Displaying items by tag: Insurers and Insurance

Why in the world would the media (rhetoric question) report the
street rallying when Buffet offers to buy the only thing keeping
monolines afloat? He is effectively holding the sword labeled monoline
hari kari.

From Bloomberg :

Berkshire would put up $5 billion as capital for the plan and is
offering to insure the municipal debt for 1.5 times the premium charged
by the bond insurers to take on the guarantee. The insurers could
accept the offer and back out within 30 days for a fee, Buffett said.

course, management (at least the ones with any gray matter left) are
saying thanks, but no thanks. Wait a minute, though. They say that CDOs
have value and the mark downs are a temporary thing that will amortize
and revert back to par or above by maturity. If that was truly the
case, and you are strapped for capital that no one appears to want to
give to you, Buffet's offer makes plenty of sense. After all, he is
willing to pay you 2/3rds of what you paid for this low growth risk, but you get the capital that you seek so desperately and you get to capitalize on those structured products that you feel the market undervalues so foolishly. That
's a damn good deal for someone who is scrambling for money. Then
again, that's only if you really believe your own structured product
story. I don't think they do.

The only stock that should be rallying
is Berkshire Hathaway. Outside of potential for Buffet's stock holders,
nothing has changed. Even the Buffet equity potential has not changed
much. We all knew this is what he wanted to do - take advantage of the
mistakes that the monolines made with very little risk.

Published in BoomBustBlog
Monday, 11 February 2008 05:00

Reinsurer recap

What do the RMBS reinsurers look like? Here is snapshot of the statistics to look at before AGO's earnings are announced.

Published in BoomBustBlog

I thought of sharing with you some of the key observations we had in the case of Assured Guaranty.

AGO has a market cap of $1.8 billion and book value of $1.6 billion.
The company’s investment portfolio totals $2.46 million comprising MBS
and ABS of which 82% is AAA rated. However, AGO has a significant
exposure to RMBS through the provisioning of financial guarantees.
According to the company’s last quarterly filings, it had exposure to
RMBS, subprime RMBS, CDOs of ABS and Prime RMBS exposures totaling
$21.5 billion. Out of this, 17.3% were rated BBB or lower. Following is
the detailed breakup of AGO’s exposure on these securities:

  • $6.53 billion of subprime RMBS tranches (all rated AAA)
  • $905 million CDOs of Mezzanine ABS (again all AAA rated)
  • $1.26 billion of CDOs of High Grade Pooled ABS (again all rated AAA).
  • $14.23
    billion of RMBS comprises a mix of Prime, HELOC and Alt-A loans, 24% of
    which are rated BBB or lower. Detail breakup:

- HELOC worth $2.52 billion rated BBB

- Alt-A exposure $4.14 billion, majority of which are rated AAA

- Prime exposure worth $2.54 billion rated in the range AAA to BBB

- Remaining $5.12 billion exposure is in the international market

note that in the last six months, when the credit crisis started
unfolding, AGO’s share price has dropped only by 15%, as compared to
75% - 90% for its peers (please refer to the price chart)
That means that either this company is extremely good in fundamentals,
or, everybody in the market is busy in bashing Ambac and MBIA since
these two companies are the largest bond insurers.

Published in BoomBustBlog

From the latest MBIA securities offering prospectus: "An investment in the shares involves a high degree of risk. You should not invest unless you can afford to lose your entire investment."

You'd better believe it. Let's see who'll be silly enough to actually buy these! I browsed through the prospectus of the last surplus notes offering and found that anyone who actually read the prospectus would have been a fool to have bought those notes. Well, I don't want to insult anybody who bought the notes, so let's just assume they didn't read the prospectus (which doesn't sound very bright either, but let's give MBIA investors the benefit of the doubt). They are trying to raise $750 million, when my various musings dictate they need to raise about $6 billion. Hmmm, they seem to be falling short. The last offering lost the investors over 20% of thier principal the first week of trading (just as I anticipated in my post the week before it started trading). This loss totally trumps the 14% annual return you might have gotten if the NYS Dept. of Insurance didn't curtail the payments.

