First, the bad news: Assured Guaranty said tonight that it will take a $163 million after-tax loss on financial guarantees written on credit default swap contracts when it reports its earnings next week. The guarantor said that 70 percent of its reported losses were driven by market-to-market activity, and that CDS net par outstanding stood at $62.3 billion as of the end of September. The good news is that business has never been better:
"The widening of credit spreads, which has caused the decline in the value of our in-force derivatives book, has also created significant demand and favorable pricing for new business," stated Dominic Frederico, President and Chief Executive Officer. Accordingly, Assured also announced today that third quarter 2007 new business production as measured by the Present Value of Gross Written Premiums, a non-GAAP financial measure, was $133 million in the financial guaranty direct segment, a 46% increase compared to the third quarter 2006. This is the highest financial guaranty direct quarterly PVP in the Company's history.
So widening credit spreads would appear to represent a double-edged sword of sorts. What Frederico didn't mention was that it isn't likely just widening credit spreads that are driving greater demand for the more traditional role of financial guarantor in securitized transactions -- it is also the market's clear loss of trust in the rating agencies. Since investors are less sure than they ever have been that a AAA-rated security is indeed just that, sources have suggested to me that investors are again finding appetite the "irrevocable guaranty" -- something that had been perceived by many during the boom years as a superfluous form of credit enhancement, even for subprime-backed transactions.