Bleak prospects for monolines

Mixed second-quarter results for monoline insurers have raised fresh worries about their future prospects.

Ambac and Assured Guaranty have announced huge losses, and, although MBIA recorded a gain, analysts predict the surprise result is only a temporary reprieve. 

New York-based Ambac suffered a second-quarter net loss of $2.4 billion, due mainly to losses on its residential mortgage-backed securitisation (RMBS) insurance business and impairment losses in its investment portfolios related to RMBS and tax-exempt municipal securities. The company wrote no new business in the quarter.

"The quarter's financial results are obviously very disappointing, as continued poor performance of the mortgage-related portfolios and rising forward interest rates have escalated projections of future claims," remarked David Wallis, Ambac's chief executive officer.

Independent research firm CreditSights claims the company may run out of capital as early as 2013, despite a contingency reserve release of $1.8 billion from the Office of the Commissioner of Insurance of Wisconsin. The firm ran a stress test on Ambac's structured finance portfolio to examine its solvency and forecasted losses much higher than those anticipated by Ambac itself.

"It is tough to see how the company can survive as an ongoing entity based on our stress test. We do not rule out the possibility of a Syncora-like endgame whereby Ambac's CDS counterparties could agree to take equity in the company's municipal finance book of business and additional longer term consideration in exchange for commutations and settlements," CreditSights concluded.

Meanwhile, New York-based MBIA surprised analysts by announcing a net gain of $895 million in the second quarter, mostly because of its estimated recovery of $1.1 billion on ineligible mortgage loans in certain insured second-lien RMBS transactions. However, despite the positive headline figure, the firm said it had written "virtually no new business" at all in the first half of the year, saying that continuing litigation had deterred customers. Instead, money came in from scheduled premiums on existing deals it has insured.

Chuck Chaplin, MBIA's chief financial officer, commented: "The performance of insured RMBSs continued to deteriorate in the second quarter, and we expect continued high levels of claims payments for the balance of 2009. We believe MBIA Insurance has more than adequate resources to cover these payments."

CreditSights, however, remains dubious about MBIA's ability to fulfil its claims payment obligations over the longer-term. Having conducted a stress test on MBIA's structured finance portfolio, it came to the conclusion that MBIA was in danger of running out of capital as early as 2012.

Responding to the second-quarter gain, CreditSights analysts said: "While this is a clearly a positive if the company can recover a substantial part, if not all, of the $1.1 billion, we still believe this only delays the inevitable capital depletion that we modelled in our recent stress test."

Of all the monolines, CreditSights' analysts believe Bermuda-based Assured Guaranty has the brightest prospects, even though the company reported a second quarter net loss of $170 million. This loss was due to deterioration on credit derivatives written on US RMBS exposures. However, their optimism stems from its acquisition of New York-based FSA in July and the fact that it is the only one of the established monolines to have written significant new business in 2009. During the second quarter, Assured Guaranty insured 7.6% of new issue public finance volume in the US.

Chief executive Dominic Frederico said: "A great deal of our activity in the second quarter was devoted to completing the acquisition of FSA, which marks a major step forward toward our strategic goal of transforming Assured into the market leader for financial guaranty insurance. The combination provides us with greater capacity to write business and more flexibility in balancing portfolio exposures."

 See also: Moody's: FGIC unable to meet payments
Ambac makes $1.539bn derivatives gain
Fiscal strain poses challenges for monolines