International Insurance Society, Inc.
The Changing Insurance Landscape—
What Survives?
Howard W. Albert
Chief Credit Officer, Assured Guaranty Ltd.
Safe Harbor Disclosure
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Forward-looking statements are being made in this presentation. Actual results could differ materially from these statements.
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Factors that could cause actual results to differ materially include, but are not limited to:
For example, the Company’s forward looking statements, including its calculations of adjusted book value, PVP, net present value of estimated future installment premiums in force, total
estimated net future premium earnings, and statements regarding capital losses, pricing, ratings, expenses and new business production could be affected by many events.
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downgrades of financial strength ratings assigned by the major rating agencies to any of our insurance subsidiaries at any time, which has occurred in the
past;
downgrades of transactions we insure;
our inability to execute our business strategy;
reduction in the amount of reinsurance facultative cessions or portfolio opportunities available to us;
contract cancellations;
developments in the world’s financial capital markets that adversely affect our loss experience, the demand for our products, our access to capital, our
unrealized (losses) gains on derivative financial instruments or our investment returns;
more severe or frequent losses associated with our insurance products, or changes in our assumptions used to estimate loss reserves and realized (losses)
gains on derivative financial instruments;
changes in regulation or tax laws applicable to us, our subsidiaries or customers;
governmental actions;
natural catastrophes;
the Company’s dependence on customers;
decreased demand for our insurance or reinsurance products or increased competition in our markets;
loss of key personnel;
technological developments;
the effects of mergers, acquisitions and divestitures;
changes in accounting policies or practices;
changes in the credit markets, segments thereof or general economic conditions, including the overall level of activity in the economy or particular sectors,
interest rates, credit spreads and other factors;
other risks and uncertainties that have not been identified at this time; and
management’s response to these factors.
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See the Company’s SEC filings and latest earnings press release and financial supplement, which are available on its website, for more information on factors that could affect its
forward-looking statements. Do not place undue reliance on these forward-looking statements which are made as of June 10, 2009. Assured does not undertake to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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This presentation references several non-GAAP financial measures. These non-GAAP financial measures are defined in the appendix of this presentation. In each case, if available, the
most directly comparable GAAP financial measure is presented and a reconciliation of the non-GAAP financial measure and GAAP financial measure is provided. This presentation is
consistent with how our management, analysts and investors evaluate our financial results and is comparable to estimates published by analysts in their research reports on us. Each of
the non-GAAP financial measures is identified in this presentation as such.
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Financial Guaranty Industry
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The financial guaranty industry was founded in 1971
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•
A financial guaranty provides interest and principal payment default protection to
investors
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3
Financial guaranty is a specialized form of credit insurance
Financial guarantors, also known as bond insurers, are monoline companies and are only permitted to
engage in bond insurance business
The bond insurer pays the investor in the event of default
The bond insurer will pursue payment from the issuer through bankruptcy court or other means; the
investor does not need to handle this
The financial guaranty policy covers the life of the investment and is non-cancellable by the bond
insurer
Because the bond is insured, it receives the rating of the bond insurer which reduces the interest cost
to the issuer
The issuer of the bonds usually pays the premium
