Standard & Poor's Ratings Services said Monday that it assigned its AA financial strength and counterparty credit ratings to newly formed mutual bond insurer Build America Mutual Assurance Co. (BAM). The outlook is stable.
"We expect BAM to achieve and sustain a very strong competitive position," said Standard & Poor's credit analyst Marc Cohen. S&P said it views BAM's competitive position as supported by very strong market acceptance, a relatively low risk profile given its designated target market in public finance, and the strong and relevant experience of senior management.
Tthe company's strategy of insuring essential public-purpose municipal obligations, which is embedded in BAM's corporate documents and organizational charter, is a strength to the rating. The unique pricing characteristics that BAM will employ (1% members' capital contribution, 10-year upfront risk premium, and subsequent annual installment premiums) potentially position BAM to attain very strong market acceptance.
BAM's lack of legacy risk exposures may allow it to attain stronger risk-adjusted pricing than peers. Nevertheless, the new insurance pricing model does not preclude a legacy insurer or another new entrant from a similar approach; nor does this new pricing approach render existing pricing approaches ineffective. However, BAM's introduction of this new pricing scheme will not place it at a disadvantage, S&P said.
Although there is a lack of operating history under the unique mutual organizational structure in the bond insurance sector, the optimization and collection of capital as each insured transaction is written enhances the durability of capital and is a strength to the rating.
Demand for and acceptance of a mutual municipal bond insurer should support BAM's competitive position and revenue growth during the next five years. S&P views the mutual structure as a strength, as it may provide risk-profile stability and thus support BAM's ability to issue new insurance policies competitively during and after periods of stress.
BAM's management and corporate strategy is a strength to the rating. BAM's senior management team has extensive knowledge of the financial guarantee and U.S. public finance market.
The company's strategic plan maintains conservative risk limits on its underwriting, as well as financial and operational goals and transparency.
BAM's enterprise risk management is strong given its conservative risk culture, stated risk controls, and focus on optimizing capital. BAM will continue enhancing its strategic risk-management and capital-model decision framework, and its risk concentration management tools (including stochastic modeling) as it begins to grow its risk and exposure.
The outlook is stable. S&P said it could lower the ratings on BAM if the bond insurance product line is not re-embraced by fixed-income investors and municipal bond issuers during the next 12-24 months to a sustainable level that supports BAM's competitive position, capital, and earnings generation.
The rating could also be lowered if the economic savings proposed to issuers does not reflect BAM's perceived competitive advantage in terms of pricing parity or our risk-adjusted pricing.
Other possible reasons for downgrade would be: if BAM's low-risk profile were to change, but this is not expected; if there is significant management turnover or a change in risk-management controls or tolerances, or if there are insured losses that deplete capital, but this is not expected.
BAM's expected strong operating performance, very strong competitive position, and extremely strong capital are already considered in the rating, so S&P does not expect to raise the rating during the next 24 months.
