Insurance Quotes & Advice

 The bond insurance industry has been reeling for over a year now and in the third quarter, losses have continued to pile up.  Their troubles have created instability in bond markets as declining ratings impact the underlying securities they insure. 

During the credit and real estate boom earlier this decade, these bond insurers sold derivative-based guarantees on mortgage-backed securities and other more complex housing-related securities known as collateralized debt obligations, or CDOs.

Now that house prices have slumped and foreclosures surged, Ambac and MBIA have to pay up on some of those guarantees, while recording permanent impairments on the others.

They’ve also lost their crucial AAA ratings, making it more difficult to sell new guarantees. Further rating agency cuts could put even more stress on these companies.

With the financial crisis coming to a head last month, it is now even more difficult to find credit these days.  Further liquidity problems could force the industry to turn to the government for help.

The growing troubles in the insurance industry in general will increase pressure on Congress to implement a National Insurance Commission.  The days of a hands off approach to financial services are over and in the coming years we likely see an increase to federal regulations across the board.

Now obviously these companies would prefer to survive without the government’s help and the longer the credit crunch lasts the worst off they will become.  The two largest bond insurers, Ambac and MBIA appear to have enough reserves to survive the next quarter at least but they are quickly running out of options.

Their significant exposure to toxic debt makes it so that their fortunes are inexorably tied to the housing market and things continue to look bleak in those circles.  Yeah it’s possible they can survive without intervention but that doesn’t help bond markets or their clients for that matter.

The investors and municipalities who are paying the price for all this won’t see relief until these companies raise their credit ratings once again and that’s probably not possible short of a housing recovery or the more likely scenario, re-capitalization through government means. 

Now that the banking system is getting relief from the federal government, there are also a few companies in the insurance industry that want to access that large pool of capital.  The CEO of Ace Limited however has criticized his fellow counterparts saying it’s wrong for them to seek taxpayer funds.

“Taxpayers should be a last resort rather than a cheap source of capital … We’ll row our own boat,” Greenberg said Wednesday on a call with investors after the insurer reported quarterly results that topped Wall Street expectations.

Under that scenario, “perfectly healthy insurers may well have to (participate) … in order to compete with companies that do … it will become a general government capital subsidy rather than a means of crisis correction,” he wrote to Paulson.

Ignoring the massive federal loan required by AIG, the most troubled sector has been bond insurance.  It’s losses have caused untold havoc for the bond market and a number of municipalities across the country.

As the financial crisis worsens and the housing slump grows deeper, mounting losses for the sector and the likelihood of further ratings downgrades may force their hand.  A bailout may become a necessity for them but where does the government draw the line.

Mortgage insurance is another troubled sector, tied closely to the falling housing market that could also see it’s fortunes worsen over the next year.  Insurance companies across all sectors are taking a beating to their typically large investment portfolios.

Is the government to take equity stakes in all these companies in exchange for a cheap source of capital?  We all know that government oversight and regulation will be increased when everything is said and done but with the equity exchange for capital precedent that has already been set, are we slowly turning into a state run financial system. 

I don’t think this is what Congress had in mind when they begrudgingly voted to rescue the financial system.  This is not how a free market system is supposed to work.

With the financial system crumbling, it seems as if ratings agencies can’t cut credit ratings fast enough.  Facing intense scrutiny from regulators because of their part in the build up and subsequent collapse of the subprime market, ratings agencies aren’t holding back when it comes to ratings downgrades.

It’s actually a little bit amusing that in some circles they are actually receiving some criticism for being a little to quick on the draw.  Standard & Poors and Moody’s Investor Services have their sights squarely on the bond insurance industry which will likely face another round of downgrades as they continue to face losses from insuring toxic Collateralized Debt Obligations.

Fitch Ratings Services would also probably be considering another round of downgrades if not for the fact that many companies in the industry have asked them to cease rating their companies. You could say they lost some clients for being the first ratings agency to point out the considerable difficulties that the industry faces today.

A major problem of the financial system has been the conflict of interest between rating agencies and the companies that hire them.  Give a bad rating and the company being downgraded is likely to cut ties with them if one of the other agencies is willing to give a higher rating.

Credit ratings are the bread and butter of financial institutions.  It determines how their interest rates will be in order for them to raise capital in the bond markets as well as having a significant impact on their stock prices.

Capital reserves can quickly dry up in this type of economic climate and firms with low ratings will find liquidity practically nonexistent.  One need only look at the example of AIG to see this how quickly an industry giant can be brought to it’s knees.

It’s becoming an endless cycle downwards, as bond insurers get downgraded, it has a significant impact on the financial system as all the bonds they insure get downgraded as well.  The financial institutions that hold these bonds will have to writedown these losses due to the market devaluations to their portfolios.

This then leads to their ratings downgrades as well as the impact of the devalued bonds slowly makes it’s way through the financial system.  Unfortunately the problems facing the bond insurers are far from over as their fate and the rest of the financial system as well will likely be tied to the fate of the housing market.