Security Capital Assurance, parent of the monoline bond insurer XL Capital Assurance Inc., late Thursday said it will temporarily cease writing new business after rapid deterioration in the subprime mortgage market led the company to report a fourth-quarter loss of $1.2 billion.
The company reported fourth-quarter case loss provisions of $651.5 million for 13 collateralized debt obligations made up of asset-backed securities, as well as unrealized mark-to-market losses of $518.8 million on credit derivative contracts used to provide financial guarantees to various counterparties. For the year, SCA reported a net loss of $1.2 billion.
"The extraordinary and rapid deterioration in U.S. residential mortgage-related credits led us to incur record levels of case reserves in the fourth quarter of last year," Paul Giordano, chief executive officer for SCA, said in a statement. "We are in the process of realigning our cost structure to reflect the current business conditions and have made the strategic decision to cease writing new business for a period of time to preserve capital."
The losses on high-grade, asset-backed CDOs are the first to be realized by a bond insurer, which could portend future losses for other financial guarantors, according to Deutsche Bank analyst Darin Arita.
SCA canceled its dividend payout - expected to save $9.9 million through the end of this month - and said its auditors had decided against including a "going concern" paragraph in its annual report filings expected out today, suggesting the company and its auditors believe SCA has a future as a business. To raise its ratings, Giordano said SCA will continue to explore strategic alternatives, including not writing new business, seeking to raise new capital, reinsuring a part of its book, and restructuring existing contracts.
Not writing new business will save the company between $75 million and $100 million each quarter, while the cutting of the dividend should free up about $40 million a year, according to Banc of America Securities LLC analyst Tamara Kravec. The company said any new dividends would be subject to the approval of management and the board of directors.
In terms of new business, SCA saw adjusted gross premiums for the fourth quarter decline 21% to $155.6 million from $197.2 million in the fourth quarter of 2006. The company calculates AGP by including up-front premiums received on new deals, along with the present value of what the company expects to earn from the deals in future installments.
U.S. public finance AGP increased 361% to $66.4 million from $14.4 million the year before due to premiums earned by providing credit enhancement on municipal transactions already insured by one insurer. U.S. structured finance AGP fell 79% to $23.1 million, from $107.6 million in the year ago quarter.
In ceasing to write new business, SCA has taken one step closer to runoff, a scenario in which a bond insurer shuts its doors to new business and simply lets the revenue it expects to realize over time trickle in as the policies it has written slowly approach maturity.
Both Kravec and Arita foresee a managed runoff as the most likely scenario for SCA.
"We believe a runoff scenario is the likely outcome for SCA," Kravec wrote in a recent note. "The company is in a 'hibernation' period until it can rebuild its capital base, redeem its ratings, and begin writing new business or it officially goes into runoff given potentially significant losses."
Moody's Investors Service rates XL Capital A3, on review for downgrade, while Standard & Poor's assigns a rating of A-minus, on negative watch, and Fitch Ratings gives it an A, on negative watch.
In addition, on Friday Moody's affirmed the Aaa rating and stable outlook for Assured Guaranty Corp., as well as the Aa2 rating for Assured Guaranty Re.
Moody's said Assured Guaranty's total capital ratio is 1.4 times, which exceeds the target level of 1.3 times.
