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DUFF & PHELPS OUTLOOK FOR FINANCIAL GUARANTY COMPANIES IS FOR MODERATE STABLE GROWTH

 NEW YORK, Oct. 20 /PRNewswire/ -- The current rising interest rate environment presents a challenge to the financial guaranty industry and increases the level of competition among guarantors, Duff & Phelps Credit Rating Co. said in a special report to be released October 27.
 Without the incentive of lower interest rates, issuers are bringing less paper to the market than in 1992 and 1993. Although Duff & Phelps is concerned by some of the problems for insurers caused by increasing interest rates, there are offsetting positive factors that lead Duff & Phelps to conclude that the insurers will experience moderate stable long term growth.
 The greatest concerns with increasing interest rates are:
 * Higher interest rates dampen issuance and insurance levels, promoting market share competition among insurers and providing the impetus for reduced premium rates. D&P estimates that average premium rates were down more than 11% from year end 1993 levels.
 * Reduced premium rates in concert with lower volume reduced the ability of the guarantors to generate capital through earnings.
 * Reduced premium rates lower the internal rate of return on new insured transactions. This could make it more difficult over time to attract additional equity capital in the face of a reduced ability to generate capital internally
 * Higher interest rates could decrease demand for insured municipal paper by causing risk-averse individual investors to invest a greater percentage of their money in federally insured bank deposits.
 The offsetting positive factors are:
 * The balance sheet growth of 1992 and 1993 strengthened an already solid industry and provides some "cushion" against lower earnings.
 * Higher interest rates should lead to wider trading spreads between insured and uninsured transactions-- increasing the issuers interest cost savings and lending some support to premium rates.
 * Higher interest rates will lead to higher investment portfolio returns.
 * Demand for insured paper by individuals continues to be strong.
 To analyze the impact over time of increasing interest rates, Duff & Phelps simulated the financial performance of the financial guaranty industry under two scenarios: increasing interest rate assumptions and stable interest rate assumptions. Not surprisingly, the results of the simulations show that an increasing interest rate environment will result in lower earnings and returns over time, and therefore less capital. However, even in the increasing rate environment, the industry experiences moderate and stable five year growth. In an increasing interest rate environment, statutory capital grew at an annual rate of 8%, to reach $6.7 billion by 1998, from the 1993 level of $4.6 billion. In a stable interest rate scenario by comparison, statutory capital grew at an annual rate of 9%, to reach $7.2 billion by 1998. Operating leverage reached 168:1 in 1998 under increasing interest rate assumptions, versus 157:1 under stable interest rates.
 -0- 10/20/94 R
 /CONTACT: Ralph R. Aurora of Duff & Phelps Credit Rating Co., 212-908-0226/


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OP -- NY093R -- 7364 10/24/94 13:03 EDT
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Publication:PR Newswire
Date:Oct 24, 1994
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