Amid some of the toughest economic conditions for municipal issuers in decades, bond insurer Assured Guaranty Corp. has tightened its municipal underwriting standards, its parent's president said.
Assured said about 20% of the municipal deals that it was offered failed to meet its credit standards, compared to about 5% a year and a half ago, Assured Guaranty Ltd. president and chief executive officer Dominic Frederico said during a first-quarter earnings conference call Friday.
"We have further strengthened our underwriting standards to reflect our current expectation of municipal performance," Frederico said. "We don't accept every deal we're shown, even if they are rated investment-grade by the rating agencies."
He noted that muni defaults hit some of their highest levels in years in 2008, with about 130 issuers defaulting on $7.5 billion of debt outstanding - although about $3.2 billion was attributable to Jefferson County, Ala. Most were uninsured issues.
However, municipal bonds have ongoing revenue streams, making it easier to recover from short-term challenges, unlike structured finance products, which typically have fixed and terminal payment pools, Frederico said.
In addition, the concerns about the municipal economic environment may actually increase the demand for Assured insurance. With the downgrades to most of its competitors, Assured has been the dominant bond insurer in the market, wrapping 434 issues with a par value of $9.3 billion in the first quarter of this year, according to Thomson Reuters.
Frederico also continued to voice his concerns over Fitch Ratingse_SSRq recent downgrade of Assured Guaranty Corp. to AA.
The financial guaranty industry would benefit from having a more consistent set of capital and stress test guidelines, Frederico said. Financial guarantors currently face different models and assumptions from the three major rating agencies, in addition to any regulatory requirements.
He suggested that one super-regulator should be tasked with overseeing the industry, whether at a new federal entity, an existing federal entity, or one existing state agency, such as the New York Insurance Department, getting increased powers.
"From our point of view, we would like to see some comprehensive regulator," Frederico said.
Assured also said it soon expects to hear back from the rating agencies on reviews of its proposed acquisition of Financial Security Assurance Holdings Ltd. Assuming the agencies don't say the deal will have a negative impact on either company's rating, Assured expects to complete the deal by the end of the second quarter.
Assured Guaranty Ltd. Thursday night reported a first-quarter net income of $85.5 million in 2009, compared to a net loss of $169.2 million in the first quarter of 2008. Its net operating income jumped to $63.4 million from $6.2 million in the same periods.
Assured's stock traded up 23.27% yesterday to $13.72 per share. The parent companies of some other bond insurers also rose in trading, with MBIA Inc. up 12.83% to $7.21, Ambac Financial Group Inc. up 21.97% to $1.61, and Radian Group Inc. up 25.48% to $3.30.
Elsewhere, MBIA Inc. on Thursday announced it would split its chairman and CEO roles to improve corporate governance. CEO Jay Brown will remain on the board of directors, and director Daniel Kearney will take over as a non-executive chairman.