James Dean looks at the plight of the bond insurers

Bond insurer XL Capital Assurance (XLCA) was downgraded by Fitch this week, for the second time this year – Moody’s downgraded it at the start of March. XLCA’s insurer financial strength rating fell to ‘BB’ from ‘A’, having been at the top-rated ‘AAA’ on 1 January. Fitch also downgraded bond insurer FGIC to ‘BBB’, and placed it on negative outlook.

The ratings agency expects XLCA’s parent, Security Capital Assurance (SCA), to lose up to $4bn (£2bn) on sub-prime collateralised debt obligations (CDOs). SCA has stopped writing new financial guaranty business in a bid to preserve capital.

Other bond insurers have been teetering on the edge of downgrades, although Ambac was shored up in recent weeks with a $1.5bn cash injection. Moody’s subsequently affirmed its ‘AAA’ rating. MBIA also remains top-rated for the time being.

Catlin reported record profits at the start of March, and has been getting some good press from analysts of late. Citibank analyst Trevor May said: “Catlin is now a strongly positioned international insurer with headroom for further growth, while retaining the virtues of its smaller company culture.”

May also predicted strong organic growth. He continued: “Despite the softening premium rate cycle, we foresee further enlargement of the group through the medium term as expansion of the embryonic US business and the array of international offices offset declines in the London market and Bermuda. Catlin provides a rare example of a genuine growth story in property and casualty insurance (P&C). Since 2001 premiums have risen eight-fold while the asset base has grown by a compound 45% a year. Only half of this increase is acquisition based.”

May also believes Catlin will benefit from the accrual of high margin earned premiums as the participation of former Wellington Names diminishes through 2008-2010. But he warned that P&C insurers, especially those which receive a high proportion of revenues in dollars, are high risk stocks. Further, the integration of Wellington, while progressing well to date, still carries the risk of key personnel and business account losses.

Catlin’s $543m pre-tax profit was ahead of expectations for both Citi and Numis. Citi’s target price of 540p, reduced from 580p, remains way ahead of Numis’s 430p, upped from 360p. Citi recommends to ‘buy’ and Numis to ‘hold’. Catlin shares were trading at 442.25p as Insurance Times went to press.