Frederico On Moody’s Downgrade Threat
Bermuda’s Assured Guaranty Ltd. today [Mar. 21] responded to the announcement by Moody’s Investors Service that it has placed the debt ratings of Assured Guaranty and its subsidiaries and the insurance financial strength ratings of Assured Guaranty’s insurance subsidiaries under review for possible downgrade.
In its announcement, Moody’s cites constrained business opportunities for financial guaranty insurance and continued economic stress for US municipal, mortgage, and European exposures.
In response to the announcement, Dominic Frederico [pictured], president and CEO of Assured Guaranty, said: “We have been working with Moody’s for some time, emphasizing the improvements in our credit profile since their last review in 2009.
“As the current rating process is not yet complete, we are surprised that Moody’s decided it had enough information to place Assured Guaranty on review for a possible downgrade.
“In light of our improved financial strength over the last two years, Moody’s action was unjustified and unwarranted. Assured Guaranty has not just, as Moody’s writes, ‘survived’ the financial crisis but has demonstrated its resiliency, resourcefulness and financial strength.”
Mr. Frederico went on to say Assured Guaranty has paid nearly $4 billion in claims since the onset of the mortgage crisis to protect investors from losses related to the firm’s insured residential mortgage-backed securities [RMBS].
And its claims-paying resources to protect policyholders have grown from $11.2 billion in 2007 to over $12.8 billion today.
“Since our last rating assignment, we have achieved record operating income of $664 million and $604 million, with operating ROEs of 14.9% and 12.1%, in 2010 and 2011, respectively,” said Mr. Frederico. “Further, since the second quarter of 2009 – the period Moody’s last analyzed – we have reduced our insured portfolio’s exposure by approximately $105 billion overall, including $62 billion in structured finance, of which $11 billion was in the RMBS portfolio.
“Additionally, to further strengthen our capital position, in January 2012 we entered into a $435 million excess-of-loss transaction for our US public finance portfolio.”
Mr. Frederico said Assured Guaranty’s business production continues to demonstrate a fundamental demand for the firm’s product.
“Since the second quarter of 2009, we have insured over $58 billion of US municipal bonds,” he said. “In 2011 alone, we guaranteed 1,228 new issues; this is over 12%, or one out of every eight, of the transactions sold during the year and represents a total insured par of over $15 billion.
“For single-A underlying credit quality transactions, our principal targets in the municipal market, we guaranteed 38% of all transactions and 16% of the par sold in 2011.”
Mr. Frederico said Assured Guaranty achieved these results while adhering to a strict credit underwriting and pricing approach even during a period when new issuance was down 34% from the prior year and interest rates were exceptionally low.
“In the RMBS area, Moody’s states that as part of its upcoming review it will focus on downside risk sensitivities. We believe that our successful activities in the RMBS area, which include representation and warranty [R&W]collections and servicing interventions, along with the run-off of the portfolio and possible litigation awards, should offset potential concerns,” he said.
“Specifically, our proactive risk management and loss mitigation approach has produced a cumulative total of $2.4 billion in settlement and putback receipts and commitments from R&W providers in our RMBS transactions. We were among the first companies to substantiate and receive payments for the pervasive misbehavior in this market.
“Because of our confidence in our R&W rights, we anticipate that the bulk of our RMBS losses will ultimately be paid by third parties. We have continued to move aggressively to reduce delinquencies and losses through servicing intervention and have seen declines in delinquencies, improvements in loss severities and lower losses on transactions where we have replaced the servicer or imposed special servicing.”
Moody’s cites its detailed, published methodology for how they rate the financial guaranty insurance industry. In applying that published methodology to Assured Guaranty’s operating subsidiaries, the firm believes it is “firmly in the Aa rating category.”
“We will continue to work with Moody’s as they conduct their evaluation of our ratings. We look forward to serving our clients and resolving this process as expeditiously as possible,” said Mr. Frederico. “Later this week, we will provide additional information responding to Moody’s announcement.”
Assured Guaranty Ltd. is a publicly traded Bermuda-based holding company.
Its operating subsidiaries provide credit enhancement products to the US and international public finance, infrastructure and structured finance markets.
