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| Howard Pfeffer |
Pfeffer is president of FGIC, a bond insurance company that was spun off from General Electric Capital last year and has been ramping up personnel and expanding its business activity ever since.
How has FGIC changed in 2004?
We started in December or January with about 100 people. We're now up to about 163, including professionals, support staff and surveillance. We will probably go into the 200 range by next year. We're operating in a variety of businesses we were not in, including a broader array of consumer assets. We also have our international office in London up and running, which includes 15 people in the structured finance and infrastructure groups.
Prior to about a year ago, we were owned by GE and we focused on municipal finance and within municipal finance, a small sector. We also insured some mortgage-backed securities. Over the past year we've broadened the businesses we're in and our goal is to be in all of the businesses our competitors are in. We spent most of the year increasing our staff and at the same time booking new business. FGIC has a very good name in the market for a number of reasons, such as the history of the name and its financial strength, and there is a pretty fair demand by investors for additional insurance names out there.
What new sectors have you been active in?
We did out first credit card deal for First Financial, we did a Continental Airlines parts deal and we closed our first secondary collateralized debt obligation transaction. We've done a healthcare receivables deal and we are mandated on some deals going into next year, including commercial deals and structured insurance. We've closed our first secondary transaction in Europe, a utility deal, and we're mandated on a gas pipeline deal in Europe. We also did an Avis fleet rental deal. So we're participating pretty broadly in the market.
We're also a major player in the MBS area, where we've done more than we expected, in sub-prime, HELOCs and Alt-A. Prior to the sale, FGIC was focused on HELOCs with a handful of issuers and we've really broadened the number of issuers and the products we do business with. We're full service on the structured side.
Why are you now writing business in all these new areas?
To develop the reputation to execute and to create value, you've got to be a full-fledged monoline. You can't go to a banker and say you will execute deal A and not deal B. We've got a great name in the market, we've been around since 1983, so this is not a new company. We are one of what we call the Big Four and the company has the track record and the history not only in the muni market but also on the structured finance market. The goal here is to create the full-service monoline to be in all of the businesses our competitors are in. We're probably 80% of the way there.
Are most of the wraps you provide done at the time of sale or on a secondary basis?
Most of the commercial and consumer ones are primary policies, though occasionally there are ones [applied] in the secondary market. That's been increasing, especially at the triple-A level, because there's been heavy issuance of senior/subordinated transactions. The tradeoff between primary and secondary is you get fewer rights in the documents, but because you are at a high rating you can generally live with fewer covenants. Then there are others that are purely secondary and are negotiated after the fact.
What's your background and those of the senior members of your team?
I came over in December of 2003 from AMBAC, where I was vice chairman, along with couple of other people on the ABS side, including Tom Adams. We also have several FGIC people with long histories in this market dating back to [Capital Markets Assurance Corp.]. We've hired people from MBIA Inc., including Ken Degen and Y.C. Wu. We've also had some hires overseas, such as Rick Watson.
How do the broader fixed-income trends affect the monoline business?
There are clearly some challenges. Spreads are very tight in all of the fixed-income markets, which creates competition from the uninsured market. We are impacted by the same things that impact the fixed-income debt markets in general. But the demand for insurance is still strong even though spreads are still tight. Five years ago, many of the markets we participate in didn't exist. There are only a certain number of triple-A companies in the world so there's always going to be demand. Diversification is an important part of our strategy because it allows us the ability to not be dependent on any one market.
How does the ABS market's increasing commoditization affect new assets?
In some ways that overshadows the development of new markets but there are still many new assets being done that don't get the [attention] of the mortgage market because it is so large. There are new assets being securitized, but many are one-off so they are not as noticeable. One of the things we track is the development of the capital markets, and it's continuing throughout the world. For example, the structured insurance transactions. There are many uses for the product that still haven't been discovered yet.
Does your new ownership structure increase your ability to transact?
Under GE, the company had limited areas it could do business in. Under the new ownership structure, we have a business plan approved that allows us to do business in all of the areas I've mentioned. One of the bigger differences is FGIC runs as an independent company. We make all of the decisions. The board does not approve all of our transactions and it's an important change from the way things were done previously.
What's your sales pitch to investors?
We have done a lot of marketing to investors both domestically and internationally. We have the safest book of business. Since the company has been operating in the municipal space, 87% of the book of outstanding liabilities (as of 9/27/04) is in the muni market and the balance is primarily low-risk MBS. Investors like that we have a low-risk book of business. And we have capacity for credits, we're not full up on many names in the ABS market, certainly in the international market. Also, there are certain investors that are full up on our competitors' names so they welcome another name to put in their book.
We're certainly return sensitive, so we're not going out to compromise [on fees]. We're going to compete head to head based on the factors I've mentioned. But we're not a market-share focused company. We're return-focused, we're risk focused, but those aren't figures we put out there. We have walked away from many transactions our competitors have done. We are focused on the share of premiums that we write and what the returns are, but we're not focused on par dollar league tables.
How large is your book and how will it change?
It is now $230 billion and over the next three to five years, we want to get 25% of the book in non municipals.