Assured Guaranty Ltd.’s business is poised to enjoy a two-pronged benefit: capturing fatter portions of fatter spreads, according to the credit research firm CreditSights.
After buying Financial Security Assurance this month, Assured controls the only companies writing any measurable new business in the bond insurance industry.
Assured and FSA together captured 83% of the market share during the first half of 2009, according to Thomson Reuters, with nearly $21 billion in insured deals.
With Berkshire Hathaway’s bond insurer the only other underwriter on the map and FSA planning to ramp up following the merger, Assured Guaranty should “dominate the market,” CreditSights wrote in a report yesterday.
That dominance will translate into much better returns than the company generated in 2006 and 2007, according to the report.
The reason is that the company will face less competitive pricing, CreditSights said.
In an interview earlier this month, Assured chief executive officer Dominic Frederico explained the price of a bond insurance policy is buffeted by its value to the issuer. For example, if a single-A rated city trying to sell a bond would pay a percentage point less in interest on its debt if it opted for bond insurance, it would never pay more than a percentage of the debt for an insurance policy.
Bond insurers charge a portion of that spread, Frederico said. Competition is a primary determinant of how plump the portion is.
When seven viable insurers fought for business as recently as 2007, CreditSights said, insurers were charging 25% to 45% of the spread.
That was smaller than usual. The most it has ever been is about 70%, according to CreditSights.
“Now that Assured is the only insurer writing new business, it is able to take a larger piece of the spread differential,” Assured said.
Not only will the insurer be able to capture more of the spread, the spreads are bigger.
For most of 2007, a single-A rated 10-year municipal bond yielded less than 50 basis points more than a triple-A rated 10-year, according to the Municipal Market Data yield curve. Today that spread is roughly 120 basis points.
CreditSights does not foresee Berkshire Hathaway becoming a long-term competitor in bond insurance.
Startup firms like Municipal Infrastructure and Assurance Corp., which is currently awaiting financial strength ratings from the rating agencies, may be able to compete, CreditSights said.
