Assured Guaranty Ltd

NYSE:AGO

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and welcome to the Assured Guaranty Limited First Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director of Investor Relations and Communications. Please go ahead.

[Robert Tucker]

Thank you, operator and thank you all for joining Assured Guaranty for our first quarter 2020 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 to the new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you are listening to a replay of this call, or if you are reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations and SEC filings, most current financial filings and for the risk factors.

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 and 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 would like to ask a question.

I will now turn the call over to Dom.

[Dominic Frederico, President and Chief Executive Officer]

Thank you, Robert and welcome to everyone joining today’s call. First, I would like to extend our heartfelt sympathies to all those affected by this horrible pandemic and also our thanks and admiration for the courage of the healthcare providers, first responders and other essential service providers on the frontline. We are all grateful for their dedication and hard work. I am also proud of the way Assured Guaranty’s people have stepped up to keep our operations running without interruption, almost entirely from their homes by implementing the remote technology and business continuity plans we put in place and have tested regularly for many years.

We have continued to write new business in both the new issuance secondary markets. We will continue to provide value for shareholders, issuers and policyholders at a time when bond insurance has never been more important than its support of the efficient function of markets. During the first quarter, Assured Guaranty’s overall insurance production was very good even though market turbulence limited market production. PVP of $51 million was 21% higher than in the first quarter of 2019 propelled by a 39% increase in public finance PVP worldwide. U.S. municipal market environment during the first quarter was bifurcated by the market reaction to the pandemic.

Until the end of February, the economy was strong, interest rates were at near our historic close and credit spreads were extremely tight. For example, yields on 30-year municipal bonds fell to a record low of 1.38% on March 9. There was robust demand and strong liquidity in the municipal bond market, because long-term municipal mutual funds took in $114 billion of net inflows during the 14 months leading up to March 2020. Then from February 24 through March 23, major equity indices collapsed by more than 30% and during the first 4 weeks of March, investors pulled out an estimated $41.8 billion net at our municipal mutual funds, which closed poor selling by the funds to cover liquidations. The 30-year benchmark yield jumped almost 200 basis points at 1 point. New issuance in the U.S. public finance market temporarily ground to a halt. For us, this meant $800 million of par of new issues that were mandated to ensure during the quarter were postponed past quarter end. Our secondary market business however has continued uninterrupted. Even with the first quarter’s generally low yields and tight spreads and the lack of issuance during part of March, we have succeeded in increasing by 22% the par amount and municipal new issues sold with our insurance compared with last year’s first quarter production. All told, across the primary and secondary markets, we insured $2.7 billion of municipal bonds during the period.

One result of the market disruption is that investors have turned more attention to credit risk. This has created opportunities for Assured Guaranty that will be reflected in future quarter results in both primary and secondary markets. And we believe these circumstances have driven home to both investors and issue orders, the value of our guarantee. Outside the U.S. public finance, most of our new business in the quarter came from international infrastructure finance, most notably through our second solar energy transaction in Spain, which was also a first transaction to be guaranteed by our new French subsidiary.

We have continued our strategy of further diversifying our international production target markets include Spain, Ireland, France, Germany as well as Australia. Although some transactions have been delayed in the current COVID-19 environment, credit spreads have widened and we continue to see relatively strong investor appetite for our product. We continue working on maintaining and expanding investor relationships and we are also seeing a growing and diversified stream of incoming enquiries in response to the greater visibility we have achieved in the market in recent years. In the UK, the chance of new budget proposes a £600 billion investment over the next 5 years into infrastructure, including railroad, affordable housing and broadband. We have no details on where private vessel will fit into this program.

We are encouraged that the current government supports significant infrastructure investments. While there are many good reasons in the current environment for investors and issuers in all of our markets to utilize our financial guaranty, keep in mind that this new business we have – this new business will have little impact on 2020 earning. This is because while we collect the majority of our premiums upfront we earned them over the life of each transaction. For example, only approximately 3% of premiums earned in 2019 related to new financial guaranteed policies rode in 2019.

Our insured portfolio was in good shape to weather this economic disruption. Three quarters of our insured exposures to U.S. municipal bonds, a sector that has a very strong track record in stressed economic environments. During the Great Recession and ensuing years from 2008 to 2013, Assured Guaranty paid claims in only 6 new U.S. municipal defaults and we obtained settlements mitigating the ultimate losses in that core. Similarly, our international infrastructure business performed very well, with only a few losses. In the structured finance market leading into the Great Recession, we declined to ensure what turned out to be some of the more highly loss severity asset classes in transaction structures of that financial crisis.

