Moody's Investors Service released proposed changes in its rating methodology for financial guarantors that it said would better reflect the changes that have occurred in the bond insurance industry since 2007.
Following the housing market crisis, Assured Guaranty stood as the lone legacy insurer until Build America Mutual was launched in 2012. Even as MBIA's National Finance Guarantee makes a comeback, the bond insurers face challenges in increasing their market penetration in such a low interest rate environment. The proposed methodology changes will accommodate for such shifts in the insurance industry.
"The proposed changes aim to better reflect the market and operational changes that we have observed during and following the financial crisis," Stanislas Rouyer, associate managing director of Moody's specialty insurance team, said in an interview Tuesday. "The guarantors were some of the companies most affected by the financial crisis and currently operate in a much narrower business than in the past."
Moody's said the proposed methodology will make it easier to explain how it evaluates guarantors and communicate its views to the market.
The proposed changes to the methodology include a scorecard that will affect the way Moody's evaluates the bond insurers' business position, capital adequacy, and financial flexibility.
"As it relates to the business position, the proposed factors look at the industry environment and how each guarantor fits within the industry by looking at its market position and product strategy," Rouyer said. "For capital adequacy what we're doing is proposing a formula, based on public information that captures the potential volatility in results we can expect from guarantors under extreme stress."
Rouyer said that the new scorecard wouldn't result in any rating changes.
"The proposed rating methodology incorporates the lessons we and the market learned about the guarantors during and following the financial crisis," he said. "The ratings were adjusted over time to reflect industry developments, so that is why we don't expect any rating movement if the new methodology were to be implemented as proposed."
The rating agency has asked for public comments by Sept. 15 on the proposed changes, which are detailed in a 41-page release.
"We are still reviewing Moody's proposed criteria and plan to respond to Moody's with our comments before the September 15th deadline," a spokesperson for Assured Guaranty said in an email. "However, we note that Moody's has proposed to significantly reduce the importance of insured portfolio quality and capital adequacy in their new criteria.
"We believe recent experience has shown that the quality of an insurer's guaranteed risks and the adequacy of its capital are the two most important components of its financial strength," the Assured spokesperson said.
"We're planning on sharing our thoughts with Moody's," said Kevin Brown, managing director of MBIA.
BAM also confirmed that it will be in touch with the rating agency.
Moody's is also seeking feedback on whether insurers' capital adequacy scores should be adjusted to reflect the possible negative or positive differences between the underlying credit performances of insured bonds verses uninsured bonds.
