Reinsurance Available for Increased Capital According to Bond Insurers

Speaking at a Banc of America Securities bond insurer conference on Tuesday, several executives from some of the larger companies that provide payment insurance for bonds and other securities backed by subprime mortgage stated that they could raise more capital through reinsurance, if needed. 
 
The companies, which have seen their share prices plummet in recent months on growing fears that they will not be able to come up with the money to pay off claims on billions of dollars worth of subprime coverage they have written in the last few years, face the prospect that each of the three major ratings agencies will demand higher capital requirements for the insurers to provide a better cushion for potential losses. 
 
The conference was broadcast over the Internet, and executives from Ambac Financial Group Inc., MBIA Corp., and Security Capital Assurance Ltd. all said they could raise capital through reinsurance. Executives also said they could slow new business or issue debt to meet new ratings agency requirements. 
 
But at the same time, they argued that the situation is not as dire as the market and the ratings agencies believe, even as negative market and investor sentiment seems to build. 
 
"Does the (market) implication carry water?" said David Wallis, a senior managing director at Ambac. "I don't think it does. I have not read one report that reaches these sorts of numbers' of losses that are implied by current trading levels on bond insurers. 
 
Mr. Wallis said that the 49% of the company's so-called mezzanine, or subprime collateralized debt offering collateral, could "disappear, and we are okay," because of protections that are typically built into its insurance policies, or wraps. 
 
Sean Leonard, Ambac chief financial officer, said that 85% of the company's portfolio was non-mortgage related and could be reinsured, which would free up capital to pay potential claims on its subprime book of business. The company already has reinsurance in place that gives it the option of increasing coverage. 
 
"We would be weighing the earnings drag versus the potential for dilution in other capital instruments," such as issuing equity, Mr. Leonard said. 
 
Even as the insurers fielded questions on how well they expected to hold up to new ratings agency tests, Security Capital Assurance questioned whether one agency, Fitch Ratings Inc., is taking an overly pessimistic view in its ratings of some of the securities Security Capital guaranteed. 
 
"Obviously they have made the most dramatic changes to their ratings methodology, which we find baffling," said Edward B. Hubbard, president and chief operating officer of Security Capital Assurance's financial guarantor subsidiary. 
 
In particular, Security Capital took issue with a Fitch downgrade of a collateralized debt offering CDO it insures, which went from a triple-a rating in July to triple-B-minus in recent weeks. 
 
The growing pessimism inherent in the ratings agencies review of transactions and insurers seems to be spreading outside of the subprime asset-backed marketplace, the executives agreed. 
 
Municipalities that issue new bonds have bought less insurance than in past quarters, Security Capital Assurance and MBIA executives agreed, with Hubbard saying in some cases, issuers are choosing to go without insurance on highly rated bonds, "reflective a little bit of what is going on in the market," he said. 
 
One executive cited a statistic from industry publication The Bond Buyer, which estimated that recently, around 40% of government-issued bonds obtain insurance, down from around a 50% rate in recent years. 
Mr. Hubbard said he sees some double-A rated deals deciding to forgo insurance that would boost the deals to a triple-A level.&n