|[January 18, 2013]
Assured Guaranty Disputes Moody's Rating Decision and Announces Future Actions
HAMILTON, Bermuda --(Business Wire)--
Assured Guaranty Ltd. (together with its subsidiaries, Assured Guaranty
or the Company) (NYSE:AGO) today released the following statement by
Dominic Frederico, President and Chief Executive Officer, in response to
the announcement by Moody's Investors Service Inc. (Moody's) of new
credit ratings for Assured Guaranty and its subsidiaries, including
revised insurance financial strength ratings of A2 (stable outlook) for
Assured Guaranty Municipal Corp. (AGM), A3 (stable outlook) for Assured
Guaranty Corp. (AGC) and Baa1 (stable outlook) for Assured Guaranty Re
Ltd. (AG Re):
"We strongly disagree with Moody's assignment of an A2 rating to AGM,
especially given Moody's statements in its own release that AGM has
capital adequacy 'corresponding to a high Aa score' and insured
portfolio characteristics that are 'high investment grade.' Moody's
based its downgrade on its subjective, qualitative factors of 'Franchise
Value and Strategy,' 'Profitability' and 'Financial Flexibility,' which
we will refute later in this release.
"Moody's ratings now appear to be determined by unsupported qualitative
factors and assumptions about future product demand, future
profitability and future stock price that have little or no relevance to
the Company's actual ability to meet all of its financial obligations
with the highest certainty. When a company's financial strength and the
quality of its insured portfolio are no longer the dominant factors in
its 'financial strength rating,' there is a serious flaw in the rating
process. A close reading of Moody's release also reveals contradictions
and inconsistencies that essentially discredit it.
"After announcing its credit watch for Assured Guaranty companies in
March 2012, Moody's published a Summary Rating Rationale, which cited
their key rating factors, including their qualitative factors, and
placed AGM and AGC clearly in the Aa category. In yesterday's report,
Moody's rated our performance on those same qualitative factors
significantly below where Moody's rated them just ten months ago, even
though our actual performance on each of those factors has since been
stable or improved and there is general agreement, even at Moody's, that
the economy has improved. This is further evidence that a downgrade is
"Another troubling aspect of Moody's rating process is that it was
conducted without the transparency mandated under the Dodd-Frank Act and
required by Moody's own Professional Code of Conduct, which is posted on
Moody's website.1 Specifically, Moody's still has not shared
material capital model results with us, despite our repeated requests
throughout the process. As importantly, on the limited information
provided, Moody's would not discuss underlying assumptions used to
achieve these summary results nor assure us that all Moody's rated
companies are stressed similarly.
"If we look at the three years since our last detailed Moody's review,
when AGM and AGC were assigned ratings of Aa3, we have materially
increased our financial strength while significantly decreasing our
insured exposures. During this period of global financial stress,
Assured Guaranty produced a total of $1.8 billion in operating earnings.
We increased statutory capital by $1.4 billion and decreased our
statutory insured par in force by $116 billion, which included an $11.1
billion reduction of U.S. residential mortgage-backed securities (RMBS).
Currently, 22% of our remaining U.S. RMBS par exposure is covered by
loss mitigation agreements, further protecting Assured Guaranty's
capital. Our solid capital position and decreasing exposure over this
time period has also resulted in a 38% reduction in our insured
leverage. We also held total claims-paying resources at approximately
$12.5 billion even after paying over $3.0 billion (before R&W
recoveries) to protect policyholders. These strong results certainly
should have led, at a minimum, to a rating affirmation.
"Additionally, over the last three years, representation and warranty
(R&W) providers have paid or agreed to pay $2.7 billion for R&W breaches
in our insured RMBS, bringing the total to date to $2.8 billion,
significantly curtailing our exposure to future adverse development in
this asset class. We have further opportunities to recover more losses
from the R&W providers who have not settled but are subject to
outstanding litigation that has so far been favorable for financial
guarantors. This should further contribute to maintaining capital
"As to market penetration, we have been facing an extraordinarily
challenging business environment, with historic low interest rates,
tight credit spreads and ratings reviews. Moody's seems to believe this
market environment is permanent, even though their own review for
downgrade further contributed to our challenging conditions, creating a
self-fulfilling prophecy with respect to new business levels. Despite
those conditions, we have selectively insured over 4,000 municipal
transactions sold in the primary market, exceeding $57 billion in par,
while maintaining our credit underwriting standards and improving our
pricing. This demonstrates both the fundamental demand for our guaranty
and our underwriting discipline. We believe Moody's should view our
restraint under these conditions positively and certainly not assume
these market conditions are permanent.
