Can Assured Guaranty Top Genworth Financial and Radian Group?

Assured Guaranty (NYSE: AGO  ) will release its quarterly report on Monday, and investors have lost some of their confidence over the past several months. Even though the company has some of the same positive mortgage exposure that have lifted shares of Genworth Financial (NYSE: GNW  ) and Radian Group (NYSE: RDN  ) to their highest levels in more than a year, Assured Guaranty also has to deal with a municipal finance environment that remains uncertain and full of risk.

The financial crisis dealt a double hit to Assured Guaranty as well as Genworth and Radian, as the housing bust not only reduced the value of collateral for mortgage-insurance policies but also slashed the tax revenue that hard-hit municipalities earned from property taxes on those homes. In the wake of the recovery, Assured Guaranty has seen the same double-benefit. But with many cities and towns around the country struggling, investors have grown nervous once more about the prospects for financial insurance companies. Let's take an early look at what's been happening with Assured Guaranty over the past quarter and what we're likely to see in its report.

Stats on Assured Guaranty

Analyst EPS Estimate

$0.63

Change From Year-Ago EPS

(26%)

Revenue Estimate

$190.3 million

Change From Year-Ago Revenue

(14.3%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

What's next for Assured Guaranty earnings?
In recent months, analysts have pulled back a bit on their prospects for Assured Guaranty earnings, cutting a nickel per share from their third-quarter estimates and almost twice that from their full-year 2013 projections. The stock has also had a tough time, falling 4% since early August.

Assured Guaranty's second-quarter results didn't do much to lift investors' spirits about the stock. Net income plunged 42% as falling earned premiums and a reduction in unrealized gains weighed the company's results. The amount of new business Assured Guaranty produced in the public finance sector dropped by more than half, reflecting the uncertainty in the market amid widespread financial distress among state and local government entities. The company also cited exposure to Detroit bonds and losses on mortgage-backed securities as increasing its expected net losses.

The bankruptcy of the city of Stockton shows some of the challenges Assured Guaranty faces. In early October, Stockton reached a deal with Assured Guaranty that will give Assured a building that the city had planned to use as its city hall and will involve payments to the company over the next 40 years. Nevertheless, with almost $165 million in bonds at stake, Assured Guaranty still could end up with substantial liability if the city can't recover in the long run.

More recently, problems in Puerto Rico could also pose a threat to the company. Although S&P said that Assured Guaranty and MBIA have ample reserves to handle losses from the island territory, the threat of another financial crisis would damage the companies' respective recoveries over the past five years.

Still, Assured Guaranty did have some victories to celebrate during the quarter. In August, the company settled lawsuits against JPMorgan Chase (NYSE: JPM  ) alleging misrepresentations about mortgage-backed securities that Assured Guaranty insured. Although the companies didn't disclose the terms of the settlement, similar allegations between MBIA and Bank of America (NYSE: BAC  ) led to a multibillion-dollar settlement earlier this year, although Assured Guaranty's claim against JPMorgan was just $43 million.

In the Assured Guaranty earnings report, watch to see whether the company reemphasizes insurance mortgage-backed bonds. Given the success that Genworth and Radian have had in recovering lately, Assured Guaranty might prefer to emphasize housing-related insurance rather than relying on public finance markets to hold up.

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