Bond Insurers

Insurers In Stark Contrast

Bond insurers Assured Guaranty Ltd. and MBIA Inc. each released first-quarter earnings Monday, and while their results were vastly dissimilar, they shared at least one thing in common — each company’s stock quickly tumbled afterward.

MBIA fell almost 6.22%, or $0.58 to $8.75, after the company posted a net loss to shareholders of $1.5 billion in the quarter, mostly driven by a $2.2 billion loss on insured credit derivatives.

Assured stock closed the day down 9.26%, or $1.85 to $18.13, after it revealed that strong profits were not a reflection of new business production.

MBIA’s $2.2 billion derivatives loss caused its total book value to sink to $6.61 per share from $12.66 in the quarter.

The company has not written new insurance since its balance sheet imploded during the financial crisis due to its exposure to mortgage-backed securities and other risky financial products. It explained that gains and losses on credit derivatives can be misleading, whereas its normal operations remained steady.

Last quarter’s loss, the company told investors in a conference call, was driven by market confidence that MBIA would be able to pay future claims on credit default swaps, thereby causing the value of its obligations to increase. In the first quarter of 2009, similar market perceptions had deteriorated, which gave MBIA’s balance sheet a $1.6 billion gain.

“Just as we do not believe that our credit quality deteriorated by $1.6 billion worth in first quarter 2009, we don’t believe that it has improved by $2.2 billion in this quarter,” said Chuck Chaplin, MBIA’s president and chief executive officer.

Chaplin said that using adjusted-book values, a measure of accounting that does not adhere to generally accepted accounting principles, MBIA’s per-share value declined less dramatically, to $36.01 from $36.35 in the quarter.

“Our businesses operated near break-even on an adjusted-book-value basis this quarter,” he said.

Meanwhile, Assured posted numbers showing an outstanding quarter.

It posted first-quarter operating income of $89.6 million, a 41% increase from the same period one year ago. Moreover, quarterly revenue was $683.9 million, a 181% increase from last year, while gains on credit derivatives produced $230.8 million.

However, most of those gains were not driven by new business production.

The “principal reason” for the favorable numbers, the company’s earnings statement said, was its July acquisition of Financial Security Assurance, which Assured re-named Assured Guaranty Municipal Corp.

New business production for municipal bond insurance declined substantially from the same period last year.

Through the two subsidiaries, Assured Guaranty Corp. and Assured Guaranty Municipal, the insurer guaranteed $74.3 million of primary market issuance — a 41% decrease from a year ago.

Assured attributed the decline to tighter spreads and adhering to strong underwriting standards. Another factor was the prevalence of taxable Build America Bonds in the municipal market. The growth of BABs has limited tax-exempt issuance while largely operating without credit enhancements.

“To date, BAB bond issues have had lower insurance utilization than tax-exempt bonds because of the large size of the issues and the high credit ratings of the issuers,” the earnings statement said.

In a conference call for investors Tuesday morning, Assured president Dominic Frederico said insuring BABs is less appealing to issuers for structural reasons.

Traditionally, the insurance charge, which lowers the borrowing cost, is considered part of the coupon rate. But in the BAB market, the insurance premium is outside the federal government subsidy, which means that at certain times it can be too expensive for the issuer to buy insurance, he said.

“So we’re trying to work with the Senate and the Treasury to say, if you put in the insurance premium as part of the BAB subsidy, you actually lower the cost to issuer, you lower the cost of the government subsidy, and you make the premium that we charge taxable, so it’s really a kind of triple-play, hat-trick benefit,” Frederico said.

Overall, Assured backed 6.3% of the bonds issued last quarter, or 8.8% of new tax-exempt issuance.

Before the credit crisis, insurers routinely backed more than half of all issuance. But as investors increasingly emphasize underlying ratings, Assured has struggled to increase the market share of insured bonds.

Frederico has said repeatedly that Assured will benefit from more competition in the muni market, as it would give investors confidence that bond insurance is a viable product.

MBIA’s muni-only insurer, National Public Finance Guarantee Corp., maintains the largest public finance portfolio in the industry at $499.2 billion. NPFG’s statutory capital, defined as assets over liabilities, was $2.1 billion at the end of the quarter, while claims-paying resources were $5.6 billion.

It hopes to be one of Assured’s competitors once lawsuits contesting the transfer of capital that enabled its creation in February 2009 are resolved.

Meanwhile, since late 2008 MBIA’s main activity has been pursuing legal remedies against a number of financial counterparties which, it alleges, induced the insurer to guarantee highly rated assets that the banks knew were risky.

“It’s important to remember that a significant portion of the major losses that MBIA has sustained over the past three years has more to do with collateral that was misrepresented and doomed to fail, rather than the recession,” said Jay Brown, MBIA’s chief executive officer, in a call with investors.

In the earnings statement, Chaplin added: “While the damage done to our balance sheet and franchise is severe, our contractual rights and litigation claims are strong and we are confident that we will ultimately realize substantial recoveries.”

Unless MBIA succeeds in that goal, or a new insurer steps up with high-grade ratings, it looks as though Assured will remain the dominant player in an uncertain market.


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