UBS research team has trimmed the second-quarter operating EPS estimates for Assured Guaranty Ltd. (NYSE:AGO) from $0.67 to $0.25 for its exposure to Detroit. That is a whopping 60 percent cut for the insurance giant.
Brian Meredith and Marie Lunackova of UBS Investment Research in their report, however, maintained their buy rating on Assured Guaranty.
Assured Guaranty is a bond insurer which covers debt obligations, including variable-interest entities, which enables firms to keep certain assets off of their balance sheets.
Detroit losses an earnings, not a balance sheet event
UBS research team estimates per-share loss of Assured Guaranty Ltd. (NYSE:AGO) at $0.66. The analysts feel negative contribution would accrue from public finance ($0.70), economic structure finance ($0.06), and scheduled losses of $0.09. The bond insurer would derive positive contribution from risk-free rates at $0.19.
Brian Meredith and Marie Lunackova of UBS AG (NYSE:UBS) anticipate Assured Guaranty to derive $28 million from new business during the second quarter of 2013, up from $18 million posted in the first quarter. However, the estimates are way below $50 million posted during the second quarter of 2012.
Maintains buy with a target of $28
UBS analysts retained their buy rating on the bond insurer. They anticipate a price $28 based on 0.8 times of their March 31, 2014 estimated operating BVPS of $34.24 and $0.80 per share of the incremental R&W benefit. Assured Guaranty is expected to successfully resolve its anticipated R&W recoveries, helping reduce the perceived risk on the insurer’s equity.
The analysts note their continued bullishness on the bond insurer reflects their assessment of the longer-term risk/reward trade-off, as they anticipate 2015 operating ROE at 7.3 percent and average growth on BVPS and dividends of almost 11 percent over the next 3 years, bolstered by share buybacks.
Brian Meredith and team forecast Assured Guaranty Ltd. (NYSE:AGO) to go in for stock buybacks for almost $143 million during the second half of 2013. The analysts, however, feel the buyback amount could be enhanced in 2013 if the bond insurer can accomplish a transfer of dividends from its U.S. holding companies to Bermuda without incurring prohibitively high withholding taxes or if the insurer secures permission from Bermuda regulators to upstream dividends in excess of the regular annual allowance.
AGO’s Detroit loss pegged at $130 million
The UBS analysts anticipate about $130 million of losses on Assured Guaranty Ltd. (NYSE:AGO)’s Detroit exposures. The analysts’ loss estimate is driven by losses on pension COPs, on which they feel impairment as very likely. The analysts’ estimates incorporated a recovery of 25 cents on the dollar for this exposure.
However, Brian Meredith and Marie Lunackova of UBS do not envisage any losses on the bond insurer’s exposure to municipal utilities bonds and UTGO.
