With more earnings released late last week, bond insurers continued to post large net incomes largely as a result of an accounting rule that discounts the value of their liabilities based on the market's perception of the company's own risk of non-payment.
MBIA Inc. recorded $1.7 billion in net income for the second quarter thanks in large part to $3.3 billion in pre-tax unrealized gains on credit derivatives, the company announced Friday. Assured Guaranty Ltd. late Thursday reported a net income of $545.2 million for the second quarter, with an after-tax unrealized gain on credit derivatives of $518.3 million.
Widening credit spreads on both companies' insurer subsidiaries led to the large unrealized gains, the companies said. The gains will reverse into losses once credit spreads narrow.
But both companies also reported positive net operating incomes, which excludes those gains. Assured posted an operating income of $38.7 million in the second quarter, compared to an operating income of $46.7 million for the second quarter last year. MBIA booked an after-tax operating income of $228.9 million in the second quarter, compared with $206.9 million in the same quarter last year.
MBIA chose not to change any of its projections for losses on its mortgage-related exposures, leading to minimal growth in impairments and loss reserves.
"While deterioration in the housing and mortgage markets continued over the past three months, it has been consistent with what we projected when we established reserves and impairments for our housing-related portfolio in the first quarter," MBIA chairman and chief executive Jay Brown said in a statement.
Downgrades to MBIA's insurance subsidiary - MBIA Insurance Corp. - took their toll in second quarter, further inhibiting its ability to write new business, the company said. MBIA has written just $1.4 billion in new issues this year, according to Thomson Reuters data.
In addition, the downgrade of MBIA Insurance to A2 from Aaa by Moody's Investors Service in June forced MBIA to terminate or post collateral on many of its guaranteed investment contracts. For the second quarter, MBIA Inc. sold approximately $4.3 billion in assets to rebalance its asset/liability management portfolio. It said it will sell more assets in the third quarter to strengthen liquidity and limit the potential impact of any further downgrade.
Including losses and impairments, the sale cost the company $517 million pre-tax, net of any hedging gains during the second quarter.
"Our biggest disappointments this quarter were the downgrades by Standard & Poor's and Moody's, which had a significant impact on our asset management business and our ability to write new insurance business," Brown said in a statement. "Our business model, however, is functioning as it should under the current stress. The deleveraging of our portfolio has accelerated in recent months, and our capital position improves daily."
MBIA also said Friday it may consider taking legal action against Pershing Square Capital Management LP, whose manager, Bill Ackman, has criticized MBIA for years, while taking a short position in the stock.
The statements followed a question in an earnings conference call which referenced a recent piece in the Financial Times in which New York insurance commissioner Eric Dinallo criticized those who have called insurers insolvent, noting a 1930s New York law "providing for civil and criminal sanctions for spreading false rumors or making statements 'untrue in fact' about an insurance company's solvency." The article did not reference any short-sellers by name.
"MBIA is assessing all of its actions and will take such actions as it determines are in the best interest of shareholders including any litigation that may be necessary," Brown said in a conference call. He noted that the company "agrees" with the superintendent's statement that "certain short-sellers may have, in fact, violated New York insurance law."
While MBIA and other downgraded insurers have floundered, Assured has picked up new business. The present value of Assured's gross written premiums in U.S. public finance increased substantially during the second quarter to $183.2 million from $15.4 million for the quarter last year, the company announced Thursday.
"Our second-quarter results for new business production in both direct and reinsurance reflect our strong position in a difficult market," said Dominic Frederico, president and chief executive officer of Assured Guaranty Ltd., in a statement. "Our overall credit profile across our entire portfolio remained strong during the quarter with only a modest increase in our closely monitored credit list."
But Frederico said in a conference call Friday morning that Moody's decision to put Assured Guaranty Corp.'s triple-A rating on review for possible downgrade has hurt business since late July. Some issuers planning to use Assured wraps have chosen to go to market without insurance, while Assured has had to lower its prices to attract others.
Frederico continued to express his company's "frustration" with Moody's decision, saying it appeared to be more about industry-wide conditions than Assured's itself. He reiterated that Assured exceeds Moody's triple-A capital target and that the pooled corporate exposures Moody's expressed concern about are mostly highly rated by the rating agency itself.
"We will continue to work closely with Moody's as we do with all the other rating agencies, but we still truly are saddened by the lack of clarity and justification, which has caused significant disruption in markets that rely on bond insurance, namely the U.S. public finance market, and also to our shareholders," Frederico said during a conference call.
Moody's said in a conference call last week that it bases its rating model on more than just capital adequacy. It also said it recognized the pooled corporate exposures have performed well in the past, but that they represented a large concentration to a single sector potentially sensitive to economic downturns.
Moody's said it will finish its review of Assured by early September.
