Municipal bond insurers are enjoying a banner year, as low interest rates have set in motion a refunding trend that results in an earnings bonanza for the industry.

The top three financial guarantors all cited refundings as contributing heavily to their results for the nine-month period. On a statutory accounting basis, Financial Guaranty Insurance Co., AMBAC Indemnity Corp., and Municipal Bond Investors Assurance Corp. registered net income gains ranging from $11 million to $25 million.

Financial guarantee regulations give uncommonly positive weight to insured refundings. When an issue is first insured, the guarantors are required to put nearly all of the premiums collected into an "unearned premium reserve." As the bonds age, the insurers draw down, or "earn out," the premiums gradually.

But when a deal is refunded, the entire premium is earned out all at once and goes directly tot he bottom line. Interest rates promise still more refundings: The Bond Buyer's Municipal Bond Index has been bumping along at all-time lows for the last three months.

FGIC's statutory net income for the nine months showed the biggest increase, jumping 61%, to $65.9 million from $40.9 million during the same period last year. Almost half of the the gain came during the third quarter, according to a company spokesman, and almost 13% of that was from refunding-generated premiums.

"Our net income of $30.9 million for the third quarter [according to generally accepted accounting principles] was the highest quarterly net income ever recorded by the company," the spokesman said. "The earnings were largely due to $3.9 million in premiums earned on municipal bond refundings and to realized capital gains of $2.6 million on our investment portfolio."

FGIC's 1990 data were somewhat lower than usual because of $11.86 million of loss adjustment reserves. Statutory loss adjustments since September 1990 totaled $5.93 million.

The FGIC spokesman noted that the firm's statutory net income directly benefits from parent General Electric Capital Corp.'s policy of not taking dividends from the bond insurer.

AMBAC Indemnity Corp. scored a 27.7% increase in statutory net income during the first nine months of 1991, to $75.1 million from $58.8 million during the same period in 1990. Company officials also said AMBAC's robust data were boosted by refundings.

On a GAAP basis, AMBAC derived $17 million from refundings in the nine-month period of 1991, compared with $9.8 million for last year. Capital gains also contributed to the earnings.

MBIA's net earnings increased 11.9% during the period, to $105.91 million from $94.63 million. In the third quarter, refunding earnings at MBIA more than doubled, to $4.6 million from $2 million.

Financial Security Assurance, whose earnings are tied far more to the structured finance market than to municipal finance, enjoyed a 66% increase in statutory net income, to $28.76 million from $17.3 million.

In FSA's case, refundings are not an issue because its insured municipal bonds are mostly too young for refundings or calls. The structured market, where premiums tend to be paid annually, has no equivalent to the unearned reserve mechanism.

Capital Guaranty Insurance Co.'s statutory net income bounced back from a loss position in the first nine months of 1990. This year, the firm earned $9.59 million, compared with the nine-month loss of $971,266 in 1990.

Other financial measures were less showy but, by and large, very healthy. Net premiums written by the major firms increased from 25% to 32%, thanks to swelling new issuance and spotty increases in premiums for capacity-constrained credits such as New York City and Washington, D.C.

The only exception was FSA, again due to its heavy participation in a fundamentally different market from municipal insurance. FSA's net premiums dropped 41%, to $31.78 million from $53.93 in the first nine months of 1990.

Asset deterioration in the structured business, where FSA guarantees pools of securities for sale in the secondary market, followed the dramatic deterioration of portfolios throughout the nation's businesses, a spokeswoman said. As a result, the firm was forced to be "very selective" about the deals it pursued, she said.

By contrast, the firm was "poised for growth" at the beginning of 1990 and secured many deals at "appropriate" pricing levels. "We were going like gangbusters," she said.

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