And from 2009 to first quarter of 2020, our insured structured finance portfolio decreased 95% going from $174.6 billion to $9.5 billion. Importantly, from 2008 to 2013, we will profitably cheer earning a total of more than $2.7 billion in adjusted operating income and we have been profitable each year. Looking at the U.S. public finance from 2009 newly acquired AGM through 2019, the average net losses we paid on bonds of issuers in the 50 states was less than $45 million per year. This excludes our Puerto Rico claims in the latter years of that period.

As a U.S. territory, Puerto Rico represents a unique situation. We are still in the process of negotiation and the exercise of our strong legal right, which we believe will resolve in significant recoveries based on our and the municipal market’s successful history of mitigating losses. U.S. municipalities reacted to their experience of 2008 financial crisis by generally improving their operating and liquidity positions, which we believe has even better prepared them to ride out this pause in economic activity. COVID-19 appeared after the longest recorded economic expansion during which municipal government’s tax receipts grew significantly, allowing them to improve their balance sheets and rating based bonds. Of course some municipalities are less greater than others and in these situations where revenues are materially reduced downgrades could occur, the downgrades themselves do not cause us to have losses.

Our surveillance department has closely examined and applied stress test to individual insured transactions in the portfolio sectors that we believe at the highest likelihood of being affected by the pandemic. Among those sectors, we have considered most at risk, the largest are certain transportation sectors, bonds backed by hotel occupancy taxes, stadiums and certain student housing. As a class, municipal bonds are well structured to protect bondholders, but most of our transactions containing covenants that require issuers to increase rates, fees or changes to ensure that there are charges to ensure that there are adequate funds to meet debt service requirements.

While many are also required, the maintenance of a debt service reserve fund with up to a years’ worth of debt service capacity. While we are still in the early stages of determining the long-term economic impact of the pandemic on the issuers, at this point, we – based on our review we currently do not anticipate material unrecoverable losses as a result of the pandemic. We stand ready to meet our obligations to policyholders based on our excess capital, financial liquidity, granular insured portfolio and structural protections on our guaranteed transactions. The issuers are likely to reimburse us for liquidity claims if any in short order to limit damage to the reputation, credit ratings and capital market access. The Federal Reserve and Congress have taken unprecedented steps to limit the economic damage from this crisis, including specific programs for state, municipalities, the municipal bond market and additional actions are expected.

The major infrastructure build would almost certainly lead to municipal and state bonds being issued to share costs of the federal government and we would expect to find opportunities among those issues. In the current circumstance, it is sensible economic policy for the federal government to keep states and municipalities to help states and municipalities keep police, firefighters, medical professionals, school teachers and other public employees on the payroll until it is safe to restore cash generating economic activity.

In Puerto Rico, the lock down has postponed activity in the Title III core revealing again how the Promesa process has delayed putting the island on the path to economic health as this could have all been resolved through consensual negotiations long ago. One of the lessons learned in this crisis does suggest the potential economic stimulus for Puerto Rico, because the pandemic has exposed vulnerabilities in the U.S. and global medical supply chain, a significant public and health and national security challenge that Puerto Rico can help address. It is an opportunity for Puerto Rico to help the nation, while it stimulates its own economy by bringing medical manufacturing on to American sale. The island has had a long history of producing pharmaceuticals supported years ago by federal tax incentives whose renewals set the stage for Puerto Rico’s economic decline.

Almost 50 pharmaceutical facilities still operate there and a large experienced work force is available to the industry. This is an important uncapped strength at Puerto Rico that U.S. policymakers should recognize. If the federal government can recraft appropriate incentives to reinvigorate the industry, Puerto Rico can both help address the immediate medical crisis and also provide long-term domestic capacity that could reduce the U.S. reliance on foreign manufacturers. Also, oil prices have come down dramatically and PREPA has been tasked by the Oversight Board to report by May 22 on how to take advantage of this development. PREPA has already announced that the reduced fuel costs will result in significant decreases in electricity rates.

Our asset management segment, which is still relatively a small part of our business, was affected by the market dislocation caused by the pandemic. This will likely affect our plans for new CLO issuance in 2020 the pace of which the legacy wind down funds will be liquidated and near-term capital raising. However, we believe our experience in structured finance will allow us to take advantage of market opportunities in the medium to long-term and we believe in the long-term value and returns of this business for Assured Guaranty. As a large originator of CLO assets and currently a top 20 CLO manager both in the U.S. and globally, we are well positioned in the current environment to find attractive opportunities in both the CLO and asset-backed markets. We are currently focused on the more liquid asset classes that have shown excellent credit resiliency and severe downturns.