Published in BoomBustBlog

But was granted a reprieve from Citibank, et. al. See the following excerpt from the 8K this morning.

Item 1.01 Entry into a Material Definitive Agreement.

January 17, 2008, Ambac Financial Group, Inc. (“Ambac”) and Ambac
Assurance Corporation (collectively, the “Borrowers”), certain lenders
and Citibank, N.A., as administrative agent (the “Administrative
Agent”), entered into an amendment (the “Amendment No. 1”) to the First
Amended and Restated Revolving Credit Agreement, dated as of July 30,
2007 (as amended, supplemented and otherwise modified from time to time
and in effect on the date hereof, the “
Credit Agreement”)
among the Borrowers, the Administrative Agent, The Bank of New York and
KeyBank, National Association, as co-syndication agents, HSBC Bank USA,
N.A. and Wachovia Bank, National Association as co-documentation agents
and Citigroup Global Markets Inc. as the sole lead arranger and sole
book runner, and certain other financial institutions, as lenders.

Amendment No.1 amends Section 5.03(a) concerning minimum net assets and
the definition of “Total Capital” set forth in Section 1.01 of the
Credit Agreement by excluding net mark-to-market (losses) gains on
credit derivative contracts with the exception of the Impairment Value
with respect to such losses. In addition, the Amendment No.1 adds a
definition of “Impairment Value” to Section 1.01.


Excerpt from the earnings call transcript:

how about answered quality? Many of you have expressed concern over
this issue. Some feel that our 1.1 billion reserves, which is
incorporated in our quarterly results was a surprise and contrary to
assurances expressed by the company in the past. David Wallace is going
to cover this issue in detail when I am finished. He will provide you
with the same analysis that he provided our board and financial

I do not want to run on here only to force listeners to
hear it all again but the short answer is this. We analyzed our
potential losses using several methods. Until this quarter, the
methodologies in which we had the most confidence showed no losses,
this quarter although one methodology in which we had previously relied
continued to show no losses. An additional methodology, which is tied
to the specific legal structure and radiance on the underlying
securities, began to feel losses as the rating agencies accelerated
downgrades of the underlying securities. Naturally, we took these
results in to account setting our reserve."

Published in BoomBustBlog

Hat tip to TradingBR:

Rating Action: Channel Reinsurance Ltd.

Moody's puts Channel Re and Two Rock on review for downgrade

New York, January 23, 2008 -- Moody's Investors Service announced today that it has placed the Aaa insurance financial strength rating of Channel Reinsurance Ltd. (Channel Re) on review for downgrade. At the same time, Moody's also placed on review for downgrade the Aa3 rating assigned to contingent capital securities issued by Two Rock Pass Through Trust, a related financing trust.

Channel Re is a financial guaranty reinsurance company dedicated to providing reinsurance capacity to MBIA Insurance Corporation (MBIA), the New York based financial guaranty insurance company. Channel Re has reinsured a broad range of risks from MBIA, including recent vintage second-lien mortgage securitizations, as well as significant amounts of ABS CDOs containing such exposures.

Moody's stated that today's rating actions were motivated by growing concern about the possible effect of these mortgage-related risks on Channel Re's credit profile in light of the prospect for worsening performance in the mortgage market and the inherent volatility in RMBS and ABS CDO exposures.

"As part of its review, Moody's will evaluate the possible impact of this exposure on Channel Re's risk-adjusted capital adequacy and franchise value", said Ranjini Venkatesan, a Moody's analyst. "We will also assess possible changes in the value that Channel Re provides to MBIA as a result of both companies' evolving credit and franchise profiles in the rapidly changing financial guaranty markets."

Moody's additionally noted that Channel Re's credit profile also has implications for the credit profile of MBIA, with strain at Channel Re placing incremental pressure on MBIA's capital adequacy, and will be a consideration in the ongoing review of MBIA's ratings. MBIA's ratings were placed on review for downgrade on January 17, 2008.

