Bond insurers reported growth in their municipal market business as issuance surged through the second quarter, and those with exposure to Puerto Rico told investors that exposure is manageable as the territory heads toward a debt restructuring.
Assured Guaranty and National Public Finance Guarantee reported profit gains compared with the second quarter of 2014, driven by increases in new business. Build America Mutual, which has no exposure to Puerto Rico, reported a 23% increase in the gross par value of bonds insured and a gain in claims-paying resources. However, it posted a loss because of mark-to-market results from its investment portfolio.
Demand for bond insurance has been bolstered by year-over-year gains in long-term muni issuance every month through July this year. At the same time, Puerto Rico's plan to restructure its debts raised investor concerns over Assured and National, which have about $5 billion each in exposure to the commonwealth. Moody's Investors Service this month said the default by the Puerto Rico Public Finance Corp. is a credit negative for the two bond insurers.
Assured's net income rose to $297 million from $159 million in the second quarter of 2014. Net income for the first half of the year jumped to $498 million from $201 million a year earlier.
"Assured Guaranty produced excellent results in the second quarter," said Dominic Frederico, the company's president and chief executive officer. "Operating income reached a record $278 million, with the closing of our Radian Asset acquisition providing a significant benefit. We also further strengthened our balance sheet, and we continue to be the industry leader, insuring nearly two-thirds of the U.S. municipal insured par sold during the quarter."
Frederico estimated that the company on Dec. 31 had $1.9 billion of excess capital above the Standard & Poor's AAA requirement. The rating agency affirmed Assured's AA financial strength rating and stable outlook.
Assured Guaranty's operating shareholders' equity stands at $6.0 billion, or a record $40.55 per share, and adjusted book value is $8.7 billion, or $58.69 per share, an all-time high.
Assured's claims-paying resources grew by $634 million during the quarter to more than $12.6 billion. While this equals the $12.6 billion it had at third quarter 2009, Assured Guaranty has since reduced insured leverage of net par to statutory capital by 63%.
For transactions closed during the second quarter, Assured Guaranty's par insured was 128% higher than in the second quarter of last year and 129% higher than in the first quarter of this year. During the first half of 2015 Assured Guaranty insured over $8 billion in par.
Second quarter business was well underwritten, with lower average capital charges than in last year's second quarter. Also, the underlying ratings on 16 of those transactions were in the double-A category.
In regards to Puerto Rico and Assured's exposure, S&P indicated that default by multiple issuers in Puerto Rico would not change Assured Guaranty's capital adequacy score. Similarly, in affirming its AA-plus rating for AGM on July 6th, KBRA wrote that AGM's claims-paying resources exceeded KBRA's AAA requirement by "a comfortable margin" after simulated portfolio-wide stress-case losses plus significant losses on most classes of insured Puerto Rico debt.
As of July 31, Assured has a net par exposure of $5.14 billion to Puerto Rico.
"Typically, our losses have been a fraction of our exposure to a defaulting credit," said Robert Tucker, managing director of corporate communications and investor relations. "To put some perspective on this, in looking at our Puerto Rico Electric Power Authority (PREPA) bonds, as of July 31, 2015, our net par outstanding is $744 million and average annual debt service on those bonds over the next ten years is approximately $65 million. So, a hypothetical loss with a 20% severity would result in an annual claim payment of approximately $13 million, or just 3% of what our investment portfolio is generating each year."
Build America Mutual reported a 23% increase in gross par outstanding to $17.8 billion. Claims-paying resources rose $4.8 million to $586.8 million, largest quarterly increase since the first quarter of 2014, when it was also $4.8 million. As a mutual company, BAM doesn't have "earnings per share," so the quarterly change in claims-paying resources is the key metric of BAM's performance on a quarter-by quarter basis, according to the company.
White Mountains, the venture capital firm that gave the insurer its startup investment when it was founded in 2012, reported $14 million and $23 million of GAAP pre-tax losses relating to BAM in the second quarter and first six months of 2015, compared with GAAP pre-tax losses of $8 million and $17 million in the second quarter and first six months of last year.
The increased loss in both periods was driven by lower mark-to-market results from BAM's investment portfolio. BAM's affairs are managed on a statutory accounting basis, and it does not report stand-alone GAAP financial results. BAM's statutory net loss was $8 million in both the second quarter of 2015 and the second quarter last year. As a mutual insurance company that is owned by its members, BAM's results do not affect White Mountains' adjusted book value per share. However, White Mountains is required to consolidate BAM's results in its GAAP financial statements and its results are attributed to non-controlling interests, according to the report.
"BAM recorded a strong quarter on all fronts," said Sean McCarthy, chief executive officer. "Primary-market volume increased to an all-time high of $3.3 billion, driven by both strong issuance conditions in the municipal market and increasing credit spreads that made insurance more attractive to buyers. That, in turn, helped drive improved pricing conditions and allowed BAM to increase its claims-paying resources by more than $4 million in the quarter. The strong quarter was capped on June 29, when Standard and Poor's affirmed BAM's AA rating with a stable outlook, recognizing BAM's strong capital adequacy, clean portfolio without exposure to Puerto Rico or other below investment grade credits, and the value we deliver to the market through our transparency initiatives, which are highlighted by the more than 2,000 Obligor Disclosure Briefs we've published on our web site for more than 1,500 municipal issuer-members."
National, the muni-only arm of MBIA Inc., also reported gains. National recorded $40 million of operating income in the second quarter of 2015 compared with $34 million in the second quarter of 2014.
"While new business production in National continued to ramp up slowly, we added key players to our sales and marketing team that will better position us to originate new business and to provide a high level of service to the municipal finance market," said Chuck Chaplin, president and chief financial officer at MBIA. "We believe that the superior performance of insured bonds as compared to uninsured bonds of stressed muni issuers and projected higher interest rates will provide solid growth prospects in the medium term. We also continued to repurchase our common shares, which we believe will add value to MBIA shareholders in the future."
Net premiums earned were $73 million in the second quarter of 2015, up 9% from $67 million of net premiums earned in the second quarter of 2014, reflecting a 44% increase in refunded premiums earned and an 18% decrease in scheduled premiums earned.
National closed $272 million of additional primary new business par exposure during the second quarter of 2015. Low interest rates, narrow credit spreads and competitive insurance pricing continue to adversely impact the opportunity to achieve attractive returns on new business production.
National had qualified statutory capital of $3.3 billion and claims-paying resources totaling $4.9 billion as of June 30, 2015.
During the second quarter, Kroll Bond Rating Agency, Moody's Investors Service and Standard and Poor's Corporation each affirmed their credit ratings and outlooks on National. In May Kroll affirmed its AA-plus insurance financial strength rating with a stable outlook and Moody's affirmed National's insurance financial strength rating at A3, maintaining a negative outlook. S&P affirmed its AA- financial strength rating and Stable Outlook on National in June.
"Developments around our Puerto Rico exposure commanded much attention this quarter," said Chaplin. "All debt service payments due July 1 were made by the Puerto Rico entities. Excluding National's commitment to purchase a $45 million short-term note from PREPA, its total Puerto Rico gross par exposure declined by $250 million as a result of the July 1 principal payments. We continue to work with PREPA, local government officials and other creditors toward a consensual solution that addresses Puerto Rico's significant fiscal and operational difficulties while respecting the rights of creditors."
