EMBRACE POSSIBILITIES, INVEST IN CERTAINTIES
Are Munis Rich or Cheap?
September 2015
Market Update Bond Insurance Penetration Continues to See Growth $9.0
7.5% 7.7%
8%
$7.0
7%
$6.0
5.7%
6%
4.6%
$5.0
3.9%
$4.0 $3.0
5.6%
5.5%
5.3%
5%
3.7%
4%
2.7%
3%
$2.0
2%
$1.0
1%
$0.0
0% 1Q-13
2Q-13
3Q-13
4Q-13
Insured Volume
1Q-14
2Q-14
3Q-14
4Q-14
1Q-15
2Q-15
Insured Penetration
•
While insured volume has ebbed and flowed, quarterly insured penetration and volume has trended upward over the past three years.
• •
The $8.3 bn of insured volume in 2Q 15 represents the highest level since 3Q 09. In terms of “insurable” volume (generally bonds rated “A” or “BBB” category), more than 25% of that par and 55% of that volume utilized insurance in the first six months of 2015.
Source: SDC Platinum 1
Insured Penetration
Insured Volume ($bn)
$8.0
9%
Market Update Insured League Table – YTD through August 31, 2015
Insurer AGM MAC Assured BAM National Total Insurance
Par (mm) $10,524.4 $808.3 $11,332.7 $6,523.7 $386.1 $18,242.5
Total Market
$279,039.4
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% of Market Par 3.8% 0.3% 4.1% 2.3% 0.1% 6.5%
Deals 634 122 756 581 16 1,353
% of Market Deals 7.3% 1.4% 8.7% 6.7% 0.2% 15.5%
8,715
Through the first eight months of 2015, Assured has surpassed our volume and transaction count for full year 2014.
Source: SDC Platinum
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% of Insured Par 57.7% 4.4% 62.1% 35.8% 2.1% 100.0%
% of Insured Deals 46.9% 9.0% 55.9% 42.9% 1.2% 100.0%
Assured Guaranty Financial Strength Ratings • •
We maintain strong financial strength ratings
– Importantly, S&P considered the effect of a default by multiple issuers in Puerto Rico over a one, two or three year time period and concluded there would be no change in Assured Guaranty’s capital adequacy score based solely on such defaults
•
As of September 8, 2015
On June 29, 2015, S&P affirmed the AA (stable outlook) financial strength ratings of AGM, MAC, and AGC – S&P found the Assured Guaranty group’s capital adequacy to be above their AAA requirement; although S&P did not disclose the size of the group’s capital adequacy cushion (the amount of capital remaining after S&P’s simulated AAA depression test), we estimate it to be $1.9 billion at year-end 2014, $400 million higher than S&P reported for year-end 2013
•
Financial Strength Ratings S&P
Moody’s
Kroll
AGM
AA stable outlook
A2 stable outlook
AA+ stable outlook
MAC
AA stable outlook
Not Rated
AA+ stable outlook
AGC
AA stable outlook
A3 negative outlook
Not Rated
In response to recent developments in Puerto Rico, on July 6, 2015, Kroll Bond Rating Agency (KBRA) wrote that its AA+ stable rating of AGM was based on an analysis that assumed significant losses on most classes of insured Puerto Rico debt in addition to stress-case losses across our insured portfolio –
KBRA’s analysis showed that AGM’s claims-paying resources were sufficient to meet all requirements by a comfortable margin
–
Separately, KBRA affirmed MAC’s AA+ (stable outlook) rating on August 3, 2015
In January 2015, Moody’s published its revised bond insurer criteria –
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Moody’s subsequently published Credit Opinions maintaining AGM and AGC’s existing ratings under the new methodology, yet the revised criteria are clearly designed to cap the potential rating of any bond insurer at a level below the AA category
Assured Guaranty Portfolio Amortization Creates Rating Agency Capital • • •
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Amortization of the portfolio reduces rating agency capital charges but also embedded future earned premiums Public finance exposure amortizes at a steady rate – $344.5 billion net par outstanding – 13% expected to amortize by year-end 2016; 24% by year-end 20181
Structured finance exposure amortizes quickly – $46.0 billion net par outstanding – 28% expected to amortize by year-end 2016; 63% by year-end 20181
New direct or assumed business originations, and re-assumptions, increase future premiums
Consolidated Net Par Outstanding Amortization by Asset Type as of June 30, 2015 ($ in billions) $640 27.2%
$617
$557
24.2% 20.6%
Public Finance 18.0%
$459 15.9%
72.8%
4Q-09
75.8%
4Q-10
79.4%
4Q-11
82.0%
4Q-12
84.1%
4Q-13
$404
$390
12.4%
11.8% 88.2%
87.6%
4Q-14
2Q-15
Actual 1. Represents the future expected amortization of current net par outstanding as of June 30, 2015.
