Assured Guaranty Ltd
NYSE:AGO
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Assured Guaranty Ltd
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Good day everyone, and welcome to the Assured Guaranty Limited 2017 Fourth Quarter and Year-end Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded.
I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communication. Please go ahead.
Thank you, operator, and thank you all for joining Assured Guaranty for our 2017 fourth quarter and year-end 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 the replay of this call, or if you are reading the transcript of the call, please note that our statements made today and 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.
This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures, 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. [Operator Instructions].
I will now turn the call over to Dominic.
Thank you, Robert, and welcome to everyone joining today's call. In 2017, Assured Guaranty demonstrated once again that our long-term vision, well conceived strategy and skilled execution can create impressive growth in the value of our Company.
We earned $661 million in non-GAAP operating income increased our non-GAAP adjusted booked value to $9 billion for the first time, further advanced our financial strength and broaden the scope of the Company all while paying substantial claims to protect insured bondholders.
Our 2017 accomplishments include, our greatest annual dollar increase in non-GAAP adjusted book value per share, which ended the year in a record $77.74 up 70% from year earlier. A record year-end non-GAAP operating shareholders' equity per share of $56.20, 13% higher than year earlier.
The return to shareholders of $571 million of excess capital through $70 million in dividends and repurchases of 12.7 million common shares, a 35% annual growth and the present value of new business production of PVP which reached $289 million to highest annual amount since 2010.
A widening of our leadership in the U.S. municipal bond insurance market guaranteed more than 58% of insured bond sold. The completion of our acquisition of the European Arm of MBIA Insurance Corporation, which generated $57 million of after tax gain and increased non-GAAP adjusted book value by $322 million at the acquisition date.
Our first direct investment in an asset management firm as part of our strategy to identify alternative investments that complement our existing financial guarantee business provide accretive returns and complement our core strengths, and the continued success of loss mitigation efforts, one of our key strategies including a major RMBS settlement in the fourth quarter for a pre-tax gain of $105 million.
In new business production, we saw a significant contributions from all three of our financial guaranteed markets, U.S. Public Finance, International Infrastructure Finance and U.S. and International Structured Finance. And we increased overall PVP for the fourth consecutive year.
We accomplished this in the year of continued low interest rates, exceptionally tight credit spreads and disturbing headlines about the plate of the Puerto Rican people and the illegal behavior of the Puerto Rico Government and Oversight Board.
In the primary municipal bond market, we continue to lead the industry in terms of both PAR and the number of transactions insured. Issuers continue to increase their use of our insures on larger deals attaching AGM Insurance to 23 new issues with $100 million of more of AGM insured PAR.
We also lead the industry in a number of smaller transactions with AGM And Mac guarantying almost 400 bank qualified issues. Importantly for the second consecutive year, PVP generated in the secondary market was in the vicinity of 30% of total U.S. public finance PVP.
In 2017 we insured approximately $1.7 billion of secondary market PAR and we count all of our 2017 U.S. public finance business including transactions of both primary and secondary markets Assured Guaranty generated U.S. public finance PVP of $196 million a year-over-year increase of 22%.
On the international side, Assured Guaranty's performance was even more noteworthy during 2017. International Infrastructure Transactions generated $66 million of PVP, $14 million more than in the previous two years combined. The transactions we closed show we have returned to being an important player in international infrastructure capital markets, particularly in the United Kingdom.
We closed three transactions in the UK senior housing sector where we see ongoing opportunities and ensured a 261 million pound refinancing for St. James Hospital in Leeds one of the largest teaching hospitals in Europe.
We also issued a long-term financial guarantee that improves the debt service liquidity for bonds issued to refinance euro tunnel, introducing Europe an application of our guarantee that has a potential enhance long-term debt service liquidity for many other issuers.
It is also interesting to note that in 2017 we insured two transactions located outside of the UK which further reflect the recognition, value and acceptance of our guarantee in the European market. Because Internationally Infrastructure Transactions often take a long time to complete, transaction flows tend to be less regular and the timing of closing is not easy to predict.
It is therefore encouraging that we have generated PVP in the international market for nine consecutive quarters. While we are still likely to achieve some volatility in the international production, it is clear we have the value proposition and acceptance to succeed in this market.
In January 2017 we expanded our international presence by completing our acquisition of MBIA’s European operating subsidiary, which we renamed Assured Guaranty London. The acquisition added approximately $12 million of primarily European infrastructure and utility transactions to our insured portfolio.
In time, we believe we can ultimately simplify our international corporate structure and enhance our market visibility by consolidating all of our European insurance subsidiaries under the brand name of AGM’s UK subsidiary Assured Guaranty Europe.
Our structured finance business was also productive in 2017 generating $27 million of PVP in a variety of market sectors. It is important to note that this figure excludes a significant amount of PVP that was generated from our municipal structured transaction that was executed by the structured finance group, but accounted for under the U.S. public finance sector.
