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SCA future bleak; Berkshire and Assured pick up new business

The dramatic lowering of SCA’s rating by Standard & Poor’s (S&P) last week from AAA to A- was part of a series of actions by the ratings agency on the troubled bond insurance sector, which has been beset by sub-prime related losses.

In a mixed week for the sector, there was a clear delineation between stronger players who have made progress in executing plans to address the current crisis, and those that look set to struggle after losing prime ratings vital to writing high quality bond business, potentially sliding towards run-off.

There was also news of early success for Berkshire Hathaway’s recently launched bond insurer which, according to Moody's Investors Service, expanded rapidly in the troubled field, backing 112 issues in just the past two days.

Meanwhile, former ACE Ltd arm Assured Guaranty Ltd – one of only two bond insurers along with Financial Security Assurance (FSA) whose credit ratings have yet to be threatened by downgrade – welcomed a $1bn investment from Wilbur Ross, as it looks to win market share from under pressure rivals.

For SCA, which Bermudian XL Capital owns 46 percent of after spinning off the unit in September 2006 – the future looks bleak.

The six-notch downgrade to A- on CreditWatch with negative implications follows recent actions by rival ratings agencies Moody’s and Fitch Ratings, who cut the insurer to A3 and A, their seventh and sixth highest investment grade respectively.

S&P said its downgrade of SCA units XL Capital Assurance Inc (XLCA) and XL Financial Assurance (XLFA) reflected its view that the company’s capital plan has “meaningful execution and timing risk”.

“In our opinion, the company’s ability to access additional capital resources is uncertain,” the agency added.

And Goldman Sachs analyst James Fotheringham warned SCA may struggle to write new business at the lower rating, although in a note to clients he said: “We continue to value SCA as an ongoing concern pending details of management’s capital and business plans.”

Financial Guaranty Insurance Co (FGIC) was also downgraded by S&P, from AA to A, remaining on CreditWatch with developing implications. The agency said the downgrade was a result of its assessment of potential losses, which was higher than previous estimates, with a capital cushion shortfall of around $2.2bn.

“We understand that the company’s capital plan does not expect to raise capital adequate to offset this shortfall. In addition, we believe that there is meaningful execution risk with respect to the elements of the capital plan,” the agency explained.

But the sector’s giants, MBIA Insurance Corp and Ambac Assurance Corp, faired better.

MBIA’s AAA rating was removed from CreditWatch and assigned a negative outlook as S&P highlighted the company’s efforts to hold on to its cherished rating, accessing $2.6bn of additional claims-paying resources.

The agency said the progress was “a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company”.

MBIA yesterday suspended its asset-backed securities guarantee business for six months, and said it would separate the unit from its less risky municipal business. It also eliminated its quarterly dividend.

Ambac, meanwhile, saw its AAA rating affirmed by S&P, reflecting the agency’s assessment of “the scope of [its] capital raising plans and [its] ability to implement those plans”.

The insurer is working with banks to raise up to $3bn in capital, well in excess of $400mn current shortfall of capital cushion suggested by S&P, with the agency maintaining its ratings on CreditWatch with negative implications pending the recapitalisation.

For Berkshire Hathaway, FSA and Assured Guaranty, the turmoil presents fresh opportunities.

With unblemished AAA ratings, Assured Guaranty’s new business production more than quadrupled in the fourth quarter, in contrast to larger rivals such as MBIA, which last week revealed it had written “very little” new business as it remains under scrutiny in the crisis.

Meanwhile, Berkshire Hathaway, whose chairman and CEO Warren Buffett last month offered to take over $800bn municipal bond guarantees from MBIA, Ambac and FGIC, picked up significant business at the end of February.

A Moody’s spokesman confirmed the agency had rated 112 issues over two days last week.

Although the credit agency is yet to rate Berkshire’s start-up insurer, its guarantees are backed with a contingent payment insurance policy provided by AAA-rated Berkshire subsidiary National Indemnity Co, Moody's said, justifying the highest rating for bonds it insures.

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