For the first time in nearly a decade, a new triple-A-rated bond insurer will enter the asset-backed marketplace.
XL Capital Assurance, the domestic affiliate of Bermuda-based reinsurers XL Financial Insurance and XL Insurance, received triple-A ratings from Standard & Poor's Ratings Co. and Fitch.
XLCA will compete for business with long-time sureties MBIA, Ambac Assurance Corp., Financial Security Assurance, and Financial Guaranty Insurance Corp.
"We think we represent a very attractive alternative to investors," said David Stevens, president and chief operating officer at XLCA. "We're fresh and new and there isn't a lot of investor exposure to us."
XLCA will target all the traditional ABS sectors, including credit cards, consumer loans, and home-equity loans in both the public and private markets. XLCA also said it will go after the emerging asset classes, as well as collateralized debt obligations, corporate and trade receivables.
Further, Stevens said that XLCA's business will have a heavy international component to it, including Europe and Asia.
Market Feedback
Because portfolio managers are concerned with diversity of risk exposure, investors will likely welcome paper insured by a new company, as portfolio's are often "sated" with wrapped paper, meaning they are full of exposure to the four monolines, an analyst said.
However, a few market sources were skeptical since XLCA doesn't have a triple-A rating from Moody's Investors Service, unlike the monolines, who are rated by all three major agencies.
As to whether or not XLCA plans to score a Moody's rating, Stevens would only say, "We only planned to get two ratings to open our doors, and we've chosen to get ratings from S&P and Fitch."
He added that ratings from two agencies is sufficient for investor confidence.
"It's certainly going to be harder for them to take any real market share without a Moody's rating," said Michael Hoeh, ABS money manager at Dreyfus Corp. "It's really odd for a bond insurer like that not to approach Moody's. Maybe they're in the process, in the middle of negotiations, and they just can't talk about it."
Moody's declined to comment.
In any event, one analyst said that, currently, the areas of the market with the most opportunity for the sureties are derivatives, CDOs, new issuers, and esoteric asset classes, all of which XLCA plans to target.
Other sectors, however, have been moving away from the monolines this year, including the subprime auto and credit card sectors.
For example, AmeriCredit Corp., which has traditionally gone to market with FSA, recently began issuing a portion of its portfolio in senior/subordinate structure. Similarly, Metris Companies, Arcadia Financial, and Olympia (CHECK ON FULL NAME) have all begun issuing deals as sen/subs where they used insurance policies in the past.
"It's a tough time to be entering that part of the market," the analyst said.
Capital Structure
Currently, XLCA is licensed to do business in 10 states, but is in the process of buying a shell company, which is a company that is no longer operating but has existing licenses in other states. XLCA anticipates that within the 12 months, it will be licensed in all 50 states.
As for capital structure, XLCA is paid in capital of approximately $85 million, expecting to hit $100 when the acquisition of its shell company closes. XLCA is also in a reinsurance treaty with XLCA Financial Insurance, which has a shareholder's equity of approximately $274 million. XLFA has a reinsurance facility from a triple-A rated reinsurer for another $100 million.
Finally, XLI, which has approximately $2.7 billion in shareholders' equity, unconditionally guarantees the reinsurance provided by XLFA to XLCA.
For the past year or so, XL has been recruiting from existing talent in the bond insurance industry. For example, Stevens is a veteran from MBIA.
David Czerniecki, another managing director, was most recently at Lehman Brothers, though was previously at CapMac, then MBIA after it acquired CapMac in 1998. Wynne Morriss, a senior managing director at XL, was also CapMac and then at MBIA for one year, before moving to XL. Similarly, Steven Czarch, a managing director, made the move from CapMac/MBIA to XL.
"A lot of people came together at the same time," Stevens said. "It's a start-up firm, but it's got a lot of veteran blood in it."
