Bond insurer’s Assured Guaranty Ltd.’s operating income improved to $166 million in the third quarter of 2012 from $38 million in the third quarter of 2011.
On a per diluted share basis, operating income improved to $0.85 from $0.21.
However, Assured Guaranty’s net income declined to $142 million in the third quarter of 2012 from $761 million in the third quarter of 2011. On a per diluted share basis, this was a shift to $0.73 from $4.13.
“The increase in operating income compared with third quarter 2011 was primarily due to higher refundings and accelerations of net earned premiums, lower loss expenses, which was significantly higher in third quarter 2011 due mainly to changes in discount rates, and a lower effective tax rate,” Assured Guaranty stated in a press release.
Operating income is not a Generally Accepted Accounting Practices measure. However, some analysts believe it is the best measure of a bond insurer’s financial performance.
The gross par of insurance written declined to $3.2 billion in the past quarter from $4.6 billion in the third quarter of 2011. Just looking at U.S. public finance insurance written, gross par declined 31% in these periods to $3 billion from $4.34 billion.
“Despite the challenging interest rate and market environment, the company maintained average new business credit ratings in the A category,” Assured stated. “Pricing varies due to the mix of business; however, premium rates in third quarter 2012 were consistent by sector with rates in third quarter 2011.”
Assured’s “third quarter 2012 loss expense was $100 million ($66 million after tax, or $0.34 per diluted share), compared with $254 million ($191 million after tax, or $1.04 per diluted share) in third quarter 2011,” Assured reported. “The decrease was primarily due to lower loss expense in the U.S. residential mortgage-backed securities sector, offset in part by higher international public finance losses attributable to Spanish sub-sovereign exposures.”
Moody’s Investors Service put Assured’s Aa3 on review for a downgrade on March 20.
“Assured Guaranty is operating with a overhead from Moody’s,” said BTIG managing director Mark Palmer. “As a consequence new business was down [in the quarter].” Issuers appeared reluctant to seek Assured’s insurance when the rating might change between the transaction’s pricing and closing.
Despite this, Assured beat earnings expectations by having: higher refundings, accelerated premium earnings on insured transactions, terminations, and a significantly lower year over year loss expense, Palmer said. This shows that Assured Guaranty can generate economic value through other means besides new business, Palmer said.
Assured had its best quarter for insuring public finance in the secondary market since 2008, insuring $500 million in par there. There is a significant amount of nervousness in the market regarding outstanding municipal debt, Palmer explained. This helped Assured in the past quarter to do wraps in the second quarter and will continue to help it in the coming quarters, Palmer said.
