The ever-evolving situation for the municipal market's most vulnerable financial guarantors showed further developments in the last couple of days, as two companies announced additional losses while another removed one of the potential solutions.
Security Capital Assurance Ltd., the parent of struggling bond insurer XL Capital Assurance Inc., announced on Friday it will take an additional $1.5 billion charge for 2007, and will delay filing its annual report, pending a complete review of its fourth-quarter performance. The charge is likely to hinder the company's ability to write new business.
The charge is a reflection of falling values on the credit derivatives the company insures, and will include a $645 million impairment on collateralized debt obligations of asset-backed securities. SCA said it will work with financial advisor Goldman Sachs and newly hired Rothschild Inc. to conduct a review of all the strategic options available to the company.
Bank of America equity analyst Tamara Kravec said in a research report yesterday that the company is debating whether to include a "going concern" section in documents released with the annual report.
The company has suffered from ratings downgrades and little success in coming up with ways to raise needed capital to keep those ratings at triple-A levels. Standard & Poor's downgraded XL Capital on Feb. 25 to A-minus from AAA, keeping it on negative watch. Moody's Investors Service rates it A3, with a negative outlook, and Fitch Ratings assigns a rating of A, while keeping it on negative watch.
"Given the downgrades, SCA is limited in the amount and quality of business it can write," Kravec wrote. "We believe a runoff scenario is the likely outcome for SCA."
A runoff would dictate the company cease writing new business.
Meantime, Ambac Financial Group Inc., parent of Ambac Assurance Corp., announced Friday that it expects losses on credit derivatives and total return swaps to be about $650 million for the month of January, with continuing losses into Februrary. Ambac said in its annual report that rating agency downgrades and falling values for mortgage-backed and collateralized debt obligations led to the losses.
Also, Warren Buffett told CNBC yesterday that his previously-announced offer of up to $800 billion in reinsurance through Berkshire Hathaway Assurance Corp. is no longer available to the three largest bond insurers - MBIA Insurance Corp., Ambac, and Financial Guaranty Insurance Co. - after all three summarily rejected his offer.