At the corporate level, we look to prudently continue our capital management program. Unlike the experience of some other companies, we have no need for government assistance and given our excess capital position and the strength of our balance sheet, we believe the most appropriate decision is to continue to buyback shares at the current extreme discount through adjusted book value. As always, we will continue to assess and potentially adjust the level of our share repurchase program. I am confident that Assured will weather this current economic challenge and prove again the resiliency of our business model, which is designed to withstand global economic disruptions. In fact, we came into 2020 with what I consider the strongest financial position in our history with better insured leverage, less than half of what it was in 2009, an insured portfolio with a more conservative distribution of sector risk and 10 years ago, including a far smaller and well-performing structured finance sector, below investment great exposure of a 10-year or low of less than 4% of net par outstanding and far more capital and liquidity than necessary to maintain our financial strength ratings.

From 2008 through 2019, our insurance subsidiaries paid $11 billion of gross public finance and structured finance claims, but recovered nearly half of those payments through reinsurance and loss mitigation efforts. Meanwhile, throughout that time, our consolidated claims paying resources remained at $11 billion or higher. Looking at the last 5 years, Assured Guaranty has earned an average of over $600 million of adjusted operating income each year, including $400 million of average annual net investment income. Our high-quality investment portfolio and cash totaled $9.8 billion and provides far more than enough liquidity, because we are only obligated to cover shortfalls in interest and principal when they are due.

We can anticipate and plan for our liquidity needs and many of our insured transactions have designated funds available for debt service for the rest of the year. Everything I said about the strength of our company was seconded in our report, SAP released about bond insurance industry on April 3 when the pandemic had already disrupted markets. Acknowledging the significant pandemic across market volatility and the fiscal challenges ahead for all U.S. public finance sectors, S&P wrote we view the potential impact to U.S. bond insurers as somewhat low at this time notwithstanding the current macroeconomic environment, the fault of issues insured by bond insurers are not expected to be widespread. They went on to note the potential for ratings migration of some insured issues. But said, this was not expected to put stress on the insured’s capital adequacy giving the insurer’s robust capital position. I encourage you to read the report.

Let me conclude by reviewing four important points to takeaway from today’s call. First, we are pleased with our first quarter production, which increased year-over-year despite the market disruption. Second, the resulting environment may well create opportunities with higher municipal interest rates, widening credit spreads and concerns over credit driving more demand for our products. Third, we have looked carefully at our individual insured transactions in the sectors we think most likely to be affected by the pandemic economic impact and do not currently expect permanent unrecoverable losses from liquidity claims this year that we cannot easily manage. And finally, we remain committed to our capital management program subject to the availability of funds at the holding company.

For more than three decades, we are focused on building a company that will protect its policyholders and provides value to shareholders even in times like these. That is exactly what we have done and I believe the current environment will shot a spotlight on the benefits of our unconditional and irrevocable guarantee and the strength of our unique business model.

I will now turn the call over the Rob.

[Rob Bailenson, Chief Financial Officer]

Thank you, Dominic and good morning to everyone on the call. I would like to pickup what Dominic left off and reemphasized the strength of our balance sheet, capital position and business models, all of which enable us to withstand the turbulence in global markets caused by this pandemic. Even in this environment, we managed to achieve record per share highs as well as adjusted operating shareholders’ equity of $67.25 per share or $6.1 billion and adjusted book value per share of $98.02 per share or $8.8 billion.

Our financial strength and stability are supported by the quality of our invested assets in insured portfolio. The investment portfolio in cash are valued at $9.8 billion has an average rating of AA- and generates a stable stream of investment income. In our insured portfolio, over 96% of par outstanding is investment grade and with deferred premium revenue – I had little phone trouble – in our insured portfolio, over 96% of par outstanding is investment grade and with deferred premium revenue of $3.8 billion, it will generate a long-term stream of future earnings.

Turning now to the quarter, our consolidated adjusted operating income was $33 million in the first quarter of 2020, which consists primarily of an $85 million gain from our insurance segment, a $9 million of loss from our new asset management segment into $39 million loss from our corporate division which is where we would – we track our holding company results.

