Moody’s Investors Service Wednesday night put on review for possible downgrade the Aa2 rating of Assured Guaranty Corp. and the Aa3 rating of Financial Security Assurance Inc.

Moody’s cited a more negative view of Assured’s mortgage-related and pooled corporate exposures and FSA’s mortgage-related exposures for the review. Assured Guaranty Ltd. plans to acquire Financial Security Assurance Holdings Ltd. later this year — excluding its troubled financial products unit — in a move that will put under one roof the market’s two most active bond insurers.

Moody’s acknowledged that Assured has benefited from its strong market position and conservative underwriting, but said the increase in future earnings streams from public finance is “not sufficient to offset the deterioration in its insured portfolio resulting from the weak economy.” Moody’s also pointed out that FSA had generally strong underwriting outside the mortgage sector and noted the support its asset management business received from parent Dexia SA.

Moody’s said the deterioration of both companies’ insured portfolios raises concerns of decreased financial guarantor franchise values. It said the market dislocation may also encourage new entrants or “the growth of alternative forms of execution.”

In response, Assured Guaranty Ltd. president and chief executive officer Dominic Frederico cited his company’s strict underwriting standards, arguing that its insured portfolio has held up favorably compared to other bond insurers and financial institutions. He said the assumptions Moody’s uses were “significantly more stressful than those used by the Treasury in its recent stress testing of banks” and did not take into account how any federal economic and mortgage-related programs may help.

Frederico — who has been an outspoken critic of the rating agencies — said Moody’s should be more transparent about its assumptions. He also once again called for a single regulator to oversee the financial guaranty industry for capital and financial strength requirements.

“We believe that the financial markets cannot and should not be subjected to volatility and uncertainty due to the rating agencies’ undisclosed assumptions,” Frederico said. “Moody’s review of our insurance financial strength ratings may lead to near-term uncertainty and volatility in the markets that we serve — particularly in the municipal market, where we are effectively the only major active financial guarantor.”

FSA said it is seeing “improving trends” in its own portfolio of insured residential mortgage-backed securities.

Moody’s said it does not believe that Assured’s planned acquisition of FSA would have any negative rating implications “in and of itself,” but that “actual rating implications would depend on the specifics of such an integration and the combined business strategy of the group.”

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