Hello, and welcome to the Assured Guaranty Limited Third (sic) [Second] Quarter 2019 Earnings Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Robert Tucker, Managing Director, Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you, operator. And I'd like to thank everyone for joining us on Assured Guaranty's call today. It's our second 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 contains 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 Limited; Rob Bailenson, our Chief Financial Officer; and Andrew Feldstein, CEO and CIO of BlueMountain. After their remarks, we'll 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.

Thank you, Robert and welcome to everyone joining today's call. The second quarter was very successful for Assured Guaranty with $141 million in non-GAAP operating income, new highs in key shareholder value measures, substantial new business production and a milestone in our efforts to diversify our revenue base and intelligently deployed our excess insurance company capital to the execution of one of our strategic objectives. I'll let Rob give you the details about our earnings results and our continuing share repurchase program in a few minutes. I'll start with the news we released yesterday. We have taken a significant step forward in our strategic execution by adding an asset management component to our overall business operations. This will diversify our revenue sources with fee-based income and provide an additional engine for growth in profits and free cash flow. We accomplished this by investing some of our trapped excess capital in a seasonal trend of asset management company, whose core competencies and credit culture are compatible with ours and with a likelihood for attractive returns is high. We have agreed to acquire BlueMountain, a highly regarded asset management firm, with a scale that can provide meaningful returns to Assured Guaranty. BlueMountain has extensive experience evaluating credit and managing investments and it is recognized as a top tier CLO manager. We can leverage its sophisticated infrastructure to facilitate future acquisitions in the asset management sector. And we see credit and capital market synergies with our existing financial guaranty franchise in a number of areas such as CLOs, asset-backed finance, infrastructure and healthcare. BlueMountain's top management will join Assured Guaranty, not only to continue running BlueMountain, but also to lead Assured Guaranty's alternative investment strategy. BlueMountain's CEO, Andrew Feldstein, who is also a cofounder of BlueMountain and its current Chief Investment Officer, will…

Thank you, Dominic, and good morning to everyone on the call. First, I would like to say that we are very excited to acquire BlueMountain and welcome Andrew and his team to the Assured family. We have a long history of creating shareholder value by executing our strategic initiatives, and we expect the BlueMountain acquisition will be accretive to earnings per share and ROE beginning in 2020. In the second quarter of 2019, we posted strong operating results and once again reached record high non-GAAP operating shareholders' equity of $63.48 per share, and adjusted book value of $88.67 per share. Non-GAAP operating income in the second quarter of 2019 was $141 million, or $1.38 per share, compared with $74 million, or $0.66 per share in the second quarter of 2018. Operating income increased compared with the second quarter of 2018, mainly due to the lower loss expense and higher net investment income in the second quarter of 2019, as well as a commutation loss from the Syncora transaction in the second quarter of last year. These increases were partially offset by lower net earned premiums and a higher effective tax rate. Second quarter 2019 loss expense was a benefit of $1 million, compared with an expense of $45 million in the second quarter of 2018. In the second quarter of 2019, we recorded a benefit in U.S. RMBS and an increase in U.S. public finance reserves, mainly on certain Puerto Rico exposures. As a reminder, loss expense reported in income in any given period differs from economic loss development due to the consideration of unearned premium reserve in the calculation of loss and LAE under GAAP accounting rules as well as the inclusion of economic development related to financial guaranteed VIEs in economic development. Economic loss development was a benefit…

Thanks Rob -- Dominic thank you for the opportunity to introduce BlueMountain to Assured Guaranty's stakeholders. Thank you for the confidence you've shown in BlueMountain, in our people, in our investment processes, and in our long-term prospects. Our companies reinforce and complement each other's strengths. It's exciting to think about the value that we can create together. BlueMountain has been managing clients' assets for 16 years. We have assembled a superb experienced team of investment and business professionals. Currently, we manage over $19 billion of assets and we operate in three general investment categories. We are especially prominent in CLOs with $12 billion of CLO assets. We are the 16h largest CLO manager globally. We expect that to grow to $14 billion by mid next year. We manage a number of opportunities funds. These long-duration funds invest in corporate credit, asset-backed finance, infrastructure, and healthcare. And we manage four relative value hedge funds. Many companies were interested in acquiring or partnering with us. Assured Guaranty stood out as the one with the strategic vision that most aligned with our own. We were attracted by its strong commitment to building a successful alternative asset management platform by its experience judgment and long track record in credit and most importantly, because the firms are a great cultural fit. Our relationship goes as far back as 2005 when Assured Guaranty wrapped our very first CLO. Asset management represents a valuable source of fee-based income for the company. It'll diversify revenue sources and complement the risk premiums received from financial guarantee policies. I'm also excited by the opportunity to enhance returns on Assured Guaranty's investment portfolios, always within an appropriate level of portfolio risk. We are acutely aware of the importance of protecting the financial strength of the company's insurance subsidiaries. I commit to give all my efforts and energies to add value for Assured Guaranty's shareholders. And I'm excited and proud to be aligned with shareholders through my own significant stake in the stock. Now, I'll turn the call over to the operator for Q&A.

