Assured Guaranty Ltd. told investors Friday that its strong second-quarter earnings demonstrate that it is beginning to recover from the after-effects of the recession and financial crisis.
“We are making good progress in building customer demand and product acceptance in our U.S. municipal target markets,” Dominic Frederico, president and chief executive officer, told investors in a conference call.
The insurance holding company late Thursday posted its highest operating earnings ever for a single quarter, with $172 million earned from April to June. That reflects a 530% increase from the $27.3 million recorded in the same period a year ago, though the startling statistic has much to do with Assured’s June 2009 acquisition of Financial Security Assurance.
Operating earnings is a measure of accounting that does not adhere to generally accepted accounting principles but instead attempts to capture future income earnings minus future liabilities.
Assured Guaranty is the only bond insurer to have maintained double-A or higher ratings throughout the financial turmoil of recent years. Its competitors were downgraded in 2008 and forced to stop writing new business after structured mortgage bonds they insured defaulted, causing billions of dollars of cumulative losses.
Its U.S. insured public finance portfolio amounts to $381 billion, according to Friday’s second-quarter financial supplement. That is the second largest insured portfolio in the industry after the half-trillion dollar book insured by National Public Finance Guarantee, a competitor that isn’t writing insurance policies because of ongoing litigation.
Frederico said Assured had three accomplishments in the second quarter. It “gained considerable traction” in the municipal business, “added significantly” to the number of opportunities in the global public infrastructure and structured finance markets, and “expanded our loss mitigation capabilities” in the insured residential mortgage backed securities portfolio.
The company’s adjusted book-value, or ABV — another non-GAAP measure — was $48.41 per share, or one cent above the year-end 2009 price.
The ABV figure is about three times its current stock price, which jumped Friday to
Shareholders’ equity at mid-year was $3.87 billion, reflecting a 10% increase in the first six months of the year. The company attributed much of that gain to the $525.5 million of net income earned from January to June.
While Assured continues to dominate the municipal bond insurance industry, questions continue to linger about the industry itself.
Before the financial crisis, it was common for more than half of all issuance to be insured in the primary market. Since 2008, less than 10% of new issuance has been insured.
In the first six months of the year, Assured’s monthly penetration into new issuance ranged from 3.8% in March to 9.2% in June, according to Thomson Reuters.
One problem for Assured is the lack of competition in the market, which hurts the image of bond insurance as a viable product.
“We have been highly focused on rebuilding investor confidence,” Frederico told investors. “We’ve been in contact with almost every institution and fund that invests in municipal bonds.”
Frederico said in the question and answer session that Assured has frequent conversations with insurance commissioners in New York and Wisconsin regarding the public finance portfolios of its struggling competitors.
“Our concern is the validation of the product, the protection of the policyholder,” Frederico said. Responding to whether Assured was thinking of assuming the portfolios of other failed monolines, he said it was an ongoing discussion.
“There’s no current submission,” Frederico said, “but there’s discussion all the time about portfolios, because that’s part of the protection of the policyholder.”
Another problem is the impact of taxable Build America Bonds, which generally come to market uninsured. BABs have limited the supply of tax-exempt bonds eligible for insurance, thereby tightening credit spreads and making it difficult for insurers to save borrowers money.
Frederico said insuring BABs could prove fruitful in the near future due to heightened concerns regarding muni credits.
“Taxable invetors, who are not traditional buyers of municipal bonds and bond insurance, have become concerned about municipal risk and we believe will benefit by our credit reveiew, transaction structuring, and surveillance,” Frederico said, adding that insurers offer more than just timely payment of principal and interest.”
Assured has two platforms: Assured Guaranty Municipal Corp., and Assured Guaranty Corp. AGM, the more active of the two, is a muni-only insurer previously named Financial Security Assurance. It maintains total claims-paying resources of $6.93 billion, and its net par outstanding to qualified statutory capital ratio is 154 to 1.
AGC is a diversified insurer that writes policies for municipal bonds and structured finance products. It holds $3.76 billion in claims-paying resources, and its net par outstanding to qualified statutory capital ratio is 76 to 1.
Together the two insurers wrapped about $14 billion, or 7%, of the $204 billion municipal bonds issued in the first six months of 2010.
Standard & Poor’s in mid-May affirmed its AAA rating with a negative outlook on both insurer platforms. Moody’s Investors Service gives each insurer Aa3 ratings, three notches lower.