Bond Insurers

Payout Boosts Assured

Assured Guaranty Ltd. reported higher operating earnings than expected in the first quarter due to a large out-of-court settlement, but said new business production in public finance fell by about one-half compared to the same quarter last year.

Officials conceded that the stronger earnings were “obviously not sustainable” because they were boosted by a single event — a $1.1 billion settlement with Bank of America involving mortgage-backed securities.

The decline in sales of municipal bond insurance policies comes as issuance in the muni market has dropped 55% to an 11-year low.

As the only monoline to maintain double-A ratings or higher throughout the financial crisis, Assured has been struggling to keep up demand for bond insurance.

“New business production was lower than our goal for the quarter … but we think our production was reasonable,” chief executive Dominic Frederico said in an earnings call Tuesday morning. He cited uncertainty after Standard & Poor’s proposed new bond insurer criteria that could result in a downgrade for Assured.

Frederico noted the company’s penetration rate in the new-issue muni market has climbed, to 6.7% in March and 8.9% in April from 2.7% in January.

“Smaller and lower-rated issuers continue to rely on our guaranty for market access,” Frederico said, noting that Assured wrapped 13% of issues under $25 million and 12% of all issues rated single-A.

But the average rating of munis insured in the quarter was A-minus, two notches lower than the insurer’s average A-plus rating for its $417.4 billion public finance portfolio as of March 31.

“Total market share has been tough to maintain,” said Alan Schankel, managing director of fixed-income research at Janney Capital Markets. “To continue writing new business, they’ve lowered their credit standards a bit. However, that could be offset by premium increases, and if they are earning larger premiums by lowering credit standards, it may not be a bad ­decision.”

Matt Fabian, managing director at Municipal Market Advisors, said Assured can play on credit fears overshadowing the municipal market to its advantage.

“The current market is very worried about credit, so more people are willing to pay for insurance than before,” he said. “By going down the scale — even a little — Assured can get more premium without adding a lot more risk.”

Sabra Purtill, Assured’s managing director of investor relations, said there has been no change in underwriting standards. She said the lower average rating primarily reflected what issues came to market.

Assured wrapped $414 million of Puerto Rico bonds in the first quarter, which lowered the average rating, she added. The Puerto Rico bonds were rated A-minus, BBB-plus, and BBB.

The transaction represented about 18% of the $2.2 billion of bonds it guaranteed during the quarter.

Assured’s net income fell 61% from the first quarter of 2010 to $125.4 million in the first quarter of this year.

But operating earnings — a measure of accounting that does not adhere to generally accepted accounting principles but attempts to capture future income earnings minus future liabilities — jumped 125% in the quarter to $248.9 million.

The jump was largely the result of the company’s more optimistic assessment on how much it will retrieve through its efforts to force various financial institutions to reimburse it for losses it sustained insuring mortgage-backed securities. Assured and other bond insurers contend the financial institutions failed to live up to underwriting standards and must repurchase the insured loans that have defaulted as a result.

Assured captured $1.1 billion from Bank of America in an April 14 agreement, the biggest settlement to date for a municipal bond insurer since the housing collapse.

This settlement dominated the conference call as analysts sought details on how discussions with other financial institutions are doing.

Frederico said only that he expects to settle with or sue several more banks this year, including Deutsche Bank, UBS, Credit Suisse, JPMorgan, and Flagstar Bank.

“Conversations start out friendly, become awfully contentious, and then ultimately hopefully result in a settlement or an agreement,” he told investors.

The Bank of America agreement generated a pre-tax gain of $411 million, which will be recognized as income over several quarters. The bank is also obligated to cover 80% of certain losses up to $6.6 billion.

Frederico declined to offer a time frame for further settlements but said he was emboldened by increased attention to mortgage issues at the Treasury Department, the Securities and Exchange Commission, and the Federal Reserve.

He said the issue should be further clarified in the coming six to 12 months as the attention has led to “a more conducive environment to settlement.”

The agreement with Bank of America covers almost 30% of the firm’s outstanding below-investment-grade residential mortgage-backed securities. Assured is pursuing Deutsche Bank, UBS and Credit Suisse for a similar amount.

“So between them, that’s 60% of our total,” Frederico said.

Assured said it has so far reviewed $6 billion of loans from the three banks and found breaches of contract in $5.4 billion. It has another $9 billion to review.

Assured Guaranty closed at $16.02, down 3.61% from Monday’s close.


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