The aviation sector was also a focus where we executed a number of residual value transactions on aviation equipment and we are also focused on the capital management solutions for various institutions such life insurances or financing and risk transfers for regulatory compliance.
Additionally, we wrote secondary market policies of some asset securitizations to demonstrate the value of our guarantees in the asset-backed market where we do see additional opportunities in consumer loan, auto loan and home business securitizations. This secondary market program has stimulated interest in our guarantees in the primary asset-backed market.
During the year, S&P Global ratings conducted its comprehensive annual review of Assured Guaranty and reaffirmed once again AA stable financial center rating [indiscernible] to our principal operating subsidiaries. Separately, Kroll Bond Rating Agency reaffirmed its AA plus stable rating for MAC, its AA stable ratings for AGC. And in January 2018 a AA plus stable ratings for AGM.
As for Moody’s, we have well disputed there is objective methodology and their industry guard for the quantifiable improvement in our financial strength. Given AGC’s AA stable ratings from both S&P and Kroll Bond Rating Agency, we no longer consider a Moody’s rating is center for AGC and ask Moody’s to withdraw its AGC rating.
Our continued financial strength, results from our fundamental credit discipline, combined with continued execution of our alternative strategies, but with the 10 years from 2008 to 2017, we have maintain our total claims paying resources at approximately $12 billion.
Which is a remarkable achievement considering that during that period, we paid out more than $7.1 billion, comprising $4.4 billion in net claim payments to keep insured investors hold, there were $535 million in dividend to shareholders and $2.2 billion to repurchase 42% of the common shares outstanding at the beginning of our repurchase program in 2013.
Acquisition of legacy bond insurers or assuming their insurer portfolio to reinsurance resulted in large and immediate increases to the size of insured portfolio. Which is equivalent to writing new policies in the same PAR of amount.
Such acquisitions as to the reserve of unearned premiums that's at a predictable floor for each quarters revenues. Just this month, we announced that we would reinsure substantially all the Syncora Inc’s insured portfolio and commute a significant portion of the exposure we had previously seen at the Syncora Guarantee. This transaction is expected to close by the end of the second quarter.
Our Alternative Investments Group is also tests - with identifying and investing in other types of businesses where there is synergy with our core competencies, a risk profile in line with ours and high potential attractive returns. One source of these opportunities is the asset management field, and during 2017, we purchase a limited partnership in a fund, than invest in the equity of private equity managers.
We also purchased a minority interest in investment advisory, Wasmer, Schroeder & Company. And highly regarded independent investment advisory firm that is a great strategic fit. Assured Guaranty and Wasmer, Schroeder have complementary strength a municipal credit analysis and both have extensive relationships in the public finance market. We expect to support the continued growth of Wasmer, Schroeder, as it seeks acquisitions of other fixed income asset management firms.
Our pursuit of acquisitions in alternative investments is one a way we reduced our excess capital, as our insured portfolio amortizes and our leverage ratios decline. We saw the ratio of our statutory net play outstanding to total claims paying resources decline to 20 to 1 at year end 2017, from 22 to 1, at the beginning of the year.
We are also committed to a capital management program, focused on increasing shareholder value. In 2017, we met our stated goal, of repurchasing $500 million of shares annually to increase our value per share.
To continue to capital management program, we need to upstream sufficient capital from our operating subsidiaries to our publicly traded holding companies, while keeping a watchful eye on the appropriate capitalization for each of our insurance companies and also adhering to the dividend limitation set by the regulators.
In September we [indiscernible] that system on a U.S. subsidiaries through MAC’s repurchase of $250 million of its own shares from its immediate holding company, which is jointly owned by AGM and AGC. The cash on the repurchase was distributed to AGM and AGC in proportions of their ownership, providing those companies with additional liquidity, for streaming dividends or deeming stock.
Then in the fourth quarter of 2017, we have paid commission from the Maryland Insurance Administration and the New York Department of Financial Services to redeem $200 million of AGC’s stock and $101 million of AGM’s stock respectfully. These purchases provide funds to the parent company that may ultimately view as share repurchases or alternative investments.
Another key strategy is loss mitigation. We have been very successful over the years in obtaining recoveries for breaches of rep and warranties in RMBS transactions. And with the significant settlement, we concluded in the fourth quarter, concerns about our exposure from that sector are substantially behind us.
On the public finance side, we are focused on helping Puerto Rico set itself on a path to economic recovery and future assets of the capital markets. After Hurricane Maria, we voluntary withdrew without prejudice and adversary complaint we have filed to challenge legality by the original Puerto Rico Fiscal Player that the Oversight Board and certified.
The plan violated numerous provisions of PROMESA and the long constitutions of both Puerto Rico and the United States. We withdrew the complaint to remove with this trash from the recovery efforts.
