Bond insurers reported lackluster third-quarter earnings, as a low interest rate environment continued to constrain their growth.
Assured Guaranty and National Public Finance Guarantee reported declines in third-quarter profit from a year earlier, while Build America Mutual took a statutory loss.
The insurers' market penetration fell to 6.1%, from 6.6% in the second quarter, as they continued to wait for an increase in interest rates that could spur a recovery in demand for bond guarantees, eight years after the financial crisis decimated the business. Analysts expect Federal Reserve policy makers in December to lift the benchmark rate from near zero, where it's been since December 2008.
"Whether or not it occurs that soon, an improving economy and labor market will almost certainly lead to an increase from the zero rate in the near term, which would likely result in higher interest costs for borrowers," Dominic Frederico, president and chief executive officer of Assured, said during a Nov. 6 conference call with investors . "As we have seen in the past, higher interest rates should increase demand for bond insurance. I'm confident about the future, and we will continue to look for prudent and creative ways to expand our market and create value for our policyholders and shareholders."
Assured's net income fell to $129 million, or $0.88 per share, from $355 million or $2.09 per share for the same time period last year. For the first nine months of 2015, Assured's net income was reported at $627 million or $4.13 per share, up from $556 million, or $3.13 per share, during the first nine months of 2014.
"We produced $164 million of operating income and continued to build the company's financial strength, market position and value to our shareholders," Frederico said. "Our year-to-date operating income of $582 million is 42% higher than the first nine months of last year. At Sept. 30, operating shareholders' equity per share stood at a record $41.87 per share, and our record adjusted book value per share was just shy of $60."
Assured guaranteed $3.1 billion of new municipal issues sold, which represents 60% of the insured par and 56% of the insured issues during the quarter. "We guaranteed 43 more transactions than the rest of the entire industry combined and in the month of August alone, we guaranteed 72% of the insured new-issue par," he said. "Additionally, we increased our secondary market par insured by 38% compared with the third quarter of 2014."
BAM announced an 11% increase in gross par outstanding to $19.8 billion. The company also said that its claims-paying resources rose $5.8 million to $592.6 million, the largest quarterly increase since the company was founded in 2012. As a mutual insurer, a portion of the payments BAM collects from issuers — 56% in the third quarter — flow directly into its capital base as "member surplus contributions," resulting in the statutory loss of $8.3 million, a spokesman said.
"The gains in claims-paying resources were driven by the increasing value investors are placing on our guaranty, bolstered by the added transparency offered by our Obligor Disclosure Brief credit summaries," said Bob Cochran, BAM's chairman. "The biggest beneficiaries are the issuers who use BAM insurance and become our members."
Cochran also said that an environment with rising interest rates and credit spreads will be more favorable for bond insurers, but BAM, and the industry as a whole, have built a solid base of investor demand even without that tailwind.
"And we expect that to translate to continued growth in volume and financial strength even if the Fed stands pat," he said.
National Public Finance Guarantee recorded $48 million of operating income in the third quarter of 2015 compared with $70 million a year earlier. The company said the year over year decrease was primarily due to an errors and omissions insurance policy recovery received in the third quarter of 2014 and lower premium earnings.
Net premiums earned for National were $68 million, down from $74 million in the third quarter of 2014. The decline was moderated by a 9% increase in refunded premiums earned.
National insured $129 million of par value of combined primary and secondary market business during the third quarter of 2015. NPFG said that 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 $3.4 billion and claims-paying resources totaling $4.8 billion as of September 30, 2015.
"We are pleased with the stabilization that we've now achieved following the financial crisis, notwithstanding this quarter's unfavorable year-over-year comparison, which is primarily a function of the unusual items of the third quarter of last year," said Chuck Chaplin, President and chief financial officer, of MBIA Inc., the parent of NPFG.
Puerto Rico
Shares of Assured and NPFG have fallen on concern over their exposure to Puerto Rico bonds, which totals $5.14 billion as of July 31 and $4.29 billion as of July 2, respectively. Both have said their exposures are manageable.
"As long as our rights are respected, and the government shows the political will to correct the longstanding deficiencies, we look forward to playing a constructive role in Puerto Rico's efforts to restructure its debt and improve its economy," Frederico said.
NPFG's chief executive officer Bill Fallon said that National continues to work with the Puerto Rico Electric Power Authority, local government officials and other creditors toward a consensual solution that will address Puerto Rico's significant fiscal and operational difficulties while respecting the rights of the creditors.
"Although this has been a frustrating and slow process, we remain optimistic that an acceptable solution will be reached, Fallon said. "In the meanwhile, we've further expanded our sales and marketing organization and we've increased the scope and numbers of transactions that we've reviewed for underwriting. We've also begun to expand our initiatives into the secondary market. Low interest rates continue to be the biggest challenge to National's new business originations."
BAM has no exposure to Puerto Rico.