Starting with the insurance segment, the adjusted operating income was $85 million to $111 million in the first quarter of 2019. Part of the change in the insurance segment adjusted operating income is attributable to an $8 million after-tax mark-to-market loss on our investments in insured investment management funds. These investments are mark-to-market each reporting period with changes in fair value recorded as a component of adjusted operating income in the line items equity and earnings of investees. The market dislocation and volatility caused by the COVID-19 pandemic was the primary driver of the mark-to-market losses in the CLO and asset-backed Assured Investment Management funds in which we invested.

As of March 31, 2020, the insurance companies had collectively invested $192 million into Assured Investment Management funds and will invest another $300 million over time. We expect that adjusted operating income will be subject to more volatility than in the past when our investments were almost entirely in fixed income securities and our long-term view of the enhanced return we will receive in the Assured Investment Management funds remains positive. Net earned premiums and credit derivative revenues in the first quarter of 2020 were $107 million compared with $126 million in the first quarter 2019. The variance is mainly due to lower accelerations from refundings, which were $15 million in the first quarter of 2020 compared with $26 million in the first quarter of 2019 as well as scheduled amortization of the insured portfolio.

Net investment income for the insurance segment was $83 million in the first quarter of 2020 compared with $99 million in the first quarter of 2019. The change was primarily due to a decline in average invested balances in the externally managed portfolio as funds were deployed during the year to expand into alternative investments, including Assured Investment Management funds, which recorded at fair value in a separate line item as opposed to net investment income and to repurchase shares. The average balance of loss mitigation securities also declined as a large troubled insured transaction in the portfolio was favorably settled and proceeds were reinvested in lower yielding assets.

Loss expense in the insurance segment was down to $18 million in the first quarter 2020, with $44 million in the first quarter 2019. In both periods, the expense was primarily related to economic loss development on certain Puerto Rico exposures offset in part by a benefit in the RMBS portfolio. The economic benefit in the first quarter of 2020 was $3 million, which consisted of a benefit of $63 million in RMBS exposures partially offset by loss development of $59 million in the U.S. public finance sector, primarily attributable to Puerto Rico exposures. The net benefit attributable to U.S. RMBS was mainly related to higher excess spread on transactions whose insured debt is linked to LIBOR, which decreased this quarter, whose assets are partially fixed rate. The effect of changes in discount rates, which is included in economic development during the quarter, was a loss of $31 million, of which $25 million related to first lien RMBS.

In the Asset Management segment, adjusted operating income was a loss of $9 million. We have previously announced our strategy to transition the investment focus in business model of our Assured Investment Management platform toward its core strategies, including an early wind down of certain hedge funds and legacy opportunity funds. We had expected the restructuring to continue throughout 2020, but depending on the duration and market impact of the pandemic, the execution of our strategy may take longer than originally anticipated.

Prior to the COVID-19 market disruptions, we have made good progress in the wind down of legacy funds with outflows of $875 million in the first quarter. During that time, the funds sold $215 million of notional CLO equity, which contributed to the increase in fee-earning AUM from $8 billion as of December 31, 2019 to $9.5 billion as of March 31, 2020. We believe the effect of the pandemic on market conditions and increased volatility may present attractive opportunities for the alternative asset management industry that Assured Investment Management maybe able to capitalize on. And so our long-term outlook for the asset management platform remains positive.

In our Corporate Division, the holding companies currently have cash and investments available for liquidity needs from capital management activities of approximately $220 million, of which $28 million resides in AGL. Adjusted operating loss for the corporate division was a loss of $39 million in the first quarter of 2020 compared with a $25 million loss in the first quarter of 2019. This mainly consists of interest expense on the U.S. holding company’s public long-term debt and the intercompany debt to the insurance companies. The intercompany debt proceeds were primarily used to fund the Blue Mountain acquisition. It also includes the board of director and other corporate expenses.

The results for first quarter 2020 include a $5 million loss on extinguishment of debt related to the purchase of $23 million in AGMH principal purchased favorable pricing for a yield of 7.5%. The loss represents the difference between the purchase price and the carrying value of the debt, which includes the unamortized fair value adjustment that were recorded upon the acquisition of AGMH in 2009. The first quarter 2020 also included a $5 million write-down of an equity investment. On a consolidated basis, the effective tax rate may fluctuate from period to period based on the proportion of income in different tax jurisdictions. In the first quarter of 2020, the effective tax rate was 24.7% compared with 13.1% in the first quarter of 2019.

