ACE Ltd. spun off its financial guaranty and reinsurance units in an $882 million initial public offering through a new entity called Assured Guaranty Ltd.
The offering takes the financial guaranty unit, Assured Guaranty Corp., one step closer to fulfilling its plan of securing a second triple-A rating and competing with other established triple-A monoline bond insurers, according to analysts. Currently, Moody's Investors Service rates the guaranty unit Aa2' and Standard & Poor's rates it AAA'.
Assured Guaranty Ltd., the new holding company for Assured Guaranty Corp. and Assured Guaranty Re (previously ACE Guaranty Corp. and ACE Guaranty Re), sold 49 million shares at $18 each, said Sabra Purtill, senior vice president of investor relations at Assured Guaranty Ltd.
A source close to the deal said the offering lacked strong demand as investors are waiting to see if the company can successfully implement its new business strategy, which hinges on achieving the top rating from Moody's.
The proceeds from the IPO will go to ACE Ltd.'s property and casualty business, according to the prospectus. Standard & Poor's views that as a positive move for the parent company. Immediately following the IPO, the agency revised ACE Ltd.'s outlook to stable from negative, citing the additional financial flexibility as a strength for the A-plus rated company.
Post-spinoff, ACE will own 35% of Assured Guaranty Ltd., or 25% if underwriters exercise their rights to sell an additional 7.35 million shares, according to the company.
According to one analyst, established triple-A guarantors, such as Ambac Assurance Corp. and MBIA, trade at nearly 1.1 times their adjusted book value. Assured Guaranty's price is steeply discounted at 75% of its adjusted book value, but on par with the adjusted book value ratio of another triple-A bond insurer, Financial Guaranty Insurance Co., which was acquired by the PMI Group last winter for $2.2 billion.
Compared with FGIC, Assured Guaranty's smaller size, shorter duration portfolio and higher return on equity may put it at an advantage, an analyst said.
Earlier this month, Moody's placed its ratings of Assured Guaranty Corp. and Assured Guaranty Re under review for a potential upgrade, citing the company's revised business plan and improving credit profile. New reinsurance activities will be increasingly underwritten by Assured Guaranty Re, while Assured Guaranty Corp. will focus on primary business. Assured Guaranty Ltd. is also selling the majority of its non-financial guaranty exposures and businesses, other than mortgage default reinsurance, to subsidiaries of ACE Limited.
Assured Guaranty earned $214.5 million last year, almost three times its net income in 2002, as net written premiums exceeded gross written premiums due to $154.8 million of return premium from two terminated reinsurance contracts, according to the company's quarterly reports and offering prospectus.
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