MBIA Inc. and AMBAC Indemnity Corp., the largest insurers of United States municipal bonds, yesterday announced that they will form a joint venture to market and reinsure financial guarantee insurance in Europe.
Both companies stressed that the cooperation in Europe will not have an impact on their competition for business in the United States, where they together control more than 65% of the market for municipal bond insurance.
"We will completely isolate the European business from the rest of our operations," said Michael J. Maguire, president of MBIA's European subsidiary, MBIA Assurance. "We have reviewed the situation, and do not expect any regulatory or antitrust concerns to arise."
The new venture, MBIA/AMBAC International, will build on each company's existing involvement in European asset-backed, structured, and local government finance, in an effort to expand their business in that market, officials at the two companies said.
John W. Uhlein, a first vice president at AMBAC, and Maguire will become managing directors of MBIA/AMBAC International, and lead the new operation.
Under the initial terms of the alliance, AMBAC and MBIA's European employees will continue to work for their parent firm, but will cooperate in marketing and analyzing new deals. The actual insurance policies will continue to be underwritten by the parent companies, with each holding an option to reinsure up to 50% of issues that are insured by the other firm.
In the longer term, Uhlein said the companies expect that the joint venture will expand the business, and MBIA/AMBAC International will coordinate future hirings.
"The objective is to make the operations very integrated," Uhlein said. "For instance, AMBAC will be opening a London office later this year, and once that takes place, the existing MBIA office will close.'
MBIA officials said that this will involve no job losses.
Analysts applauded the joint venture as a way to bolster both companies' income from Europe.
"This should allow them to combine their marketing prowess and develop a market in Europe," said David Litvack, bond insurance analyst for Fitch Investors Service. "We think there is no foreseeable downside."
MBIA, through its MBIA Assurance subsidiary, has insured $4.1 billion in par value of transactions since the unit was established in 1991. AMBAC has insured a par value of $1.8 billion since entering the European market in 1994.
Maguire said the companies believe they currently insure only a fraction of the fixed-income field.
Roger K. Taylor, chief operating officer at Financial Security Assurance Holdings, parent company of the fourth-largest U.S. municipal bond insurer, which has maintained a European presence since 1987, said the alliance could have positive repercussions for the entire industry.
"Europe is a very big market and financial guaranty insurance is still very new there, so an intelligent marketing and business development program will really help everybody in the industry," Taylor said. "But I think this spirit of cooperation, which has been rare in our industry, is even more positive."
The alliance had its roots in an early-summer discussion between MBIA chairman David H. Elliott and AMBAC chairman Phillip B. Lassiter about the costs of maintaining two separate European operation, while trying to build market share, Maguire said.
"I think both companies had similar concerns about the costs of our European operations," Maguire said. "Our European involvement has been profitable, but going forward, we'd like to expand our staff, and that promised to be expensive."
Uhlein and Maguire said European debt markets have a significantly different basic structure than their U.S. counterparts, making it difficult to establish a foothold with a smaller organization.
"The whole capital markets' infrastructure over there is still in its infancy," Uhlein said. "There are many different constituencies you have to get in front of, from bankers to issuers to investors, which tend to be less institutional in Europe than they do in the U.S."
"We're competing with bank letters of credit, but also unenhanced transactions and direct bank loans. We also tend to be more involved with bankers in structuring insured transactions," Maguire said.
Despite rating agencies' concern about the insurers' diversification into businesses that are riskier than traditional municipal bond insurance, Litvack said the insurers' European business fits into the municipal business' risk profile.
"The risks that they underwrite in Europe fit under no-loss standards, making them comparable to the risks they underwrite in the U.S. municipal business," he said.
Although both Uhlein and Maguire said the joint venture plans to expand to other countries and to introduce additional products, they declined to specify where those expansions will take place.
