Moody’s lowered the ratings of Assured Guaranty Corp. and Financial Security Assurance, even as it lauded their financial strength. The unusual move is seen more as a comment on the financial guaranty industry and its prospects than the strength of the individual companies.
The moves last week lowered the financial strength ratings on Assured Guaranty to Aa2, Stable, and on Financial Security Assurance to Aa3, Developing, from “Aaa.” Only Berkshire Hathaway Assurance Corp. retains an “Aaa” Moody’s rating in the municipal bond insurance industry.
Assured recently announced its proposed acquisition of FSA.
‘Substantial financial resources’
Moody’s said the moves were made because “the business model of financial guaranty insurance has been damaged over the past year due to sustained turmoil in credit markets and the very poor performance exhibited by a number of guarantors.” Although it blamed industry conditions for the downgrade, Moody’s simultaneously lauded the Assured-FSA combination, noting, “the acquisition of FSA … will … create a combined entity with substantial financial resources and a strong market position.”
FSA also was lowered due to Moody’s perception of a waning market for bond insurance. Additionally, Moody’s pointed to FSA’s exposure to mortgage risks while noting, “FSA’s relative competitive position … has been favorably affected by its position as one of three primary financial guarantors with limited exposure to higher risk [mortgage securities].”
Both Assured and FSA responded strongly to the rating actions. Dominic Frederico, Assured Guaranty’s chief executive officer, noted the strength of the combined Assured-FSA entity and the fact that Moody’s hailed the merger as a positive move for both companies. Frederico indicated that he viewed Moody’s action as a “speculative outlook for financial markets and the near-term demand for financial guaranty insurance,” and not “their own analysis of our capital adequacy and portfolio quality.…”
Market leaders
Despite Moody’s controversial rating moves, both Assured and FSA remain at the top of the bond insurance industry, and both companies remain well capitalized to meet existing claims on their insured portfolios. As various bond insurers have seen their ratings fall this year, the market for bond insurance has slowed as well. However, Assured and FSA remain market leaders in the financial guaranty business and their proposed merger is being undertaken to strengthen their already strong capital base and market leading position. We view these downgrades as more a statement by Moody’s on the bond insurance business, and less an indicator of Assured’s and FSA’s financial wherewithal.
Bond insurance continues to provide investor protection against non-payment for municipal bonds, an investment that rarely defaults. State and local governments continue to need infrastructure improvements that will be funded by tax-free bonds, many of which will carry bond insurance. It is a fact that, in the past, bond issues that are insured were required to pass stringent credit quality tests to qualify for bond insurance. That has not changed—and we expect that trend to continue. It is unfortunate that the overall rocky financial climate has affected two market leaders in the municipal market through little fault of their own.