive structure, obviously, by definition, the first 20 years come under a different level of capital or cash requirement. Okay, those things that always be engineered as part of any negotiation. So it seems similar to me, it’s representative of at least the recognition of rights. There's a positive step forward. Obviously we have the secured lien, we’re a little bit different creditors say the least, and this argument. Of course, we'll expect as we continue to negotiate, as we have across all the borders try to get to consensual agreement, a deal that makes sense for us.

Then a naive question, who is the oversight on the PROMESA OB?

Congress last time I checked. And really, obviously, the judge should be kind of the on-site oversight to say why do I accept his fillings and Congress should be the true oversight because they're the ones that specified the law that created this thing.

Alright. And then last question. In your commentary, you were talking the most recent CE filed against the constitutionality of the OB appointments. Did you say that that has already been ruled on and effectively that puts you on track to join the appeal?

Yes. So remember, last week, Judge Wayne, or it was a week before, I lose track of time, ruled that because she believes the Oversight Board is territorial, in effect, people and not Congressional people or federal people, that the appointment clause doesn't matter. And of course, if you also read that same day, another judge came out on a different claim against the federal government that ruled exactly the opposite that said the control board are federal employees, therefore the federal government is responsible or it could be responsible to be very legalistic in my description. So you've got two conflicting opinions, which, for us is great. Because if the idea is that this court wants to run one way, at least there's another court that says, no, there's a possible second way to go.

And that's kind of where I was going with this question. So what's the next step? I mean, I think the other one was the Tucker Act challenge, then you had Judge Swain's ruling. Now that goes to the appeal court and basically those two kind of conflicting rulings will then be resolved? Is that the next step?

Right now, you've got Swain basically denying the suit from the constitutionality of the appointment of the Control Board. That will be appealed within that court to the appellate, which is the appellate court in Boston. The First District or whatever – the First Circuit court in Boston. So that's where that goes next. So they'll schedule the presentation of arguments. They'll set a court date, et cetera. And that'll get appealed at that level. If there's still conflict there, then depending on what that court does, it either attempts to go higher or it gets resolved there. So that runs its own a track. The other court runs its own track as well. And they don't, at this point, meet at the top until somewhere down the road.

Okay. Alright, thank you.

You’re welcome.

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

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.