The bond insurers' earnings juggernaut will slow in 1994, but solid growth will resume in 1995, a report published last week by Standard & Poor's Corp. says.
The industry's statutory earnings grew at a compounded annual rate of 29.5% from 1987 to 1992, the report says, and even bond insurance officials acknowledge that level of growth is unsustainable.
It may be some time before insurers will again enjoy growth as dramatic, but the industry's growth should remain in the double-digit range because of "embedded" and new opportunities, according to the report, entitled "Where Will Growth For Bond Insurers Come From?"
Opportunities exist in established markets - new-issue municipal, secondary, and asset-backed - and in new ventures like cash management and proceeds reinvestment, the report says.
New-issue volume is expected to decline in 1994, but "long-term growth is expected to come from new-money issuance fueled by the country's growing infrastructure needs" and the shift in the burden to state and local governments from the federal level, the report says.
At the end of 1992, insurance penetration was 26% in the secondary market compared to 39.4% in the new-issue market in the first six months of 1993, leading Standard & Poor's to surmise that "there is still room to increase penetration through innovation and improved service."
Growth has not materialized in the asset-backed market as quickly as some insurers would like, the report says, and the monoline insurers face competition from alternative credit enhancement in many sectors.
But the structured finance market will experience improved returns as investors become more familiar with the insurers, the trading value of monoline enhancement improves, and investors become more reliant on the insurers' surveillance, the report says.
New markets and diversification into other areas have yet to reap significant rewards for the insurers, but "should begin to pay off over the next two to three years," Standard & Poor's said.
In the international market, Financial Security Assurance Inc., Capital Markets Assurance Corp., Financial Guaranty Insurance Co., and Municipal Bond Investors Assurance Corp. all have established presences overseas.
Structured finance deals in Europe have provided most of the overseas opportunities thus far, but municipal activity in Europe is just beginning and the Japanese asset-backed market has shown signs of life.
Only AMBAC Indemnity Corp., FGIC, and MBIA have ventured into new products like guaranteed municipal investment contracts, or MICs, and municipal cash management. "S&P expects [the insurers] will continue to follow conservative policies when diversifying, thus limiting risk to their core operation," the report says.
James Malling, executive vice president at MBIA, said a slowdown in earnings is inevitable, but that does not change the outlook for the industry's core business.
"We believe very strongly in our core business. In the long run, our core business has spectacular growth prospects," Malling said. "Anything we do is designed to build off that strength."
He said the firm has not set specific earnings goals for its new products, which he says are already profitable "in the aggregate."
A spokesman for FGIC, which last week unveiled its cash management and MIC subsidiaries, said, "New products and services that build upon FGIC's core strengths will be an important component of the company's future success. We will look for and develop opportunities that play off FGIC's capital strength, market acceptance and recognition, triple-A ratings, and credit expertise."
AMBAC officials declined to comment, but a recent report from Duff & Phelps Credit Rating Co. says the firm's management expects the MIC and Health Care Investment Analysts Inc. subsidiaries to contribute up to 20% of operating earnings in 1998.
Capital Guaranty Insurance Co. has repeatedly stated that it does not intend to expand beyond insuring municipal issues. FSA officials were precluded from talking about new ventures because the firm is in a "quiet period" following its filing for an initial public stock offering last month.
Embedded opportunities, which are defined as those that can be realized without new business, should provide the bulk of the industry's long-term growth, Standard & Poor's said. Even without writing any new business, the industry should enjoy earnings growth due to increases in investment income and earned premiums, reductions in expense ratios, and continued improvements in the risk profile of the insured portfolio, the rating agency said.
For example, the unearned premium reserve of $3.59 billion as of June 30 represents a "significant future earnings stream."
The insurers' asset base of $9.04 billion at June 30 is also expected to boost earnings, and will produce even greater returns in a rising interest rate environment, the report says.
