Kemper Securities Group this week published its annual analysis of the municipal bond insurance industry, and by and large the insurers received high marks.

Richard Ciccarone, director of fixed-income research at Kemper, outlined areas where the industry could run into trouble, but he found overall risk profiles to be relatively low. "Currently, weaknesses for one company are generally offset by strenths in other categories of analysis," he wrote in the report.

Each firm, therefore, is seen as counteracting any specific excesses with conservative behavior. For example, Capital Guaranty Insurance Co.'s ownership and profitability were deemed average, but its capital adequacy, liquidity, quality of insured business, and loss experience all received straight A's from Mr. Ciccarone.

Financial Guaranty Insurance Co. and Municipal Bond Investors Assurance Corp. were given the lowest marks for capital adequacy, but both firms received the highest praise for their profitability.

"MBIA and FGIC [showed] the best performances as measured by return on capital and surplus," the report says.

In addition, Mr. Ciccarone notes that profitability at the top three insurers -- MBIA, FGIC, and AMBAC Indemnity Corp. -- is somewhat bloated by refundings and calls of high-coupon deals sold in the early 1980s. For an insurer, these events can be like an unlooked-for payday, since the company can take a deal's unearned premium reserve and "earn out" the funds, applying them to the respective quarter's bottom line.

This bloating is temporary, Mr. Ciccarone emphasized in an interview, because the majority of such insured deals, in particular hospital bonds insured from 1981 to 1983, already have been refunded.

Currently, the industry's highest-profile development is the sale of stock to the public. MBIA completed an 11.5 million-share secondary offering in April, and AMBAC awaits final approval from the Securities and Exchange Commission for a 17.6 million-share common stock sale. Mr. Ciccarone said the equity markets could prove to be less generous parents than institutions.

"People used to say that with soft capital, you couldn't necessarily count on it in hard times. Is the same relationship here?" he asked. "We are really not sure how [a sour economy] is going to impact" the insurers' future access to the public markets for capital.

"In a modest way," Mr. Ciccarone continued, "we are in a negative environment now, given the Bridgeport news, and it might be telling how AMBAC's stock sale goes."

Financial Security Assurance Inc.'s arrival in the new-issue insurance business, together with the increased appetite for asset-backed deals at MBIA and FGIC, requires a redoubled analysis of structural financings, according to the report.

"Although substantial overcollateralization based on historical experience is a positive, these structures have not experienced the impact of a full national depression to test their ability to cover the adequacy and timely sale of collateral," the report says.

But, similar to the offsetting analyses of the firms' financial strength, Mr. Ciccarone immediately tempers the treatment of FSA's structured finance exposure, the largest in the industry.

"However, FSA's asset-backed bonds, other than its single-risk financings, appear adequately secured with little threat of significant losses," the report says. "On the positive side, [structured deals] can provide increasing levels of overcollateralization over time as 100% of cash flow pays down senior debt first."

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