With the bond insurance industry pretty much all to itself, Assured Guaranty Ltd. solidified its dominant position in the second quarter and captured virtually a 100% share of the municipal bond insurance market in July.
Under standard accounting principles, Assured Guaranty lost $170 million, or $1.82 per share, during the second quarter.
Because of an accounting quirk in how companies account for credit derivatives, this loss was actually because the company’s own credit quality improved.
Assured Guaranty recorded $190.2 million in losses on credit derivatives. The losses stemmed from a narrowing of Assured’s own spreads, according to the company, implying it is less likely to default on its end of contracts.
The way the Financial Accounting Standards Board sees it, that imposes an opportunity cost: if Assured wrote those derivatives today, it would be able to charge more than it did before the spreads narrowed.
Assured claims the gains and losses on derivatives will fluctuate over time, and converge to zero as they mature.
Excluding the derivatives loss and certain other charges, Assured reported operating income of $27.3 million, compared with operating income of $38.7 million in the second quarter of 2008.
The company attributed much of the decline to the cost of buying Financial Security Assurance last month.
The combined company is essentially the only carrier writing new business in bond insurance.
Assured and FSA together claim they insured $3.3 billion in municipal bonds in July, which is actually more than the $2.9 billion in total insured volume reported by Thomson Reuters.
The combined company claimed a 12.9% share of overall issuance, which is basically 100% of insured issuance.
The acquisition of FSA “marks a major step forward toward our strategic goal of transforming Assured into the market leader for financial guaranty insurance,” Dominic Frederico, chief executive officer, said in a statement.
New premiums written sank 50% to $140 million, mostly because of “limited activity in the global structured finance, infrastructure, and financial guaranty reinsurance markets.”
New premiums in public finance declined 30% to $127.8 million, which the company described as in-line with a decline in issuance overall.
Assured insured $10.26 billion in munis during the second quarter.
The company also booked an increase in investment income, to $43.3 million from $40.2 million. The insurer collected about $616.5 million in proceeds from a stock sale during the quarter.
While most of that was used to pay for the acquisition of FSA, Assured generated investment income off it before the deal closed.