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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Assured Guaranty Limited Fourth Quarter and Year-End 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Robert Tucker, Senior Managing Director, Investor Relations and Corporate Communications. Please go ahead sir.
Thank you, operator, and thank you all for joining Assured Guaranty for our fourth quarter and year end 2021 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 outlook, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you are listening to a replay of this call, or if you're reading a transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations 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 in our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com. Turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; 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'd like to ask a question. I will now turn the call over to Dominic.
Thank you, Robert, and welcome to everyone joining today's call. Assured Guaranty's insurance production, loss mitigation and capital management strategies combined to deliver outstanding results in 2021. We had many notable accomplishments during the year. We earned $470 million of adjusted operating income, 84% more than in 2020 and we more than doubled adjusted operating income per share to $6.32 per share. We brought all three of our measures of shareholder value to new highs. Over the year shareholders equity per share grew 9% to $93.19. Adjusted operating shareholders' equity per share increased 13% to $88.73 and adjusted book value per share rose 14% to $130.67. We repurchased 10.5 million common shares or approximately 14% of our shares outstanding at December 31, 2020 at an average price of $47.19. Those repurchases totaled $496 million and with the addition of $66 million of dividends, we returned a total of $562 million to shareholders. Through strong new business production in each of our financial guaranty markets, U.S. public finance, international infrastructure financial and global structured finance we generated a total of $361 million of PVP in 2021. Direct PVP exceeded $350 million for the third consecutive year, compared with an average annual direct PVP of $210 million from 2012 to 2018, making the last three years our best in more than a decade for direct new business production. With a more than 60% share of new issue insured par sold we lead the U.S. public finance bond insurance industry to its highest penetration, market penetration in a dozen years. And taking advantage of exceptionally low interest rates, our U.S. holding company issued a total of $900 million, a 3.15% 10-year and 3.60% 30-year senior debt to refinance $600 million of debt with higher coupons ranging from 5% to almost 7%. As a result, annual debt service savings will be $5.2 million dollars through the next maturity date. Our financial guarantee production was well diversified across all of our markets. U.S. public finance PVP of $235 million included its second best direct production in at least a decade, surpassed only by the previous year's results. Our $79 million of international infrastructure PVP marks the fourth year out of the last five that we've exceeded $75 million of direct PVP in that sector. Global structure finance PVP of $47 million was the second best in direct production since 2012. Our markets and economic environment offered both opportunities and challenges during 2021. Issuance of U.S. municipal bonds reached a record par amount of $457 billion in 2021. This partly reflected investors increased demand for tax exempt paper in expectation of higher tax rates and continued limitations on state and local tax deductions at the federal level. Additionally issuers were eager to take advantage of extremely low municipal interest rates to refinance bonds issued in the past at higher rates. With the option to execute tax exempt advance refundings still off the table, many issuers also turned to the taxable market to replace higher coupon tax exempt debt. Total insured market volume increased to 8.2% ph of par issued, the highest annual rate over the past 12 years and up from 7.6% during 2020 and 5.9% during 2019. We believe this increased penetration in 2021 indicates that the risk of unpredictable developments, which was brought home by the onset of the COVID-19 pandemic in 2020, has made a lasting impression on investors. We've also seen that Assured Guaranty has the underwriting and risk management skills to construct an insured portfolio that experienced minimal claims from the economic disruption caused by the pandemic, most of which have already been reimbursed. The $37.5 billion of insured par in 2021 represented a 10% annual increase on the heels of a 43% increase the prior year, resulting in a 57% growth of the insured market in just two years since 2019. Assured Guaranty's production was the leading force behind this growth as we insured over 58% of new issue insured par sold in 2020 and more than 60% in 2021, our highest annual market share since 2013. Our $23 billion of insured new issue volume in 2021 was almost $3 billion more par than we insured in 2020 and was generated by more than 1000 individual transaction. An important trend in recent years has been the use of our guarantee to help launch some of the municipal bond markets largest transaction, which indicates growing institutional demand for the security, relative price stability and significant market liquidity our guarantee can provide. We guarantee the $100 million dollars or more on each of 48 large issues launched in 2021, up from 39 transactions in 2020 and 22 in 2019. Significantly, we continue to add value on credits with underlying ratings in the A category from one of our or both of S&P and Moody's, ensuring 109 such AA transactions totaling more than $3.5 billion of insured par. U.S. public finance forms the largest part of our uniquely diversified financial guarantee strategy. Our three pronged strategy also targets insurable transactions in both infrastructure finance outside the United States, and structured finance throughout the world. This helps us in times