Kroll Bond Rating Agency, a three-year-old firm on a mission to restore trust in credit ratings after the 2008 financial crisis, said Assured Guaranty's Municipal Assurance Corp was the ideal first case for its refined methodology to assess guarantors.

Kroll, which assigned the industry's only AA-plus rating and a stable outlook to Assured's new municipal-only insurer earlier this month, views capital as paramount, members of the rating team said in an interview. The firm's rating level for a financial guarantor is largely based on the insurer's ability to pay claims under a two-step stress case scenario which places the company in a run-off, they said.

"We don't consider market share, minimum level of [return on equity], prescribed level of diversification or other notions of franchise value to be big contributors to the rating," said Kroll senior managing director Karen Daly. "They don't determine the ability to pay claims or ensure access to capital during times of stress."

After a downgrade by Moody's earlier this year, Assured announced it would launch a muni-only business without a Moody's rating. Kroll is currently discussing assigning ratings with three other bond insurers, and does not plan to rate inactive players.

Experienced management staff, revenue streams associated with ceded business from within Assured and an established underwriting framework contributed to MAC's rating, according to Kroll's report.

"MAC was a good candidate to start with, having a ceded book and a portfolio in place, as opposed to the newer companies which have different structures," said Jerome Fons, executive vice president at Kroll.

Kroll did not rate MAC as a consolidated group with other Assured companies. Standard & Poor's, which assigned MAC an AA-minus rating on July 17, said the muni-only insurer would be rated as part of a group including Assured's other businesses.

"We're mindful that money could be moved out of MAC, and we note that as a rating concern as well as the relevant regulatory limits, but the core of our analysis is MAC's ability to fulfill its obligations to policyholders in runoff," Daly said.

Kroll, which hesitates to characterize its outlook on the industry as being bullish, maintains that current market penetration at around four percent for the bond insurers is due to idiosyncratic factors such as narrow credit spreads. The rating firm expects to be looking at municipal books and companies' abilities to satisfy claims as the role of bond insurance shifts towards muni-only firms.

"The new crop of bond insurers - being focused primarily on high-grade municipal bonds - looks a lot different than the major legacy firms did leading up to the financial crisis," Fons said. "One challenge of these firms is to grapple with costs other than credit costs, in other words, not losses from default on exposure."

Kroll's attention to capital and the ability to pay claims is a return to how bond insurers were rated before the decade leading up to the financial crisis, said Richard Larkin, director of credit at HJ Sims in New Jersey. Ratings then didn't evaluate franchise value the way some ratings do today.

"Viability as a business concern, quality of stock and the ability to generate revenue became a factor once companies started dipping into capital markets," Larkin said. "People may say Kroll is returning to an older model."

For Larkin's team at HJ Sims, bond insurance ratings don't have an impact on whether a policy is attractive. Though the launch of a municipal-only insurer at the time of Detroit's bankruptcy will make the business appealing, Larkin said it's hard to know if insurers have learned their lesson from the financial crisis.

The team at Kroll doesn't expect market penetration to reach near historic pre-financial crisis highs, when almost 60 percent of muni bonds carried insurance, but they believe current ratings on guarantors don't clearly reflect the new types of insurance platforms entering the market.

"After the collapse of the financial guaranty industry, we talked about the notion of franchise value which doesn't necessarily ensure access to capital or the ability to pay claims," Daly said. "We thought there was room to add our voice to the discussion," Daly said.

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