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Insurers See Reinsurance As 1st Capital Option

The municipal market’s two largest triple-A bond insurers might look to reinsure their “very reinsurable” portfolio of muni bonds if the rating agencies tell them to raise more capital, executives from Ambac Financial Group Inc. and MBIA Inc. said yesterday. The two executives, along with a third from Security Capital Assurance Inc., said reinsurance would be their first option to boost capital levels, commenting at a bond insurance mini-conference hosted by Banc of America Securities LLC in New York. The insurance executives added that slowing new business production, asking from more money from their parent companies, and selling new debt or equity are also options. Each of the three major rating agencies is reviewing the bond insurance industry to decide whether the recent wave of structured-finance downgrades merits a drop in one or more of the insurers’ credit ratings, too. When asked at yesterday’s conference if MBIA would, if necessary, raise capital to avoid a ratings downgrade, MBIA chief financial officer Chuck Chaplin replied bluntly, “yes.” Chaplin and Ambac CFO Sean Leonard said reinsuring business through existing treaties would likely be the first option for boosting their capital respective positions. Both added that they have already sought out other third-party reinsurers to potentially take on some of the companies insurance risk. “Excess capital is really in the eye of the beholder,” Chaplin said. “Each rating agency will have a different view of what our excess capital really is.” The two executives each said they are now working closely with the rating agencies to make sure they agree with assumptions being made in the ongoing industry-wide reviews. They added that they have so far been happy with the agencies’ interaction during the review process, but that they are worried the agencies’ complicated models might not properly capture the insurers’ structured-finance risks. Jack Dorer, managing director at Moody’s Investors Service, said that disagreement over some model assumptions is inevitable. While the insurers are looking at the rating agency models to understand them, these companies are also looking at them through “their own modeling lenses,” Dorer said. “Our analysis is based on our analysis,” he said, adding that his bond insurance ratings team has also enlisted the help of Moody’s structured- and municipal-finance analysts for its review. While Fitch Ratings and Moody’s have said it is unlikely that MBIA Insurance Corp., MBIA’s triple-A guarantor subsidiary, will see its rating affected by the new reviews, the company is already preparing options to shore up capital if necessary. In the normal course of business, MBIA cedes about 10% of its new business production through ongoing treaties with reinsurers, Chaplin said. He added that the treaties would allow MBIA to cede as much as 30% of business and that the company has also looked into other forms of reinsurance to help MBIA deal with excessive losses. In a panel discussion at the end of the conference, one audience member asked whether the balance sheets of financial guaranty reinsurance companies were not too closely tied to the bond insurers. There are only a handful of companies that specialize in the business, and some of the primary insurance companies, such as SCA, also own reinsurers. “If they are talking about doing significant amounts of reinsurance, I would agree that it would probably require them to look outside their traditional sources of reinsurance,” Dorer said. Ambac has begun discussions with large, multi-line reinsurers, not just the financial guaranty reinsurers, according to Leonard. He said even the insurance businesses of commercial banks could provide reinsurance options. Ed Hubbard, executive vice president of SCA and the president and chief operating officer of XL Capital Assurance Inc., said his company has been “proactive” in seeking reinsurance options before the rating agencies announce the results of their new reviews. Hubbard said SCA has “approached a few counterparties in the market” and that they have found interest among both traditional and nontraditional reinsurers. In the event that bond insurers have trouble getting reinsurance for the problem credits on their books, they could cede more of their muni insurance to reinsurers, Chaplin said, calling munis “very insurable.” Chaplin, Leonard, and Hubbard listed slowing their new business production, requesting more money from their parent companies, and selling more debt or equity as the other main capital-boosting options. Hubbard said selling equity would be the least preferable option for SCA, which saw its stock price drop to a low closing price of $4.29 on Nov. 21 from a peak closing price of $33.88 on May 23. SCA’s stock rallied after yesterday’s conference, ending the day up 87 cents, or 19.6%, to close at $5.32. In a separate announcement, SCA said late Monday that Brian O’Hara, the president and chief operating officer of XL Capital Ltd., resigned from his position on SCA’s board of directors. O’Hara had been a board member since SCA’s August 2006 initial public offering, in which the XL Capital parent spun off SCA and relinquished part of its ownership in the bond insurance holding company. XL still owns 46% of SCA and holds the right to appoint O’Hara’s replacement.

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