when one market or another shows temporary weaknesses, and it drives great results in years like 2021, when we are thriving in all three of our markets. Further demonstrating the diversity of our business, in 2021 we guaranteed financings of the Spanish solar power facilities, and UK higher education and healthcare projects. Additionally, we worked with a UK water company to extend a debt service reserve guarantee, which is a unique product we developed as an alternative to bank liquidity facilities. We also provided a number of secondary market guarantees. Our European business was historically based in the UK, which previously allowed us to do business throughout the European Union. We have long been active and where we continue to believe they have plentiful and diverse opportunities. Our Paris subsidiary, which we opened in 2020, to serve continental Europe more effectively, especially now that the UK has left the European Union, further grew its business or originations in 2021. A global structured finance an important part of our business is to provide institutions like banks and insurance companies with tools to optimize the capitalization of their asset portfolios. During the year, we guaranteed large insurance securitizations, and significantly increased our CLO activity. Our guarantees help CLOs attract new investors who might otherwise be discouraged by the higher capital requirements or uninsured CLOs, and we are seeing more opportunities to help investors reduce the capital consumed by both existing structured finance exposures and new investments. The new business we wrote across all of our markets in 2021 enabled us to increase the year end net par amount of our insured portfolio for the first time in many years. We believe the trend going forward will be to continue increasing the par amount of our insured portfolio and increase our store of [ph] deferred premium revenue, which will further stabilize and grow our future earnings. We have continued to reduce the risk in our insured portfolio and believe we can continue to do so as we continue to write new investment grade business. The below investment grade portion of our insured portfolio declined to barely more than 3% as of December 31, 2021. Almost half of our below investment grade net [indiscernible] is to Puerto Rico and we expect that with the court approved settlements pertaining to the GO and certain other credits scheduled to occur on March 15 of this year, that figure should drop below 2.5% and continue to fall as more of our Puerto Rico settlements are executed. After years of twists and turns related to the restructuring of Puerto Rico debt, decisive progress occurred in 2021. We and the other creditors along with the Commonwealth agreed to support the final revision of the Oversight Board's restructuring plan for the central government, which the Title III Court approved in January of this year. As a result, the Commonwealth Government's exit from bankruptcy is expected to begin in mid March. The Title III Court also laid the groundwork for favorable consideration of additional agreements that support certain other Puerto Rico restructurings, such as for highways and Transportation Authority. All this means that Puerto Rico's long awaited resolution of its unpaid debt is proceeding well, and the island is positioned for years of fiscal stability, according to the Oversight Board's latest fiscal plan. In addition to our success in the financial guarantee business in 2021, we also made significant progress towards our goals for the asset management business, where overall investment performance was strong. As one of the top 25 collateralized loan obligation managers by assets under management, we were well positioned to participate in the CLO market and reached a record level of issuance. During 2021, we launched six new CLOs representing $2.5 billion of assets under management, more than double of what we issued in 2020 and we converted a non-fee earning AUM to fee earning AUM by selling substantially all the CLO equity still held by AssuredIM legacy funds, where we had been rebating management fees. Through these efforts we increased CLO management fees in 2021 to $48 million from $23 million in 2020. Additionally, we reset and refinanced 10 CLOs in the United States and Europe. In the asset backed sector, we closed a continuation fund holding an auto finance investment. Additionally, the healthcare portfolio managed by Assured Healthcare Partners continued to grow as capital was deployed. Looking back on the year we believe much of Assured Guaranty's success reflected the markets growing appreciation of the reliability of our financial strength and the security we provide investors while also delivering financial benefits and first class service to bond issuers and other clients. The responsibility embodied in our careful underwriting, disciplined risk management and tireless loss mitigation, the proven resilience or financial guarantee business model and our strategic approach to capital management to protect policyholders and create value for shareholders. In our view, this heightened recognition of our guarantees value could help to drive demand higher as interest rates rise. We expect market conditions in 2022 and beyond to be very different from those of 2021. As the Fed strives to contain inflation, the economic and social impact of the COVID-19 recedes, developing geopolitical events continue to disrupt markets, and municipal governments prepare for the end of extraordinary federal support. Rising interest rates widening credit spreads and the accompanying volatility tend to increase financial guarantee demand. We believe Assured Guaranty is better positioned for the long-term success than in any time in our history. Our financial strength has never been stronger. The credit challenges in our legacy insured portfolio are largely behind us. Our markets are large, our opportunities diverse, our human capital exceptional, and our business model proven through decades of economic cycles. We look forward to fulfilling the high expectations of our policyholders, clients and shareholders. I will now turn the call over to Rob.
