Sell Side

FSA Parent Announces 1Q Loss of $422M

Financial Security Assurance Holdings Ltd. yesterday reported a first-quarter net loss of $421.6 million due to increased loss reserves and deteriorating conditions for second-lien mortgages. The news overshadowed the bond insurer’s significant growth in deals written for the U.S. municipal market.

The losses at the holding company, parent of triple-A bond insurer Financial Security Assurance Inc., reflected a $317.9 million unrealized loss for credit default swaps tied to pools of corporate debt and a $355 million increase in loss reserves. The reserves were made up of $266.1 million more for actual losses on eight home equity lines of credit and a new $86.9 million case reserve set-aside for four Alt-A closed-end second-lien mortgage transactions.

“We think this is a conservative number, but we do admit that it is a volatile environment and we allow for some further migration,” said FSA chief executive officer Robert Cochran. “This is the right order of magnitude; it won’t be something that is five times this number.”

Executives at FSA decided a month ago that the insurer will not write any more policies on second mortgage products or other unsecured consumer products for as long as Cochran or other executives are around, he said.

FSA also reported a $1.5 billion fair-value loss adjustment in its guaranteed investment contract portfolio. Residential mortgage-backed securities make up about two thirds of that portfolio, according to Moody’s Investors Service, which said late yesterday that it would reevaluate FSA’s second mortgage-related exposures in the wake of worse-than-expected losses. According to the rating agency, FSA had a capital ratio of 1.4 times at the end of 2007, exceeding the 1.3 times capital target. 

“In the event that Moody’s evaluation of FSA’s mortgage risk leads to an upward revision of loss estimates, the guarantor’s capital cushion relative to the Aaa rating threshold could be eroded, pressuring the rating,” Moody’s said in a release.

Many of FSA’s peers have also reported first-quarter losses tied to deteriorating second-mortgage exposure; both MBIA Inc. and Ambac Financial Group reported their own multi-million dollar losses, attracting further review from Moody’s.

Earlier this week, the rating agency said bond insurers with significant exposure to second-lien residential mortgage-backed securities, like MBIA Insurance Corp. and Ambac Assurance Corp., could see their ratings suffer as the securities face further deterioration. It added FSA to the list late yesterday.

In U.S. public finance, FSA increased the par volume of first quarter insured deals by 28.7% to $18.4 billion, from $14.3 billion in the first quarter of last year. The financial guarantor took advantage of its place as one of only two stable, triple-A rated bond insurers in the market for the quarter. Since then, Berkshire Hathaway Assurance Corp. has joined FSA and Assured Guaranty Corp. as a triple-A option, after BHAC secured a second gilt-edged rating to insure deals in the new-issue market.

For FSA, present value premiums written for the quarter rose to $196.6 million, a 165.7% increase over the $74 million written in last year’s first quarter, the company said. Present value premiums — a combination of the upfront premiums from deals closed during the quarter and the present value of estimated future installment premiums from those deals — are used by the company to measure its new business production.

“The competition in the municipal market had driven premium rates to what we described last year as 'minimally acceptable,’ ” Cochran said. “Now with more limited competition and wider credit spreads in the municipal market we are able to get back to more attractive return on equity.”

Much of the bond insurer’s business in the first quarter was in the secondary market, where investors came to FSA and asked them to put additional insurance over the existing policy of other insurers.

“The secondary activity that we did early in the quarter was mostly wraps of wraps,” Cochran said. “Our only rule was that we would look all the way through to the underlying municipal credit to be sure we were comfortable with that, and then price it as if it there was no underlying wrap.”

However, primary market activity has picked up in the second quarter, leading FSA to write business at an even higher rate than in the first quarter, the company said.

“In March, and then continuing into April and May, we’re seeing significant new issue volume and opportunity,” Cochran said.

FSA reported $281.9 million in total present value premiums in the quarter across all sectors, up 42.7% from last year’s total of $197.5 million. The bond insurer completed several transactions in structured finance and international public finance, including Europe’s only primary-market infrastructure deal, despite volume being down in both areas, the company said.

So far this year, FSA has insured $22.6 billion through 745 deals, for 60% market share, according to data from Thomson Reuters.




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