Assured Guaranty Ltd. completed its $822.1 million purchase of Financial Security Assurance Holdings Ltd. yesterday, creating a dominant bond insurer in a decimated industry.
After closing the deal, which was originally inked with FSA parent company Dexia in November, Assured is essentially the only insurer writing significant new business.
"We responded to a market opportunity," Dominic Frederico, Assured's chief executive officer, said in an interview. "In terms of the breadth of product and expertise, each company had its own expertise and strength, and now they become complementary."
A series of financial-strength downgrades has straitjacketed most companies in a market that only two years ago had seven viable players.
Ambac Assurance Corp., which Standard & Poor's now rates just two notches above junk, has negligible prospects for writing new business, the rating agency determined last month.
MBIA Inc. is hampered by litigation in its effort to restructure.
Warren Buffett's bond insurer, Berkshire Hathaway Assurance Corp., has been reluctant to insure much debt since launching.
That leaves the market to FSA/Assured.
"The only ones that are getting even any kind of respect in the market anymore are FSA, Assured, and Berkshire," a trader in Los Angeles said. "I don't think anyone else is getting any respect at all."
This trader said bonds insured by Ambac or MBIA essentially trade as if they are uninsured.
In the first half, Assured, FSA, and Berkshire Hathaway were the only companies on Thomson Reuters' list of active insurers. Berkshire's market share was just 2.3%.
During the first half of 2009, Assured insured $17.6 billion in municipal debt, which was 70.6% of insured volume during that period, according to Thomson Reuters.
Insurance penetration through May - meaning the percentage of the $148.7 billion of debt floated by municipalities that was insured - was 12.5%.
Penetration in June was less than 5%.
The combined company insures $654.49 billion of debt, including $421.16 billion of munis, according to figures reported as of March 31.
Assured Guaranty Ltd.'s subsidiary, Assured Guaranty US Holdings, will own the divisions Financial Security Assurance Inc. and Assured Guaranty Corp.
The FSA franchise will be a muni-only insurer. FSA in August decided to stop insuring structured deals, which include pools of mortgages or collateralized corporate debt.
Aside from its public finance book, Assured will remain in the structured finance business, a bold move during a time when many decry the very notion of insuring structured debt.
Frederico said most of the damage from insuring structure finance has come from collateralized debt obligations of asset-backed securities.
Other than that one product, Frederico said the structured finance book is doing fine.
"You look at the whole body of the book in totality and you'll see it's performing incredibly well under the worst economic times in anyone's recollection," he said.
Competition is encroaching. At least one private insurer, Municipal and Infrastructure Assurance Corp., backed by Macquarie Group Ltd. and Citadel Investment Group, is awaiting ratings to begin insuring bonds.
Aside from a proposal for insurance from the federal government, two proposals call for a mutual bond insurer, owned by the issuers. The business model for the mutual insurers would be to offer attractive premiums to municipalities, not to generate profits for shareholders.
Frederico is not worried. He thinks the market has room for three to five well-capitalized insurers, with the market leader's share at 10% to 15%.
In that case, he believes insurance penetration could reach back above 30%. Penetration peaked at well over 50% in 2005 before plunging last year.
Assured and FSA collected $638 million in combined premiums last year. FSA reported a profit of $11.5 million in the first quarter, and Assured reported a profit of $85.5 million.
Assured's stock has more than quadrupled since its trough in early March. The shares closed Wednesday at $12.65, up 27 cents on the day. The stock implies the company's market value is about $1.15 billion.
The stock peaked at more than $30 in 2007.
Assured paid $546 million in cash plus 22.3 million shares of its stock for FSA. Based on the closing price of the stock on Tuesday, the share portion of the cost is valued at $276.1 million.
The acquisition excludes FSA's troubled financial products division.
Sean W. McCarthy, who was president and chief operating officer of FSA Holdings, has been named to the same post at Assured Guaranty. Assured president Michael J. Schozer, chief financial officer Robert B. Mills, general counsel James M. Michener, and chief accounting officer Robert A. Bailenson will continue in their positions.
"Our customers can look forward to responsive service starting day one," McCarthy said in a statement.