Thank you, Dominic, and good morning to everyone on the call. I'm very pleased to report that our fourth quarter 2021 adjusted operating income was $273 million or $3.88 per share, a significant increase over the adjusted operating income of the fourth quarter of 2020, which was $56 million or $0.69 per share. The primary driver of the increase in fourth quarter 2021 total adjusted operating income was the insurance segment where adjusted operating income increased 154% over fourth quarter 2020 from $109 million to $277 million. Much of this benefit came from our loss mitigation strategies, particularly for our Puerto Rico exposure. After many years of negotiation, and other loss mitigation efforts, we are close to resolving $1.4 billion in gross par associated with our Puerto Rico GO, PBA, CCDA, and PREPA exposures. The increased certainty of the settlement in Puerto Rico is, improved economic output, combined with the increased value of our actual and expected recoveries under the settlement agreements, were the primary drivers of the $186 million economic benefit in the fourth quarter of 2021. During the fourth quarter of 2021, we sold a portion of our Salvage and Subrogation recoverables, associated with certain matured Puerto Rico GO and PREPA exposures, resulting in proceeds of $383 million, thereby realizing some of our expected recoveries early. In 2022 we continued to sell portions of our GO, PBA and PREPA Salvage and Subrogation recoverable, resulting in additional proceeds of $133 million. The prices at which we crystallized these recoveries as well as observed market pricing for other similar instruments, and the forward interest rate environment, are reflected in the updated assumptions of the value of the remaining recovery bonds, and contingent value instruments that we project receiving in the various Puerto Rico settlements. Other components of the insurance segment also performed well in the fourth quarter of 2021. Total income from investments, which consists of net investment income on the fixed maturity portfolio, and the equity and earnings on AssuredIM funds and other alternative investments, was $111 million and increased from $94 million in the fourth quarter of 2020. Collectively, the investments in AssuredIM funds and alternative investments generated $44 million in equity and earnings of investees in the fourth quarter of 2021, compared with $24 million in the fourth quarter of 2020, with the increase mainly attributable to a large fair value gain on a specific investment in a private equity fund. As a reminder, equity and earnings of investees is a function of mark to market movements attributable to the AssuredIM funds and other alternative investments. It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period to period. Our fixed maturity and short-term investments account for the largest portion of the portfolio, generating net investment income of $67 million in the fourth quarter of 2021, compared with $70 million in the fourth quarter of 2020. As we shift fixed maturity assets into alternative investments, net investment income from fixed maturities may decline. However, over the long term, we are targeting enhanced returns on the alternative investment portfolio of over 10%, which exceeds our projected returns on the fixed maturity portfolio. In terms of premiums scheduled net earned premiums decreased slightly in the fourth quarter of 2021 to $91 million, compared with fourth quarter 2020 of $94 million. Premium earnings due to refundings and terminations were $20 million in fourth quarter 2021 compared with $65 million in the fourth quarter of 2020 when two large transactions refunded. The Asset Management segment adjusted operating loss was $3 million dollars in the fourth quarter of 2021 compared with $20 million in the fourth quarter of 2020. The improvement in Asset Management segment results is primarily attributable to increased management fees and the strategies we launched since the 2019 BlueMountain acquisition and a nonrecurring impairment of the lease right-of-use asset of $13 million in 2020. Asset Management fees on a segment basis were $21 million in the fourth quarter of 2021 compared with $20 million in the fourth quarter of 2020. Higher fees from healthcare opportunity funds and CLOs more than offset the decrease in fees from wind-down funds as distributions to investors continued. As of December 31, 2021 AUM of the wind-down funds was $582 million, compared with $1.6 million as of December 31, 2020. In the fourth quarter of 2021, the effective tax rate was 15.1% compared with 12.7% in fourth quarter 2020, which included the release of a reserve for uncertain tax positions. The overall effective tax rate on adjusted operating income fluctuates period to period based on the proportion of income in different tax jurisdictions. Overall the fourth quarter capped off the year of successful execution of our strategic initiatives. These achievements are reflected in our 2021 full year adjusted operating income of $470 million, which includes a loss on extinguishment of debt of $175 million pre-tax or $138 million after tax. Despite the debt extinguishment charge, full year 2021 adjusted operating income represents an 84% increase compared with 2020 adjusted operating income of $256 million. The primary driver of this increase was the Insurance segment, with $722 million adjusted operating income in 2021, compared with $421 million in 2020. The 2021 Insurance segment adjusted operating income includes a benefit of $221 million, which primarily consists of a benefit of $146 million for U.S. public finance exposures and $84 million for U.S. RMBS exposures. U.S. public finance benefited from the increased recovery assumptions the Puerto Rico exposures that I mentioned earlier and the U.S. RMBs benefit is primarily a function of home price appreciation. Economic loss development, which excludes the effects of deferred premium revenue was a benefit of $287 million in 2021 across the whole portfolio. Loss expense in 2020 was $204 million and was primarily attributable to Puerto Rico. On a full year basis, total income from the investment portfolio was $424 million in 2021 compared with $371 million in 2020. The investment returns on a portion of the portfolio invested in AssuredIM funds demonstrates an important component of the benefits of the Asset Management segment, not only as a fee earning business, but as an investment advisor for our Insurance segment. AssuredIM funds in which the insurance subsidiaries invest, generated gains of $80 million in 2021 compared with gains of $42 million in 2020. The gains were across all strategies, particularly healthcare, CLOs and asset base, and generated a year-to-date return of 20.8%. Other third