Assured Guaranty Ltd. is saying Moody’s Investors Service should upgrade its bond insurance subsidiaries rather than continue to consider downgrading them.
Assured Guaranty Corp. and Assured Guaranty Municipal are the only remaining viable monoline insurance companies wrapping new municipal bond issues. On March 20 Moody’s placed them on review for a downgrade from its current Aa3 rating. The agency usually resolves reviews for downgrades within 90 days, according to a Moody’s source.
Moody’s cited three factors as contributing to its review of Assured Guaranty. First, in recent months Assured was insuring less business by par value. Second, Moody’s mentioned “pressure on new business margins due to low interest rates and tight credit spreads.” Third, there have recently been increased risks of default in Assured’s U.S. and European portfolio.
Some observers have said that a Moody’s downgrade from Aa3 would substantially damage Assured’s ability to attract business insuring muni bonds.
Late on Friday, in response to Moody’s threatened downgrade, Assured released a 16-page rebuttal. It partly claims that some of Moody’s concerns driving the review are inappropriate for judging bond insurers’ credit ratings. The company contradicts some of Moody’s claims and presents other financial developments it claims are relevant.
Using Moody’s own rating methodology for the financial guaranty industry, Assured Guaranty states that the best weighted score is Aa1. That is two notches above its current rating.
Responding to Moody’s point about Assured signing up less new business and losing market share in munis, Assured wrote that this has little importance in measuring its financial health. “The Assured Guaranty companies have recorded approximately $6 billion of deferred revenue, which insulates us from any financial disruption caused by a temporary lack of current production,” Assured stated.
Responding to claims of reduced profitability, Assured wrote that in 2006 Assured Guaranty Municipal Corp. (then called Financial Security Assurance Inc.) had an average premium rate of 36.9 basis points on total debt service of new issuance. In 2011 AGM had an average premium of 65 basis points on total debt service of new issuance. In 2011 AGM, which accounts for most of Assured’s muni guarantee business, insured $14.97 billion in par value.
Against Moody’s statement that the risk of default in the U.S. and Europe was rising, Assured wrote that the U.S. economy is improving. The company also noted that its leverage has gone down. For example, the ratios of net statutory par outstanding to statutory capital have gone from 131:1 in 2007 to 95:1 in 2011. In the same years the ratios of net statutory par outstanding to claims-paying resources has gone from 56:1 to 42:1. Lowered leverage is normally seen as indicating increased financial safety.
Assured noted that claims-paying resources have grown by 17.8% from 2007 to 2011. It also pointed out successes that Moody’s did not address in announcing its review on Assured. The portion of Assured’s portfolio in the riskier structured finance area has declined from 27% in the fourth quarter of 2009 to 21% in the fourth quarter of 2011, Assured noted.
Assured has had “success in pursuing recoveries for breaches of representations and warranties by mortgage originators and securitization sponsors.” In November 2009 Moody’s projected that Assured would recover $1 billion in that asset class. By the end of 2011 Assured had recovered $2.4 billion.
Assured’s rebuttal to Moody’s is found on the Assured Guaranty Web site. Moody’s did not immediately respond to a request for comment.