New downgrades, warnings crush bond insurers

By Reuters
Posted Oct. 25, 2010 at 11:27 a.m.

The bond insurance business, which fell to its knees during the 2008 financial crisis under the weight of soaring defaults, may have finally heard its death knell Monday.

Assured Guaranty lost its crucial “AAA” credit rating from Standard & Poor’s and Syncora Holdings warned it could have a liquidity problem from future claims on mortgage-backed bonds.

Assured Guaranty’s downgrade was a blow to Wilbur Ross, the high-profile investor whose firm has invested about $500 million in the bond insurer and counts it among the firm’s biggest holdings.

Assured had been effectively the only bond insurer writing new business after competitors like Ambac and MBIA had their ratings slashed on the back of dwindling capital and rising mortgage defaults.

“We believe the current state of the financial guarantee market, with only one organization issuing new policies, is symptomatic of investors’ and issuers’ diminished demand for bond insurance,” S&P said in the Assured downgrade note.

Assured Guaranty shares were down 13 percent at $18.57 and Syncora shares were down 31 percent at 16-1/2 cents at midday, as the already-battered business took another hit from worries about the foreclosure process and a nationwide investigation into mortgage lenders. Ambac and MBIA were both down about 2 percent.

Just two months ago, Assured easily beat Wall Street expectations for quarterly profits and said it saw improvements in early-stage delinquencies of its mortgage-backed portfolio.

Assured’s municipal unit was the only active insurer in the muni bond market in the first three quarters of 2010, covering $20.8 billion of newly issued bonds, according to Thomson Reuters data.

The data showed insured bonds dropped to 7 percent of the municipal debt issued this year, down from a historical level of around 50 percent.

Billionaire Ross said in an interview last month was upbeat on the business.

“I disagree that it was necessary,” Ross told Reuters Monday about the downgrade, adding it appeared to him S&P had changed its criteria for the company to keep a “AAA” rating.

“I don’t agree with the rating, but I don’t think the impact on Assured’s business will be material,” he added. “There certainly has been no deterioration from June to the present” in Assured’s business.

Meanwhile, Syncora said its Syncora Guarantee unit — formerly XL Capital Assurance — would see its net worth shrink as much as 28 percent, thanks to bigger than expected payouts. Its net worth, or policyholders surplus, stood at $143.8 million as of June 30.

The company also said in a statement it may have to pay more on claims than it will receive in premiums, which could put the company in a cash squeeze.

“If not mitigated these issues could materially impair the company’s ability to satisfy its future obligations,” it said.

Syncora added, without elaborating, that it was exploring ways to deal with the liquidity crunch and “other challenges.”

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