party alternative investments also generated gains of $64 million in 2021, compared with $19 million in 2020. These gains more than offset the reduced net investment income on the available to sell fixed maturity portfolio, which was $280 million in 2021, down from $310 million in 2020. Lower average balances in the fixed maturity portfolio, reinvestment yields, and income [ph] loss mitigation securities were the primary drivers of the year-over-year variance. Total minimum premiums in credit driven revenues were $438 [ph] million in 2021, compared with $504 million in 2020, including premium accelerations of $66 million and $130 million respectively. In the Asset Management segment, we have continued to make great progress in 2021. We raised new third party capital in our CLO, healthcare, and asset based strategies. We increase fee earning CLO AUM through the issuance of 2.8 billion in CLOs and the sale of CLO equity out of the legacy funds and we continue to liquidate assets and the wind-down funds. The improvement in the Asset Management segment operating loss from $50 million in 2020 to $90 million in 2021 was primarily attributable to an increase in management fees from $59 million in 2020 to $76 million in 2021. Higher fees from two CLOs and opportunity funds more than offset the decline in fees from wind-down funds. The increase in opportunity fund fees was primarily attributable to the new healthcare funds launched in late 2020, which raised additional third party capital in late 2021. The corporate division had adjusted operating loss of $263 million in 2021, including a loss on debt extinguishment of $175 million, or $138 million on an after tax basis, which resulted from a $600 million in debt redemptions that Dominic mentioned earlier. This charge is simply an acceleration of expenses that would have occurred over time. In the prior year, corporate division adjusted operating loss was $111 million. The debt redemptions were financed with the proceeds from the issuance of $900 million in new 10-year and 30-year debt, which resulted in reduced average coupon on redeemed debt from 5.89% to 3.35%, and $170 million debt reduction in our 2024 debt refinancing needs. In addition the debt refinancing has generated annual debt service savings of $5.2 million until the next maturity date, and provided flexibility to continue share repurchases. We were able to accomplish all of this without significantly affecting our debt leverage, or interest coverage ratios. The additional $300 million of proceeds for the debt expenses were used primarily for share repurchases. In the fourth quarter 2021 we repurchased 3.7 million shares for $192 million at an average price of $51.47 per share. This brings full year 2021 purchases to 10.5 million shares or $496 million, which represents 14% of the total shares outstanding at the beginning of the year. The continued success of this program helps to drive up per share book value metrics to record highs as of December 31, 2021. Subsequent to the quarter close, we repurchased an additional 1.7 million shares for $91 million. Since the beginning of our repurchase program in January 2013, we have returned $4.2 billion to shareholders under this program, resulting in a 69% reduction in total shares outstanding. The cumulative effect of these repurchases was a benefit of over $37 in adjusted operating shareholders equity per share and $65 in adjusted book value per share, which helped drive these metrics to new record highs. From a liquidity standpoint, the holding companies currently have cash and investments of approximately $274 million, of which $124 million resides in AGL. These funds are available for liquidity needs, or for use in the pursuit of our strategic initiatives to either expand our business or repurchase shares to manage our capital. This week, the Board of Directors authorized the repurchase of an additional 350 million of common shares. Under this and previous authorizations, the company is now authorized to purchase 364 million of its common shares. In addition, we declared a dividend of $0.27 per share, which represents an increase of 13.6% of the previous dividend of $0.22 per share. As we look to 2022 and beyond, we are optimistic that our largest single BIG exposure, Puerto Rico, will be substantially resolved by the end of this year. The interest rate environment will be more conducive to new insurance business production, and that the Asset Management segment and Alternative Asset strategies will continue to contribute to the company's progress towards its long-term strategic goals. I will now turn the call over to the operator to give you the instructions for our Q&A period. Thank you.
Thank you. [Operator Instructions] And our first question today comes from Thomas McJoynt-Griffith at KBW. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions here this morning. So first, does the international insurance portfolio have any exposure to areas that would potentially be at risk of an ongoing conflict in Eastern Europe?
No, we have no exposure to the Ukraine or Russia. We do have exposure in Hungary, but it's small and it's vastly amortizing.
Okay, thanks clarifying that. And then next I have a few questions around the contingent value instrument. So first, were the marks related to the CVI that you already have received as well as CVIs that are contemplated of receiving in the future with unfinalized settlements? And then second, does the CVI get market every quarter based on things like actual tax receipts in Puerto Rico or is it the updated fiscal outlooks there? Can you just kind of walk through those pieces?
So, number one, we've not received any CVI yet, so remember all those restructurings are still in the future with the first one being the general obligation and related credits, but we would actually receive instruments starting on March 15. You know, the CVI is a long duration instrument. It's predicated on sales tax volumes over many, many years. So you've got to make an assessment of what you think that present future value is, relative to current performance and any other expectations you might add. So that number is a mark for mark number will fluctuate based on the long-term view of value. And obviously, as they -- we know they've already substantially exceeded the early benchmarks relative to that revenue. Obviously, we think that security is a solid investment or solid returning value.
Okay, thanks. And when you do receive the CVI come March 15, will you be able to monetize it immediately? And also, speaking of monetization, the fully satisfied claims that you did monetize in the fourth quarter and again in the first quarter, how much additional fully satisfied claims are there that you'd be able to do the same now?
