After a bumpy first quarter that included warnings of possible downgrades from rating agencies, bond insurer ACA Financial Guaranty Corp. reported last week that it had managed to turn a profit in 2001 and expected 2002 to be the company's "breakout year."
"We believe this year will be significantly profitable," said chief executive officer Michael Satz in a conference call Friday. "We're targeting a double-digit return on equity."
Satz also announced the hiring of industry veteran Ruben Selles as managing director of the municipal finance department. Selles has spent the last 20 years at Ambac Assurance Corp., most recently as managing director of the health care division in the portfolio risk management group.
Satz had run municipal finance himself, but decided it needed someone who could give his full attention to it. He believes hiring Selles will "provide a point of focus" for an area that will eventually be expanded.
The five-year-old ACA has a unique niche in the municipal bond insurance market in that it provides single-A ratings to borrowers with below-investment grade credit ratings -- issuers unlikely to qualify for insurance offered by triple-A-rated insurers.
Satz said ACA had met its goals to be profitable on a Generally Accepted Accounting Principles basis for the full year and in the fourth quarter on a Statutory Accounting Principals accounting basis.
On a GAAP basis, ACA recorded a profit before reorganization expenses of $4.4 million, which Satz described as "in line with expectations." The profit after reorganization was $2.6 million in 2001, compared to a loss of $5.4 million in 2000.
By the more conservative statutory yardstick, ACA reported a loss in 2001 of $3.3 million -- but noted a profit of $2.6 million for the fourth quarter -- compared to a loss of $13.6 million in 2000.
Analysts said the ACA 2001 report looked promising.
"They have a reasonable good chance of turning their profitability around this year," said David Litvack, managing director of financial guaranties-municipal structured finance for Fitch Ratings.
Litvack noted that last year was a "transition" year in that ACA incurred great expenses setting up an organization to structure and guarantee collateralized debt obligations without yet reaping the benefits of the business. ACA completed a CDO deal earlier this year.
"It sounded pretty good. They hit for the most part the goals they had set for themselves," said Bob Green, director of global bond insurance ratings for Standard & Poor's. "They're looking for double-digit earnings for 2002 -- that would be quite a turnaround if they're able to do that."
Both Fitch and Standard & Poor's had placed ACA's A-rating on watches for possible downgrade at the beginning of 2001. The ratings were kept aloft by a $45 million investment of new equity in February.
Back in May, Satz had predicted possible profits of $5 million to $10 million for 2001. In an interview Friday, he said that since pre-reorganization profits were $4.4 million, he wasn't too far off. He noted that the effects of the Sept. 11 disaster in lower Manhattan delayed closings in ACA's structured finance business. So those profits didn't come in before the end of last year.
Last year Satz had also projected that written premiums in the municipal finance business would total $30 million; the reality was exactly half of that, $15 million. Satz said that the downgrade warnings cut into ACA's municipal business, and rather than slash prices to build more business, the company decided to be patient and wait until the market normalized. He said he expects premiums of $30 million to $40 million for 2002. ACA focuses on what Satz calls an "under-served" area of the municipal market, such as rural health care centers.
Before joining Ambac in 1982, Selles was a health care rating analyst with Moody's Investors Service, and had previously had the same job at Shearson Lehman Brothers.
