Sell Side

Assured Launches AA-Plus Muni-Only Insurer

Assured Guaranty launched a municipal-only financial guaranty insurer Monday to meet investor demand for clarity in an industry that has been searching for footing since the financial crisis.

The new business, Municipal Assurance Corp, will have $1.5 billion in claims-paying resources, including $800 million in statutory capital. An additional $709 million in unearned premium reserves is associated with the $111 billion in ceded par from Assured Guaranty Municipal Corp and Assured Guaranty Corp. In its first rating of a bond insurer, Kroll Bond Rating Agency has designated MAC as AA-plus stable.

“Assured  has been the only carrier that has been able to continually serve the market through the entire financial crisis,” Assured chief executive officer Dominic Frederico said in an interview. “As we come through that, we take a lesson from everything - it became clear to us that there was a segment o f the market that would prefer a muni only insurer.”

Assured paid $91million in January 2012 for Municipal Infrastructure and Assurance Corp, the business that would become MAC, from Radian Asset Assurance Inc. Assured announced it would launch a muni-only insurer earlier this year after receiving a two-notch rating downgrade by Moody’s Investors Service.

MAC is licensed in thirty states including , New York, Pennsylvania and Illinois, plus the District of Columbia. It is awaiting authorization in eight other states, including Florida and Texas. Assured did not say when MAC’s first transaction would be, though it would be “soon.”

The number of insurance-wrapped issues fell dramatically during the recession, as interest rates slid and credit spreads left little room for additional guaranty.

“We’re battle tested,” Frederico said. “We’ve been consistent, we’ve got the expertise that’s proven itself time after time, we’ve continued to serve the market, and this just broadens our opportunity to serve the market.”

Kroll’s AA-plus stable rating of MAC is the highestbond insurer rating in the industry. Build America Mutual, the mutual municipal bond insurer launched in July 2012, has a AA stable rating by Standard & Poor’s. S&P assigned MAC a stable rating of AA-minus on July 17.

“Kroll Bond Ratings’ AA-plus rating on MAC reflects in part on Assured Guaranty’s seasoned management team, best practice enterprise risk management and established infrastructure,” Jim Nadler, Kroll’s president, said in an emailed statement.

Assured, with little competition as the lone survivor of the financial crisis, began to share the market this year with BAM, which wrapped 38 percent of issues in the first half of this year.

Frederico said that new entrants into the market for bond insurance will struggle in the long-term without a large back book of capital. National Public Finance Guarantee Corp., MBIA Inc.’s muni-only insurer, will be the most credible other monoline upon reentering the market, he said.

“If you start with a zero back book and your capital base is in debt,” Frederico said of start-up guarantors, “you’re really sinking in some pretty deep quicksand. We earn nearly as much interest income as the total capital of our closest competitor.”

S&P said Wednesday it will treat Assured and MAC as a consolidated group, giving a single rating to MAC, AGM and AGC, meaning exposure to risk in one portfolio could have an effect on the rating of another. Frederico said MAC will reap the benefits of the larger organization without detrimental effect.

“Structured finance issuers are people too, and we serve that market through the dedicated facility, AGC,” he said. “There are statutory fences between operating companies, AGC’s in its own protective shell, and we’ll still service that industry. The business spectrum of that company has narrowed significantly.”

Assured has said that AGM is running off its structured finance business and will eventually be comprised of municipal-only policies. While MAC will carry the same rating as AGM and AGC as of now, it may be able to differentiate itself in the future, said Matt Fabian, managing director at Municipal Market Advisors.

“MAC represtents a new top end for the Assured product,” Fabian said in an interview. “This structure helps filter out more of the risk from underwriting lower-category credits, which in theory means the rating on this policy should be more reliable than on the Assured family.”

Investors believe the municipal market’s long, stable history of credit experience provides for greater degrees of protection and clarity, Frederico said.

“There’s a part of the investor community that says, 'I want something simple. I can see clearly through a muni only portfolio, I know what it’s made up of,’” said Frederico.

Municipal defaults may catalyze further demand for municipal insurance, Frederico said. Cities and towns threatening to default may drive more people back into the insurance market. With nearly 95 percent of the market gone uninsured over the last four years, there are a lot of unprotected people, he said.

“The perception of the industry is tainted a bit,” Frederico said. “You’ve got to separate the industry from Assured. People who were in Jefferson County bonds, Stockton, California bonds, they are very happy to have us as an insurer.”



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