Ambac Focuses on Risk Diversification
The president and CEO of Ambac Assurance Corp., one of the top bond insurance firms in the fixed-income securities market, said a key driver of his firm's financial performance is risk management.
"Risk diversification is key in this market," Robert Grenader said at a Piper Jaffray investors conference here.
Ambac manages its claims exposure through investment grade underwriting, conservative risk limits, targeting of low loss severity sectors and proactive surveillance, he said.
He said that Ambac still has plenty of growth opportunities, noting that 57% of public financing deals in 2005 were insured. And the annual growth rate of global issuance has been 19% annual, which includes public finance, structured finance and international deals.
Ambac has $12.1 billion of claims paying ability, and keeping a strong credit profile is key to the company's financial success, Mr. Grenader said. Ninety-seven percent of Ambac's investments are rated "A" or better. Among the portfolio of obligations insured by Ambac, 79% are rated "A" or higher.
"Our largest expense component really is our cost of capital," Mr. Grenader said.
One strategy for maximizing returns is to focus on niche products in the marketplace that other participants don't necessarily understand as well, Mr. Grenader said. He cited the securitization of New York hotel tax receipts as an example.
However, competition between the monoline bond insurance firms was tough last year, he acknowledged. Ambac's net income was $751 million, up 3% from a year before.
And in the aftermath of the worst hurricane season in decades, losses increased as well. Losses and loss expenses rose to $150 million last year, up from $70 million in 2004. The outlook regarding losses and loss reserves in 2006 remains cloudy, Mr. Grenader said.
"We do believe New Orleans is the key, and I can't tell you how that is going to turn out yet," he said.
SNAPSHOT: Ambac Assurance Corp.
Claims Paying Ability $12.1 Billion
2005 Net Income $751 Million
2005 Losses $150 Million
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