Now, the owner's of Channel Re, Rennaisance Re and Partner Re have already marked their investments in Channel Re down to near zero (see my take ). Again, Moody's is way behind the curve, being much more reactive and not very predictive. More importantly, Channel Re was formed exclusively to reinsure MBIA, forcing an extreme amount of concentration and correlation risk. MBIA also owne 17% of Channel Re, and is also on negative ratings watch. Given the outlook of the owners of Channel Re, a downgrade should be inevitable, but who knows when dealing with the big three. If a downgrade were to occur, it should immediately undercapitalize MBIA, and will compound the problems that would occure if they themselves get downgraded.

Published in BoomBustBlog

This should put to bed the notion that monoline insurer's books
shouldn't be marked to market. The reason why Ambac has big operating
losses is because the stuff that they insure is worth less and taking
big losses. It's just that simple. If you allowed them to keep "fake"
values on the books while the real stuff is tanking, then when the
insured losses are actually realized, shareholders will get slammed
very, very hard. If the mark to market losses are truly inaccurate,
then when things are realized, the company will be able to book a gain.
Until then...

The losses are real, and market pricing cannot be
circumvented for any significant amount of time without the perpetrator
having to pay penance.

'nuff said! (for those that ever followed Stan Lee:-) )

Published in BoomBustBlog

This is the part where you should expect me to say all hell breaks loose. For those who don't follow me regularly, this is my take on the monolines and Ambac. Now, let's check the headlines... From Bloomberg.com:

Ambac's Insurance Unit Cut to AA From AAA by Fitch Ratings

Ambac Financial Group Inc., the second-largest bond insurer, was stripped of its AAA credit rating by Fitch Ratings after the company abandoned plans to raise new equity...Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said yesterday in a statement. The downgrade ``reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction,'' Fitch said... Without its AAA rating, New York-based Ambac may be unable to write the top-ranked bond insurance that makes up 74 percent of its revenue. Ambac may quit the business or sell itself, said Robert Haines, an analyst at CreditSights Inc., a bond research firm in New York. The downgrade throws doubt on the ratings of $556 billion in municipal and structured finance debt guaranteed by Ambac.

``This makes Ambac insurance toxic,'' said Matt Fabian, senior analyst and managing director at Municipal Market Advisors in Westport, Connecticut. And therein lies the fundamental problem. The insurance was toxic from the get-go. The Fitch change in moniker status did nothing to change this, but give us bloggers and some reporters something to type about.``The market has no tolerance for a ratings-deprived insurer.''

Moody's Investors Service and Standard & Poor's, the two largest ratings companies, are reviewing Ambac's ratings for a possible reduction. Moody's said this week that it may also cut the ratings of MBIA Inc., the largest bond insurer. This all a big fat joke. They cut ratings after a 80% drop in price and announcement of a $33 per share loss? Don't do us any more favors. Like I have disclaimed earlier, I am far from a fixed income expert, but I could have sworn that the ratings agencies advisory was aimed at being predictive, and not reactive. All they are doing is telling people how much money they lost!!!

``The likelihood is quite high the others will follow,'' said John Tierney, credit market strategist at Deutsche Bank AG in New York. ``Barring some significant development on new capital, it's just a matter of time before S&P and Moody's act on MBIA and Ambac.''... The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $100 billion of collateralized debt obligations linked to subprime mortgages, $22 billion of non-prime auto loans and $1.2 trillion of municipal debt. Buffet's stock may see a lot of demand out of this...

New York-based Merrill Lynch & Co., the world's largest brokerage, this week took $3.1 billion of writedowns on the value of default protection from bond insurers... Fitch, following its downgrade of Ambac Assurance, adjusted ratings accordingly for 137,990 municipal bonds and 114 non- municipal issues insured by the company. Bonds with underlying ratings higher than Ambac's will remain above the bond insurer's level, Fitch said yesterday in a statement...Fitch last month demanded the company raise $1 billion by the end of January. Ambac on Jan. 16 slashed its dividend 67 percent and said it would sell stock or convertible notes to bolster its capital. The plan provoked a boardroom dispute and led to the departure of Chief Executive Officer Robert Genader.

