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A few thoughts on today's insurer movement |
| Written by Reggie Middleton | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Monday, 25 February 2008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Query: Should ratings agencies defer doing their job in order to avoid a market fall? Isn't the reason for our being in this situation due to their not doing their job? Query: How can S&P affirm capital starved MBIA's AAA rating when their captive reinsurer was downgraded below AAA? Channel Re reinsures over $900 million of MBIA's least desirable risks. So, will they have to take this back onto thier books? The downgrade is the equivalent of losing over half billion dollars of capital, give or take. Query: Has anyone forgotten about the junk bonds, consumer finance and leveraged loan CDOs that the monolines insure? If you think the banks are at risk of balance sheet damage, imagine how bad it will be for their insurers where all of those losses will be concentrated. Query: Are investors joining in this trader driven rally? XL Capital was cut from AAA to A- today, but it rallied with the rest of the market. Whaaaattt??? Look closely... XL has 45% of its fixed income securities (US$ 10.9 billion) portfolio in mortgage and asset backed securities (including $2.4 billion into subprime).
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Comments (5)
  written by Reggie Middleton, February 26, 2008
You have to differentiate between the losses booked as an owner and the losses to be booked as an insured. The url you posted shows were MBIA (in addition to Koch and General Re) wrote down the carrying value of thier investment to zero. Basically, a 100% capital loss. Unlike General Re and Koch, MBIA had additional capital tied up in Channel Re as an insured. Now any of those insured issuances that were insured above A- are downgraded. This means that MBIA's clients whose insured issuances were passed on to the reinsurer have been downgraded and must mark to market accordingly unless MBIA reassumes those risks, consuming additional capital.
This is a bad thing.
 written by tom wallace, February 26, 2008
Reggie:
I suppose I should just spend more time with the MBI 10k -- but all the equity owners wrote down their interests to zero. This means that MBI can't cede more then losses equivalent to the total assets of MBI. Their reinsurance recoverable from Channel should equal Channel Re's assets. It can't be more, because there isn't more. It can't be less (except for amounts owed to companies other then mbi) since the equity holders have thrown in the towel and all the significant liabilities are associated with mbi. When the 4q financials come out, the reinsurance recoverable from channel should be channels assets. Ratings on other reinsurers matter, but mbi gets all of channels assets, which is a known number. However, the above is based on logic -- so who knows until the statement is released.
written by tom wallace, February 26, 2008
Which is just another way of saying that once all the equity owners threw in the towel, all the cash flows of Channel go to (and from) mbia only. So it's effectively all on mbia's balance sheet. Note that prior to the total writedown, they were carrying it using the 'equity method' and then doing eliminations.
From an economic perspective, I don't see any other way to look at it. As far as accounting conventions, who knows. Sorry to beat this to death, but I am puzzled about why channel's rating matters. There is no longer any reinsurance.
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http://investor.mbia.com/phoenix.zhtml?c=88095&p=irol-newsArticle&ID=1102479&highlight=
The way that I would interpret this comment is that they have taken credit for all possible recoveries from Channel Re, including its capital. Since this was booked in 4Q, I don't understand the point of a rating, other then to say that Channel's only customer (mbia) will, in fact, get all the assets (since they are tapped out).