Okay, so these are complicated questions. So in terms of the monetization, you have to have the right structure, and you have to be able to convert the existing exposure into a security that can be sold into the marketplace, so that's not for all of Puerto Rico. And as we looked at those opportunities to monetize it was really based on our view of value. It's a kind of benchmark relative to expected value. It allowed us to risk manage some of the Puerto Rico exposure, obviously you know the driving around fairly substantial balances related to this principle credits or transportation and general obligation. It also allowed us to do a better cash management strategy relative to the settlement obligations we have, coming March 15 when we have to settle the old bonds as we receive the news, so that's number one. Your second question. And then first question, obviously we can't really at this point in time, there's still a lot of uncertainty in terms of value. In terms of the CVI, we hope that it will start to trade as soon as it's issued, but that really relates to the market and demand in the marketplace with the security and what prices are available. These are the things that we continue to watch, monitor, and will manage as we see opportunities unfolding in the future, based on all these variables; you have variables of interest rates, you have variables of further geopolitical unrest. You have variables of market’s perception of Puerto Rico, in terms of their willingness to pay. So, there’s a lot of balls in the air that will ultimately dictate value. But obviously, the best value you’re going to have, is the one that the market is willing to provide, once these securities are issued and the market is established.
Let me just add Tommy that when we sold our subrogation rights this quarter, I mean fourth quarter and first quarter, that will include what we were going to get on March 15 when this is consummated, which consists of new GO bonds, CBI and cash. So, we sold those before we actually are getting them in March 15, so we have subrogation rights to the extent that that par has been paid. So effectively, we've been selling those CBIs through selling our subrogation rights. And then on March 15, we will get an additional, say rough numbers, $1.5 billion of cash, new recovery bonds and CBI, and we will look to execute and sell them and maximize our economic benefit over time.
Right, yes, that will make sense. And then lastly, could you just walk through the most likely timelines for the resolution of HTA and PREPA? I know you mentioned that you expect Puerto Rico to be resolved by the end of this year. Can you just put a little finer tune on the actual timing throughout the year? And then how do any strategic actions such as acquisitions or capital actions like special dividends factor into that expected timeline?
Let's get to the timelines of Puerto Rico. So, we really expect and of course, these are dates that could slide, obviously, as we've seen happening in the general obligation, that doesn't get to now March, and it could have been done by the end of the year. So, we look at transportation, our expectation is a third quarter resolution. PREPA, you saw the request for immediate mediation, but we still think that drags on a little bit and maybe that's fourth quarter, but between third and fourth quarter for transportation and PREPA we expect it to be resolved by the end of the year. And then you're right, once we're free of this burden, because obviously it's been a significant drag on the company relative to people's perception, not economic reality as you can see in the current quarter, the benefit we realize based on our perceived value of settlements around predominantly general obligation, it at least then gets back, which then provides us that opportunity to start to re-engage on further capital management opportunities, principally special dividends to kind of accelerate the capital management that we've been doing. So, it opens up a whole host of opportunities for us as we finally get Puerto Rico behind us in the rear-view mirror, which we believe economically is there, but we still have the legal technicalities of having to go through the process of the exchange, et cetera, as Rob pointed out.
Okay. I appreciate all the comments.
No problem.
Ladies and gentlemen, our next question comes from Jackie [ph] [indiscernible]. Please go ahead.
Hi, guys. Can you hear me okay?
Yes, hi Jackie.
Hi, Jackie. How are you?
Hi, guys. I’m good. Thank you so much for your time this morning. I just had two quick questions. One of them I think Dominic might have just answered, but on the sold, the supplicated assets that that you sold, the proceed I’m assuming are not available for the for capital redeployment but will be withheld to satisfy the claims that you expect on March 15. Is that kind of what you indicated?
Yes.
Okay. So, we shouldn't be penciling that in as excess cash now.
We have a significant liquidity event on the settling of the old bonds where we get the new bonds, the cash and the CBI. So, we got to pay first, before we receive second. So, this allows…
Got it.
We took the opportunities in the portfolio to basically form that for short-term cash. These sales allow us to further alleviate some of that cash responsibility.
Okay, great. And then just, sorry…
Jackie I just want to also add that, just remember we sold those subrogation rights at significantly higher values than we expected with respect to our reserve analysis and that's why you're seeing a significant benefit to our Puerto Rican reserves.
Right. So, that was going to be my second question Rob, so the benefit that we saw for the Puerto Rico reserves, that incorporates the full expectation of where we sat on December 31, that's not just a reflection of those sales, is that correct?
Yes, that's correct. It's a reflection of a couple of things. We look at all possible scenarios as you know we look at all the news that happened in the quarter. We looked at the fact that the judge accepted the plan of adjustment. We looked at this as a benchmark and then we then, we look at that and we sort of extrapolate or it instructs us to look at the other exposures. The GOs that are coming, that we’re getting on March 15 and also transportation and PREPA and we put appropriate interest rate sensitivities with respect to inflation adjustments, that’s all taken into account in our future, loss reserves related to Puerto Rico.
