Asset-Backed Securities Turning Record Profits for Bond Insurers
Elstein, Aaron, American Banker
Bond insurers are reporting record earnings as they venture beyond guaranteeing municipal bonds and into the exotic world of asset-backed securities.
This obscure but influential business, led by such firms as MBIA Insurance Corp., Financial Security Assurance Inc., and AMBAC Indemnity Corp., enjoyed an 18% rise in net income last year, to an unprecedented $901 million, according to a report issued this week by Fitch Investors Service. This rise accompanies a 7% decrease in premiums received from insuring municipal bonds, Fitch said.
As securitization becomes a game that companies all over the world are learning to play, analysts think the future is bright for bond insurers, assuming they don't compromise their underwriting standards as they vie for market share.
The value of insuring asset-backed securities was vividly demonstrated this February when subprime auto lender Jayhawk Acceptance Corp. filed for bankruptcy.
Jayhawk funded its operations in part by selling securities backed by payments on car loans made to customers with bad credit. But the buyer of these securities, SunAmerica Corporate Finance, was not in danger of losing any of its investment because MBIA had guaranteed their payment.
Analysts and investors value the insurance for the peace of mind it offers. Bond insurers are graded triple-A by the ratings agencies, and when they insure a securitization their rating is conferred on the deal, regardless of the issuer's own rating.
This crucial factor empowers below-investment grade companies to sell highly rated securities and is the engine driving asset-backed securities.
"I sometimes get calls from investors worried about their securities and I ask them, 'Are you worried about the insurer?"' said Jeffrey P. …