February 26, 2008 / 11:25 AM / 11 years ago

UPDATE 1-GS says SCA's ability to write new business a concern

(Recasts; adds analyst’s comments, background)

Feb 26 (Reuters) - Goldman Sachs said it was concerned about bond insurer Security Capital Assurance’s (SCA.N) ability to write new business after it was downgraded by all three rating agencies.

The brokerage raised its price target on bond insurers MBIA Inc (MBI.N), Ambac Financial Group Inc ABK.N and SCA on Tuesday, a day after Standard & Poor’s removed its threat of an imminent downgrade on MBIA’s rating, and affirmed Ambac’s “AAA” grade.

Security Capital Assurance may struggle as a single-A rated company, analyst James Fotheringham said in a note to clients.

“However, we continue to value SCA as an ongoing concern pending details of management’s capital and business plans,” he said.

On Monday, S&P said it cut the “AAA” ratings on SCA’s unit, XL Capital Assurance Inc, by six notches to “A-minus,” adding it was under review for further downgrades.

SCA has already been cut by Moody’s Investors Service to “A3,” the seventh-highest investment grade, and by Fitch Ratings to “A,” the sixth-highest investment grade.

S&P ended its downgrade review for MBIA’s top “AAA” rating, citing success by the largest U.S. bond insurer in raising new capital. The outlook was negative, indicating a rating cut may still be likely over the next two years.

Ambac, however, remains on review for downgrade, S&P said.

“The S&P report detailing the results of a subprime stress test of financial guarantors suggests higher capital cushions than we had forecast,” Fotheringham said.

He, however, said the higher-than-expected capital cushions for monoline insurers, as suggested by the S&P report, have little impact on his valuation of Ambac, MBIA and SCA.

“We believe this (higher capital cushion) was driven by capital release from run-off of existing book and less capital consumption given lower production, in addition to capital initiatives implemented so far,” he said.

The analyst raised his price target on MBIA to $14 from $11, on rival Ambac to $9 from $7 and on SCA to 80 cents from 50 cents.

Fotheringham said he views S&P’s actions as a “positive” for MBIA, “neutral” for Ambac and a “negative” for SCA.

Shares of Ambac closed at $12.41 Monday on the New York Stock Exchange, while MBIA closed at $14.58 and SCA at $1.80. (Reporting by Tenzin Pema in Bangalore; Editing by Vinu Pilakkott)

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