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Frederico: Keep It Private

Assured Guaranty Ltd. president and chief executive officer Dominic Frederico said yesterday that although the municipal market will face stress in the short term, there are better options for supporting it than states or the federal government funding a mutually owned insurer.

A healthy market would have three or four strong insurers, and private solutions are needed to help alleviate the lack of capacity currently available in the market, he said during an earnings conference call with analysts and investors. But a federally supported insurer would drive those potential solutions out and leave the municipal market dependent on the federal government in the future.

A blue-ribbon panel commissioned by the National League of Cities has proposed setting up a national, municipal-only mutual guarantor that could focus on minimizing costs to issuers rather than maximizing profits.

Rep. Gerald Connolly, D-Va., has, among other suggestions to help the municipal market, said the federal government could directly guarantee municipal debt or fund an insurer.

Frederico, though, said the government should instead consider reinsuring some of the monolines' existing guarantees or providing other assistance to below-investment-grade credits.

"There is no question that the municipal market is facing numerous challenges, such as the cost of financing, investor demand, falling municipal revenues, and the overall economic outlook; however, we do not believe that the U.S. taxpayer or the municipal market would be better served by starting a nonprofit, government-controlled entity," Frederico said.

Assured has benefited significantly as the dominant remaining player in the insurance market. It avoided backing the collateralized debt obligations of asset-backed securities that led to downgrades at other insurers, and retains its triple-A ratings at Fitch Ratings and Standard & Poor's. It has an Aa2 rating from Moody's Investors Service, which has cast doubts on whether any standalone bond insurer would receive a Aaa rating.

Assured's fourth-quarter 2008 present value of gross written premiums in the U.S. public finance market increased 124% to $57.4 million. Its gross written par increased 109%.

So far this year, bond insurer Assured Guaranty Corp. has wrapped 244 new issues with a par value of $5.3 billion, or 83.5% of the entire insured market, according to Thomson Reuters. It has insured 12.4% of all bonds that have come to the market this year.

And Assured last year agreed to acquire the market's second-ranked insurer, Financial Security Assurance Inc., which has wrapped 67 issues with a par value of $745 million this year. Assured expects its acquisition of FSA parent Financial Security Assurance Holdings Ltd. - which excludes its troubled financial products unit - to close in the first or second quarter.

Assured will meet with the rating agencies in March to discuss the transaction and hopes to receive rating conclusions by the end of the month, Frederico said.

The transaction has received Hart-Scott-Rodino antitrust approval from the U.S. government and approval from the United Kingdom's Financial Services Authority. It expects to receive approval from the New York and Oklahoma insurance departments in March.

Assured will also seek shareholder approval for financing the deal next month.

The company will decide how it will position the insurers after the transaction closes. Assured could consider creating a muni-only insurer as some other industry participants are doing, but Frederico noted the market already accepts Assured Guaranty wraps, so it may not be necessary. FSA last year said it would stop writing structured finance business to focus on public finance.

Frederico said bond insurance will demonstrate its value in the current economy, as the municipal market will see "tremendous stress" in the short term. He expects more issuer rating downgrades, restructurings, and missed payments.

"We keep talking about the value of our product goes well beyond the fact that we just provide guarantees, and it's about liquidity and about valuation, but it's also about remediation, and you're going to see a lot of that play out, we believe, over the next 18 months," Frederico said. "But as said, we're really focusing on kind of the critical services, critical projects, and who has got the best revenue protection."

Assured Guaranty late Wednesday reported a net fourth-quarter loss of $243.8 million, and an operating income for the fourth quarter of $3.5 million. It recorded loss and loss-adjustment expenses of $90 million, a majority of which were related to U.S. residential mortgage-backed securities exposures.

The company, though, is making strong progress in getting recovery from lenders of loans that breached representations and warranties, Frederico said. In addition, it could benefit from recently proposed federal legislation that would allow judges to rework mortgages.

Analyst Gary Ransom, of Fox-Pitt Kelton Cochran Caronia Waller, wrote in a note to clients that Assured's operating earnings were better than expected. He expects the FSA transaction to be accretive to operating earnings, but will keep his 2009 estimate at $2.35 per share until the deal closes.

Assured Guaranty shares finished down 2.21% yesterday, closing at $4.87.


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