Fitch Takes Assured Guaranty Down Another Notch

Fitch Ratings downgraded the Insurer Financial Strength (IFS) rating of Assured Guaranty Corp. from double-A to double-A minus, and dropped the IFS rating of Financial Security Assurance from double-A plus to double-A. The Assured Guaranty rating cut comes as yet another blow to the bond insurer after several months of ratings actions that slashed the monoline from triple-A to double-A. The downgrades have a significant impact on Assured Guaranty’s business, since under the terms of monoline operations an insurer can not insure anything with a superior rating. Fitch’s downgrades reflect a heightened expectation of credit losses. Most of the claims activity from Assured Guranty and Financial Security Assurance stemmed from exposures to second-lien mortgages, according to a release. But in 2009, Fitch’s expectations fell for certain first-lien residential mortgage-backed securities (RMBS), and because of this, Fitch increased the expected loss estimates related to first-lien RMBS exposures, the rating agency said. “We are pleased that Assured Guaranty Corp. and FSA remain in the double-A rating category, a designation indicative of significant financial strength,” said Assured Guaranty’s president and CEO Dominic Frederico in a statement. “We believe the one-notch rating downgrades primarily incorporate Fitch’s stress loss estimates based on an extremely pessimistic view of the future performance of residential mortgage exposures and point out that Fitch noted our ability to mitigate potential future losses and improve rating agency capital.” Loss estimates are outpacing growth in paying resources, putting more pressure on Fitch’s revised performance expectations. The companies are focusing on mitigating losses on RMBS exposures, but Fitch reports that these efforts are focused on second-lien exposures where claims are already occurring. Fitch expects the companies to pursue loss mitigation rights on first-lien exposures as claims begin to emerge. Fitch also downgraded the debt ratings of Assured Guaranty US Holdings and Financial Security Assurance Holdings to single-A negative, and assigned a Negative Rating Outlook. Frederico said that the removal of the ratings from Rating Watch Negative to the longer-term designation gives more time for more clarity on the direction of the economy and the outlook of the RMBS portfolio versus estimates. “Despite the ratings uncertainty over the past few months, demand for our guaranty products has remained strong in the municipal market,” Frederico said. “Currently, we are subject to the sometimes conflicting and not readily transparent requirements of three disparate rating entities.” Write to Jon Prior.