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Structured Finance
$519 $369 11.2% 88.8%
4Q-15
$334
$299
9.9%
6.6%
90.1%
93.4%
4Q-16 Expected
4Q-17 1
$279 6.1% 93.9%
4Q-18
Assured Guaranty Deleveraging While Increasing Capital •
Assured’s net par outstanding1 to qualified statutory capital has declined from 131:1 in 4Q-09 to 57:1 as of 2Q-15, putting us in a stronger capital position – Since 4Q 2009, qualified statutory capital increased from $4.9 billion to $6.9 billion at 2Q 15. – Deleveraging should continue in the near term as new business is not expected to replace the amortization of the structured finance portfolio
•
S&P indicates that the maximum level of leverage for a bond insurer to be eligible for a AAA rating is 75x. Assured has been below this level since 1Q-14.
Net Par Outstanding1 to Qualified Statutory Capital Net Par Outstanding1/ Policyholder Surplus and Contingency Reserve 131
126
98 90 75 62
57
54
Actual 4Q-09 1. 2.
5
49
43
41
Expected amortization2 4Q-10
4Q-11
4Q-12
4Q-13
4Q-14
2Q-15
4Q-15
4Q-16
4Q-17
4Q-18
Net Par Outstanding represented on GAAP basis. Typically, this comparison would reference net par outstanding on a statutory basis. The difference in the two figures is minimal. Assumes no new business production and calculates estimated amortization divided by qualified statutory capital (policyholder surplus and contingency reserve).
Assured Guaranty Key Highlights
$11.3 bn YTD 2015 NEW ISSUE INSURED PAR (8/31/15)
756 YTD 2015 NEW ISSUE INSURED TRANSACTIONS (8/31/15)
$12.6 bn CLAIMS PAYING ABILITY
$418mm FIRST SIX MONTHS 2015 OPERATING INCOME
≈$400mm INVESTMENT PORTFOLIO – ANNUAL INTEREST INCOME
≈ $400mm AVG. DAILY TRADING VALUE OF OUR INSURED BONDS
Note: The figures above are presented on an AGL consolidated basis.
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Market Update Highlighted Transaction
Wayne County Airport Authority, MI Detroit Metropolitan Airport Airport Revenue Bonds, Series 2015D Series D Par: $213,330,000 (AGM Par Insured: $40,015,000) Underlying Rating: A/A2 (S&P/Moody’s) Lead Underwriter: Citigroup Sale Date: 9/22/2015, Select Maturities: Coupon Maturity Date CUSIP Par Amount (%)
Spread vs. MMD (bps)
Credit Enhancement
12/1/2032
944514SS8
$10,015,000
5.000
3.650
92
AGM
12/1/2040
944514SY5
$20,000,000
5.000
3.860
82
AGM
12/1/2040
944514SW9
$38,390,000
5.000
4.000
96
Uninsured
12/1/2045
944514SZ2
$10,000,000
5.000
3.930
82
AGM
12/1/2045
944514SX7
$73,400,000
5.000
4.070
96
Uninsured
12/1/2025 Par Call
Source: Bloomberg
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Yield (%)*
Assured Guaranty Select Assured Transactions in 2015 In the Primary Market, $11.3 Billion of Insured Par on more than 750 Transactions Sold With Our Insurance1, Including These Selected Issues $99,745,000 $72,000,324
$108,315,000
$146,325,000
$541,090,000
$100,565,000
General Obligation Bonds, First Refunding and Second Series of 2015
Tax-Exempt Private Activity Bonds, Series 2015
Tax Allocation Revenue Ref. Bonds (Civic-Recreational-Industrial Redevelopment Project #1, 2 & 3)
GO Refunding Bonds, Series A & B of 2015
Commonwealth of Pennsylvania
Treasurer of State of Ohio Portsmouth Gateway
Rhode Island Health and Educational Building Corporation Revenue Bond Financing Program, Series 2015A
Providence Public Schools
City of Industry Public Facilities Authority, California
Luzerne County, Pennsylvania
May 2015
April 2015
April 2015
June 2015
May 2015
$47,240,000
$54,000,000
$42,110,000
$55,635,000
$103,000,000
General Airport Revenue Bonds (North Terminal Project), Series 2015B
1st Senior Lien Revenue Bonds, Series 2015A
Water Revenue Bonds, Series 2015-A
Transportation Excise Tax Revenue Refunding Obligations, Series 2015
Election of 2014 General Obligation Bonds, Series A
Mid-Bay Bridge Authority, Florida
The Utilities Board of the City of Cullman, Alabama
City of Glendale, Arizona
Moreno Valley Unified School District, California
February 2015
May 2015
February 2015
January 2015
May 2015
$56,550,000
$29,520,000
$48,500,000
$94,030,444
$115,165,000
Certificates of Participation (Master Lease Program), Series 2015B
Refunding Revenue Bonds, Series 2015A & 2015B
Revenue Bonds, Series 2015
General Obligation Bonds, Series A and B of 2015
General Obligation Bonds, Election of 2014, Series 2015 and 2015 General Obligation Ref Bonds