"Our more than $4.9 billion of net deferred premium revenue and
approximately $400 million of annual investment income provide a solid
base of earnings for years to come, giving us the flexibility to pursue
only business that meets our rigorous underwriting standards.
"We are confident about our ability to serve our markets and build our
business based on our proven value proposition and our track record of
solid performance. We also have confidence that, irrespective of Moody's
action, informed issuers and investors understand our true strength and
the value our guaranty provides."
Today, Assured Guaranty's Board of Directors authorized a $200 million
share repurchase program.2 This latest repurchase program
replaces the prior authorization, under which Assured Guaranty
repurchased approximately 2.1 million common shares out of the 5 million
common shares authorized. The funds for this program will be provided by
the parent holding company, Assured Guaranty Ltd., and will have no
impact on the capital resources of the financial guaranty subsidiaries.
Additionally, the Company:
intends to launch during 2013 a new municipal-only financial guaranty
insurer to increase its penetration in the public finance market; it
will not carry a Moody's rating;
will continue to pursue strategic insured bond purchases and
consensual transaction terminations on favorable terms; and
will develop plans to increase capital flexibility within the Assured
Guaranty group while maintaining the highest possible ratings at its
principal operating companies.
Assured Guaranty's Specific Responses to Moody's Key Factor Comments:
Moody's wrote: "Factor 1: Franchise Value and Strategy -
Moody's assessment of this factor balances AGM's position as the sole
active financial guarantor to survive the 2007-2009 US financial crisis
intact against the dramatic decline of the industry. Structured
finance business, which accounted for a meaningful portion of AGM's
pre-crisis activity, has virtually isappeared. The target market
for insuring US public finance issuance (now primarily mid-to-low
investment grade municipal bonds) has also declined, and is now less
than one-third its size in 2006. While AGM benefits from its
position as the most active player in a smaller industry, its overall
business activity, as measured by the present value of gross premiums
written, remains well below pre-crisis levels. The secular narrowing of
its business opportunities and related pressure on value creation result
in our low investment-grade (Baa) assessment of this rating factor."
Assured Guaranty response:
Ten months ago, Moody's assessed AGM's Franchise Value and Strategy as
single-A (a full ratings grade higher).
Despite having been on rating review for most of the year, facing
historic low interest rates and tight credit spreads -- AGM insured
1,160 credits in 2012 in the primary market, representing $13 billion
in par insured.
In the secondary market, we issued 610 policies representing an
additional $1.3 billion of par in 2012.
Moody's wrote: "Factor 2: Insurance Portfolio Characteristics
- AGM's insured portfolio is somewhat bifurcated from a risk
perspective, with a historically low-loss core municipal book as well as
exposure to certain sectors and credits experiencing material credit
stress. Based on Assured Guaranty's internal ratings, the portion
of AGM's 3Q2012 insured net par outstanding considered below investment
grade was roughly 3.3%. Under Moody's scenario analyses, AGM's
credit risk ratio (expected loss) and tail risk ratio (stress case loss)
were also consistent with a high investment-grade score for this factor.
In developing these estimates, certain adjustments were made to input
parameters for Moody's Portfolio Risk Model to account for the 2010
recalibration of Moody's US public finance ratings to the global scale.
However, the portfolio does have material exposure to legacy
mortgage-related risks, which are highly sensitive to weakness in the
macroeconomic environment, and large risks among individual municipal
credits. We therefore consider the company's portfolio
characteristics score to be in the A rating range."
Assured Guaranty response:
Ten months ago, Moody's assessed AGM's Insurance Portfolio
Characteristics as Aa (a full ratings grade higher).
Since then, the percentage of AGM's net par outstanding rated below
investment grade has gone down from 3.6% to 3.3%, a decrease of $1.5
From year-end 2011 to third quarter 2012, Assured Guaranty's statutory
net par to statutory capital has improved from 95:1 to 88:1.
From year-end 2011 to third quarter 2012, Assured Guaranty's
below-investment-grade U.S. RMBS net par outstanding has gone down
from $13.2 billion to $11.5 billion, and at third quarter 2012, $4.2
billion of Assured Guaranty's $19.1 billion of U.S. RMBS net par was
covered by loss mitigation agreements.
