Bond Insurers: Redux

By Eric Fox | February 26, 2009 AAA

The bond insurers were at the center of the financial crisis in 2008, as high profile hedge fund managers pummeled the sector into oblivion. Lately, however, things have quieted down, as the center of gravity of the crisis has shifted to the banking sector.

In The Spotlight (Again)
Last week, the sector came back into public view when MBIA (NYSE:MBI) announced that it would create a separate public financial guarantee insurance company using a dormant insurance subsidiary in Illinois. The new company, National Public Finance Guarantee Corporation, will insure only municipal and other public finance bonds.

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National will acquire all of the current public finance business of MBIA Corp, which puts it on the hook for insuring $537 billion par value of municipal bonds. Insuring bonds like these were the original core business of MBIA before it diversified into other products, a fateful decision that led to much of its current problems.

Initially, the market was enthused with the idea because it granted MBIA the opportunity to gain business from a new wave of municipal issues, unfettered by the billions of dollars in structured finance business it insured during the boom times. However, any enthusiasm was short-lived - at only one day. MBIA since has joined the rout in the financial sector, along with competitor Ambac (NYSE:ABK). (To learn more about municipal bond insurance, be sure to check out Fatal Seduction Of The Municipal Bond Insurers.)

New Kid On The Block
Both companies still face tough competition from Berkshire Hathaway (NYSE:BRK-A). The Warren Buffett-run company entered the municipal bond business early in 2008 after MBIA and Ambac lost their AAA ratings and the market became concerned about default rates rising. The Berkshire subsidiary is now rated AAA and is licensed in 48 states.

Let The Losses Roll
Meanwhile, the losses continue to roll for the insurers. For Q4 2008, Ambac reported a net loss of $2.34 billion, or $8.14 per share. In addition, Ambac recorded a negative $594.4 million net change in the fair value of its credit derivative portfolio. At the end of 2008, Ambac insured bonds with a net par amount of $434.3 billion.

Ambac also launched a clean insurance subsidiary called the Everspan Financial Guarantee Corporation in which it will write new public finance business. The company said it presently has no plans to move any legacy business over to the new subsidiary.

Radian Group (NYSE:RDN) also reported a substantial loss of $250.4 million, or $3.11 per share, for its fourth quarter.

If things work out for MBIA, however, the big winner may be Warburg Pincus, a private equity firm that invested $800 million in MBIA in 2008. Although the firm was clearly too early, investing is a long-term game and its investment may pay off in the end.

Bottom Line
Although the bond insurers were pushed from the limelight by other financials over the last few quarters, the recent reorganization by MBIA has moved them back to center stage. Unfortunately, the industry is still losing money. And that will probably continue for the foreseeable future. (For further reading on the financial crisis, and how you can get through it, check out our Financial Crisis Survival Guide Special Feature.)

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