School Board of Lake County, Florida
Lower Colorado River Authority, Texas
University of Maine
Montour School District, Pennsylvania
January 2015
March 2015
April 2015
New Orleans Aviation Board, Louisiana
March 2015
Hayward Unified School District, California July 2015
1. Source: SDC database. Sales from January 1 through August 31, 2015. Amounts are on a sale-date basis and reflect only those series insured by Assured Guaranty Municipal2, AGC, or MAC.
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Assured Guaranty Contacts William J. Hogan Senior Managing Director Head of Public Finance 1 212 408 6006 BHogan@assuredguaranty.com
Chris Chafizadeh Managing Director Municipal Markets 1 212 339 0832 CChafizadeh@assuredguaranty.com
William O’Keefe Senior Advisor Municipal Markets 1 212 339-3451 WOKeefe@assuredguaranty.com
Western Region Jason Kissane Managing Director 1 415 995-8023 JKissane@assuredguaranty.com
Eastern Region James Binette Managing Director 1 212 408 6005 JBinette@assuredguaranty.com Procurement@assuredguaranty.com
Project Finance Lorne Potash Managing Director 1 212 261 5579 LPotash@assuredguaranty.com
New Business Origination Mary Francoeur Managing Director 1 212 408 6051 MFrancoeur@assuredguaranty.com John Hallacy Managing Director 1 212 339 0862 JHallacy@assuredguaranty.com
Secondary Markets Richard Cassata Managing Director 1 212 408 6067 RCassata@assuredguaranty.com
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Marketing Bernard Bailey Managing Director 1 212 261 5528 BBailey@assuredguaranty.com
George Mulry Managing Director 1 212 261 5597 GMulry@assuredguaranty.com
Pricing Jason Falzon Director 1 212 408 6036 JFalzon@assuredguaranty.com
Forward-Looking Statements and Safe Harbor Disclosure •
This presentation contains information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give the expectations or forecasts of future events of Assured Guaranty Ltd. (“AGL” and, together with its subsidiaries, “Assured Guaranty” or the “Company”). These statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating or financial performance. Any or all of Assured Guaranty’s forward-looking statements herein are based on current expectations and the current economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors that could cause actual results to differ materially are (1) rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for downgrade, or a change in rating criteria, at any time, of Assured Guaranty or any of its subsidiaries and/or of transactions that Assured Guaranty’s subsidiaries have insured; (2) developments in the world’s financial and capital markets, including changes in interest and foreign exchange rates, that adversely affect the demand for the Company’s insurance, issuers’ payment rates, Assured Guaranty’s loss experience, its exposure to refinancing risk in transactions (which could result in substantial liquidity claims on its guaranties), its access to capital, its unrealized (losses) gains on derivative financial instruments or its investment returns; (3) changes in the world’s credit markets, segments thereof or general economic conditions; (4) the impact of rating agency action with respect to sovereign debt and the resulting effect on the value of securities in the Company's investment portfolio and collateral posted by and to the Company; (5) more severe or frequent losses impacting the adequacy of Assured Guaranty’s expected loss estimates; (6) the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default swap form; (7) reduction in the amount of insurance opportunities available to Assured Guaranty; (8) deterioration in the financial condition of Assured Guaranty's reinsurers, the amount and timing of reinsurance recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under its reinsurance agreements; (9) failure of Assured Guaranty to realize insurance loss recoveries or damages expected from originators, sellers, sponsors, underwriters or servicers of residential mortgage-backed securities transactions through loan putbacks, settlement negotiations or litigation; (10) the possibility that budget shortfalls or other factors will result in credit losses or impairments on obligations of state and local governments that the Company insures or reinsures; (11) increased competition, including