Assured Guaranty Ltd., the biggest municipal bond insurer, reported declines in fourth quarter and 2015 net income, even as it increased operating income, adjusted book value and business production in the face of a challenging interest rate environment.
Net income fell to $429 million, or $3.03 a share, in the fourth quarter, from $532 million, or $3.28 a share a year earlier, according to a Feb. 25 press release. Net income for fiscal 2015 slipped to $1.06 billion or $7.08 a share from $1.09 billion, or $6.26 a share for fiscal 2015.
Operating income rose to from $117 million, or 83 cents a share, for the quarter, and a record of $699 million, or $4.69 for the year, from $81 million, or 50 cents a share, and $491 million, or $2.83 a share, in 2014.
"Assured Guaranty completed another successful year with record operating income, while we also further strengthened our balance sheet, reduced insured leverage, and continued to optimize our capital structure," Dominic Frederico, president and chief executive officer, said in the release. "Additionally, we saw continued growth in demand for our core product, municipal bond insurance. Considering the near-record low interest-rate environment, we are confident this increased demand signals renewed market recognition of Assured Guaranty's value proposition, financial strength and proven business model."
The net present value of new business production was $76 million for the fourth quarter of 2015, bringing the total to $179 million for the year, a 7% increase from 2014. Operating shareholders' equity per share and adjusted book value climbed to records of $43.11 and $61.18, respectively.
In a conference call, Frederico said insured penetration grew despite lower interest rates and tighter credit spreads than in the preceding year.
"The index for thirty-year AAA yields averaged approximately 35 basis points below its 2014 average and during the year, credit spreads tightened to levels not seen since 2008," he said. "While these conditions constrained pricing, we maintained our discipline and were even able to improve pricing as the year progressed. Clearly, the growth in demand is driven not by the rate environment but by improved perception of our guaranty's fundamental value. If long-term interest rates increase, growth could accelerate significantly."
Assured's share repurchases totaled $135 million for the quarter and $555 million for 2015 The board of directors on Feb. 24 authorized an additional $250 million of share repurchases, which will drive adjusted book value higher, said Mark Palmer, analyst at BTIG LLC.
"AGO has continued to add to its reserves against potential losses from its Puerto Rico exposure and the company disclosed that its $319 million in economic loss development was primarily driven by increases in its expected loses from the Commonwealth's debt," said Palmer in his report. "We continue to believe that a dire outcome for bondholders from Puerto Rico's debt restructuring is already more than reflected in AGO's discount valuation."
Frederico said Puerto Rico concerns tended to obscure the company's accomplishments in 2015.
"Let me put this into perspective," he said. "Puerto Rico downgrades immediately showed the market an important benefit of our insurance. Puerto Rico-related bonds we insured have consistently traded better than their uninsured equivalents since the downgrades and often by wide margins."
Frederico also emphasized that negative headlines do not trigger losses.
"We have repeatedly been able to use our capital, liquidity and market access to work through troubled credits with outcomes far superior to what was initially offered – as witnessed by the outcomes in Detroit, Jefferson County and Stockton," Frederico said.
