Start-up to back low-rated bonds Aegon, other large firms put $120 million in American Capital

October 11, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF

Aegon USA Inc. and a handful of other large financial firms have kicked in more than $120 million to back a start-up bond insurance company in Maryland.

The firm -- American Capital Access Corp. -- will specialize in insuring bonds that have a far higher degree of risk than AAA-rated bonds.

Bond insurance companies have typically ignored riskier offerings by small municipalities, colleges, rural hospitals and nursing homes, in favor of much larger deals. But executives with American Capital said they can make money insuring these bond issues and help their clients thrive.

"We want to help put insurance where insurance can best be used," said H. Russell Fraser, American Capital's chairman and chief executive officer, a 30-year veteran of the bond business. "There is a need all over the country, particularly in the rural areas."

The market for insuring riskier bonds is huge. Last year, $25 billion in risky municipal bond issuances -- rated A minus, BBB, BB and those that received no rating at all -- came to market without insurance, said Wayne A. Marsden, who heads American Capital's marketing and business development. Marsden said those organizations that issued bonds without insurance paid higher fees to raise the money.

Insurance not only lowers the cost to issue debt, but enables the organization to sell the debt nationwide. It also gives the buyer comfort knowing that if the bonds default, he will be reimbursed by American Capital.

American Capital will make its money by charging an insurance premium, and possibly a fee for advising clients on how to structure their offering, Fraser explained.

"They should do well," said Donald E. Flynn, director of equity investment with Baltimore-based Aegon USA Inc., a unit of Aegon N.V., the Dutch insurance giant. "They have a unique market niche in the financial guarantee industry and very strong management team."

The new company is based in New York, but it is domiciled in Maryland, which means it will be regulated by Maryland's insurance commissioner. It is licensed to do business in 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. Fraser said the company has opened an office in Potomac that will house Marsden and about 10 employees early next year, including the chief financial officer.

Before starting American Capital, Fraser, 56, had been chairman and chief executive of Fitch Investor Services, a New York bond-rating agency, since 1989. In 1980, he became president and chief executive of New York-based AMBAC, the country's oldest municipal bond insurer. AMBAC's assets grew under Fraser's leadership to more than $1 billion from $35 million.

Fraser, prior to AMBAC, was director of fixed-income research at PaineWebber Inc. in New York.

Donald J. Matthews, 63, is American Capital's president and chief operating officer. He was a principal of Johnson & Higgins, an international insurance intermediary and employee benefits consulting firm. He was also chairman of the firm's global financial group.

Aegon and the other investors are backing American Capital with $126.2 million. Aegon kicked in $15 million. The other investors include Little Rock, Ark.-based Stephens Group Inc., $30 million; Insurance Partners LP, $30 million; GCC Investments Inc., $30 million; and Third Avenue Value Fund, $15 million. American Capital's management and employees have invested $6.2 million.

The company also has $125 million in reinsurance, so the company has $250 million with which to pay claims.

Pub Date: 10/11/97

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