Based on the limited data provided by Moody's, it appears that their
concern over RMBS exposures is related to their stress loss estimates,
which we calculated could arise only if over 80% of all mortgages
remaining in our portfolio default. This is an unrealistic assumption.
Such a catastrophic scenario would raise serious questions as to the
viability of our national and local governments, the private sector
and the economy in general. Applying such extreme modeling assumptions
selectively to Assured Guaranty is clearly inconsistent with rating
methodologies that purportedly produce rating consistency across
Moody's single-scale rated universe. We are aware of no other credit
that Moody's requires to survive such adverse conditions in order to
be rated in the Aa range.
Most market analysts have stated they believe the housing market has
clearly turned the corner into recovery. Moody's Analytics' chief
economist wrote last month that "housing is turning from an economic
headwind into a tailwind."
Moody's wrote: "Factor 3: Capital Adequacy - Our assessment of
AGM's point-in-time capital adequacy is very strong, reflecting the
relative emphasis on municipal risks as well as loss-mitigation
activities related to RMBS. Based on our base case estimated loss
distribution, AGM holds claims-paying resources sufficient to cover
losses at a confidence level corresponding to a high Aa score. In
this analysis, insured RMBS and certain other stressed exposures are
excluded from our Portfolio Risk Model, in order to allow for a separate
detailed loss assessment of those transactions. Potential losses
estimated for these stressed exposures are then combined with the
modeled losses on remaining exposures to derive an aggregate loss
distribution for the overall portfolio. However, estimates of
capitalization can vary considerably based on underlying assumptions
about default probability, loss-given default, and correlation. This
kind of variability, leads us to assess capitalization somewhat more
conservatively than modeling might suggest, but still in the Aa range
for this factor."
Assured Guaranty response:
Ten months ago, Moody's assessed AGM's capital adequacy as Aa
Moody's assessment of AGM's capital adequacy and their poorly
disclosed changes to their capital risk model violate transparency
requirements of their own policies as well as those of the Dodd-Frank
We note that their language suggests their Portfolio Risk Model
yielded an even better result for AGM than their assessment indicates.
Moody's wrote: "Factor 4: Profitability - AGM sustained large
losses during the financial crisis as a result of claims related to
mortgage securitizations. However, profitability has rebounded in
recent periods. For the three years ended December 31, 2011, AGM
recorded an average statutory return on equity of 15.7%, aided by
representation and warranties recoveries from mortgage originators and
sponsors of RMBS. Profitability has also been enhanced by large
opportunistic purchases of AGM-insured RMBS securities at deep
discounts, which are financially beneficial but suggest a lack of
investor confidence. Evaluated over longer time horizons,
however, profitability has weakened notably, with 5-year and 10-year
average statutory returns on equity at 0.5% and 6.8%, respectively,
which lags those of its specialty insurance and reinsurance peers and,
given the low levels of new business production, we believe AGM's
profitability will remain under pressure. Consequently, Moody's
views AGM's profitability to be consistent with a score in the single-A
Assured Guaranty response:
Ten months ago, Moody's assessed AGM's profitability as Aa (a full
ratings grade higher).
AGM's profitability has remained relatively stable since then.
Moody's points to AGM's return on statutory capital of 15.7% for the
three years ending December 2011 and then needs to go back to
five-year and 10-year averages to justify its assessment. If Moody's
wants to base our ratings on the future, how does what happened five
or ten years ago matter This is an instance of selective
Concern over future profitability ignores Assured Guaranty's $4.9
billion of net deferred premium revenue, which will protect Assured
Guaranty's earnings for five to eight years - a claim no other
specialty insurer can make.
Moody's wrote: "Factor 5: Financial Flexibility - AGM's
financial leverage is characterized by a relatively modest debt load,
and operating earnings coverage has been relatively strong over the past
three years. As with profitability, however, earnings coverage is
weaker when a longer time frame (e.g. five years) is considered. More
importantly, in our view, various market indicators (such as the firm's
low stock price relative to operating book value per share, and its
elevated CDS spreads) suggest that the firm's financial flexibility in
accessing new funds on a cost-effective basis could be quite constrained.
For these reasons, we score AGM's financial flexibility in the Baa
Ten months ago, Moody's rated AGM's financial flexibility Aa (two full
ratings grades higher).
