Letter Re: An Approaching Tsunami for Hedge Fund and Muni Bond Insurers
Would you buy stock in Allstate Insurance or Farmer's Insurance if you knew a tsunami was going to hit the entire East Coast? If you had foreknowledge of such a catastrophe, you certainly wouldn't put your money into insurance companies, because no insurance company could cover an event that huge. I believe that something analogous is what is now happening in the financial markets. Savvy investors are getting out of financial insurance companies that may be asked to cover huge losses projected to occur this year. These Wall Street companies insure pension funds, CDOs, hedge funds, and other financial instruments, including those that contain the toxic subprime mortgages and other questionable mortgages.
Insurance is the last line of defense against collapse of these giant funds. I wanted to take a look at what has been happening to this particular kind of insurance company lately. Here's what I found:
ACA Capital Holdings Inc. (ACAH) has lost almost all its value and could be out of business within hours.
Ambac Financial Group Inc. (ABK) has dropped about 80% in value in the past month, and just today has lost its AAA credit rating.
MBIA, Inc. (MBI) dropped about 77% in value in the past month. It's also in danger of a downgraded credit rating
Assured Guaranty Ltd. (AGO) has dropped about 37% in value in the past month.
RAM Holdings Ltd. (RAMR) has dropped about 80% in value in the past month.
MGIC Investment Corporation (MTG) has dropped about 56% in value in the past month.
Radian Group Inc. (RDN) has dropped about 56% in value in the past month.
Moneygram International, Inc. (MGI) has dropped about 74% in value in the past month.
Please note that these losses are just in the past month. Most of these companies had already lost heavily earlier in 2007. These are all the publicly traded insurance companies that I know of in this specialized market. In other words, the whole sector is quickly deteriorating. This is not being reported by the press in any coherent fashion.
These specialized insurance companies also insure municipal bonds for cities, schools, hospitals etc. If the insurance companies go broke, many funds such as retirement funds will crumble.
Minyanville just came out today with a good article on insuring financial derivatives.
The point of all this is that investors are getting out of this type of insurance because they know that the funds that have been insured are garbage and no insurance company has enough money to pay for a huge catastrophic event, any more than a home insurance company could cover a tsunami affecting the whole east coast. The insurance company would just go broke. That's what appears to be happening. This is an earthshaking event. The lack of support by investors would seem to indicate that the funds are in far worse shape than anyone is willing to admit publicly.
These insurance companies are the last desperate hope of a failing trillion dollar market. If they can't prop it up, nobody can. - K.L. in Alaska