A new report by Standard & Poor's Ratings Services analyst Robert Green said the first half of 2000 boasted the best-priced asset-backed policies in five years, and those opportunities are helping to shrink municipals' share of the insurers' overall business.

Green said that bond insurers can group opportunities and pay the most attention to the sectors with the highest profitability. "What's different now is that the bond insurance industry has the ability to divide up business between three product lines," he said. "Those lines are public finance, asset-backed and international."

Insured public finance volume was down 30% for the first six months, as overall volume and the insurers' penetration of the market both fell. Green noted, however, that profitability in public finance was still very strong, amidst reports of rising premium rates.

"There was a move to focusing on things other than market share and toward better pricing and underwriting strategy," Green said on the mid-1990s focus on market share above economics. "Management should be given kudos. It has been able to diversify. International business was great this year, up 79%. The industry's volume is down somewhat, but it's almost a situation where business volume that was lost in public finance has been made up in international volume."

Green's report said that each major bond insurer's average premium rate was 35.8% over the average for the first six months of 1999.

With the exception of Financial Guaranty Insurance Co., the primary insurers reported lower capital charges, which determine a bond insurer's theoretical losses in S&P's capital adequacy model and used to determine capital allocation needs.

However, FGIC's numbers are not comparable because the insurer posted an exceptionally high capital charge and a correspondingly high implied-premium rate that resulted from a unique transaction, the report said. The company insured a commercial paper conduit in the second quarter of this year, accounting for almost half of the reported par written.

"Because of the structural nature of the program, which involves variable levels of business, the company's present value of premiums written and its weighted-average capital charge materially differ from prior averages," Green wrote.

"We look for growth in the asset-backed business," said Linda Wilson, a spokeswoman for FGIC. "FGIC's strategy is to focus on financial guarantees in the HEL and HELOC segments of the mortgage-backed business and financial guarantees for well managed, bank-sponsored conduits."

The industry's profitability index, which divides the period's weighted-average premium rate by the weighted-average capital charge, increased to 22.32% for business written in the first six months of 2000, up from 16.85% in 1999.

Among the major bond insurers, Ambac Assurance Corp.'s domestic structured finance par volume declined by about 7.6% for the first six months of 2000, to $14.5 billion. The present value of premiums written for that period increased by 42.3%.

Ambac's profitability index rose to 21.51% for the first six months of this year, compared with 13.84% for the same period 1999.

"At the end of the day, we're committed to municipal business," said Howard Pfeffer, head of Ambac's public finance division. "But what you're seeing is a growth in the company. We have several sectors now that we focus in on that are all growing and that's why you're seeing the mix of business as a company changing over time."

Although MBIA Inc. is still below the industry average, the firm's profitability index of 18.74% for the first six months of 2000 rose from 12.71% in 1999.

"This is also the best profitability index for MBIA since the company entered the structured finance market," Green wrote. "The positive movement benefited from a 35% increase in the average premium rate for the period."

The index was also improved by the fact that MBIA's average capital charge on business written during the first six months of this year fell to 3.05%. In line with the industry trend, Green wrote, MBIA's volume declined to $16.8 billion in the first half of this year, compared to $20 billion for the same period in 1999.

Financial Security Assurance Inc. saw its highest-ever average premium rate for any period during the first six months of this year, a 4.9% increase.

The firm also had its best ever weighted-average capital charge, which fell to 2.11% for the first six months of the year, compared with 2.73% for the same period of 1999.

FSA declined to comment, and MBIA did not return phone calls. - Sheri Carpenter-Kasprzak/The Bond Buyer

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