Here's an interesting one for you:
Beefed-Up Assured Is
Ready to Rule the Roost
Assured Guaranty Ltd.’s business is
poised to enjoy a two-pronged benefit:
capturing fatter portions of fatter spreads,
according to the credit research firm
CreditSights.
After buying Financial Security Assurance
this month, Assured controls
the only companies writing any measurable
new business in the bond insurance
industry.
Assured and FSA together captured
83% of the market share during the first
half of 2009, according to Thomson Reuters,
with nearly
$21 billion in insured
deals.
With Berkshire
Hathaway’s bond
insurer the only
other underwriter
on the map and FSA
planning to ramp up
following the merger,
Assured Guaranty
should “dominate
the market,” Credit-
Sights wrote in a report yesterday.
That dominance will translate into
much better returns than the company
generated in 2006 and 2007, according to
the report.
The reason is that the company will
face less competitive pricing, CreditSights
said.
In an interview earlier this month, Assured
chief executive officer Dominic
Frederico explained the price of a bond
insurance policy is buffeted by its value to
the issuer. For example, if a single-A rated
city trying to sell a bond would pay a percentage
point less in interest on its debt if
it opted for bond insurance, it would never
pay more than a percentage of the debt for
an insurance policy.
Bond insurers charge a portion of that
spread, Frederico said. Competition is a
primary determinant of how plump the
portion is.
When seven viable insurers fought for
business as recently as 2007, CreditSights
said, insurers were charging 25% to 45%
of the spread.
That was smaller than usual. The most
it has ever been is about 70%, according to
CreditSights.
“Now that Assured
is the only
insurer writing new
business, it is able to
take a larger piece
of the spread differential,”
Assured
said.
Not only will the
insurer be able to
capture more of the
spread, the spreads
are bigger.
For most of 2007, a single-A rated 10-
year municipal bond yielded less than 50
basis points more than a triple-A rated 10-
year, according to the Municipal Market
Data yield curve. Today that spread is
roughly 120 basis points.
CreditSights does not foresee Berkshire
Hathaway becoming a long-term competitor
in bond insurance.
Startup firms like Municipal Infrastructure
and Assurance Corp., which is
currently awaiting financial strength ratings
from the rating agencies, may be able
to compete, CreditSights said.