Great. And then, Dominic, I know you've talked about this many times over the years, but could you just refresh our memory now that we may actually be seeing some rising rates in terms of, what are the key benchmarks that you watch in terms of new business production and both on maybe whether it's the 10-year, the Fed, I think it's 10-year? And then also on spreads, just like when you would anticipate, I know we've seen some pretty strong demand already, but you would really anticipate to start to see municipalities really coming back to market in size?
Well, Jackie, the long awaited it may be starting to come to fruition of rising interest rates, which we've been predicting going on back to 2011, but it actually finally came to realization. But what we look at, to answer your question is predominantly the 10-year treasury. We look at overall rates and more importantly, the economic condition surrounding the rate environment, because remember, the credit uncertainty, the global political uncertainty widens our markets and creates opportunity for the business irrespective of interest rates. But obviously, as interest rates rise, typically the credit spreads widen as well because they're kind of related, one is an aggregate, one is a percentage of that aggregate. So, uncertainty is a key driver, but we look at the 10-year treasury as kind of the biggest benchmark since most of our bonds have a 10-year call on them. That's kind of the rate that we look at. So, as we look at the potential movement in that rate, obviously you've seen the penetration starting to grow anyway across our markets relative to the use of insurance and the acceptance of the institutional investor. So, we believe that the rise in interest rates further enhances, if not exacerbates, those opportunities. So, we watch the 10-year treasury spreads overall, rates overall and then the other kind of surrounding economic whereas inflation, whereas growth versus recession, where is the geopolitical environment because all those things feed into the calculation.
Got it. And is there a number Dominic, in your head, where you think it really is a step function change in demand or is it more a sliding scale?
Jackie, I’ve been sliding that number for you. I can’t tell you how many years. So, right now probably, how can you place a 5-year, 3-year or 3% 10-year treasury.
Got it. Okay, thanks. I figured I'd do that, but I wanted to ask.
Yes. But Jackie, remember, all movements along that curve will significantly enhance demand. Remember, the market has gotten so used to refinancing on very low rates, it's kind of a need they’re going to need to continue to feed and the only way they'll be able to get there they’re comparable terms in a rising market is to use more insurance, which is obviously great news for us. Obviously, we think at a 3-year, 10-year treasury it’s a panacea. Right? A very different market relative to growth opportunity and the production that we would book, it would be substantially different than what we currently experience.
Great. Thank you, guys for your time. I really appreciate it. Hope you are all doing well.
Thank you, Jackie.
Thank you.
And the next question today comes from Michael Simple, a private investor. Please go ahead.
Good morning, gentlemen, and congratulations.
Thank you, Mike.
Yes, a few questions. You noted the bond refinancing which you affected in Q3 of last year and how you refinanced $600 million but raise an additional $300 million, which went towards share repurchase. I'm just curious. In the previous decade, the share buyback was affected by a request for a special dividend from your regulators. And in this instance, it appears that maybe you didn't go that route and instead opted to raise holding company debt to fund that additional buyback that was above and beyond your as of right. I'm just curious, do I have that correct? And if so, what motivated you to go that route rather than your traditional annual request for a special dividend?
It's a great question, Michael. So special dividend, obviously, we look at a lot of things, but one of the things that is really predicated on the special dividend is our relationship with the regulators and the regulators view of the company. So because of, not so much Puerto Rico, but the uncertainty from COVID, even though obviously, COVID didn't have a significant impact on the company in terms of the performance of the insured portfolio, we thought it would be wiser as the states still grapple with other issues for other companies kind of across a broad spectrum that we'd be smarter to delay that and then really get to a point where whenever we go to the state, they're just going to shake our hands, nod their heads and let us walk out of the room. I supposed they sit there and kind of rub their chins and say, well, you have this to worry about, that to worry about. So we think with both COVID hopefully behind us and Puerto Rico behind us, the state would really be in a lot better position and feel a lot more comfortable with the approval of any special dividend request. So we haven't had a special dividend request in the last two years, probably more than that. And obviously, we found other means to still accomplish our goals of capital management and obviously to your point, go ahead, Bob, I'm sorry.
I'm sorry, go ahead, finish now.
Then I was going to say as we look to 2022, we still think we can accomplish our goals without a special dividend. Special dividend would just further enhance our opportunities for capital management. And we said, as I said, I think we're going to be in a great position relative to that specific request as we go through the year, resolve the rest of Puerto Rico, finally get that off the books and therefore, obviously also have COVID finally burn out, so to speak, and leave us back to a normal lifestyle.
And Michael, about the debt refinancings, we looked at where rates were on the 10 and 30-year curve and saw what we could execute last year. And one, you're always looking at your cost of capital and the makeup of your capital and want to get the cheapest one. And by executing that first 10-year at 315 and the second and third year at 360 lowered our cost of capital significantly in addition to which it saves us money as we stated in our call. And we didn't increase our -- we didn't significantly or very small, we increased our leverage ratios and our coverage ratios remain very strong. So it was a very opportunistic and very strategic move by the company to go out and execute that and use that as excess funds for capital management without changing those ratios.