And because of it was clear that the previous certified plan would have to be revised. In a common sense world, which is clearly absent in Puerto Rico, the need to revise the plan should have facilitated new collaboration between the Federal Oversight Board, the Commonwealth, and its creditors.
Instead, the revised plan the government submitted, not only squadron the opportunity to correct the flow of the original plan, it actually exacerbated them. After the board demanded further revisions, there is a now a revised-revised plan that’s still offered neither a path to economic revitalization and restoration of capital market access nor a credible basis for debt restructuring.
We joined other creditors in a February 14 public letter to the Oversight Board that outlined the current proposals many decisions. I will mention a few today. The plan contributes itself by assuming a massive adverse migration and a 20% decline in population without substantial support and/or any government plans or strategy to stand this decline.
It also makes contradictory projections about increases to healthcare cost and government expenses despite this projected following population. It also fails to distinguish between essential and non-essential expenditures, and contains no detailed program for a meaningful reduction in government spending.
Incredibly, the plan does allocate hundreds of millions of dollars for litigation expense and outsize the advisor fees while providing no debt service reflecting the government determination to mitigate rather than involve creditors and other stakeholders in developing a comprehensive consensual solution. Certifying such a plan is the service to the citizens of Puerto Rico, who will fail the cost of this litigation and lack of market access for years to come.
Additionally, no plan should be certified until all stakeholders know the government's true financial position. Puerto Rico must provide transparent disclosure of its audited 2015 and 2016 financial statements.
The data underlined the government’s assumptions in timely and up-to-date information about all financial accounts available to the government. Four and a half months after Hurricane Maria, we stood and noted to have reliable estimates of the cost of restoring normal sit to the Island and the full amount of release A that will be available for the Federal Government much less the long-term economic impact of the disaster.
All stakeholders should be focused cooperatively on the immediate recovery needs of Puerto Rico. It’s first step would be for the Oversight Board and the creditors of Puerto Rico Electric Power Authority to agree on a well qualified experience receiver that court could approve the steer PRIFA to its current emergency in a way from the corruption.
Political meddling, and general mismanagement that has lead to such scandals as the infamous Whitefish contract, the discovery of a warehouse full of restoration materials and alleged bribe solicited by restoration workers.
Talks of privatizing PRIFA without involving its creditors is a non-starter and will only close further disruption to the reconstruction of PRIFA and delay any real improvement in operations due to litigation that result from a no in-creditors’ legal rights.
If the Commonwealth, I would say would continue to ignore legal and constitutional rights of creditors and resist working constructively for the conceptual restructuring, costly litigation will continue for the foreseeable future.
We expect the creditors will ultimately prevail in either of vulnerable corporate disputes for a number of reasons. One of which is that the Puerto Rico constitution is crystal clear that GO bonds get paid first and that callbacks can only be used to take debt service on Commonwealth debt and PROMESA requires that physical plays must respect constitutional priorities and contractual wins.
But if the - intends to retroactively treat creditors unfairly, the news will reverberate across the United States undermining municipal bond investors’ confidence in the terms of their contracts and then politicians will only use to abide by the commitments they make were inherent.
Admin kits are repudiating the debt or either oblivious, ill-informed or vastly underestimated for reaching in locations of actually doing so. Such blaming industry guard for the rule of law will make it more expensive for municipalities throughout the United States to fund essential services and infrastructure. This also applies to revenue bonds like the Highway Transportation Authority.
The Title III court has turned a blind eye to the legislative history and the contents and purpose of special revenue provisions by clients ordering the transportation agency to turn over revenues for debt service while the Title III case in pending. This ruling is we understand, it will call the question in important investor protection that is fundamental to the revenue bond market. We will be appealing that ruling.
The developments in Puerto Rico have demonstrated the value of our guarantees for both people protection, and there is a port of insured bonds and market values. As we continue to defend our rights and convey our message unequivocally with all parties involved in the Puerto Rico negotiations, we know we have the capital liquidity to continue the effort as long as necessary.
We also have the confidence in knowing that our financial strength will continue to protect holders of insured guarantee, insured bonds. While Puerto Rico sticks to avoid paying its debt, other United States territories and municipalities have taken a different approach. For example, both Guam and Virgin Islands have said they intend to fully repay their debt obligations and respect the rights of creditors in the rule of law.
They serve as a current example of the prudent way municipality or territory can deal with adversity while understanding the importance of maintaining assets under the capital markets in order to the support their recovery as well as their future growth and sustainability.
As we have seen with past municipal bankruptcies, working closely with creditors and tabular expertise to help navigate complicated debt restructuring to the optimal path to emerging out of bankruptcy proceeding.
Looking towards the year ahead, we remain focused on our central objective, to build long-term value for our policyholders and shareholders. The indications are that the Federal Reserve Rate Setting Committee will continue to raise short-term rates gradually notwithstanding recent stock market volatility.
