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 to AA from AA-plus.

Fitch also downgraded the debt ratings of the U.S. holding companies, Assured Guaranty US Holdings Inc. and Financial Security Assurance Holdings Ltd. to A-minus.

All the ratings were removed from rating watch negative and assigned negative outlooks.

Assured Guaranty Ltd. completed its purchase of FSA from Dexia SA earlier this year.

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.”

Fitch said in its report that the downgrades “primarily reflect increased expectations of credit losses arising from the companies’ residential mortgage securitization exposures.”

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 the agency expects 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’s statement responded to that point by saying that Assured and FSA believe Fitch’s downgrades rely on an “extremely pessimistic view of the future performance of residential mortgage exposures.”

His statement also pointed out that “Fitch noted our ability to mitigate potential future losses and improve rating agency capital.”

In addition, he cited Fitch’s removal from negative ratings watch as 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.”

Looking forward, Frederico’s statement pointed out that the insurers’ capital bases would benefit further from the “run-off of the existing residential mortgage and asset-backed portfolios.”

Since buying FSA, Assured has made clear its plans to operate the two insurers separately. Assured offers guarantees in for both municipal and structured, while FSA has become a municipal-only insurer.

Also in his statement, Frederico advocated for putting all financial guarantors under the jurisdiction of a single regulator and suggested the Federal Reserve for that role. Insurers are currently regulated at the state level.

“Currently, we are subject to the sometimes conflicting and not readily transparent requirements of three disparate rating entities. However, under a single Federal regulator, such as the Federal Reserve, we could achieve stress testing of capital strength with assumptions that are disclosed and related to measurable economic variables, as well as results that are transparent and consistently applied to all entities and transactions, thereby providing investors with far greater ability to judge our capital adequacy,” Frederico said.

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