Assured Guaranty Ltd., which runs a default monopoly for new policies in the bond insurance market due to the collapse of its competitors, said in an earnings call Tuesday it expects business to thrive in the coming quarters.
Revenue shot up 161% to $388.5 million in the third quarter, easily beating forecasts of $338 million, according to its 10Q filing released late Monday. Contributions stemmed from a 286% year-to-year increase in new earned premiums, a 95% advance in net investment income, and a 91% jump in realized gains on credit derivatives.
The comparisons are so dramatic because the 2008 figures do not include revenue from Financial Security Assurance, which Assured acquired on July 1 of this year. Expenses related to that acquisition, as well as losses resulting from the “adverse development” on residential mortgage-backed securities, contributed to total expenses increasing 117% from the same period last year to $280 million. Just over $52 million of outlays were related to the acquisition of FSA.
As a result, the company posted a third-quarter loss of $35 million, or 22 cents per share, consistent with preliminary estimates released last Tuesday.
When acquisition-related expenses are excluded, the company noted that operating income was $104.3 million, or 65 cents per share, a 132% increase compared to the same period last year.
“We are the only established monoline to have gone through the worst recession in modern financial history in a strong capital position,” Dominic Frederico, president and chief executive officer, said during the conference call.
Looking forward Frederico was optimistic as “significant progress” has been made in integrating the parent company’s two principal insurers. Assured Guaranty Corp. deals in municipal bonds, structured finance, and international public infrastructure. Assured Guaranty Municipal, formerly FSA, is a separately capitalized and licensed muni-only insurer.
“We are now well positioned to address our market opportunities with greatly enhanced earnings power, significantly larger claims-paying resources, and first-rate underwriting and risk-management talent to drive our business forward,” Frederico said.
However, Moody’s Investors Service last week downgraded AGC one notch to Aa3 from Aa2. To avoid another downgrade, Moody’s recommended that Assured raise its capital buffer by $300 million.
Executives from Assured disagreed with Moody’s assessment.
“I think their models have been wrong, historically, in terms of how they viewed RMBS experience and stressed our loss portfolio,” Frederico said in an interview. “And although they take a 30-year view of our obligations, they don’t give us credit for what is going to be runoff over, say, the next 13 months.”
Nonetheless, Frederico said it is “in the best interest of the company” to raise the capital to achieve the highest possible ratings, adding that he was “incredibly confident” in Assured’s ability to do that.
“We are one of the few companies, if not the only company, to be able to raise $2 billion of capital through this entire market crisis, and the bankers give us a high level of confidence as well about our ability to execute,” he said.
Assured’s stock jumped as much as 31% yesterday to an intraday peak of $27.87, the highest level since October 2007. It closed the day up 20.4% at $25.53.
The rally was in part attributable to an equity research note from JPMorgan, which put forward a new 2011 price target for Assured at $42 per share, double the price at Monday’s close. The new target was based on re-calculating expected revenue from the amortization schedule included in Assured’s 10Q filing.
“When AGO acquired FSA it booked $1.6B of premium discount,” analyst Andrew Wessel wrote in the note. “A majority of the discount was applied to RMBS exposures that have a shorter duration than the overall portfolio. As a result, the discount amortization built into future premium earnings will run at a significantly higher rate than we had expected.”
Wessel called the stock “cheap,” adding that “even if we penalize the stock for its ratings uncertainty, the lion’s share of the future earnings will come from amortization of back book of business; therefore, we believe there is little downside to the stock and reiterate our Overweight rating.”
Elsewhere in the financial guaranty sector, Ambac Financial Group Inc., which warned last week that it might have to file for bankruptcy protection, failed Monday to meet the regulatory deadline to make its statutory third-quarter statement. The company yesterday said it would file the results early this morning.