This should eventually push up long-term rates, which is a served momentum to water credit spreads and greater demand for bond issuance. This may take time however to really experience the benefit of increased demand for insurance.
Additionally, the new tax regime is likely to have mix effects on the municipal bond market. Potentially including reduced new issue volume and higher yields, because the reduced demand from institutional investors now enjoying lower tax rates. Rob will speak in a moment about the more directed Tax Reform on Assured Guaranty.
Our potential wild card is what effect if any proposed federal infrastructure legislation may have on the U.S. public financial business. While we must be prepared for a potential decline in total U.S. public finance issuance of 2018, we believe the market is increasingly recognizing the value of our product.
We have the additional advantage of a diversified strategy that includes international infrastructure finance and structured finance. In both of these markets, we are growing recognition of our value preposition along with regulatory incentives to use our products to manage capital more efficiently.
Additionally, our alternative investment strategy provides a separate avenue towards growth and positive results, and our capital management program will continue to benefit shareholders. Our business model has proven to be successful for more than three decades, as we build on that success; we continually evaluate the environment and pursuing new opportunities to put capital to work effectively.
Assured Guarantee is in a very strong financial position and we have the strategy and resources for a continued success in protecting policyholders and creating value for shareholders.
I will now turn the call over to Rob.
Thanks, Dominic and good morning to everyone on the call. As Dominic mentioned, 2017 was another successful year, where the execution of our strategic initiatives contributed to our key financial metrics, which I will highlight in a minute. But first, I would like to comment on the impact to Assured Guarantee related to Tax Reform that was enacted in December.
We believe the Tax Reform will be a net positive going forward, as we expect non-GAAP operating income effective tax rate to decrease to approximately 14% to 16%, but the rate will vary as it has in the past, due to the portion of income in different tax jurisdictions in any given period.
From an adjusted book value perspective, the decrease in the corporate tax rates from 35% to 21%, but the benefit of approximately $239 million or $2.06 per share, because ABV includes unearned premium reserve that is now reflected at a lower tax rate.
The immediate impact to non-GAAP operating income was estimate charge of $35 million in the fourth quarter of 2017 comprised of a $24 million LA charge due to the deemed repatriation of undistributed bond earnings of our UK subsidiaries and an $11 million write-down of deferred tax assets attributable to the reduction of the corporate tax rate.
Please note this difference from the GAAP charge of $61 million; it was adjusted for the portion of deferred tax asset and liability write-downs that are related to non-GAAP adjustments such as mark-to-market adjustments on CDS.
Operating income including this Tax Reform charge was $91 million in the fourth quarter of 2017, compared with $139 million for the fourth quarter of 2016. The fourth quarter of 2017 included lower net earned premiums offset impart by a benefit, our R&W settlement associated with the transaction that was part of the CIFG acquisition.
The economic loss development during the fourth quarter of 2017 was a loss of $15 million, primarily related to Puerto Rico exposures that reflect the revised fiscal plan, which inappropriately reduced the amount of debt service available to paid creditors. The increase was partially offset by a $111 million benefit in the U.S. RMBS attributable mainly to an R&W settlement.
The change in risk rerates were used to discount losses resulted in the benefit of $3 million. Net earned premiums in the credit derivative revenues were $185 million in the fourth quarter of 2017 compared with $261 million in the fourth quarter of 2016. The decrease was due primarily to lower refunding and terminations, which were $82 million in the fourth quarter of 2017 compared with a $137 million in the fourth quarter of 2016.
It should be noted that Tax Reform Act also includes provisions from a field of the tax treatment of advanced refunding bonds, which may result in a lower volume of municipal obligation fundings in the future.
Turning to the full-year. Operating income was $661 million, reflects the impact of strategic initiatives undertaken in 2017 including the convocation of reinsurance relating to three previously seeded portfolios resulting in the re-assumption of $5.1 billion PAR and $82 million of unearned premium reserve generating a pre-tax computation gain of $328 million or $232 million after-tax.
And the completion of the MBI UK acquisition, which now increased our UPR, but also resulted in an after-tax gain of $57 million and an increase in an adjusted book value of $332 million.
Throughout 2017, we significantly increased Puerto Rico with losses as new developments emerged, which was the primary driver of the $332 million economic loss development for the year. This was net of benefits from our loss mitigation strategies. In terms of capital management activities, in 2017, the New York and Maryland regulators approved the total of $301 million in the AGC and AGM share repurchases.
In 2017, AGM transferred $101 million and in 2018, AGC transferred $200 million to the respective U.S. parent holding companies in exchange for the shares held by the parent. This is a funding mechanism principally used to achieve our share repurchase objectives and it is what we had previously referred to as a special dividend.
As a result as of January 31, 2018, we had cash and investments available from liquidity needs, capital management activities and other strategic opportunities of $11 million at the Bermuda Holding Company and $505 million at the U.S. Holding Companies.
