Despite a downgrade by Moody's Investors Service in November, Assured Guaranty Corp. took the top spot in bond insurer rankings in the fourth quarter.
Berkshire Hathaway Assurance Co. was number two and Financial Security Assurance Inc. was the third-ranked insurer in the quarter. But FSA, which Assured Guaranty Ltd. has agreed to acquire, retained its number one position for all of 2008.
Assured wrapped 286 issues with a net par value of $4.29 billion in the quarter, and 1,002 issues with a par value of $26.5 billion for the year, according to Thomson Reuters.
"I think this was a good illustration of investors saying that Moody's can continue to have its views on the company, but it's not going to affect how we do business with Assured Guaranty," said Assured president Michael Schozer, whose company is rated Aa2 by Moody's and AAA by Fitch Ratings and Standard & Poor's. "When Moody's put us on negative watch in July 2008, a number of deals that we had in the market were either pulled or delayed. In November 2008, when we were downgraded by Moody's, none of our deals in the market were pulled or delayed."
The market for bond insurance changed drastically in 2008, with the structured finance exposure crippling most of industry's players. The rating agencies eventually downgraded almost every insurer, many below investment grade. Ambac Assurance Corp. and MBIA Insurance Corp., once among the industries top credit enhancers, each saw production plummet more than 95% and dry up for most of the year.
Moody's in November took a pessimistic outlook on the industry, saying a stand-alone triple-A insurer was unlikely. It downgraded FSA and Assured the next day.
The problems have made many investors wary. Whereas insured bonds typically traded as homogenous credits in the past, investors now look more closely at the underlying credits and the insurers themselves. Credits wrapped by the non-triple-A insurers trade without a premium and in some cases trade at a discount, because funds don't want to show the paper wrapped by tainted guarantors on their books, according to George Friedlander, Citi managing director and fixed-income strategist.
Still, Assured, FSA, and Berkshire Hathaway provide some benefit. In a deal priced in December, for instance, an Assured Guaranty wrap on the 2028 maturity saved the Dormitory Authority of the State of New York 12 basis points compared to an uninsured portion of the bond maturing the same year.
Assured and FSA credits trade at a 10 to 35 basis points premium, but it's "all over the lot" depending on the underlying credit, Friedlander said. They trade about 10 basis points behind Berkshire, he added.
"There is more comfort when we see there is a name assured by FSA, Assured, or Berkshire," said Eric Friedland, director of research at Belle Haven Investments. "But given what's happened to the market, we're unlikely to buy something we're not comfortable enough with on its own."
Bond insurance can help in a difficult market, especially like the one issuers faced at the end of last year. With the economic crisis weighing on issuers, investors appreciate the assurance of payment and extra underwriting look bond insurance provides, insurance executives say.
With the insurance market dried up, issuers turned to other forms of credit enhancement for liquidity. The use of letters of credit increased 247.8%, for instance, but they are often expensive and capital-constrained banks are running out of capacity.
The market could use another bond insurance name to add diversity to the market, with funds running up against the limits of how much paper from the three healthy insurers they can hold. This could be exacerbated by the Assured and FSA merger, depending on how funds view it, according to Friedlander.
Entrant Berkshire Hathaway has done few deals in the primary market, wrapping just 22 new issues with a par value of $3.3 billion the entire year. But that still made it the number three bond insurer in 2008, behind FSA and Assured.
Another entrant, the Municipal and Infrastructure Assurance Corp., co-sponsored by Macquarie Group and Citadel Investment Group, is working with rating agencies and regulators to get ratings and approval to write new business. The muni-only insurer plans to back a wide range of credits in the primary market. Executive vice chairman Richard Kolman, former co-head of the municipal bond department at Goldman, Sachs & Co., said market response has been positive so far.
"What I think people really appreciate about what MIAC is doing is that we're looking to provide a private solution," Kolman said. "We have a strong investor group that's going to help us provide that to municipal issuers, which is going to be a big benefit when they want to enter the marketplace."
Ambac and MBIA are both looking to receive equity in injections from the Troubled Asset Relief Program to capitalize new muni-only subsidiaries, but it's unclear if that will come through or if insurers will support them.
Also on tap for next year, a number of downgraded insurers - some trying to avoid insolvency - must continue to deal with their structured finance counterparties to terminate exposures. The New York Insurance Department worked last year to help insurers raise capital and arrange settlements with counterparties. It has yet to put any insurers into rehabilitation, which commissioner Eric Dinallo said should be "an absolute last course."
To try and avoid the industry's past pitfalls, Dinallo's office plans to make a number of regulatory changes, such as more restrictions on the business insurers can write, greater capital requirements, and avoiding policies that require early postings of collateral or accelerations of payments.
"I think that, frankly, this is a lesson for active, proactive regulation," Dinallo said. "We could not be where we are without us getting as reasonably ahead of the curve, calling the meetings, sort of cracking the code of the problem of collective action, where no one party wants to admit they have a problem, or a weakness, or a concern."
Elsewhere in the rankings, Bank of America dominated the letter of credit market, backing 240 issues with a par value of $16.1 billion on the year.
For lawyers, Orrick Herrington & Sutcliffe LLP led the bond counsel rankings, working on 407 issues with a par value of $34.5 billion, with equal credit given to each bond counsel. Nixon Peabody LLP led the underwriter counsel rankings, working on 132 deals with a par value of $21.1 billion.
