Bond insurers' fourth-quarter results underscored the obstacle posed by low interest rates as they look to rebuild market share seven years after the financial crisis.
Assured Guaranty Ltd. and MBIA Inc. both reported profits for the quarter and full year, while officials of both companies said the current interest rate environment curtailed opportunities to expand.
"With rates near record lows, it's difficult to generate new business and the value proposition of bond insurance is not nearly as impactful," said Mark Palmer, analyst at BTIG LLC, who recommends the shares of both companies.
Insurers increased their penetration of the municipal bond industry to 5.5% at year end from 3.4% at the end of 2013. While volume for the two publicly traded companies, along with the mutually-owned Build America Mutual, jumped almost 62%, penetration remains a fraction of what it was before the 2008 collapse, when more than half of muni bonds carried insurance.
Economists expect the Federal Reserve, which has kept the fed funds target rate near zero since 2008 to restart the economy, to begin raising rates later this year. That may widen credit spreads, increasing the value of carrying insurance on lower rated bonds as well as demand for bond insurance, according to Palmer.
Assured reported that one of its objectives for 2014 was to grow new business activity. That was accomplished, it said in its report, as the company recorded a present value of new business production (PVP) of $168 million, 19% more than in 2013, with contributions from each business segment.
Dominic Frederico, president and chief executive officer, said in Assured's conference call that the company has been generating more capital than it can put to work at acceptable returns in the current low interest rate environment. With limited opportunity to deploy capital on new business, the company has relied on share buybacks to return value to its shareholders.
"Over the two years from January 2013 through the end of 2014, we returned $1 billion of excess capital through the repurchasing of 37 million shares, or 19% of our January 1, 2013 share count, and through our quarterly dividends," Assured said in its earnings report.
"The buy backs were a big part of the story with both companies," Palmer said.
In its report, MBIA said that "in addition to $300 million in the third quarter of 2014, [it's municipal unit National Public Finance Guarantee] wrote approximately $43 million par amount of primary new insurance during the fourth quarter of 2014, and $26 million in January and February of 2015.
The report added: "Low interest rates, narrow spreads and competitive pricing levels continue to limit new business opportunities. Net investment income for the U.S. public finance insurance segment was $29 million in the fourth quarter of 2014, down from $33 million in the fourth quarter of 2013 primarily due to lower average investment yields."
In the fourth quarter, MBIA launched a share-repurchase program, which had an impact on its earnings per share in that quarter, according to Palmer.
"They began to buy back shares in the fourth quarter of 2014 and then bought even more in January and February of 2015," he said.
National reported its capital position continues to strengthen, "leaving us well-positioned when rates begin to increase," said Chuck Chaplin, president and chief financial officer.
Likewise, Assured's Frederico is confident about the future because "we continue to adhere to the core principles behind that success. I do not know when interest rates will ultimately rise from their current near-record lows, but we are the best positioned guarantor to benefit from rising rates when they come," he said.
BAM's co-founder and chairman, Bob Cochran, said that last year was a great year of growth for BAM and the industry, and that momentum has carried forward into the first quarter. BAM said it has wrapped more than $14.5 billion in par value since it started in 2012, and published more than 1,550 Obligor Disclosure Brief credit summaries, which add to the value investors and issuers place on the insurance in the current market.
