Assured, NPFG Can Withstand Puerto Rico Defaults, S&P Says

Assured Guaranty and National Public Finance Guarantee could both withstand defaults on Puerto Rico debt with no change to their capital adequacy, S&P said in reports affirming the bond insurers' ratings.

"Analysis indicates that if there were a default by multiple issuers in Puerto Rico over a one, two, or three year time period that, without accounting for any other factors, there would be no change in capital adequacy score," S&P analysts wrote in affirming Assured's double-A rating. The rating agency used nearly identical language in a separate report affirming NPFG, the muni-only arm of MBIA Inc. at AA-minus. "Although the reported exposure to issuers within Puerto Rico may be large relative to statutory capital, claim payments are made over time based on the payment schedule of the insured issue," S&P said.

The ratings reports, issued Monday, give both insurers stable outlooks. Assured's shares fell 13% and MBIA's dropped 23% on Monday after Puerto Rico Gov. Alejandro García Padilla said the island's $72 billion of debt was not payable. The government has formed a working group to work on an agreement to lower payments over several years.

The S&P report on Assured cited the company's strong competitive position, proven track record of credit discipline, market leadership position and experienced management team that continues to demonstrate a strong understanding of various risks the company faces.

"The outlook is stable, reflecting Standard & Poor's Rating Services' view of Assured's strong competitive profile and very strong capital adequacy," said the report. "The outlook also considers Assured's flexibility to underwrite business in a broad number of U.S. public finance sectors, global infrastructure transactions, and global structured finance to capitalize on positive market trends. The maintenance of a capital adequacy ratio of more than 1x is essential for rating stability."

The report also notes that Assured Guaranty Municipal Corp and Municipal Assurance Corp. will write financial guarantees in a broad number of U.S. public finance sectors, which provides management the flexibility to capitalize on growth trends and pricing opportunities in one sector, while less-favorable trends or pricing are presented in others.

Assured officially closed the acquisition of Radian Asset Assurance further enhances the long-term earnings of Assured, according to S&P.

"The acquisition added approximately $159 million to the statutory unearned premium reserve and $20 million-$25 million in investment income. Additionally, the insured portfolio assumed by Assured does not change the risk profile of its total insured portfolio. Thereby, it presents minimal earnings volatility."

The S&P report on National cited the company's strong competitive position.

"The outlook is stable reflecting National's very strong capital adequacy and prospective strong competitive position," the report said. "Standard & Poor's Rating Services expects National will continue gaining market share, gradually at first and at increasing rates once it gains more visibility in the primary market. We also expect the company will effectively manage its expenses as it grows its premiums and expands its team."

The report said the rating could be cut if the company does not demonstrate sustainable growth in market share or if capital adequacy deteriorates as a result of earnings or claims volatility. National could receive a ratings upgrade if it shows successful execution of its strategic risk management program and optimization of risk-adjusted returns as well as a sustainable competitive relative to peers.

"The management team has successfully resolved all litigation, and the company was able to reenter the market last year," the report said. "The company made all claims payments and successfully remediated distressed credits while inactive. We believe National's management team has significant knowledge of the municipal market and has a history of writing profitable U.S. public finance business. The team has incorporated lessons learned as part of its underwriting guidelines as well as new business selection.

"Management is focused on increasing new business activity where there are opportunities for appropriate returns as well as having developed a targeted marketing and new business strategy. The company is also looking to expand the team, and management has added key new hires in business development."

 

 

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