Insurance Quotes & Advice

For bond insurers, maintaining the highest of credit ratings is of the utmost importance in order to attract new business. So what do troubled bond insurers do when they don’t like their credit ratings?  They fire the ratings company apparently.  Bloomberg reported that Ambac Financial has terminated it’s contract with Fitch Ratings in what has become a disturbing trend.

The second-largest bond insurer is reevaluating its ratings needs as it realigns its business, New York-based Ambac said today in a statement. “As part of this review, we have asked Fitch to remove its ratings on Ambac and all its subsidiaries effective immediately,” the company said.

Ambac’s request follows one by larger rival MBIA Inc., which in March asked Fitch to stop providing a financial strength rating on its insurance unit. In September, Radian Group Inc., which owns mortgage and financial guaranty companies, asked Fitch to stop issuing ratings and said it would no longer provide information to the unit of Paris-based Fimalac SA.

Fitch has been much quicker to the gun than it’s counterparts, S&P and Moody’s, in downgrading  credit ratings for troubled firms in the industry.  Do theses companies think they can hide from their financial difficulties by killing the messenger?

In what amounts to acts of petulant children, a number of firms have announced they will cease raising new capital since they believe there is no point anymore with the loss of the their highest ratings.  I’m sure that is thrilling news for their clients especially communities who have had debt service payments in some cases triple because of the industry’s forays into the disastrous subprime bond market.

Public officials within these communities haven’t stood still while this is all happening and have put increasing pressure on ratings agencies to end the double standard of credit ratings between municipal and corporate bonds.  Municipal bond insurance could become a dinosaur in the financial services industry but it will depend if investors are willing to purchase new issues without insurance.

Despite the fact that the government subsidizes flood insurance and that it is much cheaper than if it were offered by the private market, many Americans have yet to take advantage of the relatively low cost insurance.  A survey conducted by the Insurance Information Institute states that only a small percentage of homeowners have purchased flood insurance.

Record widespread flooding across the Midwest has once again highlighted the catastrophic damages that flooding can cause. Yet a survey conducted for the Insurance Information Institute (I.I.I.) reveals that only 17 percent of Americans have a flood insurance policy.

The proportion of Americans with a flood insurance policy is relatively unchanged from a year ago when 14 percent said they have flood insurance.

The Federal Emergency Management Agency, which runs the National Flood Insurance Program, made a concerted effort to inform homeowner’s of the dangers of flooding prior to the beginning of the hurricane season but met with little success.  As the Midwest flooding shows, one does not have to live along the coast to be susceptible to flooding.

One would think that after Hurricane Katrina, residents living in hurricane prone areas would be more likely to purchase flood insurance but that has not been the case.  If you want to put your fortunes into the fickle hands of a jury over the wind vs. water debate just be warned that insurers are quickly taking that out of the equation by cutting back on wind damage coverage.

Unless you pretty much live in the desert, flood insurance is definitely something every homeowner should look into.  Just because home values have been in decline in the past year doesn’t mean that cost of rebuilding is getting any cheaper, with inflation heating up it’s quite the opposite.

The bond insurance industry’s decision to insure the residential mortgage market has come back to haunt them and has not only caused them huge losses but could also cost them their most profitable source of income.  The decision by Moody’s Investor Service this week to rate municipal bonds by the same standards as their corporate counterparts could signal the end of the municipal bond insurance era. 

The change threatens to accelerate a drop in demand for bond insurance, which began when losses related to subprime mortgage debt resulted in MBIA, Ambac and at least three other companies losing their top credit ratings this year. Only 24.7 percent of municipal debt offerings sold this year were insured, down from 49.1 percent in the same period last year, according to a Lehman Brothers Holdings Inc. report.

Growing pressure on ratings agencies from public officials across the country, heavily influenced this decision.  When the auction rate bond market collapsed due to investors’ mistrust of insurers, borrowing cost skyrocketed for many communities through no fault of their own.

The municipal bond market was the golden goose of the bond insurance industry and for years made up the bulk of it’s profits.  With low default rates, the income from this market was pretty much risk free, unlike mortgage backed securities and other collaterized debt obligations. 

This was the reason Warren Buffet decided to enter the market back in February and offered to reinsure $800 billion in municipal bonds from troubled insurers.   However, if most municipalities get upgraded to a AAA rating as expected, there will be little need for his new subsidiary despite the sterling reputation he brings to the table.