SAN FRANCISCO — Fitch Ratings Monday downgraded the insurer financial strength rating of Assured Guaranty Corp. to AA-minus from AA and the rating of Financial Security Assurance Inc. to AA from AA-plus, citing concerns about losses on mortgage-backed securities.
Fitch also downgraded the debt ratings of U.S. holding companies Assured Guaranty US Holdings Inc. and Financial Security Assurance Holdings Ltd. to A-minus. All the ratings were removed from short-term negative watch and assigned long-term negative outlooks.
The downgrades “primarily reflect increased expectations of credit losses arising from the companies’ residential mortgage securitization exposures,” Fitch said in a release.
Assured and FSA are the highest rated of the bond insurers that backed more than half of all municipal debt sold as recently as the middle of this decade. Together, FSA and Assured, which are subsidiaries of Assured Guaranty Ltd., dwarf their smaller and newer competitor, Berkshire Hathaway Assurance Corp.
The bursting of the housing bubble and the financial crisis felled competitors like MBIA Insurance Corp. and Ambac Assurance Corp., pushing their ratings from triple-A to junk.
Assured Guaranty Ltd. completed its purchase of FSA from Dexia SA earlier this year, combining the last two of the pre-crisis municipal bond insurers that are still in a position to write new business and pledging to survive the crisis with “the highest ratings available.”
Assured president and chief executive officer Dominic Frederico in a statement Monday said the insurers were “pleased that Assured Guaranty Corp. and FSA remain in the double-A rating category, a designation indicative of significant financial strength.”
Since buying FSA, the parent Assured has made clear its plans to operate the two bond insurers separately. Assured offers guarantees in for both municipal and structured financial products, while FSA has become a muni-only insurer.
Assured Guaranty Corp. is rated AAA with a negative outlook by Standard & Poor’s and Aa2 under review for possible downgrade by Moody’s Investors Service. FSA is rated AAA with a negative outlook by Standard & Poor’s and Aa2 under review for possible downgrade by Moody’s.
During the first nine months of 2009, Assured and FSA together guaranteed 1,659 municipal bond issues worth $29.7 billion, according to Thomson Reuters. That gave the companies a combined 81.6% market share among insured issues. But the insured marketplace has shrunk dramatically since 2005, when it surpassed $251.8 billion, or about 60% of all muni market bond issuance.
The companies separated themselves from their downgraded peers by taking less exposure to mortgage-backed securities and by maintaining ratings that have allowed them to continue to bring in business that bolsters their capital, as they run off residential and asset-backed exposures. However, Fitch expressed concern about the companies’ ability to continue to outrun losses on their portfolios of mortgage-backed debt.
“The ratings have come under pressure as loss estimates have outpaced growth in claims paying resources,” the agency said.
Fitch said that to date, most of the claims activity experienced by Assured and FSA have been from exposures to securitizations of second-lien mortgages, but that analysts expect this year that certain first-lien residential mortgage backed securities categories — specifically Alt-A and option ARM — have weakened. As a result, Fitch wrote, “loss estimates related to first-lien RMBS exposures have been revised upward appreciably.”
Frederico said Fitch’s downgrades rely on an “extremely pessimistic view of the future performance of residential mortgage exposures,” adding that “Fitch noted our ability to mitigate potential future losses and improve rating agency capital.”
A spokeswoman for Assured said Fitch’s downgrade leaves the company’s business plan intact.
“Past rating actions have not had an impact on our business, and as we remain highly rated, we would not expect Fitch’s recent action to have a negative impact,” said Betsy Castenir, managing director for corporate communications. She declined to comment on the possible outcome of the Moody’s review.
Her boss, Frederico, said Fitch’s removal of the negative ratings watch is important because it “provides time for more clarity on the direction of the economy and future performance of the residential mortgage portfolio versus pure estimates.”
Assured Guaranty Ltd.’s shares fell $0.24, or 1.19%, to $19.90, in New York Stock Exchange trading yesterday. The shares have risen more than 600% since their March low on signs that the economy may be turning in the insurer’s favor.
The U.S. housing market is showing signs of stability. The Standard &Poor’s/Case-Shiller 20-city U.S. home price index rose 1.2% in July, the biggest monthly gain since October 2005, and existing home sales have risen seven of the past nine months, according to the National Association of Realtors.
