James Dean looks at the leading bond insurer.
Following on from last week's downgrades to XL Capital Assurance and FGIC, ratings agency Fitch has downgraded MBIA, the largest bond insurer in the world, from ‘AAA’ to ‘AA’, saying it is $3.8bn short of the funds it needs to maintain its top rating. MBIA complained, but in any case, the company appears more concerned with the rating assigned to it by Moody’s and Standard and Poor’s – both currently ‘AAA’ – as it asked Fitch to stop rating it in March. Fitch decided to carry on rating it for free instead.
MBIA has raised $2.6bn in capital and said in February that it would not guarantee new asset-backed securities for six months, in a bid to assure ratings agencies (and customers) of its ability to pay claims – although it insures a staggering $680bn of debt.
But while the bond insurers continue to feel the heat from the sub-prime crisis, Lloyd’s insurers appear relatively insulated. Sub-prime exposure in both underwriting and investments appears limited, and the hundred or so notifications of potential sub-prime related claims falls below the number received post-Enron, according to Lloyd’s finance director Luke Savage.
Savage also said he expected the costs for acquisition of Lloyd’s insurers to increase, but nevertheless, according to analyst Numis, this week’s £141m Heritage bid could be a catalyst for further activity.
An analyst said: “Argo was not widely seen as among the potential buyers, raising the possibility that disappointed under-bidders will turn towards other names in the sector.” But he cautioned: “It is worth noting that natural selection is likely to be at work. The remaining names are possibly either less attractive to buyers or seen as less willing sellers.”
Numis analysts believe smaller companies will remain the most likely bid targets, particularly Omega and Novae. “We believe the lower rated stocks are the best play, given the potentially smaller goodwill element in a bid price.”
Numis recommends to ‘add’ Novae shares and gives a target price of 39p, while it recommends to ‘hold’ Omega shares, giving a target price of 170p.
Novae shares were trading at 36p and Omega at 163.5p as Insurance Times went to press.