Behind Ross' Bond-Insurance Bet

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In December, Assured reinsured a fairly large book of business that Ambac had, he said.

Whenever there's a crisis in an industry, it creates an opportunity for one of the moderate-sized players to move into the top rank as a result of the confusion around and crippling of competitors, Ross said.

Not that Assured has managed to escape the asset write-downs that have bedeviled all financial companies since the subprime debacle came into full focus last summer, but its exposure to high-risk securities is roughly one-third the size of those of its larger rivals, estimates Michael Grasher, an analyst at Piper Jaffray & Co. in Chicago.

Two weeks ago, Assured reported an after-tax unrealized mark-to-market loss on derivatives of $297.5 million, or $4.31 per share, which caused it to swing to a net loss of $3.77 per share in the fourth quarter from net income of 58 cents per share a year earlier.

For the full fiscal year 2007, Assured had an after-tax unrealized mark-to-market loss on derivatives of $480.0 million, or $7.06 per share, which was responsible for a net loss of $4.46 per share for the full year.

The deal with Assured won't prevent Ross from making efforts, together with Assured, to provide relief to some of the more distressed guarantors, Ross said. He's betting there will be stratification and consolidation of the industry and believes Assured – because its credit rating isn't under threat and its capital position is fairly robust – will be able to gain more market share in the industry.

"This is to help Assured improve its position relative to the industry, either by taking on other big blocks of reinsurance or by possibly making acquisitions," he explained.

Assured would get the quickest bang for its buck by using some of Ross' cash to reinsure blocks of business of other guarantors, which takes less time than going after new business, says Piper Jaffray's Grasher, who has a buy rating on the stock. (Piper Jaffray makes a market in the company's securities.)

Not only does the deal show the kind of growth potential that Assured has, but it would provide much-needed capacity to the financial guaranty industry, which could result in reinsurance transactions with some of the other guarantors and relieve their capital requirements, Grasher said.

In December, Assured Guaranty Re Ltd., the company's reinsurance unit, agreed to reinsure a $29 billion portfolio of financial guaranty contracts owned by Ambac.

JPMorgan's Wessel wrote in his note that he believes the deal with Wilbur Ross will be done at $24 per share, and predicted the additional $750 million in stock will be sold in the fourth quarter at $28.20, a 17.5% premium. He estimates the deal will boost Assured's book value by 20 cents per share to $21.60 in the first quarter of 2008.

Wessel expects the company's profits to jump 19% this year and despite the uptick in the share price on Friday, reaffirmed his overweight rating.

Ross has a reputation for rolling up distressed steel, coal and auto-parts companies and the deal with Assured could signal that he's on the prowl once again, this time looking to clean up in a key corner of the financial sector.

Bogoslaw is a reporter for BusinessWeek's Investing channel .