Stan Rouyer from Moodys Investors Service talks about the bond insurance industry and the rising penetration rate we have seen over the past year. He also discusses the impact of the recent PREPA news and the Puerto Rico situation for the involved insurers.
WEITZMAN: The bond insurance industry has been increasing the past year. We've seen the penetration rate steadily climbing, are you surprised by this? What do you think has been has been driving this, and what is your general take on the industry?
ROUYER: You're right the penetration has improved substantially from the lows that we saw in 2013 where the guarantors only adds 3.4% of the mini market. Today, your to date, we're at about 6.3% which is almost twice what we saw then. I think what it shows is that the guarantors are slowly reeducating the market about the value of bond insurance, and that is starting to work to their benefit.
That said, the level of origination is still very low, not only by historical standards but in terms of the level of premiums that is generated from it. For example, if you look at the present value of premium which is a term that is used in the industry generated by Assured in 2014, it was about 116 million. When you look at the value of the premium generated for the first six months of the year, we are looking at 62 million. These are very, very small number, and these are levels that are not sustainable long-term. The industry is looking to find ways to improve further its business so it can get on a path that is sustainable, and we are not there yet.
WEITZMAN: Looking ahead, how do you see the insurance continuing on through the rest of this year and into next year?
ROUYER: Our outlook for the industry remains negative despite the improvement we discussed earlier in terms of market penetration. The industry still faces substantial headwinds. One is the low level of interest rate that reduces the relative value of insurance relative to going uninsured. A second one is the fact that the insurable market is smaller than it was historically just because of the weaker credit profile of the guarantors because their focus now is on the low to mid-investment grade as opposed to a wider range of credit.
The third issue is the fact that the industry is still recovering from the financial crisis, and there is still some meaningful level of skepticism about the value of insurance. In fact, a lot of institutional investors are more than happy to invest in uninsured bonds so that they can keep the full spread as opposed to sharing the credit spread with the bond insurance.
WEITZMAN: Now, let's switch gears a little bit and talk about PREPA. There was news coming from them yesterday, how does this news impact the industry going forward?
ROUYER: As you know, the agreement was between PREPA and the uninsured bond holders in Ad Hoc committee. So the insurers are not directly part of the deal, but the fact that they agreed to a haircut of only 15% on the debt is encouraging. This haircut is at the low end of the ranges that we considered when looking at PREPA. The fact that the guarantors are still at the negotiating table is not a negative thing for the industry, it shows that-- in fact, it may even indicate that some resolution should be coming soon.
As you know, the forbearance agreement was extended by a few days to September 18, so that may indicate a possibility of an agreement coming up soon. The guarantors are also in a position where they can show the values that they can offer to PREPA when it comes to issuing new debt by the possibility of insurance's debt, so all signs is if there's any loss for the guarantors, the loss that we saw for the uninsured creditors may present a cap to their own possible losses.
WEITZMAN: Now, PREPA is only one piece of the problem pie for Puerto Rico. There's a lot of other things that are happening within Puerto Rico and the Commonwealth, and no one really knows how these will be resolved, but to your best ability, how do you see this playing out and the impact on the insurers?
ROUYER: I wish I had a very clear sense of how things are going to be resolved. Clearly, Puerto Rico is a major factor in the future of the industry. The guarantors were eight Assured and MBIA. At least one among others are at very large exposure to Puerto Rico. Both of them have around $5 billion in aggregate of exposure. The difference between the two is when you look at the exposure relative to capital, National has a much larger exposure relative to capital compared to Assured. Any resolution there could work both ways.
On one hand, a quick resolution of the Puerto Rico situation with low losses could work for the benefit of the guarantors, it would not only reduce the uncertainty about their credit profile, it could validate their business model by them confirming that it provides support to the market. On the other hand, a long and possibly may see a resolution for the rest of the debt of Puerto Rico could work for the benefit of the industry. The longer is the uncertainty about the ultimate resolution, the longer the skepticism about this value of insurance would persist, and the harder it would be for the guarantors to really regain more traction in the municipal market.