U.S. Municipal Bond New Issuance:
Credit Enhancement, 1980-2007
The industry initially only insured U.S. municipal bonds
$ in Billions
$450
400
350
AHERF bankruptcy
300
Orange County, CA
bankruptcy
250
200
WPPSS default
150
100
50
0
1980
Bond Insurance
2.6%
Letters of Credit
0.1%
Other Enhancement 4.2%
1983
15.5%
6.6%
2.6%
Bond Insurance
4
1986
16.2%
8.3%
2.4%
1989
24.7%
9.2%
3.6%
Letters of Credit
1992
34.3%
3.4%
2.3%
1995
42.4%
7.1%
2.2%
1998
50.7%
4.3%
2.2%
2001
46.6%
4.7%
4.8%
Other Credit Enhancement
2004
2007
54.2%
6.6%
2.3%
46.8%
4.8%
6.3%
Uninsured
Financial Guaranty History
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In the 1980s, the industry diversified into credit enhancement in structured finance and
international markets
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In 1985, Financial Security Assurance, a company that Assured is in the process of acquiring,
pioneered the use of financial guaranties for asset-backed securities such as mortgage and auto loan
securitizations
Expansion into the global markets, particularly for infrastructure transactions, began in the late 1980s
Financial Guaranty Industry Par Written,
1991 - 2007
At year end 2007, industry total par insured was $2.2 trillion and net par
written for the year was $630 billion
$ in Billions
$700
600
500
400
300
200
100
0
% of Total
U.S. Public Finance
U.S. Structured
International
1991
84.6%
15.4%
0.0%
1993
1995
1997
1999
2001
2003
2005
2007
84.3%
15.7%
0.0%
64.2%
35.8%
0.0%
54.6%
37.5%
7.9%
48.2%
42.3%
9.6%
39.4%
45.1%
15.5%
54.2%
30.7%
15.0%
45.9%
40.0%
14.1%
38.1%
45.1%
16.8%
US municipal
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US structured finance
International
Financial Guaranty Industry: 2007
At year-end 2007, the seven primary companies were all rated triple-A by
S&P, Moody’s and Fitch;
Industry claims paying resources totaled $50.6 billion
Company
Claims
Paying
Resources
Net Par
Outstanding
(Ranked by GAAP Equity)
MBIA
$3,656
$14,559
$678,661
AAA/Aaa/AAA
1973
Ambac
2,276
14,512
524,025
AAA/Aaa/AAA
1971
Assured Guaranty Ltd.
1,667
4,440
200,279
AAA/Aaa/AAA
1988
FSA1
1,558
6,739
426,342
AAA/Aaa/AAA
1985
FGIC
584
5,369
313,949
AAA/Aaa/AAA
1983
SCA
427
3,663
165,012
AAA/Aaa/AAA
1999
CIFG2
632
1,359
78,707
AAA/Aaa/AAA
2001
As of December 31, 2007, unless otherwise noted; $ in millions
1. Includes FSA’s Financial Products segment
2. As of March 31, 2007
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Ratings
GAAP
Equity
(S&P/Moody’s/Fitch)
Year
Founded
And Then the World Changed
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Beginning in late 2007 and continuing until now, certain obligations insured by many
financial guarantors began to cause significant credit losses
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Standard & Poor’s, Moody’s and Fitch, which had previously rated all the primary
companies triple-A, downgraded companies in 2008 due to rising loss expectations
and diminished capital cushions
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Collateralized debt obligations of asset-backed securities (“CDOs of ABS”)
Home equity lines of credit
Closed-end second lien loans
All companies that had CDOs of ABS were downgraded early in 2008, with downgrades continuing
into 2009
Assured and FSA, the only companies that did not write CDOs of ABS, were downgraded by Moody’s
in November 2008 due to Moody’s concerns about future industry demand
Today, Assured is the only company active in the market today
Decline in Industry New Business Production
2007 - Present
Change in PVP1
$7.0
$6,177
$ in Billions
6.0
5.0
$5,020
4.0
3.0
2.0
$1,724
1.0
$243
0.0
2006
2007
Assured
FGIC
Ambac
SCA
2008
MBIA
CIFG
(62.0)% versus
1Q-08
1Q-09
FSA
1. For an explanation of Assured’s PVP, a non-GAAP financial measure, and a reconciliation of PVP to gross written premiums, which is the most comparable GAAP term,
please refer to the appendix on slide 16. Each company’s version of PVP may be different. Please refer to each companies operating supplement for a reconciliation of their
version of PVP to gross written premiums.
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Financial Guaranty Industry: 2009
In 2009, only two of the seven primary companies carry any triple-A ratings;
Industry claims paying resources total $41.1 billion
Company
(Ranked by GAAP Equity)
1. FSA excluding FP
GAAP Equity
Ratings
Net Par Insured
(S&P/Moody’s/Fitch)1
$2,282
$7,357
$417,306
AAA/Aa3/AA+
2. Assured Guaranty Ltd.
2,026
5,221
237,176
AAA/Aa2/AA
3. MBIA
1,640
13,565
769,400
BBB+/B3/NR
4. SCA2
710
NA
133,700
R/Ca/NR
(645)
3,600
140,000
NR/NR/NR
(3,978)
