Financial Security Assurance Inc. yesterday announced a $500 million capital infusion from its parent it will use to add capacity and write new business, positioning it to take advantage of its unblemished balance sheet in today's current market.
The additional funds will be provided by Dexia SA, and will be injected into Financial Security Assurance Holdings Ltd. to increase FSA's qualified statutory capital by 18.5% to $3.2 billion, and bring claims-paying resources to $7.2 billion, the company said in a release.
"The opportunities we are seeing, particularly in the U.S. muni market at the moment, are so significant we wanted to have the capital in place before we do the business," said Robert Cochran, chairman and chief executive officer of FSA, in an interview.
FSA has been a rare winner in the wake of recent turmoil in the bond insurance sector, as many of its competitors have seen their capital cushions eroded by mark-to-market losses in their structured finance divisions.
In recent months, market participants flocked to FSA and its stable triple-A rating, as they shied away from the uncertain triple-A ratings of most of the other triple-A rated bond insurers. FSA is rated triple-A, with a stable outlook, by all three rating agencies.
After moving into the top spot for bond insurance in 2007, FSA has taken an even greater lead through the first month of this year, guaranteeing 70.1% of the insured market for volume of $3.6 billion, through Jan. 31, according to Thomson Financial.
CreditSights analyst Rob Haines said the added volume reinforces the importance of the triple-A rating and he said expects the trend to continue for "at least the near to intermediate term." If true, it could lead to further capital infusions for FSA.
"If that trend continues long enough we'll feed that with more capital," Cochran said.
Cochran said he first thought about asking Dexia for additional capital in the beginning of the fourth quarter of 2007, as market conditions began to deteriorate. At the time, Ambac Assurance Corp., Security Capital Assurance, parent of triple-A rated bond insurers XL Capital Assurance Inc., and others began to report third-quarter losses based on mark-to-market charges on the credit derivatives contracts they insured.
As conditions became worse, and the triple-A ratings at some of the bond insurers were threatened, the idea took shape.
"It started to percolate in my mind early in the fourth quarter," Cochran said. "The management team here came to the conclusion and the case was made for additional capital early in January."
FSA finds itself in a favored position because of its conspicuous aversion to those securities that many of its competitors chose to insure, collateralized debt obligations made up of asset-backed securities, and credit default swaps.
The opinion of management was that the securities were just too risky and unpredictable, Cochran said.
"Very early in the process we decided - internally, and after a lot of discussion and attempts to analyze them - that they were ultimately unanalyzable," Cochran said.
It remains to be seen how FSA will use the added capacity. Cochran said the company will continue to write new business in the intermediate credit range of the primary market - single-A and lower, investment grade - as well as wrapping previously insured bonds in the secondary market, deals that Cochran said FSA "has been executing on a daily basis."
He said FSA has been approached by other bond insurers about reinsuring portions of their books, and that if an equitable transaction for both parties can be reached, FSA would consider it.
However, he did say that the insured market is a finite market, and with newcomers like Berkshire Hathaway Assurance Corp. now on the scene, some companies may get squeezed.
"There probably is an amount of companies that are too many and an amount of capital that is too much for a given size of market at a given moment," Cochran said. "That's why the fundamental principle of our business has to be underwriting discipline and you have to be willing to do less business than you'd like to in a given moment in time if the opportunities are insufficient."
As the current head of the Association of Financial Guaranty Insurers, FSA is responsible for representing the interests of the monoline bond insurers. Sean McCarthy, FSA president and chief operating officer, has been to Washington "often" to speak with federal regulators and lawmakers on issues affecting insurers, Cochran said.
"He's been called to Washington many times to go to the Fed, the Treasury Department, and Capitol Hill, and that is sort of an ongoing thing," Cochran said. "We are just trying to represent the industry as a whole and then the individual companies have to stand up for themselves."
While the news of Dexia's infusion does not have a direct effect on other bond insurers, it does highlight the need for them to find capital to shore up their balance sheets and maintain their triple-A ratings. It is an outcome all triple-A rated bond insurers would like to see, Cochran said.
"We don't see it in any way to being FSA's advantage to see any companies being downgraded and we are hopeful that our competitors succeed in raising the capital they need," Cochran said. "And ultimately, that it will prove that the industry deserves to remain triple-A and investors can rely on us." q