Assured Looks to Reinsure Competitors

Is your bond insurer looking for capital? Assured Guaranty Ltd. would be happy to have their business. On the heels of an affirmation from Fitch Ratings, Assured announced yesterday that it will reinsure $29 billion of financial guaranty contracts on Ambac Assurance Corp.’s books. Assured has been clear that it plans to offer reinsurance to its ailing competitors, as stock and fixed-income investors clamor for the companies to raise capital in the face of credit-ratings pressure.The rating agencies are reviewing each of the triple-A bond insurers to determine whether the recent wave of structured-finance downgrades also merits a drop in the companies’ gilded ratings. Some of the companies, such as Ambac, have been put under greater pressure in recent weeks because insurers CIFG Guaranty and MBIA Inc. have raised $1 billion or more to shore up their capital.Pressure increased Wednesday afternoon, when Fitch put Security Capital Assurance Inc.’s ratings on watch for a downgrade. The announcement made SCA the first insurer put on notice following one of the agencies’ ongoing capital reviews.Companies like Ambac and SCA have listed reinsurance as the most attractive option for raising capital, though many market sources now think hard capital will be necessary to assuage investor fears.“Reinsurance is a valuable, capital-efficient and shareholder-friendly tool for managing risk and capital in the financial guaranty industry,” said Ambac chairman and chief executive officer Robert Genader in a prepared statement. “This reinsurance arrangement immediately increases our current claims paying resources providing additional capacity to grow our business in a period when market conditions for our core financial guarantee product are favorable.”Ambac’s statement did not say how much capital would be freed up through the reinsurance. One bond insurance executive told investors at a late-November conference in New York that his company generally makes $1 of capital available on its book for each $100 of municipal bonds that it cedes to a reinsurer.Municipal bonds made up 70% of the exposure Ambac ceded to Assured in yesterday’s one-off reinsurance deal, while the rest were structured-finance or international credits, said David Penchoff, president and chief operating officer of Assured Guaranty Reinsurance Ltd.“That’s existing business on their books, and from our perspective, it’s a very clean book and it’s very well-seasoned,” Penchoff said. “So it was not a difficult book for us to underwrite.”The companies also renewed a treaty that allows Ambac to cede some new business to Assured over time. Penchoff said there is not a ceiling on the amount that Assured might reinsure through that treaty but that the amount would be based on “how active they are in certain sectors and the size of some of those deals.”The news comes one day after Assured announced it would sell an additional $300 million of stock to shore up capital in its reinsurance arm. Penchoff would not say whether his company is in advanced talks to pick up some of SCA’s exposure, but said Assured is in reinsurance discussions with all the triple-A monolines.“Everyone comes to us anyway, now they’re just coming to us in larger numbers and quantity,” he said.Assured has master documents in place to do one-off business with any of the other guarantors and has treaties with Financial Security Assurance Inc. and a reinsurance subsidiary of SCA that allows the companies to cede percentages of their new production as they underwrite business.Most of Assured’s reinsurance business has been done through one-off business like Ambac’s, and their largest source of treaty-based business has been FSA. The rating agencies have said Assured and FSA are more insulated from subprime mortgage exposure than any of their bond insurance competitors.While it is willing to take on muni exposure, Assured will not reinsure collateralized debt obligations, residential-backed mortgage securities, or home equity line of credit deals, Penchoff said.Calls for CapitalBond insurers like Ambac landed squarely in the spotlight after MBIA announced Monday morning it was getting up to $1 billion of extra capital from private equity firm Warburg Pincus LLC. Sources from around the financial markets said it was the other insurers’ turn to raise money or face possible downgrades from the rating agencies.Then Fitch put SCA’s triple-A ratings on watch for downgrade, saying a review of SCA’s capital found the company more than $2 billion short of the amount needed to maintain its AAA.SCA’s stock plummeted, dropping more than 21% on Wednesday. It fell a further $1.22, or 22.39%, yesterday to close at $4.23.Assured was the only publicly traded bond insurer with a rising stock yesterday. Assured closed at $24.90, which was higher than the closing price of Ambac — $23.84.Analysts said yesterday that the negative watch could signal the end of SCA’s run as a triple-A bond insurer. Equity analyst Geoffrey Dunn of Keefe, Bruyette & Woods said SCA has two options: accepting a pending downgrade from Fitch or closing up shop.“If [Standard & Poor’s] or [Moody’s Investors Service] comes out with incremental capital charges that are nearly as or more severe than Fitch’s determination, we believe that the company seriously needs to consider putting the company into run-off,” Dunn wrote in a report published yesterday.Reports from Standard & Poor’s and Moody’s reviews are also expected to roll out in the coming days.Banding Against Fitch.JPMorgan analyst Andrew Wessel said SCA could be in a much better situation if Fitch’s review reveals similarly deep capital shortfalls at other insurers.“If Fitch shows itself to be by far the most aggressive in terms of its capital reassessments, it may unwittingly make itself irrelevant should the industry join together in rejecting its opinions,” Wessel told clients in a report yesterday.As the bond insurers came under fire in recent months, some market participants criticized the rating agencies for their seemingly cozy relationships with the guarantors. Downgrading a triple-A insurer would be akin to admitting that the rating-agency capital models were wrong, many people said.The insurers, however, have criticized Fitch’s new Matrix capital adequacy model, saying it is too harsh.Radian Group Inc., parent company of the market’s only double-A-rated insurer, asked Fitch in September to drop its rating. Fitch was the only rating agency to drop its mark on Radian after the insurer’s planned merger with MGIC Investment Corp. dissolved — lowering the parent company to A-minus from A and the bond insurer to A-plus from AA.Fitch spokesman Ken Reed declined to comment.