11,957
413,323
A/Ba3/NR
NA
NA
NA
BB/Ba3/NR
5. FGIC3
6. Ambac
7. CIFG
As of March 31, 2009, unless otherwise noted; $ in millions
NA – Not Available
NR – Not Rated
1. Ratings as of May 12, 2009
2. From December 31, 2008, 10-K filing.
3. Estimated from December 31, 2008 GAAP and statutory filings.
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Claims Paying
Resources
Decline in Municipal Bond Insurance
2007 - Present
Change in Credit Enhancement
$ in Billions
$500
450
400
350
300
250
200
150
100
50
0
$429.9
$391.9
$119.7
2007
11
2008
YTD 4/30/09
Bond Insurance
Letters of Credit
Other Credit Enhancement
Uninsured
(12.6)% versus
YTD 4/08
Financial Guaranty Industry—What Survives?
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The industry’s operating model has been proven
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The industry is stabilizing and new entrants are emerging
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Unlike banks, financial guaranty companies are not dependent on liquidity and market access
Despite major claims losses, only one company has not made their claims payments
• Principal and interest are only paid when due
• Limited accelerations due to downgrades
All companies are considered to be “solvent” by the regulators, although most are not writing new
business
Some existing companies have formed new public finance only companies
• MBIA: National Guarantee
• Ambac: Everspan Guaranty
New competitors have also emerged
• Berkshire Hathaway Assurance
There is talk of other new entrants
• Municipal Investors Assurance Corp. (Macquarie/Citadel)
• National League of Cities
Financial Guaranty Industry—What Survives?
Municipal Market
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There is a strong and abiding need for financial guaranty insurance
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Investors have adapted to double-A level guarantees
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The U.S. municipal market has several structural features that generate demand for our product
• Large retail investor base that tends to have undiversified investments because of single-state
focus (NY investors buy NY bonds for tax benefit; don’t normally buy California bonds)
• Large number of issuers (50,000+) with limited financial disclosures
• Wide variety of credit structures and revenue sources that may or may not benefit from full
governmental support
• Healthcare facilities
• Municipal utilities
• Special purpose facilities: convention centers, stadiums
Assured, which has been split rated since November 2008, has provided guarantees on more than
10% of the entire U.S. municipal new issue market through May 30, 2009
Almost no banks or insurance companies, potential competitors to financial guaranty, are rated AAA
Bank letters of credit are an imperfect substitute for bond insurance
Financial Guaranty Industry—What Survives?
Asset-Backed and Global Markets
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Asset-backed issuance will stabilize and grow
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Securitization is the most cost effective form of financing for consumer and small commercial loans
receivables
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Some types of transactions are unlikely to come back (CDOs of ABS)
Infrastructure
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Infrastructure investment is a key component of the economic stimulus package
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Repair and expansion of existing infrastructure is necessary
Global ABS
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Issuance expected to rebuild after maturation of ABS liquidity market facilities like the TALF
Appendix
Appendix
Explanation of Non-GAAP Financial Measures
Present value of financial guaranty and credit derivative gross written premiums, or PVP, which is a non-GAAP financial
measure, is defined as gross upfront and installment premiums received and the present value of gross estimated future
installment premiums, on insurance and credit derivative contracts written in the current period, discounted at 6% per year.
Management believes that PVP is a useful measure for management, investors and analysts because it permits the evaluation
of the value of new business production for Assured by taking into account the value of estimated future installment premiums
on all new contracts underwritten in a reporting period, whether in insurance or credit derivative contract form, which GAAP
gross premiums written and the net credit derivative premiums received and receivable portion of net realized gains and other
settlement on credit derivatives (“credit derivative revenues”) does not adequately measure. Management discounts estimated
future installment premiums on insurance contracts for PVP at 6% per year, while under FAS 163 these amounts are discounted
at a risk free rate. Additionally, under FAS 163 management records future installment premiums on financial guaranty
insurance contracts covering non-homogeneous pools of assets based on the contractual term of the contract whereas for PVP
management only records its estimate of the future installment premiums that it expects to receive based on the contractual
terms of the transaction. Actual future net earned or written premiums and credit derivative revenues may differ from PVP due
to factors such as prepayments, amortizations, refundings, contract terminations or defaults that may or may not be influenced
by market interest rates, refinancing or refunding activity, prepayment speeds, policy changes or terminations, credit defaults, or
other factors that management cannot control or predict. This measure should not be viewed as a substitute for gross written
premiums determined in accordance with GAAP.
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