Ambac's interim CEO, Michael Callen, 67, said this week that the company planned to raise capital in ``an accelerated time frame.'' And exactly how are they going to accomplish that.

Moody's said this week that it may cut Ambac's ratings after the company forecast writedowns of $3.5 billion on subprime-mortgage securities. S&P said yesterday that it may cut Ambac's rating because its capital-raising options are ``impaired.'' I hate to say I told you so, but... The issue is now your credibility is severely damaged by making so many wrong calls to begin with, then taking so long to do something about them.

The sudden increase in scrutiny by Moody's, a month after the company affirmed the ratings, sparked tension with Ambac and MBIA. Ambac this week described Moody's decision to place its ratings on review as ``surprising.'' MBIA issued a statement yesterday, saying it had started a capital raising plan ``in good faith reliance'' on Moody's stated requirements. You guys know you weren't a AAA risk. Let's stop the shenanigans, please...

MBIA's surplus notes plunged as low as 70 cents on the dollar yesterday, indicating a yield of about 25 percent, traders said. MBIA fell 67 cents, or 7.3 percent, to $8.55 on the New York Stock Exchange, taking its decline to 48 percent this week. Now, here I am going to say "I told you so"! Actually, my words were, "wait until they start trading!". I don't know what investors were thinking went they bought these notes! Do they not have professional advisors ? If not, I will offer free access to my blog for those that need it. A quick lesson for free - stop trying to reach for above market yields, for you may be handed above market losses in return.

Ratings companies, which affirmed their assessments a month ago, are scrutinizing bond insurers to ensure they have enough capital to protect against losses. S&P this week said industry losses on subprime securities will be 20 percent more than it initially forecast. Ambac has a capital shortfall of about $400 million under the new assumptions, S&P said. Well, one of us needs to recharge the batteries in our calculators, recalibrate Excel, or something. I see billions of dollars in shortfalls... (see Monolines swoon, CDO's go boom & I really wonder why the ratings agencies are given any credibility!)

Ambac's 6.15 percent bonds due in 2037 have plunged by 25 cents on the dollar this week to 35.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield has soared to 17.6 percent from 10.5 percent and the extra yield investors demand over government securities with similar maturities has widened 7.2 percentage points to 13.4 percentage points. And Moody's considers this a AA risk!!! Can you imagine what they would mean by the term JUNK!

Prices for credit-default swaps that pay investors if MBIA can't meet its debt obligations imply a 71 percent chance it will default in the next five years, according to a JPMorgan Chase & Co. valuation model. Contacts on Ambac imply 72 percent odds. Hey, isn't that what I said in the links above???

Contracts tied to MBIA's bonds have risen 10 percentage points the past two days to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.... Credit-default swaps on Ambac, the second-biggest insurer, rose 11.5 percentage points to 26.5 percent upfront and 5 percent a year yesterday, prices from CMA Datavision show.

Ambac agreed to guarantee almost $200 million of bonds sold so far this year, or 6 percent of the market for new insured issues, according to data compiled by Bloomberg. Ambac's market share was 22.5 percent as of Sept. 30, 2007, according to a Dec. 13 report from Bear Stearns Cos. In a few days I will illustrate the relationship between Bear Stearns, Ambac, and Mr. & Mrs. CounteryParty Risk.

So, after all of this, what comes next??? Is this the part where you expect me to say, "All hell breaks loose!". Well, not all hell, but I think some companies may find just a taste of it...

Published in BoomBustBlog

This is from MBIA's recently published 8k. If you have not done so already, it is strongly recommended that you read the November blog post: Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton.

