NEW YORK - Assured Guaranty reported a hefty loss for the fourth quarter late Thursday as the insurer suffered from drastic deterioration in the value of the mortgage debt it guarantees.
The Bermuda-based insurer posted a $157.5 million loss for the fourth quarter last year, compared with a $220.8 million profit in the fourth quarter of 2009.
The primary culprit was a $376.2 million loss in Assured’s mortgage book, reflecting expectations it will have to reserve money to pay claims on defaulted debt insured by the company. Assured said it updated its models for how to estimate defaults on certain kinds of residential mortgage debt, namely first-lien mortgages, based on delinquencies early in the course of a loan, the severity of losses, and how likely very optimistic or pessimistic scenarios are to play out.
Another factor weighing on results is that the insurer is no longer booking as much revenue from premiums on structured finance debt. The company is insuring very few new structured finance deals, and its existing book is dwindling as the loans in its book are refunded or accelerated and not replaced. The value of structured deals Assured guarantees shrank to $149.4 billion at the end of last year from $174.6 billion at the end of 2009.
Premiums eroded to $286.3 million during the fourth quarter from $373.3 million in the year-earlier period, in part because of the contraction in the structured book.
The quarter was rough for other reasons too. The present value of new business production in the public finance area declined 23% in the fourth quarter, and 47% for the year. In a statement, chief executive officer Dominic Frederico attributed the lower penetration of the public finance market to the Standard & Poor’s downgrade of the company’s financial strength ratings in October, to AA-plus.
“Ratings uncertainty has continued to have a negative effect on our 2011 new business production, although production has also been affected by historically low issuance volume,” Frederico said.
Other factors inhibited penetration last year. Moody’s Investors Service and Fitch Ratings recalibrated their ratings scale, leading to more states and local governments with higher ratings. The upward migration in ratings naturally decreased demand for bond insurance.
“A significant number of municipal credits [have] received higher ratings due to recalibrations and more frequent upgrades by the rating agencies,” he said.
Plus, a third of municipal bond sales in the fourth quarter were Build America Bonds. BABs made a poor fit for insurance, because the federal subsidy does not cover the cost of an insurance wrap.
Assured wrapped 6.2% of tax-exempt dollar volume in the fourth quarter and 11.8% of the deals.
While those figures represent a small portion of the overall market, Frederico said they demonstrate strong demand among smaller issuers and those that have trouble accessing the market.
“We insured approximately 15% of all new public finance issues rated A by S&P, which is our target market,” he said, adding that Assured wrapped more than 15% of all par for public finance issues $25 million or less in size.
Assured also paid $22.6 million public claims, mostly as a result of sewer debt issued by Jefferson County, Ala.