Assured Guaranty Ltd., reported declines in first quarter 2016 net income and operating income, while reaching new records with the adjusted book value per share, all in the face of a continuing challenging interest rate environment.
Net income fell to $59 million, or $0.43 a share, in the first quarter this year, from $201 million, or $1.28 a share a year earlier, according to a May 4 press release.
Operating income fell to $113 million or 82 cents a share, for the quarter, from $140 million, or 89 cents a share.
Shareholders' equity per share, operating shareholders' equity per share and ABV per share reached new records of $45.26, $44.08 and $61.40, respectively. Those figures were at $43.96, $43.11 and $61.18 at year-end 2015.
"Assured Guaranty is off to a strong start in 2016. Once again, we set new per-share records for operating shareholders' equity and adjusted book value," said Dominic Frederico, president and chief executive officer during the earnings call Thursday morning. "In new business production, we saw our best start in four years, with $38 million of present value production, or PVP, in the first quarter. In our largest market, U.S. Public Finance, total PVP grew 138% over first quarter 2015 production, in a very challenging environment."
Frederico also noted that while total municipal issuance declined 7.1% compared with first quarter 2015 issuance, insured volume declined by only 4.9% and that industry insurance penetration of 5.9% was modestly higher than the 5.7% from the first quarter of last year.
"During the first quarter of 2016, Assured Guaranty continued to lead the market in par insured, capturing 54% of all insured new-issue par. Our 198 primary-market transactions represented over $3 billion of insured par, compared with $3.4 billion in last year's first quarter. Notably, however, this year's pricing was far superior on both an absolute and risk-adjusted basis," he said.
In the May 4 press release, Frederico also mentioned the acquisition of CIFG which was announced on April 13. The "strategic" move cost Assured $450 million is expected to be accretive to Assured Guaranty's earnings per share, operating shareholders' equity and adjusted book value. Additionally, the acquisition should enhance the value and market liquidity of the bonds insured by CIFG NA, according to Assured.
Interest rates remain low. However, most experts predict as many as two rate hikes by the Federal Open Market Committee this year, which would be beneficial to all three active muni bond insurers.
"Additionally, when interest rates rise, the number of eligible deals at various rating levels that will be able to benefit from our insurance will grow. We expect long term interest rates to rise gradually but the increases will accelerate as the Federal Reserve continues to increase short term rates," he said.
Frederico continued to say that if long-term municipal yields rise above 5%, this will increase the demand among retail investors for municipal bonds, and retail investors are a critical component in the demand for insured bonds.
"Higher rates will help us not only in the U.S. public finance but also in structured finance and internationally. We are the only bond insurer with a diversified strategy − a strategy that removes the dependency on any one financial market. We've found that our large and growing capital base, our broad market acceptance and the proven market liquidity of our insured bonds have allowed us to raise prices and still insure the most volume in the municipal bond industry."