Yes. Thank you. [Operator Instructions] And the first question will come from Bose George with KBW.

Yeah. Good morning. Congratulations on the BlueMountain transaction. Just wanted to ask I mean you noted it'll be accretive in 2020 but can you just talk about how we should think about the accretion from that over time? What's – was there some sort of hurdle rate on the capital or just kind of the best way to think about it?

Thanks. So as we look at the opportunity obviously, we have a range of outcomes for next year contingent on: a how fast we can implement the growth and further investment strategy in the organization; and two what we can achieve relative to the integration. We have a BlueMountain proposal we have an Assured Guaranty proposal and on both cases, our is being the more conservative it's accretive. And as we expect we do anticipate growth going forward and a continued expansion of our management fee revenue and therefore the accretion should only grow. Obviously we look at this investment in light of other investments and opportunities that we have and believed that this was the best course of action relative to what we could do for the Assured company net bottom line and shareholders.

And just in terms of the growth is that – he could be other acquisitions to bolt on to this? Or is it more organic when you think about them?

Bose as you know our history has been very acquisitive and we think there's going to be tremendous opportunity in both aspects of both organic growth as we launch new funds and provide additional support by our own invested balances and two where we think there will be further opportunity to consolidate the industry.

Okay. Great. Thanks. And then actually one just on the portfolio. Given the tighter spreads in the market can you just give us an update on when you think it – timing on portfolio stabilization is there any change there? Thanks.

Portfolio stabilization news?

Just in terms of your guaranteed profile in terms of when that runoff kind of stabilizes?

Okay. The total volume of new business rates, as we said we actually are optimistic that we kind of bottom out at the end of this year and therefore next year we expect to see par-over-par growth and obviously further increases in our PVP production recorded. So we're quite – quite expecting because of the severity of the runoff primarily due to accelerated refundings that now most of that is working through the company. And remember our acquisitions created a size of portfolio that was not representative of new business opportunities for a single company versus buying four and half other companies. So that also had kind of working its way through the system. So we're reasonably optimistic that 2020 will be year of growth.

Okay. Great. Thanks/

You’re welcome.

Thank you. And the next question comes from Geoffrey Dunn with Dowling & Partners.

Rob, can you get a little bit more detailed in terms of the financing of the deal? You said it's going to be funded by loans out of the three subsidiaries. But how exactly is that going to work and ultimately be repaid?

The loans as Dominic said are going to be funded out of the AGC, AGM and MAC. They'll be an appropriate interest rate associated with that. And then the fee income generated from BlueMountain will generate fee income up to the holding company and we the debt and there'll be excess funds available after we pay – as we are paying that for note we expect excess funds available at the holding company. And our expectation is that note would be paid off within 10 years.

The holding company he refers to is AGUS holdings. So AGUS holdings will make the purchase. It'll borrow the funds from the three operating companies basically utilizing their trapped capital. So there's no real impact on dividend or dividend capacity. Use that balance to buy the company hold it in U.S. holdings. So the U.S. holdings which are going to be an unregulated entity will then receive the future cash flows.

Okay. So the – really the holding company liquidity accretion is going to be the fee income net of the interest payment on the loan interest and principle.

That's correct.

Okay. And with respect to the capital of the operating subsidiaries there is no impact on the excess surplus from the loan or anything like that it's going to affect dividend capacity?

These loans – no we expect these loans to be admitted assets. And we've structured it such that they will be.

Okay. And then I know Dominic mentioned the secondary par but Rob what was the secondary par in PVP in the quarter?

Yeah I got that for you. In the quarter the secondary par was – wait hold, on the secondary PVP was $25 million and the secondary par was $327 million.

Okay. And then lastly just on BlueMountain can you elaborate a little bit more about how you can use their expertise in your insurance rep business and how your expertise can be extended into theirs? I want to understand a bit more about the expertise synergies of bringing the two operations together.