During the fourth quarter of 2017, we have repurchased 1.9 million shares for $70 million bringing full-year 2017 repurchases to 12.7 million shares or $501 million at an average price of $39.57 per share. Since 2013 and through today, we have repurchased approximately 43% of the total shares that were outstanding at the start of our share repurchase initiatives.
The cumulative impact of the repurchases from 2013 through the end of 2017 was a contribution of approximately $11.80 per share to operating shareholders' equity and over $20 to adjusted book value per share. Further commitment to our shareholders is reflected an increase in our dividends to common shareholders.
Our current dividend announcement of $0.16 per share represents a 23% increase over 2016 dividends. The company's successful execution of its diversified strategy has led to new records for non-GAAP operating shareholders’ equity per share and non-GAAP adjusted book value per share of $56.20 and $77.74 respectively and leaves us in great position to pursue continued repurchases, alternative investments and/or acquisitions.
I will now turn the call over to the operator to give you the instructions for the Q&A period.
[Operator Instructions]. And our first questioner today will be Bose George with KBW. Please go ahead.
Hey guys good morning. Actually first question is just on the, of the capital returns. On the last call you guys noted I think about 500 million expectations for 2018. With the redemptions you have from AGM and AGC you already have the special so you are already kind of positioned for that. So just in terms of this going forward will the next special dividend quest be for 2019. And then in terms of the pace of the buybacks is it going to continue to be spread out over the year or could you do something accelerating over here?
Well as we have said the $500 million is an annual target not necessarily going to be achieved in every 12 calendar months, but over the flow of the period that’s what we look achieve. Number two, we will always need the help of a special dividend required sometime in a year, because the operating dividend capacity of the subsidiaries will not be enough to reach that total.
So each year and typically towards the end of the year we put a request in towards the middle end and then get approval at the end and as I said before, we wanted to be kind of automatic with the regulators so that it’s a amount that very comfortable as they look at the financial strength of the organization.
However, we have other cash needs as well at the parent company and we still continue to evaluate our Alternative Strategy program in terms of making other investments that will provide growth and accretive returns to the organization. So we have goal, we have the methodology to achieve that goal and we continue to execute our strategies across all the various disciplines that we evaluate as we look to the put the money to work.
Okay great, thanks. And then switching over to the Syncora transaction. Can you give us some indication of the potential accretion from that?
Well - risk that we were able to re-underwrite and except going to risk and met our underwriting standards at a pricing value that is above current market availability. This will be a different effective transaction than other transactions we have done in that you will earn the benefit, the accretion over time.
And therefore in any given period it’s just is a matter of who we wrote new business at a better premium rate relative to the current rates. So more comes in as a higher ROE per deal as it oppose to specific accretion per value of the transaction, because the nature of the earning and the timing.
I mean it’s going to be accretive to all of our measures. It depends when it closes as well, but on an annual basis we think it will increase earned premium to the extent of between $25 million and $30 million because we are writing about $360 million of premium. So it depends on when it closes, but I would use in the first year or full-year it would be about $25 million to $30 million of earned premium.
Okay, great. And then actually just one more on the higher rate environment, could you sort of quantify the potential benefit to the investment portfolio from higher rate shift?
Well remember we talked about I guess it goes back to like third quarter of 2016, where we see the run up in rates and also the Trump effect last year in the election, where we saw immediate increase spike in demand. We always felt that 50% rate improvement probably improves production opportunity by a percentage equal to that, but as you go up the scale the relation between increased opportunity against rate increases becomes geometric not linear.
So it’s really hard to predict and of course with the Tax Reform potentially having other impacts on issuance et cetera and maybe demand for Municipal Bonds, it’s going to be harder to determine the exact value. All we could say is in the long run increased interest rates benefit our Company, benefits our insured portfolio, benefits our investment portfolio and benefits the demand for the product.
And we also do see, I mean to your question on investment portfolio, we see an increase in rates as a benefit and also our duration, our portfolio is anywhere between five to six years in addition to which Tax Reform there is an advantage to actually shifting some taxable munis which could also increase our investment portfolio and our total return on the investment portfolio.
Okay, great thanks.
And our next questioner today will be Michael Temple a Private Investor. Please go ahead.
Good morning gentlemen and congratulation. Series of quick question, but I hope you can bear with me. Regarding the categorization of the Syncora transaction, when I take that face amount with I guess it was approximately $14 billion of insured and if I simply give you credit for duplicating your 2017 production of roughly $18 billion. Again, giving you no growth for 2018 and measure that against your anticipated run-off of existing insured, I actually come up with a number for 2018 which perhaps the first time since 2009 your book will not amortize, it will actually show a modest uptick, am I doing that calculation correctly, I assume that you do $18 billion in production this year equal to what 2017 was?
Yes, you are correct, and as you remember on previous calls, we had always referred to when we would hope to see the bounce in the portfolio amortization and we expected it around 2020. However transactions like this is one of the recapture, reinsurance last year begins to build back to portfolio in addition to its normal production effort in terms of the new business market, new issue market provides.