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

On January 16, 2008, MBIA Insurance Corporation (“MBIA”), a wholly-owned subsidiary of MBIA Inc. (the “Company”), issued $1.0 billion principal amount of Surplus Notes due January 15, 2033 (the “Notes”) with an initial interest rate of 14 percent until January 15, 2013 and thereafter at an interest rate of three-month LIBOR plus 11.26 percent. As a point of reference:

London interbank offered rate, or Libor

Latest Wk ago High Low
One month 3.98938 4.37063 5.82375 3.98938
Three month 3.95125 4.44250 5.72500 3.95125
Six month 3.79375 4.26250 5.59500 3.79375
One year 3.42375 3.86438 5.50656 3.42375

The Notes were issued pursuant to the Fiscal Agency Agreement, dated January 16, 2008 (the “Fiscal Agency Agreement’), entered into between MBIA and The Bank of New York (“BONY”), as fiscal agent (the “Fiscal Agent”), in an offering exempt from the registration requirements of the Securities Act of 1933, as amended.

The Notes are subordinate in right of payment to all existing and future debt issued, incurred or guaranteed by MBIA, all existing and future claims of policyholders and beneficiaries and all other creditor claims which have priority over claims with respect to the Notes under New York insurance law, other than any future surplus notes or similar obligations. Each payment of interest on or principal of the Notes (including upon redemption) may be made only with the prior approval of the New York Superintendent of Insurance and only out of surplus funds available for such payments under the New York Insurance Law.

MBIA has the option to redeem the Notes in whole or in part on January 15, 2013 and the interest payment date occurring in January of each fifth succeeding year thereafter at a redemption price equal to the principal amount of the Notes to be redeemed together with any accrued and unpaid interest to the redemption date, and on any other date at a “make-whole” redemption price set forth in the Notes.

The Notes do not include any restrictive covenants.

In the event of MBIA’s rehabilitation, liquidation, conservation or dissolution, the Notes will immediately mature in full without any action on the part of the fiscal agent or any holder of the Notes, with payment thereon being subject to the satisfaction of the conditions to payment described herein.

In no event shall the Fiscal Agent or any holder of the Notes be entitled to declare the Notes immediately mature or otherwise immediately payable.

The Bank of New York has from time to time engaged in, and will continue to engage in, banking and other commercial dealings in the ordinary course of business with MBIA and its affiliates. The Bank of New York has received, and will continue to receive, customary remunerations with respect to these transactions.

From my second blog post on MBIA (the Scary Halloween Story) and the monolines dated Tuesday, 13 November 2007...

Published in BoomBustBlog

And dropping like a rock. There were actually professional investors trying to go long on this stock. Amazing. It is just below $5 now, down from $21 last week and $66 dollars in October. What a phenomenal short play for those that were aware of the real fundamentals. The entire monoline sector is bleeding scarlet red. This is going to spread quickly into the other sectors that I follow. I may need to hire more analysts!


From CNBC:

Ambac Possible Downgrade: "Death Knell" For ABK?

The big story this morning is in bond insurers. Bond insurers weak (again) today as Moody's placed Ambac under review for a possible ratings cut. What happened? Last month Moody's affirmed the rating with a Stable outlook. They cited the higher than expected losses and the abrupt retirement of the company's chairman and CEO.

This is not good news, as Friedman Billings Ramsey noted this morning: "A rating agency downgrade would be the death knell for ABK, and merely the threat of a downgrade complicates the company's capital-raising plans even further."

More importantly, a cut in the rating of the company would also mean the ratings of the bonds they insure would almost certainly be lowered. That means the owners of those bonds would have to mark down the value of the bonds, which may lead to the final round of (painful) write downs of CDOs in some upcoming quarter.

Ambac cnbc_quoteComponent_init_getData("ABK","WSODQ_COMPONENT_ABK_ID0ENF15839609","WSODQ","true","ID0ENF15839609","off","false"); down 14 percent, MBIA cnbc_quoteComponent_init_getData("MBI","WSODQ_COMPONENT_MBI_ID0ELCAC15839609","WSODQ","true","ID0ELCAC15839609","off","false"); down 12 percent.

This the full rundown on the insurers, can be found here: Insurers and Insurance and this story - Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility.

Published in BoomBustBlog
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