from new entrants into the financial guaranty industry; (12) changes in applicable accounting policies or practices; (13) changes in applicable laws or regulations, including insurance and tax laws; (14) other governmental actions; (15) difficulties with the execution of Assured Guaranty’s business strategy; (16) contract cancellations; (17) loss of key personnel; (18) adverse technological developments; (19) the effects of mergers, acquisitions and divestitures; (20) natural or man-made catastrophes; (21) other risks and uncertainties that have not been identified at this time; (22) management’s response to these factors; and (23) other risk factors identified in Assured Guaranty’s filings with the U.S. Securities and Exchange Commission (the “SEC”).
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The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in the Company’s Form 10-K and 10-Q filings. The Company undertakes no obligation to update publicly or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in the Company’s periodic reports filed with the SEC.
•
If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may vary materially from what the Company projected. Any forward-looking statements in the presentation reflect the Company’s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
•
For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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Conventions and Disclaimers •
Unless otherwise noted, the following conventions are used in this presentation: -
“AGM Consolidated” shall mean Assured Guaranty Municipal Corp. and its consolidated entities (consisting primarily of Assured Guaranty (Europe) Ltd.; Municipal Assurance Holdings Inc. (MAC Holdings); Municipal Assurance Corp. (MAC); and variable interest entities Assured Guaranty Municipal Corp. is required to consolidate under accounting principles generally accepted in the United States). “AGM” shall mean AGM Consolidated excluding MAC Holdings and MAC. “Assured Guaranty Municipal” shall mean AGM excluding Assured Guaranty (Europe) Ltd.
-
Ratings on our insured portfolio and on bonds purchased pursuant to loss mitigation or risk management strategies are Assured Guaranty’s internal ratings. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that, beginning this quarter, the Company's internal credit ratings focus on future performance, rather than lifetime performance.
-
Exposures rated below investment grade are designated “BIG”. For residential mortgage backed securities (RMBS) transactions collateralized under representations and warranties (R&W) settlement agreements, a portion of the BIG exposure has been reclassified as investment grade.
-
In third quarter 2013, the Company changed the manner in which it presents par outstanding and debt service in two ways. First, the Company had included securities purchased for loss mitigation purposes both in its invested assets portfolio and its financial guaranty insured portfolio. Beginning with third quarter 2013, the Company will be excluding such loss mitigation securities from its disclosure about its financial guaranty insured portfolio (unless otherwise indicated) because it manages such securities as investments and not insurance exposure. It has taken this approach as of both September 30, 2013 and December 31, 2012. This reduces its BIG net par as of September 30, 2013 by $1,211 million from what it would have been without the change. Second, the Company refined its approach to its internal credit ratings and surveillance categories, which resulted in the upgrade of $264 million from BIG to investment grade. Please refer to "Refinement of Approach to Internal Credit Ratings and Surveillance Categories" in note 3, Outstanding Exposure, of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 for additional information. Under the old approach, a transaction with a projected lifetime loss, no matter how strong on a prospective basis, was required to be rated BIG. Under its revised approach, a transaction may be rated investment grade if it (a) has turned generally cash-flow positive and (b) is projected to have net future reimbursements with a sufficient cushion to warrant an investment grade rating even if it is projected to have ending lifetime insurance claim payments.