On a GAAP basis, we recorded a $55 million net loss this quarter. This included large, but offsetting mark-to-market adjustments on both our credit derivatives and committed capital securities, which we expect will reverse over time with no economic impact. We also had a $62 million loss to changes in foreign exchange rates of the British pound and the Europe. The FX loss primarily to premiums receivable, which represents the present value of future premium installments that have maturity dates far into the future.

Turning to our capital management strategy, in the first quarter of 2020, we repurchased 3.6 million shares for $116 million for an average price of $32.03 per share. Since the end of the quarter, we have purchased an additional $3.3 million shares for $92.8 million. Since January 2013, our successful capital management program has returned $3.4 million to shareholders resulting in a 58% reduction in total shares outstanding. As always, future share repurchases are contingent on available free cash, our capital position and market conditions. The effect of the cumulative share repurchase program on first quarter 2020 adjusted operating income was approximately $0.09 per share bringing adjusted operating income for the quarter to $0.36 per share. The cumulative effect of these repurchases was a benefit of approximately $20.03 per share in adjusted operating shareholders equity and approximately $36.86 in adjusted book value per share, which helps drive these important metrics to record highs.

I will now turn the call over to our operator to give you the instructions for the Q&A period. Thank you.

[Operator]

Thank you, sir. [Operator Instructions] Today’s first question comes from Tommy McJoynt with KBW. Please go ahead.

[Tommy McJoynt, KBW]

Hey, good morning guys. Thanks for taking my question. I hope everyone is doing well. When you think about the potential for municipalities to get downgraded on a net basis, do you kind of view that positively because of the future opportunities that it creates for AGO’s guarantee in the sense that it’s more valuable or does this strain on the cleanly insured portfolio outweighed that?

[Dominic Frederico, President and Chief Executive Officer]

Well, it’s a good question. So, you hate to say it, but typically market disruptions are normally a very – created very highly incentivized marketplace for us, because as you say, anytime you have got issues relative to credit performance, which is reflective of credit downgrades the desire or the attractiveness of our insurance obviously increases both in value and visibility. And therefore we expect to see more demand. And if you have read any of the recent articles I am not giving you Mike, but if you have read some of the recent articles there has been a consistent revised improved forecast for insurance penetration. So we have been averaging around say 6%. I have seen articles and that referred to a potential penetration throughout the remainder of the year, obviously once markets recover like at the 10% level obviously in the same token as spreads widen and rates increase, we get paid based on that service. So not only we see more demand for your product, you get to charge more premium, but typically in this environment it really is a benefit even though it's off of a negative situation the other thing I would say is remember downgrades within the investment grade classes are not significant capital users it's only after a issuer gets downgraded below investment grade that there's a significant bump in capital and even that in percentage terms so based on excess capital position and as SAP noted in their report they even believe that there will believe that there will be some downgrades that shouldn’t have any impact whatsoever on the performance of our portfolio or our rating so you're right, in a way, disruption causes opportunity, disruption will cause increased demand, better our pricing so and they also increase in rates increases the return on our portfolio so we get benefited on both sides of the balance sheet and much like in 2008, 2009 as you can see based on the numbers I have quoted in my speech our performance is spectacular during those periods as well much in the asset management area as well when you had capital and there is opportunity you guys take advantage of the dislocation in prices.

[Tommy McJoynt, KBW]

Got it. Thank you. And does your outlook anticipate some sort of funding help from the federal government like you mentioned a major infrastructure bill or is that kind of – wouldn’t that be kind of icing on the cake?

[Dominic Frederico, President and Chief Executive Officer]

Well, we don’t count on that relative to what we look at but it is unique and that as you think about it in 08,09 the governments response was typically to the financial institutions and large corporations and at that time we had tremendous amount of consumer exposure through our RMBS and other exposures we look at us today the portfolio was a lot smaller our insured leverage is way down our structured finance I mean at a $140 plus billion back in 2009 to be under $10 billion a day really gives you the impression or gives you the specific governance of how little we have exposed but yet the government response in 2020 to their credit has been across all borders right they are going to the consumer they have gone to the municipalities they have gone to the financial markets so the amount of government aid which is significant seems to be better spread which to me will also kind of limit the depth of the down side like I said go back to 08 and 09 and look where the government provided support where it is today I think that response is obviously for us better appropriated across all exposures in the portfolio.

[Tommy McJoynt, KBW]

Thanks. And then just sneak one more in here regarding Blue Mountain obviously there was a plenty of volatility around March and April did that cause enough kind of shake out in that business where you feel like the opportunity for Blue Mountain has improved or was it not stressful enough I guess you could say?

