Most Bond Insurers Still Plagued by Troubled Assets

By | July 15, 2009

Most bond insurers are headed for liquidation or run-off as losses from troubled assets linger, an analyst at independent research firm CreditSights said Tuesday.

While some insurers, such as MBIA and Ambac , are stronger than others, “we think the traditional market leaders’ franchises have been permanently impaired,” insurance analyst Rob Haines said in a Webcast presentation.

In a run-off, an insurer stops writing new business, but continues to pay out on existing liabilities.

For anyone holding bond insurance, “basically what you have is a very expensive keepsake,” especially for structured product holders, Haines said.

Barring a significant rebound in the subprime mortgage market, Ambac could easily become insolvent over time, Haines said.

Ambac spokesman Peter Poillon said the company tends not to comment on outside views of its financial strength, but said the company’s claims-paying resources amounted to almost $12 billion as of March 31.

MBIA Insurance Corp. could run out of capital by 2012, he said, adding that there were significant caveats to that conclusion since it was based on average trends in the absence of deal-level information on the company’s exposures.

“Exposure to troubled assets remains extremely high,” with losses from collateralized debt obligations, residential and other types of structured products expected to remain elevated over the next five years, Haines said.

“We do believe that we have adequate capital to meet all of our obligations,” MBIA spokesman Kevin Brown said. While losses on mortgage-linked debt have been higher than anyone expected, MBIA has the potential for recovering fairly large amounts from lawsuits it has launched, he added.

MBIA has taken legal action against mortgage lender Countrywide, now controlled by Bank of America , and GMAC’s mortgage unit Residential Capital, accusing the companies of making false representations on mortgage-linked debt that MBIA insured.

Brown also said he believes there will be demand for MBIA’s new municipal-only bond insurer National Public Finance Guaranty Corp, a unit created to reposition the company to write new business.

Once the two dominant bond insurers, MBIA and Ambac lost market share after devastating forays into structured financial products triggered massive paper losses.

In the municipal area, a normalized market may not return for some time, Haines said. The amount of municipal debt with insurance has declined to about 18 percent after hovering around 50 percent for many years, with many forces behind the trend, including rating downgrades of traditional insurers, he said.

Still, a market continues to exist for insured munis, Haines said. Assured Guaranty will dominate that market, but there is room for at least two competitors, he added. The possibility of a federal backstop for munis was an unlikely scenario at this time, he also said.

Municipal and Infrastructure Assurance Corp. or MIAC, a New York-based insurer formed by Australia’s Macquarie Group Ltd and Chicago hedge fund Citadel Investment Group, was one insurer that merits attention going forward, Haines said.

“We do think they will be able to capture market share, given they have a legacy-clean balance sheet,” he said.

The company, which plans to concentrate on municipal securities and infrastructure projects, is awaiting ratings.

Another relative newcomer to muni insurance, Berkshire Hathaway Assurance Corp, “will not be a long-term competitor in this market,” Haines said. The new insurer is a unit of Berkshire Hathaway Inc .

(Additional reporting by Karen Pierog in Chicago; Editing by Jan Paschal)

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