Moody's Investors Service said it has downgraded the insurance financial strength rating of Assured Guaranty Municipal Corp. (AGM) to A2 from Aa3, Assured Guaranty Corp. (AGC) to A3 from Aa3, and the Assured Guaranty Re Ltd. (AGRe) to Baa1 from A1.
In the same rating action, Moody's also downgraded the senior unsecured debt ratings of both Assured Guaranty US Holdings Inc. and Assured Guaranty Municipal Holdings Inc., to Baa2, from A3.
The outlook for the ratings is stable.
The rating action also has implications for the various transactions wrapped by AGM and AGC.
"Today's rating action reflects Moody's downward reassessment of Assured's business franchise, expected future profitability, and financial flexibility," said Moody's. "Assured operates in an industry that has not recovered from the financial crisis and, like its peers, will continue to struggle in the face of declining fundamentals, including a dramatic reduction in insurance usage, modest profitability and still-meaningful legacy risk."
While the characteristics of Assured's insured portfolio's credit quality and its capital adequacy generally remain strong (based on the data from September 30, 2012), Assured's positioning on key dimensions of financial strength, namely franchise strength, profitability, and financial flexibility have weakened over time largely as a result of enduring changes in the financial guarantor industry and the broader economic environment.
The combination of these characteristics, along with some residual uncertainty with respect to the potential for outsized losses relative to capital in the existing insured portfolio as well as more general unknowns with respect to future insured portfolio production and capital retention, lead to the overall A2 IFS rating assessment of the lead operating company.
Moody's has positioned the IFS rating of Assured Guaranty Municipal Corp. (AGM, formerly Financial Security Assurance Inc.) at A2. As the principal active operating insurer within the Assured group, AGM is a key focus for Moody's analysis of the consolidated group and an important reference point for its ratings of AGC and AGRe, entities whose underwriting profile has been sharply reduced in recent years.
The main rating sensitivities for AGM relate to the composition and performance of its insured portfolio as well as its capitalization and market support. The rating could be lowered if the quality of its insured portfolio meaningfully decreased or capital was withdrawn without an associated reduction of risk, or if profitability reduced materially. The rating could be upgraded if there were a significant rebound in business origination at attractive pricing levels and financial flexibility improved. However, fundamental challenges inherent in the business model make a return to the Aa rating level unlikely.
The A2 IFS ratings of Assured Guaranty (Bermuda) Ltd. and Assured Guaranty (Europe) Ltd. reflect a combination of formal and implicit support from AGM. The Baa2(hyb) ratings of Sutton Capital Trusts I-IV reflect the subordinated nature of the perpetual preferred stock of AGM that can be delivered to the trusts; AGM has an option to sell such securities to the Trusts at its sole discretion at any time.
The A3 IFS ratings of Assured Guaranty Corp. (AGC) and its supported affiliate, Assured Guaranty (UK) Ltd., are positioned one notch below the A2 IFS rating of AGM reflecting its more limited stand alone franchise, as well as its weaker capital profile, insurance portfolio characteristics and profitability metrics. The Baa3(hyb) ratings of Woodbourne Capital Trusts I-IV reflect the subordinated nature of the perpetual preferred stock of AGC that can be delivered to the trusts; AGC has an option to sell such securities to the Trusts at its sole discretion at any time. Rating sensitivities for AGC are similar to those described above for AGM.
The Baa1 IFS rating of Assured Guaranty Re Ltd. and its supported subsidiaries, Assured Guaranty Re Overseas Ltd. and Assured Guaranty Mortgage Insurance Company, is one notch below the A3 IFS rating of AGC and two notches below the A2 IFS rating of AGM and reflects its limited independent franchise, its weaker relative capital profile, the more flexible Bermudian regulatory environment relative to the U.S., and its role as internal group reinsurer, optimizing the risk profile of its affiliated primary insurance writers. Rating sensitivities for AGRe are similar to those described above for AGM and AGC.
The Baa2 senior unsecured debt rating of Assured Guaranty Municipal Holdings Inc. (AGM Holdings) is positioned at three notches below the IFS rating of its core operating subsidiaries to reflect the structural subordination of the parent companies relative to the operating companies. The three notch difference between AGM and AGM Holdings reflects the typical notching practice for U.S. insurance holding company structures.
The Baa2 senior unsecured debt rating of Assured Guaranty US Holdings Inc. (AG US Holdings) is aligned with that of AGM Holdings, reflecting its access to the financial resources of AGC, as well as subordinated access to those of AGM Holdings. The debt of AG US Holdings also benefits from a guarantee from Assured Guaranty Ltd.
The Baa2 issuer rating of Assured Guaranty Ltd. reflects its status as the ultimate parent company of the group with direct access to dividends from Assured Guaranty Re, which has substantial dividend capacity, as well as subordinated access to the resources of both AGM and AGC through intermediate holding companies. The provisional ratings of Assured Guaranty Capital Trusts I and II are aligned with the provisional subordinated debt ratings of their sponsor, Assured Guaranty Ltd.
The primary rating sensitivity of AGM Holdings, AG US Holdings and Assured Guaranty Ltd. is to the financial strength of the underlying operating companies and thus their ratings are likely to be positively/negatively impacted by upgrades/downgrades at AGM, AGC and AGRe.
