Assured Guaranty Municipal Corp. and Assured Guaranty Corp. are able to keep their AA-plus ratings, at least until this fall, when Standard & Poor’s said it plans to issue a new rating methodology for bond insurers that could cause a downgrade.
In a new report released this week, Standard & Poor’s said the two bond insurer platforms can expect to maintain their ratings and stable outlooks at least until the new methodology is issued. The platforms’ strengths include being a market share leader in the bond insurance industry, focusing on underwriting on the low-risk U.S. public finance market, and being well-capitalized with a strong margin of safety, the report said.
According to Standard & Poor’s measure of capital adequacy, AGM and AGC are well-capitalized.
“We expect that the companies’ margin of safety will improve as a result of the lower-risk U.S. public finance business — relative to structured finance business — they intend to underwrite, combined with strong pricing and the rapid runoff of their structured finance book of business,” analysts wrote.
Weaknesses for the bond insurer include limited business-growth prospects because bond insurance has become a niche product, and susceptibility to continued adverse loss development of U.S. nonprime residential mortgage exposure.
“We believe the moribund state of the financial guarantee market in recent years — with only one organization issuing new policies — may be symptomatic of investors’ and issuers’ diminished demand for bond insurance,” analysts wrote. “The longer this persists, the more limited the potential for the reemergence of a strong and vital bond insurance sector, in our view. This market dynamic, in turn, could hurt AGM’s and AGC’s business prospects.”
David Veno, a Standard & Poor’s analyst who co-authored the report, said the weaknesses it highlighted have more to do with the industry as a whole. “There are limited business-growth prospects because insurance is more of a niche product and a resurgence of a strong guarantee market is unlikely,” he said.
Analysts added the two insurer platforms have proven track records of credit discipline that allowed them to withstand the stress caused by the mortgage-backed securities that wiped out other bond insurers. However, the companies’ market share of new issuance is less than the average of the four dominant financial guarantors before 2008, “reflecting what we view as weak market demand.”
A stable outlook was assigned by Standard & Poor’s which reflects the expectation by the agency that the two platforms will continue to insure primarily investment-grade U.S. public finance bonds and maintain a fairly strong and competitive position in the financial guarantee market.
The stable outlook “also reflects our view of the combined companies’ very strong capital position and our expectation that the level of capital will remain above the 'AA’ minimum,” analysts wrote, adding that a strong management team also plays a key role in the stability of the rating. However, the rating agency added that based on the state of the bond insurance market as a whole, there will not be a rating increase anytime soon.
While the strong rating and its stability appear to be good news for the bond insurer, Standard & Poor’s is expected to issue a new bond-insurance rating methodology in the third quarter that could prompt a downgrade. If the final methodology comes out as currently proposed, there would most likely be rating downgrades, according to Veno.
He added that Standard & Poor’s received a number of comments on the proposed methodology and the agency is reviewing those before issuing a final methodology. If the rating agency takes those comments into consideration, there may or may not be downgrades.
Standard & Poor’s originally said Assured Guaranty could lose both its AA-plus ratings and be downgraded “by one or more rating categories … unless those insurers raise additional capital or reduce risk.” In the past, Assured has said it could maintain its ratings by raising equity, reducing outstanding exposure, and accelerating settlements or collections.
