Assured to Market: It’s Not All Negative

This came one day after Moody’s Investors Service announced it had put both Assured Guaranty Corp. and Financial Security Assurance  on watch for possible downgrade.

Even as market participants contemplated the end of the bond insurance business in its current form, Assured said it believed the market will see past the headline of Moody’s announcement and continue to use its services.

“The most important thing is to distinguish substance from form,” Assured Guaranty president Michael Schozer said. “I don’t believe we were out there selling Moody’s rating. We were selling our balance sheet.”

Moody’s announced Monday night it had placed both FSA and Assured on watch for possible downgrades from their existing triple-A ratings because of “elevated risks with the financial guaranty market” and within each company’s insured portfolio.

Although both companies had largely avoided exposure to the collateralized debt obligations of asset-backed securities that plagued previously downgraded insurers, Moody’s cited the shrinking demand for bond insurance and the difficulty and variability of loss estimations on certain products, which “may be inconsistent with the very low risk tolerance implied by a Aaa rating”.

In regards to Assured, Moody’s noted that the company exceeds the rating agency’s 1.3X target for capital adequacy at the triple-A level by $120 million. Its revised estimate of stress-case losses on Assured’s entire portfolio at a triple-A level would approximate $1.7 billion, compared to Assured’s total claims-paying resources of $2.4 billion, Moody’s said.

Moody’s estimated present value stress-case loss estimates on direct residential-mortgage based securities of $330 million for Assured and $250 million for AG Re — Assured Guaranty’s double-A rated reinsurer — little changed from previous tests. But Moody’s expressed concern about the future of Assured’s $40 billion of pooled corporate exposures, which “may be more sensitive to transaction or sector deteriorations.” Assured countered in a conference call held yesterday morning that Moody’s rates 95% of that portfolio, and 84% sits at a 'Aaa' level.

Executives at Assured said they believed Moody’s action is more about the rating agencies view on the entire bond insurance market, rather than Assured itself.

“We meet Moody’s triple-A capital requirements; therefore I believe the portfolio is extremely strong, well diversified, and very well underwritten,” said Dominic Frederico, chief executive officer of Assured Guaranty. Later he added about the corporate CDOs:  “It would be different if they didn’t rate it or it wasn’t rated triple-A currently. These are absolute ratings as of today. So I struggle with the model to be honest with you.”

The company also reported estimated earnings for the second quarter ending June 30. The company expects to report between $515 million and $565 million in income, thanks to after-tax unrealized gains on credit derivatives of between $475 million and $525 million.

Even with Assured’s comments, the stock plunged nearly 40% yesterday to $11.32 at the close, although it rebounded slightly from a loss of more than 50% earlier in the day. Andrew Wessel, an analyst with JPMorgan, also downgraded the stock to neutral from buy, writing in a report that “although we view the commentary from Moody’s as extremely vague, we feel the rating agency is taking an ultra-conservative stance given its sustained misjudgment of the larger and more troubled bond insurers over the last 12 months.”

But investor Wilbur Ross — who agreed to invest $1 billion in the company in February — backed Assured in an interview with Bloomberg TV. He has already invested $250 million, but a downgrade would give him the option of withholding a $750 million portion.

“There is no real justification for this review process, let alone for an actual downgrade,” Ross said. “I believe the outlook for the company is extraordinarily good.”

Regarding FSA, Moody’s outlook was less optimistic, noting FSA falls $140 million short of the 1.3X target for capital adequacy for a triple-A level. Moody’s revised stress-loss projections would approximate $5.1 billion at the triple-A level, compared to FSA’s estimated $6.5 billion in claims paying ability.

Moody’s cited increased estimates of present value and stress-loss levels in FSA’s direct RMBS portfolio, its $150 million in exposure to Jefferson County, Alabama, and its financial product portfolio as part of the reasons for its concerns. Dexia SA, FSA’s parent, recently saw its rating outlook changed to negative by Standard & Poor’s and Fitch Ratings due to worries about the impact of the deteriorating U.S. housing market on FSA’s earnings.

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