Analyst: Security Capital in 'hibernation'

Struggling bond insurer halts new policies, suspends dividend to rebuild capital base and redeem ratings; firm posted big loss last week.

March 14, 2008: 8:16 AM EDT

NEW YORK (AP) -- Analysts said troubled bond insurer Security Capital Assurance Ltd.'s decision to stop writing new policies should free up about $75 million to $100 million of capital per quarter, and suspension of its quarterly dividend will make available an additional $40 million per year.

Late Thursday, Bermuda-based Security Capital (SCA) posted a massive fourth-quarter loss and said it will stop writing new policies in an effort to preserve capital. SCA also canceled its quarterly dividend of 2 cents per share, but said its annual report won't include a "going concern" paragraph - something SCA previously had signaled was possible - suggesting auditors have faith in the bond insurer's future viability.

Ratings take a hit. Credit ratings agencies Fitch, Moody's and Standard & Poor's had lowered SCA's financial-strength rating, citing inadequate cash stockpiles, which made it harder for the company to attract new business and put the value of hundreds of billions of dollars in bonds at risk.

Banc of America Securities analyst Tamara K. Kravec said SCA is in a 'hibernation' period until it can rebuild its capital base, redeem its ratings and begin writing new business or it officially goes into runoff given potentially significant losses.

"We view SCA's stock essentially as a call option at this point for investors with a strong appetite for risk and patience for the uncertainty to play out," she wrote in a note to clients.

Deutsche Bank-North America analyst Darin C. Arita said SCA's massive loss on CDOs of asset-backed securities transactions is the first such loss incurred by a financial guarantor, and Arita believes it's likely others will have to incur similar losses.

Arita said the level of dividends that can be paid out of the company's Bermuda unit, XL Financial Assurance, will determine the ultimate value to shareholders.