CHICAGO -(Dow Jones)- In the world of bond insurance, the strong are getting stronger at the expense of the weak.
As subprime woes mount for insurers of municipal and loan-backed bonds, potential customers are voting with their feet. They're largely shunning firms like MBIA Inc. (MBI), Ambac Financial Group Inc.(ABK) and Security Capital Assurance Ltd. (SCA), which are struggling with subprime exposure. Meanwhile, a select few firms that avoided the subprime crisis, such as a unit of Berkshire Hathaway Inc. (BRKA BRKB) and Assured Guaranty Ltd. (AGO), are grabbing premiums and market share.
The results show how the subprime crisis is providing an opportunity for new entrants - and for older players that avoided the lure of complex businesses that, for a stretch, were boosting competitors' reported results.
MBIA, the largest bond insurer, and one of the oldest, said it wrote new business of only $43.4 million in adjusted direct premiums in the first quarter, a drop of 84% from first quarter 2007, before the subprime problems arose.
MBIA, which has said it expects to pay out more than $2 billion in claims on its subprime exposure, said that more new deals have come its way in the second quarter, and that deal pace has quickened. But so far, premiums are tracking about the same.
Its market share of U.S. municipal finance business in the first quarter plummeted to 3%, down from 21% for the first quarter of 2007, MBIA said Monday.
The meager numbers are a testament to the value of a stable AAA credit rating to bond insurers' customers: debt issuers who use the value of the insurer's credit rating to reduce the yield they must pay on the bonds they issue.
The picture was a lot brighter for the more stable bond insurers.
Upstart bond insurer Berkshire Hathaway Assurance Corp., a 2007 start-up of Warren Buffett's Berkshire Hathaway, has seen its business skyrocket. It reported the highest premiums of any bond insurer for the quarter, at about $400 million, Buffett said earlier this month. All the premiums were for insuring municipal bonds; Berkshire is avoiding some of the exotic subprime securities bedeviling most other bond insurers.
Berkshire Hathaway said its business was split, with $100 million in the form of new premiums and $300 million in transactions that were structured as credit default derivative contracts. These contracts provide credit protection on municipal bond debt in the secondary market - that is, when investors purchase credit protection on bonds that were previously insured. The motive for buying this sort of protection is likely that the original insurer's credit rating has declined.
Investors rely on bond insurer credit ratings as a sort of proxy for the credit-worthiness of the underlying municipality that issued the debt.
Berkshire Hathaway picked up AAA ratings from S&P and Moody's in less than 3 months. Berkshire owns approximately 19% of Moody's parent company, and the relationship raised questions of a conflict of interest by the Connecticut Attorney General, who is investigating the rating.
Nonetheless, the new Berkshire unit is widely viewed as a financially strong entity, and its chairman is credited as the world's best investor.
Assured Guaranty Ltd., the only established publicly traded bond insurer to keep stable AAA ratings from all three major ratings agencies, scored its highest-ever new business production in the first quarter, at $276.6 million in present value written premiums.
It held onto its credit rating because it largely stayed away from the arcane securities that have caused the most trouble.
MBIA so far has narrowly kept its AAA rating from Standard & Poor's and Moody's, the two largest ratings agencies, but swung to a negative outlook with both.
It's critical for highly rated bond insurers to have sufficient capital to provide a cushion well above expected defaults on issues they insure.
MBIA is currently $1.7 billion short of Moody's target capital requirement of about $17.8 billion, but plans to meet the target over the next two quarters. MBIA discontinued its ratings agreement with Fitch Ratings earlier this year, and Fitch has since cut MBIA to AA.
MBIA said in February it will not write any more structured finance deals for six months. Such bank-issued securities are typically backed by commercial or consumer loans, including the subprime mortgage-backed securities that have racked up heavy losses.
MBIA said that around half, or $23.5 million, of its first-quarter premiums were in the pipeline before the quarter began and almost all of that was from one structured finance transaction, which means the company will have to match its first quarter number without the benefit of carry-over structured finance deals.
MBIA said that the pace of transactions is steadily improving, and it has closed 359 deals since the end of March.
But premiums on the new business are tracking about the same as the first so far, with $9.1 million in adjusted direct premium on its 24 new public finance issues, and $17.9 million in premiums on 222 bonds it insured in the secondary market.
Next-largest rival Ambac also reported a first quarter business slump. It currently holds an AA rating from Fitch, and AAA from S&P and Moody's, all with a negative outlook.
Ambac reported new production of $40.5 million in the first quarter, down from $310.1 million from the first quarter last year.
In a Monday research note, William Blair & Co. analyst
Mark Lane
said Assured Guaranty's first-quarter production was well above his expectation, and "driven by massive market share gains due to troubled at most competitors, wider credit spreads, and strong secondary market demand within structured finance."
Shares of MBIA recently traded up 6.7% at $10.06, while Assured Guaranty was up 3% at $25.55, Ambac Financial up 0.5% at $4.40, and Berkshire Hathaway Class B down 1.7% at $4,107.
- By
Lavonne Kuykendall
, Dow Jones Newswires; (312) 750 4141; lavonne.kuykendall@dowjones.com
