Financial Security Assurance Inc, a holding company whose affiliates provide financial guarantees and financial products to clients in the public finance markets, disagrees with downgrade from Aaa to Aa3 issued by Moodys Investors Service.
Moodys ranked FSA as a company with developing outlook. I response to this statement FSA runs over several points in favour of Aaa rating of the company.
Conferring developing rating outlook to FSA, Moodys explained that FSA reflects a potential positive movement in the companys financial and business profile post-acquisition by Assured Guaranty, assuming FSA is capitalized and positioned as an ongoing writer of high-quality financial guaranty insurance within the group. FSA continues to be rated AAA/Negative Watch by Fitch Ratings (Fitch) and Standard & Poors Ratings Services (S&P).
In the same rating action, Moodys downgraded the debt ratings of FSA Holdings to A3 from Aa2.
According to FSA company continues to play significant role in lowering borrowing costs for well-run, well-structured public finance issuers, while providing experienced credit selection, negotiation of terms, remediation and payment of claims when necessary for the protection of municipal investors. Further, highly rated municipal bond insurance brings much needed liquidity to the U.S. municipal market, helping, in particular, small and medium-sized municipalities to issue bonds on favorable terms and at fair cost to taxpayers.
FSA declares to be able to meet future policyholder claims with certainty given the unique characteristics of our business model. In contrast to highly rated industrials or other financial institutions, financial guaranty insurers do not rely on future new business generation or future access to capital to support current policyholder claims, but derive revenues largely from the amortization of upfront premiums, installment payments and investment earnings, which are highly predictable. Further, FSAs focus on public sector credits will minimize future volatility.
FSA possesses a strong, balanced public finance franchise in both the U.S. and international markets with first in category market recognition. The decrease in total U.S. municipal insurance penetration to 20% -25% witnessed this year represents a rational allocation of insurance capacity by FSA and Assured Guaranty versus the 50% penetration in recent years shared by seven companies.
U.S. municipal credit spreads widened significantly year-to-date, primarily due to municipal investors increasing focus on underlying issuer credit fundamentals determine the premium potential available to a financial guarantor.
Also FSA indicated the growth in infrastructure finance business. In this market, there has been significant demand for FSA fundamental value proposition based on the complexity of the transactions, and unwrapped capital markets executions for most issuers have not been an option.
Concerning portfolio credit characteristics Moodys mentioned, FSAs disciplined underwriting strategy and active participation in the municipal market have resulted in a generally high-quality and diversified insured portfolio beyond the mortgage-related exposures.
FSA has established significant reserves for expected future losses, primarily for the HELOCs, Option ARM and Alt-A first lien portfolio, that should substantially mitigate the need for further RMBS loss reserves. Pooled corporate risk, a large segment of the ABS portfolio, is high credit quality and runs off rapidly. Consumer receivables and other non-municipal exposures represent a small percentage of the portfolio and, show no signs of credit deterioration. All exposures that have experienced any significant declines in credit or rating migration have been assigned Triple-A stress loss assumptions. FSA has almost no exposure to CDOs of ABS or CDOs of CDOs.
During the first nine months of 2008 and the third quarter FSA achieved a positive economic return on deployed equity for new municipal originations of over 20%. More importantly, our long-term profitability will be driven by over $3.7 billion of future earnings on existing business, as well as investment returns on our $5.9 billion investment portfolio. So profitability can not be called Achilles’ heel.
Commenting on financial flexibility FSA noticed that its run-off of ABS/RMBS exposure over the next three-to-five years will generate in excess of $620 million of earned revenue over the remaining life of the policies. Approximately $1 billion of risk-based capital will be released as the portfolio runs off over the next three to five years. Near-term, attractively priced municipal premiums are accretive to claims paying resources.
There is also additional debt or hybrid equity capacity at the holding company, which can be utilized when appropriate. Given the extreme impact of the current market conditions on many other industries, FSA is in a much stronger position than other types of financial institutions.
We disagree with Moodys on a number of points and believe that the downgrade to Aa3 reflects hypotheses about future market and credit environments rather than the fundamental credit strength of the company, says Robert P. Cochran, chairman and chief executive officer, Financial Security Assurance Holdings. Based on its Special Comment on the financial guaranty industry published yesterday, it appears that Moodys has moved in the direction of believing that no financial guaranty company can be rated Aaa.
L.D.