I think the synergies are more than just that. So number one the first thing is we believe we have a common credit culture. They have a proven track record of performance and so do we. And it touches some very common areas like health care, like CLOs, like structured finance. So there's a lot of duplication of that effort and I think there'll be a lot of information shared back and forth. Number two, they're going to see opportunities in their shop that fit more to an insurance scenario and we'll see opportunities in our shop that fit more into an investment scenario. So I think there's feedback there. And number three and the most important thing as we went down this path of diversification asset management, we believe we touched the same markets of the same customer base. Therefore, what was a Assured Guaranty relationship can become a BlueMountain relationship, what was a BlueMountain relationship, can also become an Assured Guaranty relationship. We are predominantly domestic say 75% guessed of the top of my head they're predominantly international 75% So there's synergies as well in terms of marketplace. So credit culture commonality of the type of business we look at. Then from an investment as from a credit both have the same basis. When you look at investment or credit, it's credit at the end of the day. And then as I said and then we also have the commonality of operations as well in terms of what we can achieve relative to synergies.

Okay. Helpful. Thank you.

You’re welcome.

Thank you. And the next question comes from Giuliano Bologna from BTIG.

Good morning and congratulations on the BlueMountain transaction. [indiscernible] a follow-up question. Do you intend...

Giuliano, I would -- we have trouble hearing you.

You need to get closer to mic or pick up your handset.

Yes. Do you intend to fund both the acquisition price and the working capital from loans? Or you -- do you intend to separate that over time?

The loans would be funded. The loans that are -- there'll be loans that come out of the insurance company, but the investments will be admitted -- will be assets from the insurance company.

That makes sense. And from a cost perspective will that be around the same cost as the investment portfolio yield or potentially higher?

Cost. What do you mean by cost?

The interest costs on the loans that you'd be taking out from the operating...

The interest costs on the loan will be a market rate interest cost based upon what an expected tenure would be.

That makes sense. And just touching on one item from the quarter, it looks like your investment income jumped up in the quarter. Is there anything that ran through that that one time?

Yes. There was I said in my commentary there was a onetime item with respect to our XXX balancing transaction which was commuted and settled and we owned it in our loss mitigation portfolio. And once that was settled, cash flow was released and the accretion of income was accelerated. That was about $14 million.

Perfect. Thank you very much and thank you for taking my questions.

Thanks.

Thank you. And the next question comes from Christian Littlejohn with Marble Ridge Capital.

Hi, guys. Good morning. Thanks for taking my questions. Just curious, how do you think about your appetite to participate in the most recent deal proposed in Puerto Rico to deal with GO and PBA debt?

The deal that was proposed by the control board?

Yes, correct.

Yes, we have no appetite. It doesn't respect rule of law, it doesn't respect constitutional priorities, doesn't respect our contractual obligations on behalf of the Commonwealth. We have no interest whatsoever.

Got it. Is it -- if and were there any negotiations ongoing? Or that's completely nonstarter for you guys at this point?

Well as you know the judge has now ruled that we have to do a new four month mandatory mediation. I believe that Judge obviously looked at the landscape and realized how far apart the given entities are and felt that if you try to move through with a plan, the amount of litigation that would ensue would basically tie it up. So therefore, there'd be no value to it. I think the judge did a very smart call here by saying it's time to get these legal principles closer and for us closer means paying attention and actually adhering to the rule of law. So obviously, we'll look forward to the mediation. We're more than happy to work collectively to get to a common resolution and we believe it's fair and respects our rights and moves the Commonwealth forward to allow to start to take care of the necessary business it face.

Got it. That make sense. Thanks. And then just one more for me Syncora one of the obvious kind of current opportunities in the market. Does this BlueMountain deal take your ability to potentially participate in that process off the table?

No. And obviously we look at the two shops kind of separately even though they come from a common pool. When we look at the opportunities to buy legacy monolines, obviously that's typically a net positive capital structure. We typically get the capital at a discount. Obviously, in BlueMountain's case, we actually put capital to work which we need to do because we're very unlevered relative to the capital we have in the organization and the business opportunities we see strictly in the financial guarantees space. We gave you the excess capital number from S&P in spite of all of our efforts to manage it down it continues to increase. So we've got to work harder to put that capital to work.

Okay. Great. Thanks

You're welcome.

Thank you. And this ends the Q&A session. So I would like to return the floor to Robert Tucker for any closing comments.

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.

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