Since then, AGM's CDS spreads have come in by 24%.
Assured Guaranty has demonstrated throughout the credit crisis its
ability to access capital in the market when needed.
Since December 2007, Assured Guaranty has raised over $1.7 billion in
equity and debt securities through multiple transactions and also
executed an innovative $435 million reinsurance contract.
Given our "high Aa" capital position, there has been no need to raise
capital during the last 10 months.
"In light of Moody's need to rely on subjective, qualitative factors to
arrive at these ratings," added Mr. Frederico, "we can only conclude
that Moody's has chosen to make assessments that do not reflect reality
in order to reach a predetermined conclusion.
"We believe Moody's action negatively impacts all investors and
encourage all affected parties to write Moody's Board of Directors, the
SEC (News - Alert) and Treasury to prevent, in the future, unjustified, unsupported and
inconsistent ratings impacting the market.
1 According to its Code of Professional Conduct, Moody's
"will publicly disclose… any material modifications to its rating
methodologies and related significant practices, procedures, and
processes," make "such material modifications…subject to a 'request for
comment' from market participants prior to their implementation" where
feasible and appropriate, and "will publish sufficient information about
its loss expectations and cash flow analysis relating to a structured
finance Credit Rating so that a financial market professional can
understand the basis for the Credit Rating." The code may be found at http://www.moodys.com/Pages/reg001003.aspx.
2 This repurchase authorization may be implemented in the
open market, in privately negotiated transactions, block trades,
accelerated repurchases and/or through option or other forward
Assured Guaranty Ltd. is a publicly traded Bermuda-based holding
company. Its operating subsidiaries provide credit enhancement products
to the U.S. and international public finance, infrastructure and
structured finance markets. More information on Assured Guaranty and its
subsidiaries can be found at www.assuredguaranty.com.
Cautionary Statement Regarding Forward-Looking Statements:
Any forward-looking statements made in this press release reflect the
Company's current views with respect to future events and financial
performance and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements
involve risks and uncertainties that may cause actual results to differ
materially from those set forth in these statements. For example,
Assured Guaranty's expectations about its future R&W recoveries,
including from litigation, demand for its insurance, future losses in
its insured portfolio, its ability to obtain capital from external
sources, its ability to pursue strategic initiatives and other
forward-looking statements could be affected by a rating agency action,
including a ratings downgrade, a change in outlook, the placement of
ratings on watch for downgrade, or a change in rating criteria, at any
time, of Assured Guaranty or any of its subsidiaries and/or of
transactions that Assured Guaranty's subsidiaries have insured, all of
which have occurred in the past, and may occur again in the future,
developments in the world's financial and capital markets that adversely
affect issuers' payment rates, Assured Guaranty's loss experience, its
access to capital, its unrealized (losses) gains on derivative financial
instruments or its investment returns, changes in the world's credit
markets, segments thereof or general economic conditions, the impact of
ratings agency action with respect to sovereign debt and the resulting
effect on the value of securities in the Company's investment portfolio
and collateral posted by and to the Company, more severe or frequent
losses implicating the adequacy of Assured Guaranty's expected loss
estimates, the impact of market volatility on the mark-to-market of the
Company's contracts written in credit default swap form, reduction in
the amount of insurance opportunities available to the Company,
deterioration in the financial condition of the Company's reinsurers,
the amount and timing of reinsurance recoverables actually received, the
risk that reinsurers may dispute amounts owed to the Company under its
reinsurance agreements, the possibility that the Company will not
realize insurance loss recoveries or damages expected from originators,
sellers, sponsors, underwriters or servicers of residential
mortgage-backed securities transactions, the possibility that budget
shortfalls or other factors will result in credit losses or impairments
on obligations of state and local governments that the Company insures
or reinsures, increased competition, including from new entrants into
the financial guaranty industry, changes in accounting policies or
practices, changes in laws or regulations, other governmental actions,
difficulties with the execution of Assured Guaranty's business strategy,
contract cancellations, Assured Guaranty's dependence on customers, loss
of key personnel, adverse technological developments, the effects of
mergers, acquisitions and divestitures, natural or man-made
catastrophes, other risks and uncertainties that have not been
identified at this time, management's response to these factors, and
other risk factors identified in Assured Guaranty's filings with the
Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements. These
forward-looking statements are made as of January 18, 2013, and Assured
Guaranty undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
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