Assured Guaranty expects 2Q gains in CDS portfolio

Excluding gains ranging between $475 million and $525 million, Assured Guaranty said it expects to earn $38.7 million, or 42 cents per share, during the second quarter.

Analysts polled by Thomson Financial, on average, forecast earnings of 57 cents per share for the quarter. Analysts do not always include special gains and charges in their earnings estimates.

The special gains are tied to an increase in the fair value of credit default swaps the bond insurer holds in one of its portfolios. Credit default swaps are essentially agreements to cover losses on financial contracts.

Financial institutions are required to mark their CDS portfolios at their current trading value, which can lead to large quarterly gains or losses in the portfolios.

Because Assured Guaranty expects to hold the credit derivatives until maturity, it expects their value will eventually reduce to zero as the swaps reach their maturity, unless there is a payment default.

Second-quarter results also include about $43.7 million in loss and loss adjustment expenses. Of the $43.7 million, $39.7 million are tied to exposures to mortgage-backed securities.

Bond insurers have been reserving more cash to cover potential losses on mortgage-backed securities as the likelihood of default has increased because of increasing defaults on the underlying mortgages themselves.

Assured Guaranty said it will file its full second-quarter financial results with the Securities and Exchange Commission by Aug. 11.

Late Monday, credit ratings agency Moody's Investors Service placed Assured Guaranty's crucial financial strength rating on review for a potential downgrade.