U.S. bond insurers change gears in volatile market

U.S. bond insurers, which collectively underwrote at least US$1 billion of par in the first half of 2008, are refocusing their strategies towards the lower-risk public finance market in the wake of the U.S. financial crisis, according to Standard & Poor’s.
In doing so, bond insurers have moved away from the higher-risk structured finance market, S&P’s observed in its report, ‘Market Disruption Provides Pricing Opportunity for Some Bond Insurers.’
“While insured new-issue volume is significantly lower in all business lines, it appears insured secondary market transaction volume and pricing are the strongest they have ever been,” the report notes.
S&P’s noted pricing was strong in the U.S. public finance segment, due in large part of the lack of competition. Financial Security Assurance Inc. (FSA) and Assured Guaranty Corp. (AGC) have garnered the lion’s share of the new-issue market, the ratings agency notes.
But a “shrinking municipal market, combined with the possible entry of new competitors, will likely pressure pricing,” S&P’s said.
Overall, S&P’s concluded, “in our view, the bond insurance industry has been significantly impaired by the impact of actual losses paid and reserves set aside for bond insurers’ exposure to 2005-07 vintage direct and indirect residential mortgage-based securities transactions.”
S&P’s further predicted that there may be increased demand for bond insurance in the future, but that “it will take time” and depend on insurers’ capital strength.