Assured Guaranty late Monday announced its first-quarter operating income was $89.6 million, a 41% increase from the same period one year ago.

However, the company acknowledged that new business production for its core product — municipal bond insurance — declined substantially from a year ago.

The operating income figures, which are not accepted under the generally accepted accounting principles or GAAP measure that excludes net-realized investment gains, losses, and other items, were bolstered by last July’s acquisition of Financial Security Assurance Holdings, which the company recast as Assured Guaranty Municipal Corp.

Assured called the acquisition the “principal reason” for the growth, which included consolidated net income of $322 million compared to $85.5 million recorded for the first quarter of 2009.
Quarterly income also received a boost from $230.8 million of gains on credit derivatives.
Overall, quarterly revenue was $683.9 million, a 181% increase from last year.

On the negative side, total financial guaranty business was $78.8 million in the quarter, a decline of 40% from $130.9 million in the same period last year. Assured attributed the decline to its insuring a smaller share of the municipal market, and reinsurance playing a smaller role.
Through its two subsidiaries, Assured Guaranty Corp. and Assured Guaranty Municipal, the company guaranteed $74.3 million of primary market issuance. That is 41% lower than the $126.8 million backed solely by AGC in the same period last year.

Tighter spreads, adhering to strong underwriting standards, and the prevalence of taxable Build America Bonds were also cited as factors.

“To date, BAB bond issues have had lower insurance utilization than tax-exempt bonds because of the large size of the issues and the high credit ratings of the issuers,” the earnings statement said.

As a percentage of municipal issuance volume, Assured insured 6.3% of new deals, or 8.8% of new tax-exempt issuance.

Dominic Frederico, president and chief executive officer, said the company anticipates “increased penetration” of the tax-exempt market and “greater participation in the taxable BABs sector.”
He added: “As this program expands, we expect it will include smaller, lesser known issuers in the A and BBB rating categories, which are part of our traditional customer base and for which insured executions would significantly lower costs.”

Meanwhile, loss and loss adjustment expenses totaled $130.5 million in the quarter, a 64% increase from $79.8 million in 1Q09. The increase reflects a decision to extend the conditional default rate curve used for modeling projected losses on exposure to RMBS.

“With regard to the additional mortgage losses, early-stage delinquencies showed some signs of improvement,” Frederico said. “However, we decided to extend the conditional default rate for another three months until we see more sustained improvement in RMBS performance. We have also intensified our loss-mitigation efforts, which we see as both strategically important and as a further opportunity to lower our loss costs and enhance earnings.”

In other Assured news, the company last week hired Donald J. Farrell as director of public finance business development in the Eastern region. Farrell reports to William O’Keefe, senior managing director who was hired earlier this year.

Farell was previously head of Eastern public finance for competitor Ambac Assurance Corp., where he spent 16 years writing insurance, analyzing credits and pricing transactions.

“We’re looking forward to working with Don, who brings significant experience and market knowledge of the financial guaranty industry,” O’Keefe said. “He will help us further our goal of providing creative and responsive service to issuers and investors in insured municipal bonds.”

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