So we have look at the issue, we have try to calculate our own bounce to see when do we start building back the unearned premium reserves, realizing that these transactions could have a significant impact on when that bounce occurs. So hopefully we are getting ahead of that bounce pure which is positive thing to start building up here and restoring the Company.
And a follow-up to that, so if we exclude the one-time nature of the Syncora transaction and Dan just look at the $18 billion in phase from last year, do you believe, I mean I know you are low to the precise guidance, but do you believe with the trends in the interest rates and perhaps more importantly, going by the way site of national nor that day in a longer providing new business, a combination of higher anticipated rates and with that, your market share might move markedly higher in the current 58%? Should we be optimistic that we will see that $18 billion figure than last year improved upon going forward?
Well, we always to try to incentivize our production people to achieve greater results throughout the year. Obviously, that’s how we build the budget that’s how we build the incentive opportunities in terms of the compensation more performance based.
So obviously, we expect the continued growth, and as I said most of the work we have done over the past few years was rebuilding the reputation of the financial guarantee and especially in the international markets.
And to your point, we believe the international markets probably represent the stronger growth opportunity at this point time on the domestic and then the other reason for that is there is this wild card out there called both the Tax Reform and the infrastructure build whatever that looks like when it gets passed.
So those two things really will have an impact on demand kind of hard to determine exactly in which direction we served the lower rate that need the budget as the bonds becomes less.
However on the individual side, the retail side becomes more, because obviously the top rate didn’t change much and a lot of individual exemptions or deductions were done away with. So it’s hard at this point in time to make that call.
Obviously, we expect to continue to build the infrastructure or the platform that we operate under, we are optimistic about our chances in all marketplaces, because of our diversified strategy. We see positive trends in both interest rates and the acceptance of the products.
So long answer to a short question. We expect our volumes to hopefully increase. But once again, there is enough factors out there that’s going to still allow us to be developing story as we see and how certain things take hold through 2018. And we look for other acquisition opportunities that will further benefit the portfolio to the extent that become available.
Okay. A couple of just quick ones as you talk about your overseas growth, are there opportunities for your services in the Far East, we will again, be famously caring about the China one belt one road and now that’s more of governmental initiatives from, but are there opportunities for you in the Far East or because that longer-term something that we could look to or is it principally UK and Europe that you see your services being utilized.
A couple of things. So there is obviously, we always look to benefit our franchise, make what I would call complementary and strategic either acquisitions or investments that basically benefit both the entity that we are looking at as part of the diversified strategy as well as our core financial guarantee business.
So that’s as I can tell you without time yet more than I can tell you. Number two, if you notice we have been dominant in the UK as our international platform, and we have had operations before in other locations just in to the long-term commitment demand, where the necessary market specifics to really false our type of product, even Australia for the same environment, but they really didn’t have any long-term financing obligations, everything was financed to our short-term basis.
However, we do see changes in that market. As I said in my commentary for the first time in my memory, we have done the risks that are outside of UK risk. In this current year, we anticipate further increasing those operations and opportunities as well as the strategic acquisitions or things that we are considering should also further our international platform.
So, objective is to make sure we continue to put financial guarantee, provide attractive investments that not only provide us growth and opportunity to expand our platform, but also ties along with the Assured Guaranty, financial guarantee product as another way to access new markets.
Obviously, any environment we look at must have rule of law. We believe that the United States will continue to have rule of law, which is going to be critical in the Puerto Rico environment and that’s another part of how we have to look at expansion overseas.
So yes, we look at international is a great platform, great opportunity. We are expanding out of the UK. We are planning for further international growth, tied to some other things that we are working on today and obviously, that’s in the hope of driving that franchise because of its value to us, and the fact that in the financial guarantee space, we have no competitors in that marketplace.
And then final question regarding Puerto Rico. Clearly, you and other creditors had to be heartened by charge claims recent actions on the couple loans that Puerto Rico was seeking. I’m just curious if we should read into that that you expect further observation of the rule of law from this charge in other matters that come before her and any hint or protection that the Puerto Rican Government has perhaps begun to realize that the scorched-earth tactics they have been taking are being met, was favored by this quarter?
Okay. I got to be really careful here, because you are getting to the end of the topic, that’s what I like them. Anyway, so I’m not heartened by anything Judge Swain does so be very clear. They do not need the loan at present.
All they have to do is collect their utility bills from principally municipal authorities, in which the government had the ability especially with the aid money coming in to support those authorities and paying their electrical bills. If we pay their electric bill, there is no need for cash from PREPA.
Therefore, the loan is just another way of trying to find creditors and which I do not accept and we will litigate that issue specifically. This Judge needs to understand that choosing the position to reestablish rule of law, which is critical to the entire behavior of our financial market.