[Dominic Frederico, President and Chief Executive Officer]

Well you can say two things one if you look at the quarter and understand the quarter as shows some impacts of the market and the pandemic but most of the quarter changes are short falls are really timing or temporary so obviously in the asset management we have great expectations for where that is going to deliver for assured guarantee however, in the current environment they weren’t able to et as much as a legacy assets sold they weren’t able to issue as much CLO opportunity they weren’t able to raise as much funds as we talked about last year at the end of the year we had to carry expenses that although we identified to be expenses related to the run of business and therefore we will follow off we are paying some severance and some retention we couldn’t accrue that at year ends that’s going to bleed in through 2020 which we would hope we would have been able to put in 2019 all of those things though are not permitted declines the same thing with the mark to market with the accounting and I am a former accountant even though I won’t admit that in public right they are now pushing for current value and everything where current value has that one problem where you have these market disruptions you have got a price to the current value although you don’t believe that is the long term economic value though it doesn’t reflect the long term economic returns and you expect but you are stuck with the market loss so at the end of the day as I look at our results to me the delay in say recognizing refunding that catches up. We are not a consumption business in other words the sale that we missed in March does come back to us, we don’t lose it, right, people that in effect plan and budget and approve financings need to get those financings accomplished for the reasons that were originally putting in their budgets and plans. So we are very different in that regard. As I talked about on my speech, most of our 2020 earnings are already known. So in terms of protection in 2020, we are in pretty good shape, number two, our demand should increase and number three, we don’t lose clients, and most of the impairments we placed in the first quarter are really based on mark-to-market temporarily or just delayed activity that is fully expected, but doesn’t really affect the long-term economic value or returns of the company.

[Tommy McJoynt, KBW]

Right. And just in terms of the number of CLO managers that kind of surge to the competition, I am saying many of them are subscale, but did you get the sense that March and April created enough volatility that there should be more consolidation than you expected pre-COVID?

[Dominic Frederico, President and Chief Executive Officer]

I will let Andrew answer that since he is our expert on that environment.

[Andrew Feldstein]

Okay, I think that’s a good insight. Look, there is 125 CLO managers in the world, 30 of them with more than $5 billion in AUM and those 30 control maybe 60%, 65 % of the market. And it is the case that the smaller independent managers are going to find this environment more challenging. And I do think that gives us an opportunity, an acquisition opportunity whether it’s whole businesses or CLO contracts, because we are in a stronger position just the beginning scale of our CLO business with $13 billion under management and then of course the greater stability and access to capital that we get because we are part of the Assured family. So I think you are right, I think your insight is right. And I think over the next 9 months either organically or through acquisitions, the struggles of smaller independent managers are going to create opportunities for the larger ones.

[Tommy McJoynt, KBW]

Great. Thanks for your time.

[Dominic Frederico, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Josh Esterov with Credit Suisse. Please go ahead.

[Josh Esterov, Credit Suisse]

Hello, good morning. Appreciate you taking my question. I see some of the slide information that you published that, of the 6,500 direct U.S. public finance obligors in the insured portfolio, you expect roughly 10 to see claims in excess of recovery, but if you put the recovery portion aside for a moment, could you talk about where you see at least temporary disruption that could lead to some level of claims payments in the foreseeable future, is that still mostly limited to the transportation, student housing and some of the little pockets of exposure you mentioned earlier?

[Dominic Frederico, President and Chief Executive Officer]

