Moody’s Investors Service Thursday issued a negative report on the municipal bond insurance industry.
The future financial health of bond insurers Assured Guaranty and National Public Finance Guarantee is questionable, Moody’s senior analyst Helen Remeza indicated in “Financial Guaranty Insurance: Negative Outlook.”
The report on the insurance industry comes a month after Moody’s placed Assured on review for a downgrade from its Aa3 rating. The agency usually resolves downgrade reviews within 90 days.
Most bond insurers have ceased wrapping new bond issues coming to market, Remeza wrote in the report.
The financial crisis has left a legacy of skepticism about bond insurance, Remeza wrote. The industry’s penetration of the municipal market has plunged substantially from levels of around 50% seen as recently as 2007. Only 5.2% of new issues were insured in 2011.
“Our view is that when penetration keeps going down, this continues to add pressure on the bond insurance industry,” said Moody’s associate managing director Stanislas Rouyer.
“The municipal debt market appears to have largely adjusted to a world with limited credit enhancement,” Remeza wrote.
Currently, institutional investors are likely to “dismiss” the value of bond insurance, according to Remeza. Only retail investors still have some interest in bond insurance.
Both Assured and NPFG parent company MBIA Inc. have exposures to below-investment-grade bonds at levels between five and six times their qualified statutory capital. Their exposures to below-investment-grade bonds are at levels slightly above two times their claims paying resources.
“In absolute terms or even relative to where the insurers were before the crisis, these are very large below-investment-grade exposures," Rouyer told The Bond Buyer.
The bond insurance industry is still afflicted by its exposure to residential mortgage-backed securities insured prior to the financial crisis, Remeza wrote. The RMBS still have elevated delinquency levels, high loan losses and reduced cash flow after debt service.
As of the end of 2011 Assured was exposed to $282 million net par of Greek sovereign debt, she wrote.
The top-10 below-investment-grade risks for Assured Guaranty in public finance constitute 57% of its qualified statutory capital and 25% of its claims paying resources, according to Remeza. For NPFG the figures are 69% and 34%, respectively. It is Assured and NPFG that have defined these issuers as below investment grade, Rouyer said.
“While guarantors’ insured public finance books are generally well-diversified, certain geographical concentration is evident,” Remeza wrote.
NPFG disagreed with the Moody’s report. “National Public Finance Guarantee Corp.’s guarantee continues to be highly valued by its policyholders,” said spokesman Kevin Brown. “We expect that once its litigation issues are resolved, National will find ample new business opportunities in light of its public-finance-only book of business and balance-sheet strength.”
“On April 13 Assured Guaranty released a 16-page paper with detailed facts addressing each of the analytical components of Moody’s criteria,” said Assured Guaranty president Dominic Frederico. “The piece that was released by Moody’s on April 26, 2012, reiterates the concerns that Assured Guaranty has already responded to with clear and concise data that support our current ratings.
“However, we continue to be concerned with Moody’s inordinate emphasis on market share when we have demonstrated significant demand for our financial guaranty in the market, especially among A-rated issuers,” Frederico continued.
“Based on Moody’s own financial strength rating scorecard as published in their March 26, 2012, Credit Opinions, the Assured Guaranty companies continue to meet Moody’s Aa rating requirements,” he said.