Just imagine that all of our businesses is somehow retroactively all contractual rights could be taken away from you, the chaos that wouldn’t sue in the financial markets in the United States and that’s the exact path this Judge is going down.
So, this is going to be applied in court. We are going to appeal every decision and everything that the government puts in front of us, we believe relief will come when we get the first appeal heard especially sales and transportation revenues, and hopefully that happens in a very reasonable period of time.
When that first reversal comes back, then I think you’ll see changes in behavior and a real commitment to getting these things done and understanding where the creditors stand in the whole argument of contextual restructuring. So, I’m not happy at all.
[Operator Instructions]. And our next questioner today will be David Einhorn with Greenlight. Please go ahead.
Hey, good morning guys. I got a couple of questions on Puerto Rico. It sounds like there is a wide range of outcomes still there. I know when you do your reserving, you feel like look at different scenarios and probability to complete them. What do you see is like the worse scenario and the best scenario and what probabilities do you sign and how do you think about it from a reserving perspective?
You know why won’t you sit with next Reserve Committee and you can then sit there and look at the detail. Obviously we don't spend that kind of [Multiple Speakers].
I would be happy to come.
I'll leave it to my CEO to get the invitation now.
See understand we react remember on capital required to do [indiscernible] we have got a basically the final possible scenarios and then probably wait there. Obviously with each illegal behavior of the government and supported by the control board and the judge we have to work that factor into our reserving model.
The concern we had today is the continued push out of any possible recoveries, the more they put out plan which I know that service, we had to than incorporate that into the potential scenario that are in our model and therefore move probabilities accordingly.
That's why you see in regardless of our own personnel feelings in terms of how this ultimately works out, the FDC and GAAP do not allow us that freedom to say no its your view not this analytical scenario model probability waiting, so because of the current - we had another fiscal plan now say this one is even worse zero that service.
We then have to accordingly change what is the basically payout or repayment scenarios that exist and that quarter just becomes the present value gain and anytime there is movement in interest rates it’s going to affect the present value of say recoveries that are back end weighted versus payments in our front end weighted.
So the reserve is going to change period-to-period based on news and change in rates and I think we have been really responsive to reflect all scenarios with a reasonable level of view in terms of possible outcomes.
And let me do these analysis, we look at anything that happens within that quarter, if its positive, then that would affect the positive scenario, we will probably change the probability with that. If it is in negative, we would increase our more pessimistic scenario and increase the probability rate to that as well. We also analyze do scenario still make sense and add scenarios if we think another scenario is appropriate.
Great. So, I mean I understand the methodology and I think that's really all you just spoke to. Can you touch scribe what you think the worse scenario in your analysis is and what probability you had signed it out and what you think the best is and for how many scenarios there are, give some color to that?
Yes, I will just add, we were in rather intense negotiation, disclosing any of that information I think really does influence or in fact the position of the negotiating table and therefore it’s never a public information, we don't anticipate making it public information.
Okay, let me ask one another question then. Can you talk about your internal ratings just some for Puerto Rico. You rate that [indiscernible] on your supplement, CCC minus, bond seem to had defaulted regular rating agencies rate and D, what is the difference between your CCC minus and the D and if you move your own ratings from a CCC minus to a D, would that impact your financial reporting?
Well I will put it this way, wont impact our reserves. When we do this, we will call this is a reserve off model, so really not relying on the rating or the probability of that rating causing a default, and therefore going to the standard to vary by specific category class in the municipal finance, this is our off model reserve, so neither that has any impact.
And I would say we have to look at the entirety, remember we still believe in our legal claims here, so at the end of the day although the behavior goes in one direction, we believe we have – legal claims and obviously recoveries also affect our view of future recoveries affect that overall comprehensive rating. So as I said, this is an off reserve.
This is our off reserve credit, that is done on this other basis of using. And obviously you see rating probability default into various of the asset classes, so we do take specific credits offline of that model.
These specific models, they are an off model, they are specific models that we designed for Puerto Rico. As Dom was describing as there are some below necessary credits that would attract the reserve through the scenario loss model which takes frequency and severity of loss based on rating agency statistics, but with Puerto Rico this would have no effect. We have discrete models that we built for them.
They are in a position all by themselves as you could well imagine.
And our next questioner today is Geoffrey Dunn with Dowling & Partners. Please go ahead.
Thank you good morning. Rob, I got a couple of to start with you. Just to be clear, the 505 at the U.S. wholesale that is after the 2018 dividend from AGC?
The 505, are you talking about what is sitting at the Hold-co?
Yes. I just want to make sure.
Yes, that is after we sent the money out. After what we called the special dividend has come up. All that money is now sitting at the holding company.
Perfect. And then I wanted to ask you about funded premiums. Obviously there have been big boost to earnings and premium line over the last several years. 10 year anniversary [indiscernible] the Tax Reform impact. Can you talk a little bit about at least directionally, how do you think where funded premiums could trend versus what we've seen over the few years. Are we set for a big correction going into 2018 and 2019?