-
Ratings on the investment portfolios are the lower of the ratings from Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”).
-
Percentages and totals in tables or graphs may not add due to rounding.
•
The materials in this presentation do not constitute advice with respect to any municipal financial products, or the issuance of any municipal securities, including with respect to the structuring, timing or terms of any such financial products or issuances. You should not rely on such material to make any decision with respect to these topics. Neither we nor any of our affiliates is acting as your advisor in connection with any municipal financial product or any issuance of municipal securities. We encourage you to consult your own financial and legal advisors and to make your own independent investigation regarding any municipal financial product and the structure, timing and terms of any issuance of municipal securities. Municipal financial product includes any municipal derivative, guaranteed investment contract, plan or program for the investment of the proceeds of municipal securities, or the recommendation and brokerage of municipal escrow investments.
•
MAC is not licensed to transact insurance business in all jurisdictions, including California, and the insurance products and services described in this presentation may not be available to all potential customers or investors. This presentation is for informational purposes only and does not constitute an offer to sell or a solicitation or an offer to buy any insurance product or service in any jurisdiction where MAC is not licensed and authorized to write insurance. Please see http://macmunibonds.com/licenses for a list of the states where MAC is licensed and authorized to write insurance.
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Non-GAAP Financial Measures and Performance Indicators
•
This presentation references financial measures that are not in accordance with U.S. generally accepted accounting principles (“GAAP”), which management uses in order to assist analysts and investors in evaluating Assured Guaranty’s financial results. These financial measures not in accordance with GAAP (“non-GAAP financial measures”) are defined in the appendix. In each case, the most directly comparable GAAP financial measure, if available, is presented, and a reconciliation of the non-GAAP financial measure and GAAP financial measure is provided. This presentation is consistent with how Assured Guaranty’s management, analysts and investors evaluate Assured Guaranty’s financial results and is comparable to estimates published by analysts in their research reports on Assured Guaranty.
•
The performance information described below is obtained from sources such as Intex, Bloomberg and/or provided by the trustee and may be subject to restatement or correction. The following performance measures are used in this presentation: - 60+ Day Delinquencies are defined as loans that are greater than 60 days delinquent and all loans that are in foreclosure, bankruptcy or real estate owned divided by current collateral balance. - Average Credit Enhancement is intended to provide a measure of the amount of equity and/or subordinated tranches that are junior in the capital structure to Assured Guaranty’s exposure, expressed as a percentage of the total transaction size, and reflects any reduction of that credit support resulting from defaults or other factors. For transactions where excess spread may be available to absorb certain losses, the amounts shown do not include any benefit from excess spread. The calculation methodologies differ for the various asset classes to reflect differences in transaction structures in order to provide a measure that management believes is comparable across asset classes. - Cumulative Losses are defined as net charge-offs on the underlying loan collateral divided by the original collateral balance. - Pool Factor is the percentage of the current collateral balance divided by the original collateral balance of the transactions at inception. - Subordination represents the sum of subordinate tranches and overcollateralization, expressed as a percentage of total transaction size, and does not include any benefit from excess spread collections that may be used to absorb losses. Many of the closed-end second lien RMBS transactions insured by the Company have unique structures whereby the collateral may be written down for losses without a corresponding write-down of the obligations insured by the Company. Many of these transactions are currently undercollateralized, with the principal amount of collateral being less than the principal amount of the obligation insured by the Company. The Company is not required to pay principal shortfalls until legal maturity (rather than making timely principal payments), and takes the undercollateralization into account when estimating expected losses for these transactions.
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