Understood. No, I mean, so in hindsight, you chose the perfect time to issue such amount of debt. So congratulations on that. A couple of other questions. As I listen to the benefits of the Assured alternative platform and the returns that is provided to the portfolio, that's all well and good. But I just wonder if you are able to provide guidance. I know in the previous call that you had indicated that while trends were improving you didn't think you were going to reach run rate profitability until perhaps Q3, maybe Q4 of this year. I'm just wondering with the turmoil in credit markets does that get pushed back into next year? And finally, are you at the stage where you can provide meaningful guidance as to what we could expect run rate revenue, profitability to be to look like once you do finally cross that threshold and put all the, so to speak, one-time losses behind you that have marked the performance to date?
Okay. So in terms of asset management, as we said on the call, I think we made tremendous progress across all boundaries of that specific operation. And if we look at it total contribution to the firm, it's a huge net positive to us. So the benefit of having it there with the ability to do the alternative investments and the returns that we've been able to realize through our own management has been substantial and therefore help to really make that a worthwhile proposition. If you look at the operations itself, we thought we'd be able to get to breakeven by the end of this year. We lost $3 million in the quarter and remember, that still includes depreciation and amortization. So if you look at cash on cash, it's positive, number one. Number two, what's really the secret sauce there in terms of turning the corner is two things. One, we still got to grow AUM against our fixed expenses relative to being a public company in the asset management space. And obviously, we grew AUM this year. We've got other plans that we have not made public to further enhance the growth in AUM in 2022. So that should help with the equation of profitability. Number two, if the expense is relative and the distraction of the legacy funds and hopefully by the end of 2022, we will no longer have any legacy funds. So I think getting rid of the legacy funds and the growth of assets will turn that to profitability, the continued use of it as a manager of our own alternative investments has been hugely beneficial and profitable for us. And that's a scale business. We need to get more scale. So we've got strategies to increase the scale and the breadth of the operations and as we execute them through 2022, we look for a very positive result. Once we get to those new asset classes and new fee management propositions we'll be able to provide further direction. But as we launch them, obviously, there's a lot of uncertainty at the beginning and as you get further performance, you are going to get more comfortable on expectations.
Michael, I just want to add for the Group. I'm getting text that I might have said something incorrectly. So just to be clear, we declared a dividend of $0.25 per share. If I said $0.27, I don't remember saying it, but it's $0.25 per share, and we over last -- the previous dividend was $0.22 per share, a 13.6% increase. Thanks.
And then just one final question, sort of a followup to the question you had from the Putnam team. Let us work with the assumption that spreads are 50 basis points wider in the new issue space, again, just choosing that as an arbitrary figure given the run-up in interest rates and the widening in credit spreads. In an environment where new issuance is 50 basis points wider for issuers, theoretically how much of that do you think you can capture in terms of enhanced underwriting spread where it's a win for them and it's clearly a win for you?
Well, that's another good question. So if you think about it, if you go back to when there were seven AAA companies competing for the business, you captured typically for premium purposes. And remember, our premium is our rate, which is a percentage of the spread, times the debt service. So when you have a widening of spreads and increase of rates, hey, the basis for which your calculation goes up, and then, of course, the widening and spreads also increases what you're able to chart, so it's a win-win. So if you go back to say, 2004, 2005, maybe you were getting anywhere between 10% and 20% of the spread. Today, we get between 40% and say, 60% of the spread. So if you do your math and say, okay if the par is X, the debt service is Y, that spread goes up 50 basis points, and I can on average capture 50% of the increase of 50 basis points, that's 25 basis points across the entire debt service spectrum, you can get an idea of what that means relative to premium. It's a good number.
Thank you. Ladies and gentlemen, our next question today comes from Jonathan [indiscernible] with Deutsche Bank. Please go ahead.
Yes, good morning guys. Thanks for taking the question. So I just want to go back to the debt liability management one more time. So you guys obviously had very good success with that in 2021 lowering your coupons, getting the interest expense lower. You still have a number of contingent preferred securities outstanding that lack modern LIBOR fallback language. So I guess my question is two part; one, do you have any plans to address or do additional debt liability management perhaps on those securities to deal with the LIBOR language? And then two, if not, how do you see things playing out in the back half of 2023 around the LIBOR language in coupons on those securities?
Well, every time we see a date the end of LIBOR continues to be extended. So I guess we'll hold that as it is. And number two, the contingent security financing is incredibly cheap. So other than working around the legal logistics of the LIBOR language, this is a very cheap form of capital.
Yes, it's our cheapest form of capital at this point and it's perpetual, and it's dollar per dollar credit for the rating agencies.
Yes, we're going to look to refinance any more debt we still got some 5 percentage out there, what Rob, 300 and…?
Yes, we have $330 million that's coming due in 2024.
Great, thank you.
You are welcome.
And our next question today comes from Geoffrey Dunn at Dowling. Please go ahead.
Thanks, good morning.
Hey, Geoff.
Hi Geoff.