Well, as we said we were actually – we review the entire portfolio annually for every risk and of course certain risk and more attention of that, that are looked at either quarterly or monthly, some like Puerto Rico probably daily. So we are constantly calling our portfolio to understand the risks. We are constantly reaching out to the issuers to make sure we understand the company expedition. So once the pandemic hit, we immediately went back to the portfolio, basically divided it among high risk, medium risk, low risk, went out to actually speak to the high risk people, which is used to identify transportation, hotel occupancy, student housing or some of the more critical ones, healthcare. And as we looked at that portfolio and really try to ascertain first, what does the total debt service do in the next 6 to 12 months as well over the next 2 years, what is the availability of funds at the issuer either based on cash on hand or debt service reserve funds and try to map out where we thought there could be some potential request for payment and the numbers are incredibly small. These are very well-engineered, well-protected typically have the availability of debt service reserve funds. So, even as we look through the liquidity payment, so ignoring the recovery right it was an incredibly small number and something usually absorbed within the organization is available cash and cash flow. So, we continue to call that, we continue to reach out to our issuers to make sure we understand the portfolio. We try to get updates as frequently as possible, obviously, we just had our board meeting went through a full kind of dissertation with the board on each credit, each risk. So we are in very good shape. And historically there has not been a lot of defaults in the municipal market. You go back and look at the published data unlike SAP and Moody’s, something like basis point of ultimate loss per year in the municipal marketplace, why because they rely on the market access. I mean, I will get like some large kind of headline benefits, I think they can behave differently, but there is always a long-term cost to it. Most people want to and do pay their bills and we will restructure or negotiated or provide additional protection to make sure they can maintain that. Remember in everybody’s budget, there is what I will call discretionary spending. So as you see revenue shortfalls even before you start tapping reserve funds etcetera, you just eliminate CapEx or some other discretionary funds to make sure that you can make the balance of payments relative to the service, because that’s a critical component. People do not want to get downgraded and in most cases in our experience as part of the downgrade typically results in the issuer paying the debt service, because they don’t want the downgrades and have that additional cost or lack of market access put on their backs.

[Josh Esterov, Credit Suisse]

I appreciate that. That’s helpful color. Thank you very much. I hope everybody stay safe.

[Dominic Frederico, President and Chief Executive Officer]

Thank you. Please everybody stay safe.

[Operator]

And our next question comes from Giuliano Bologna with BTIG. Please go ahead.

[Giuliano Bologna, BTIG]

Hi, good morning and thanks for taking my questions. I guess starting off on the new business front, is there any way of thinking about pricing trends, obviously, as credit spreads are wider, you can usually charge more and also as there is concerns about credit, you can charge more. Is there any sense of perhaps the magnitude of the pricing changes that you might be able to capture in the near term?

[Dominic Frederico, President and Chief Executive Officer]

We don’t really give you that number in that detail. I can tell you that pricing has improved across the board and someone might say well, hang in a second, let me go back and look at your par win in the first quarter against premium versus last year down, only because there is a little credit in last year that was significant called Chicago, it was part of their refunding that really skewed the first quarter number rate wise last year, but on average, the rate is up reasonably and I don’t want to give you a number, but it’s up significantly in the end of the first quarter and we expect that to continue to through at least the next few months and not the remainder of the year.

[Giuliano Bologna, BTIG]

That makes a lot of sense. Then thinking about the investments into – the investment management funds, you have invested a $192 million so far and the target is $500 million, is there any sense of timing around those investments or how fast you continue investing?

[Dominic Frederico, President and Chief Executive Officer]

Our Chief Investment Officer will answer that question.

[Andrew Feldstein]

Yes. The pace picked up a little bit in March and then continued in April and it was really because opportunities in the market arose. So, I don’t think we will continue at the pace that we saw in April. We do expect credit markets are going to normalize a little faster in this crisis than they did after 2008. Two reasons, first unlike 2008, the banking system is healthy. We don’t have a problem with our financial transmission system. It’s a different kind of crisis, worse in many ways, but better in that way, better and the banking system is sound. Second, the response from the public sector has been much quicker and much larger in this crisis and that’s both from the Fed and from fiscal stimulus programs. So the duration of the opportunity to make the kinds of investments that we did in April May slow. So I don’t think we will keep up that pace, but we do expect that by the end of the year or sometime in the beginning of next year we will have deployed that capital.

[Giuliano Bologna, BTIG]

That’s great. Thank you for that. And then just one quick follow-up I guess switching back a little bit to the insured portfolio for a second, one of the things that’s obviously top as lot of people are asking about exposures and specifically for as an example the New York MTA came up. And I think you know what [indiscernible] missed was like probably a 7x or 8x coverage than the New York MTA from because it’s a revenue bond and you have a lot of leans on revenues, is there any sense within the transportation portfolio of what the coverages when you start looking at a lot of the revenue coverages in those deals?

[Dominic Frederico, President and Chief Executive Officer]

Well, the transportation portfolio is one of the portions of the portfolio that benefits the most from structural protections and that’s in two regards, one cash on hand we do a current sweep of cash on hand now what the available funds are and two debt service reserves. So, as we looked at the airports, MTA, etcetera, the debt service reserves are significant, then we will pay claims or pay debt service for a minimum of 6 months, if not 12 months. Obviously, MTA is kind of a special circumstance, where the revenue box only accounted for around 50% of its total revenue relative to the ability you would expect is on paid debt service. We have a gross revenue pledge on MTA, which makes it obviously even higher protected. I think they were to go on record saying that bankruptcy is not an issue and they will continue to fund all payments.