Yes. And Geoff I mean, advanced refundings were significant portion of refundings over the last number of years. And you are right, I think it will have an effect in 2018. So we should see a drop over the year from 2017. How much, it's hard to say, but given that came out in December and now municipalities could not use advanced refundings in the tax of that market, we should see a drop. How much, it's too early to tell, but directionally it will be down.
Okay. And then can you give a little bit more detail behind you or 14% or 16% non-GAAP effective rate. What are some of the nuances that get you to that level?
It's really based on the fact that AG re is obviously in a zero tax rate here in Bermuda and U.S. operating entities, U.S. income will be taxed, it's taxed to 35% previously now comes down to 21%. When we run our models and we look at the mix of income, we said, okay, U.S. income is going to be at 21%, how much income is going to come from AG-re? And I wanted to give some guidance as to what we expect this year between 14% and 16%.
But obviously that could change, it's the mix of business changes and more businesses actually in Bermuda, more earnings are in Bermuda. If more is in Bermuda, that number will go at the lower end of that range and obviously it mores in the U.S., it would tend higher between, higher end of range of 16%. So that was the main difference.
I get the mixed side. I guess I'm wondering how the beat plays into this at all?
What the beat. Well, the base erosion obviously can be an issue to the extent that we see the significant amount of business to Bermuda. And that was obviously that's a minimum tax and at this point, we don't see that being an issue for our business plan with 2018. But we will closely monitor that. And as if in fact it would become an issue, we could also adjust how much we see to Bermuda.
We had 35% statutory going on in the past years. And our effective has always been in the 20s, isolating two more 20s and mid-to-upper 20s because of these are tax expense in the U.S. that's why we are look to the 21 now in the U.S. is okay, somewhere in the teens we should be once again using taxes and securities in New York’s base…
That’s also based on our forecast in our business plan.
Now, I guess I just want to make sure there is no curve walls…
Geoff before we go on, I just want to answer another question that was asked earlier and it’s got some information I mean we think that the Syncora transactions would be anything roughly about $0.35 to book value per share and adjusted book value we expect it to be about $2.43 per share accretive to the company. That’s our expectation depending on when it closes.
All right. Dominic, last question, I think the expectation was for the fiscal plan for Puerto Rico towards the end of December and then you’ll be to look at it by February, what is going on with the Oversight Board right now with respect to reviewing that plan, has there been any formal push back or requested revisions. What is the update on that front?
Well obviously with the letter that all creditors basically most of the creditors signed on the 14th of February to the Oversight Board, I think we have concluded that there are no creditors that are accepting the plan as currently filed. And therefore, they are trying to put a lot of pressure on the oversight board to basically start to get this thing back to some reasonable level of adherence to PROMESA. You saw the official has written the letter as well. Congressman Bishop [indiscernible] that current law has stated saying that there is got to be creditor involvement you’ve got to go back and respect the constitutional priorities and contractual liens.
So, I think there is coming in from all sides now and on a more unified basis, you can always look at well there is one creditor or marginally against therefore how much noise will have to pay attention to. Now they to understand basically, you have all creditors, you can win a battle against one, it’s a little hard to win battle against safety. But I think there is starting the momentum building up on that side.
Number two you got to remember the Oversight Board only has 18 more months in their terms. So, do we believe there is going to be anything really concrete accomplish, especially the outset to the marketplace? Therefore, this is going to be a waiting game. Swing seems to be making decisions that are kind of delaying the obvious, basically hiding behind Title III [indiscernible] forcing them to pay those revenues overdue.
Okay, fine. That only lasts for so long as we get it with appellate court. So, I think there is a lot of momentum pushing back finally that we have got a unified position by the creditors, I think every inch of behavior of both the government and the Oversight Board has been illegal and ultimately has to be corrected. Obviously, we are going to have rule of law. As I said contractual rights, you can imagine in all financial markets, all contractual rights are retroactively taken away; we then have no longer a financial system in the United States.
We have pure chaos and that’s exactly what Puerto Rico wants to do. And once again, we did close the distinction between Guam and the Virgin Islands in Puerto Rico. Like I said when hurricane hit Houston, the Houston there immediately got on television, I’m not going to pay any of my debt, absolutely not, why do we think it’s applicable here in Puerto Rico. And if any Congress man or senator wants to forget Puerto Rico’s debt, then fine.
Do it to the U.S. Government, don’t put in – basically a visible task on U.S. citizens and voters and tax payers that happen to own those bonds, let alone the companies that insured them, this is ridiculous and so it needs to be held accountable for.
Okay. Thank you.
And it looks to be no further questions at this time. So, this will conclude our Question-and-Answer Session. I would now like to turn the conference back over to Robert Tucker for any closing remarks.
Thank you, operator, and 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.
And the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.