If we fast forward a year and Puerto Rico is off the liability side and maybe you have some residual assets to manage, then the story becomes then about new business and capital management and asset management, kind of going back to the way things were 15, 20 years ago. And obviously, the capital management is a big headwind when you're posting single-digit ROEs on a GAAP basis, and we can assume that the underlying FG business is double digit. So Dominic, can you help us triangulate how that business should be run and back to the question of really rightsizing that platform, rough idea, what is the underlying targeted ROEs of a largely mini business and financial guarantee and anything else you can kind of point us to there, try to help us get an idea of what the excess management need is going to be once you get past the credit headwind?
Hi Geoff, that's a complicated question. I'll give it my best shot and I'll probably get a lot of head shake if you must, my stand as I answer this question because all will be concerned about what I say. So let me first give you a commercial. So my commercial is as follows. We've had to play defense in this company since the day we went public. If you think about it in 2004 we were split rated, we were the smallest financial guarantee company out there. We were struggling for market share. Moody's gave us a market share of minimum to upgrade us. So we struggled those early years to get recognition and acceptance. We finally break through, and I can't remember the exact date, but I think it was in 2008, we finally get all three AAAs, which everybody else had. So we're now on a competing platform with them, and it gets taken away from us in three months because of the financial crisis. So now we're into the financial crisis and of course, everybody had a huge expectation of the doom of Assured Guaranty, which obviously, we knew better even though nobody believed us, at the end of the day, we had full confidence in the ability of the company because we knew our books better than anybody else knows our books and trust me, we knew where our exposures where and we knew how to get around them. So we fight that for a number of years. So I said, okay, finally, we got that behind us. We took advantage of it. We bought our competitors at very steep discounts, really enhanced earnings, but we created a portfolio that included the 5.5 companies we bought plus our own writing new business in a very impaired marketplace. So by definition, you could not replace the volume of that earnings, it's impossible. You've got basically 6.5 companies' portfolios with one company writing in impaired market. But anyway, we fight that fight. We say, okay, we're going to finally get through the plan. We're proving to people that we don't have the problems the other guys have. We're the survivor and we're taking advantage of being the survivor. And what happens, Puerto Rico declares bankruptcies. So here we are again, back in a fireside with $5.5 billion of exposure to Puerto Rico. So we had to fight that fight. We said, okay, finally, we think we got Puerto Rico behind us, even though the market still didn't believe us that basically we've defeated this thing economically to our benefit, and then okay, fine, we'll take the criticisms as we always have because we did have too much Puerto Rico exposure, but a lot of it came through acquisitions that we got paid very well for. We're actually doing the analysis now by going back and recapture those premiums to see what the net-net of that was and I think it's going to be a pleasant surprise. And then what happens, we get hit by a pandemic. So we say okay, so from 2004, we've been in a battle the entire time. As I look at 2022, with Puerto Rico very much looking like it's in our rearview mirror because of the settlements that had already been agreed and it's just a matter of execution, and the pandemic finely resolving, our portfolio is well structured, diversified across many obligations to which all of them have withstood the test of recessions, natural disasters, pandemics. So we feel really confident that for once we can now go on the offensive and not defensive. Now as part of being defensive, we kept a very large excess capital balance because you had to. We had people predicting doom and gloom. And if we were addressing in those years, they'd say, were these people nuts, they're going to get rid of their capital cushion when they've got $5.5 billion of Puerto Rico. You couldn't, your hands were tied. Well, guess what? The times are coming off our hands. We're going to be allowed to aggressively manage the organization. So what are the challenges in the organization as you hit the nail right on the head, ROE, while we're moving the R as best we can, the market will really support us in further enhancing that. But asset management is the key, and asset management is two things, one growth A, B get rid of the legacy portfolios which we're well on the way to doing. We've got new strategies coming on in 2022 that we haven’t announced yet. So we're working on the ARPU finance guarantee and through asset management. Now it's the E, the E is the biggest driver. Do you go back and take out excess capital, the recipe continues to innovate and we were pricing ourselves. Well, if you take out our excess capital number, you'll find our ROE becomes really competitive and really in today's interest rate environment, a high 8 or 9 ROE is not bad and of course with our episodic transactions like reserves you can obviously get in the double-digits on a regular basis which we had done. So we've managed the company well, but please be challenged, if we're going to look at that be really hard and see whether those other strategies to enhance our opportunity to manage need, because if I can move the R, drop the E then I was going to get that ROE to excess of the cost of equity and therefore we've never had had a different evaluation of this company, that's the goal, that's the objective. We're working hard to get it done. And as you can look at this company's performance in the past, we typically do no fail when we set an objective for the organization.
Okay, and can you remind, what was the last estimate under the S&P modeling over last July, full year excess capital against AAA? And…
I'm sorry Geoff, it was 2019, it was $2.6 billion.
And fair to say that the underlying financial guarantee business is a double-digit return so far?
We calculate our [indiscernible] on every transaction we do as summary for the year. If I told you the exact results I'd have to shoot you, but they are very, very positive.
Okay, thank you.
You are welcome.
And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the call back over to Robert Tucker for closing remarks.
Thank you, operator. I'd like to thank everybody for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.