[Giuliano Bologna, BTIG]

That makes sense and I appreciate that additional color and perspective there. I will jump back into queue. Thank you.

[Dominic Frederico, President and Chief Executive Officer]

Thanks. Good to see you and good to hear you.

[Operator]

And our next question today comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

[Jordan Hymowitz, Philadelphia Financial]

Thanks, guys. Couple of questions. You continued to buyback stock even after the quarter, can you confirm that there is nothing in terms of state authorization or anything that would prevent you from buying back that $500 million this year is needed?

[Dominic Frederico, President and Chief Executive Officer]

Well, remember, during our buyback is composed of two portions, right, our ability to buyback with the availability of funds. One is what is created normally out of the operating companies subject to no approval process by the notification and the payment of dividends and two, to top it up to the level that we like to get to on an annual basis we typically rely on special dividend. Obviously, in today’s environment, we didn’t expect that they are going to be a little hazard to approve a special dividend. So that portion of the funding will have to be delayed at some point in time. Obviously, in my remarks we are committed to capital management. We believe the strength of the balance sheet, the granularity of the portfolio, the protections that are implied therein still provide us that opportunity and then of course add that to the significant discount that’s now currently available to us in the stock. And we did some goofy numbers so people especially the accounts like prepare the numbers, so I will give them to credit. If you look at where the prices versus where we anticipate the price to be for this relative to the stock authorization, we are going to probably still buyback more shares than we would have had in the original authorization of the share price, not reflected in the volatility in this current pandemic. So bottom line is we still do require special dividends at some level at some point in the year to top up the funding that we can accomplish it through other sources, like borrowing if you wanted to do that. So, all things are on the table for us. Obviously, let’s say we are committed to the program. We believe we are in great financial condition to allow us to do that and just a matter of getting the available funds with the holding company to basically execute the strategy where we are at today.

[Jordan Hymowitz, Philadelphia Financial]

And second is do you still anticipate the portfolio flattening this year in terms of all the decline?

[Dominic Frederico, President and Chief Executive Officer]

That’s a great question. Obviously, we have looked at 2020 as the year of the balance, right and obviously with the market disruption obviously there has been some delay. It really depends on when the recovery begins, when these shoppers at home are listed, when normal becomes more normal if there will ever be a normal. So, having all those caveats, but as I said, the nice thing about our situation is we typically don’t lose the customer, it just delays the customer. So, whether our hopeful balance in 2020 goes to the first or second quarter of 2021 and then I think it makes much difference. I think we see the track, we see the trend and we know that the acceleration of the amortization of the portfolio by and large has run its course. So therefore – and we know we have got good activity across all of our profit lines in the current marketplace where we are really impressed by the number of inquiries we are getting across the structured finance and international infrastructure areas. Obviously, the domestic municipal market is more or less a slow market. They are seeing a fundamental demand all the time there, but we still see an increased interest in insurance anyway because of the current volatility. So if things work out well, the recovery is deeper than what people think and markets normalize I think we will get the balance in 2020 – 2021 because of the pandemic.

[Rob Bailenson, Chief Financial Officer]

I also want to add, Jordan, if you look at the last – the year end numbers our year end EPR was greater than the prior year. So, we did increase our store of earnings at the end of this year – at the end of last year.

[Jordan Hymowitz, Philadelphia Financial]

Okay, thank you.

[Dominic Frederico, President and Chief Executive Officer]

Thanks, Jordan.

[Operator]

And our next question today comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

[Geoffrey Dunn, Dowling & Partners]

Thanks. Good morning. Jordan basically did the punch on the buyback question, but Rob, could you just give me the breakdown of the primary, secondary new business this quarter from munis?

[Rob Bailenson, Chief Financial Officer]

Sure. Secondary PVP for the first quarter was $9 million versus $22 million last year and Dominic did mention there was a significant transaction last year, which was Chicago, that’s the delta for the difference significantly and the par was $230 million for the first quarter of 2020 versus $338 million in the first quarter of 2019.

[Geoffrey Dunn, Dowling & Partners]

Okay, that’s all I got. Thanks.

[Dominic Frederico, President and Chief Executive Officer]

Thank you.

[Operator]

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to the management team for any final remarks.

[Robert Tucker]

Thank you, operator. I would 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. You may now disconnect your lines and have a wonderful day.