Bond insurer crisis: A golden goose egg

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NEW YORK (CNNMoney.com) -- It's not all bad news for the bond insurance industry nowadays.

The ongoing crisis, which has left smaller outfits like ACA Financial Guaranty Corp. in shambles and continues to threaten the survival of industry leaders Ambac and MBIA, is benefiting a select few companies.

Two firms, in particular, Financial Security Assurance and Assured Guaranty Ltd. - financial guarantors with their AAA ratings firmly in place - have enjoyed a surge in new business just within the last few months.

"This crisis, to this point, has been very good for them," said Matt Fabian, a managing director at Concord, Massachusetts-based consulting firm Municipal Market Advisors.

FSA, which has consistently been a leader insuring municipal bonds in recent years, saw its market share jump above 65% this month, up from just 22% as of the end of 2007, according to Thomson Financial.

Assured Guaranty (AGO) , on the other hand, was still a low-key player in the financial guaranty business in early 2007. Nowadays, it has the second-biggest market share in the municipal bond insurance industry behind FSA, according to Thomson.

"In the current environment, there is a very strong demand for companies viewed as rating stable, so FSA and ourselves are writing a significant volume of business," said Sabra Purtill, a spokeswoman for Assured Guaranty.

Bond insurers have long occupied an obscure part of the financial services market, mostly insuring corporate debt and municipal bonds issued by cities and small towns looking to raise money.

But companies like ACA and MBIA got into trouble after they insured mortgage-backed securities that collapsed as a result of the current credit crisis. Worried that they will not be able to handle existing claims and retain enough capital, the credit rating agencies have stripped some firms of their top-notch AAA ratings.

Municipalities depend on these financial guarantors to boost the credit rating of their bonds and ultimately allow them to borrow at more favorable rates when funding projects like building schools or repairing bridges.

But since the rating of their bond is pegged to the rating of the bond insurer, local governments are avoiding many of the players that are at risk of losing their AAA rating.

Mark Mustian, an attorney with the Florida-based law firm Nabors, Giblin & Nickerson, which adivses local governments looking to raise money through municipal bonds, said that his clients are steering clear of firms like Ambac (ABK) and MBIA (MBI) for just that reason.

And some local governments are skipping the insurance altogether. Without trustworthy insurance, these governments must pay higher interest rates to lure investors, choosing that option over getting into bed with a troubled bond insurer.

Of the more than $20 billion in municipal bonds issued during the month of February, just $5.4 billion, or just 27 percent, were covered by financial guarantors. During the same period last year, more than half of the $39 billion in municipal bonds issued were insured.

Seizing an opportunity

Noticing the increased demand, both FSA and Assured Guaranty have seized upon the opportunity. FSA, for example, got its parent company, the Belgian bank Dexia, to pony up $500 million to help cover the flood of new business in early February.

And late last month, Assured Guaranty won a $1 billion commitment from famed distressed investor Wilbur Ross. The company now believes it will experience a record level of business in 2008 as a result.

But some experts, like Jay Abrams, chief municipal credit analyst at FMS Bonds Inc., a broker-dealer that specializes in tax-exempt bonds, points out that some of these insurers are also taking advantage of the situation by charging higher prices.

"My understanding is that they are charging pretty hefty fees," said Abrams. "They will use the opportunity to do the best they can."

There are even signs that outsiders sense a rare opportunity to break into a business that was long considered to be both stable and rewarding.

In January, Warren Buffett's Berkshire Hathaway (BRKA, Fortune 500) opened up its own bond insurance business, Berkshire Hathaway Assurance Corp., in New York State amid the industry turmoil.

And a source familiar with the matter told CNNMoney.com that there has been an increase in new bond insurance companies applying for a AAA rating.

Even though recent capital raising efforts by Ambac and MBIA have shored up their top-notch rating for now, FSA and Assured Guaranty look pretty secure as front runners going forward, argues Fabian of Municipal Market Advisors.

Both firms have had plenty of time to scour their portfolio for any risky exposures, especially if the credit crisis takes a turn for the worse.

"I'm increasingly optimistic they have the potential to get in front of any potential crisis," he said.