Ambac Financial Group Inc. is looking for an outside investor to help it capitalize muni-only subsidiary Everspan Financial Guaranty Corp., Ambac chief executive officer David Wallis said Wednesday.
Ambac has also asked for Wisconsin insurance regulators to allow bond insurance subsidiary Ambac Assurance Corp. to send down more capital to Everspan, Wallis said at JPMorgan’s 2009 credit and equity insurance conference. Everspan — the old Connie Lee Insurance Co. — currently has $150 million in capital.
Ambac predicts that with $1 billion in capital, Everspan could insure up to $17 billion of bonds in its first year and as much as $46 billion by its fifth year, according to its presentation.
Ambac is taking steps to ensure independence from Ambac and transparency at Everspan. Wallis doesn’t believe the muni-only insurer will be tainted by its association with Ambac.
“We will pay all our claims; that’s what we do,” Wallis said. “We feel very confident about the demand for the product.”
Ambac wants to achieve the highest possible ratings for Everspan, but would need at least a double-A rating from one agency to write new business, Wallis said. Ambac Assurance is currently rated A with negative outlook by Standard & Poor’s, and Baa1 on review for downgrade by Moody’s Investors Service.
Everspan will not take on any of Ambac’s existing public finance exposures. But Ambac policyholders would benefit from any gains at Everspan, because it will be a subsidiary of Ambac Assurance.
Competitor MBIA Inc. recently restructured its business to split its public finance and structured finance books — albeit in a slightly different form than Ambac. MBIA Insurance Corp. of Illinois — expected to be renamed National Public Finance Guarantee Corp. — is a sister company of MBIA Insurance Corp. that has taken the responsibility for MBIA’s existing public finance book.
MBIA Illinois got $2.89 billion for backing the public finance book and an additional $2.09 million in capitalization.
But the restructuring has come under fire from structured finance policyholders that believe they are disadvantaged by the split. One group of hedge funds has already filed a lawsuit against MBIA, and another group of counterparties has complained to the New York Insurance Department.
MBIA has noted that it can pay all claims as they come due and that the New York Insurance Department approved the move. President and chief financial officer C. Edward Chaplin reiterated at the conference Wednesday that the restructuring did not represent a good bank, bad bank split, despite what some have said.
“It’s strictly a line of business split,” Chaplin said. “So when people talk about good bank, bad bank, it’s sort of like going to take all of my loss, all of my loss positions and put them in one space, and keep those that have no loss in another space. And that’s not what happened. We basically took all this domestic public finance and moved it into National; everything else remains in MBIA.”
During opening remarks, JPMorgan analyst Andrew Wessel pointed out that both Everspan and MBIA Illinois will face some challenges as they seek to get into the market.
“In discussions we’ve had with municipal portfolio managers, there’s pretty limited appetite to take any risks there until a really solid ring-fence can be set up there at the new municipal-only subsidiaries,” Wessel said. “And then there’s capital issues, as well. Both of those companies have said they will need to attract new capital at the subsidiary level before those new enterprises will be viable.”
Assured Guaranty Ltd. also presented at the conference and provided an update to its plans to acquire Financial Security Assurance Holdings Ltd. The company earlier this week received approval from shareholders for stock issuance related to the deal and got regulatory clearance from the New York Insurance Department.
The deal still needs approval from the insurance regulators in Oklahoma — where FSA has a subsidiary — and assurance from the rating agencies that the acquisition will not impact either company’s ratings. Assured hopes to have those in place by the end of March.
The deal excludes FSA’s troubled financial products unit, and Dexia and the French and Belgian governments will retain all risks and responsibility for the business. The European Commission earlier this week approved $16.9 billion in French and Belgian guarantees related to the financial products unit, but Assured must still sign off to make sure the protections are adequate.
Assured will keep both Assured Guaranty Corp. and Financial Security Assurance Inc. running. FSA last year limited itself to writing only public finance business, but Assured Guaranty Corp. will continue to guarantee a diversified book of business, Assured Guaranty Ltd. president and CEO Dominic Frederico said.
Frederico also said that, if needed, FSA’s business in Oklahoma could also be cleared out to write muni-only business. But Assured’s public finance production has been strong to start the year, so right now it would be unnecessary, Frederico said.
“Most times people are looking at starting a new muni company, it’s to get market acceptance,” Frederico said. “But as you look at the performance of our company … we already have market acceptance. Our goal now is to make sure we preserve capital, preserve ratings so we can capitalize on that market acceptance and reward the market acceptance and confidence in us by maintaining stable high ratings and providing value to the issuers and, obviously, to the investors of those securities.”
