Fitch Ratings announced that it has assigned an insurer financial strength (IFS) rating of ‘AAA’ to Assured Guaranty Corp. (AGC). Along with its affiliate company Assured Guaranty Re International (AGR), whose ‘AA’ IFS rating is affirmed. AGC is a wholly owned subsidiary of Assured Guaranty Ltd., a Bermuda-based holding company. The Rating Outlook for both AGC and AGR is Stable.
“The ‘AAA’ IFS rating for AGC reflects this company’s high credit quality insured portfolio, reduced risk profile compared with prior years, excess capital base sufficient to support current and future business, earnings from the existing business, improved corporate governance as a public company, and full service business platform,” said Fitch. “Concerns center on the highly competitive business environment in the financial guaranty universe, as well as an unproven track record as a primary company, below-average earnings prospects over the intermediate term, less diversified insured portfolio, and higher liquidity risk, all relative to its more established ‘AAA’ rated competitors.”
Fitch’s analysis also noted: “AGC’s improved credit profile is due in large part to the company’s transformation, stemming from its partial public offering of 65 percent from Ace Ltd. in April 2004. In conjunction with this restructuring AGC and its affiliate reinsurance company, AGR, exited various lines of business that would not typically be associated with an ‘AAA’ financial guaranty company. Additionally, AGC ceded or retroceded higher risk insured business to AGR, including single-name credit default swaps, health care, and layered and first-loss reinsurance from an unaffiliated ‘AAA’ primary company. Going forward, AGC is focused on underwriting high credit quality business on par with its more established ‘AAA’ competitors. Given AGC’s history as a monoline financial guaranty reinsurer, the majority of the company’s existing insured portfolio tends to be less diversified and more concentrated than its more established peers. As of year-end 2004, AGC’s net par outstanding that has been assumed from unaffiliated primaries was $51.3 billion or 69 percent of total net par outstanding.
“As of Dec. 31, 2004, AGC maintained $755 million of qualified statutory capital to support its business. When factoring in the $596 million of capital at AGR, the combined company had over $1.35 billion in statutory capital. AGC’s capital base was further supported by the recent issuance totaling $200 million of custodial trusts issued through Woodbourne Capital Trusts I-IV, pursuant to which AGC may, at its option, elect to put up to $200 million of its perpetual preferred stock to the four trusts. This issue is in addition to the existing $175 million of bank soft capital facilities available to the company. On a pro forma basis as of year-end 2004, the combined companies AGC and AGR are expected to have $2.78 billion in claims paying resources. The additional claims paying resources were a necessary component in AGC achieving an ‘AAA’ IFS rating from Fitch. In addition to the increased level of soft capital, AGR has recently engaged in several transactions with unaffiliated third parties that will reduce the capital requirements of the consolidated organization.
“Unlike a typical start-up company, AGC is generating profitability through its legacy business, but performance measures at AGC are expected to trail its established competitors over the intermediate term due to the impact of lower yielding reinsurance business and the existing tight credit spread environment. In addition, as a relative start-up in the primary financial guaranty sector, Fitch anticipates that AGC may need to be somewhat competitive on pricing to establish its name and trading value in the marketplace. Fitch does not believe that the historical performance trends for AGC will be indicative of future results as the type of business underwritten today is far less volatile than the business conducted under the previous ownership structure.”
Fitch said it “recognizes that AGC will be challenged to build its franchise and reputation on a par with its more established peers. In establishing its trading value in the market, Fitch anticipates that AGC will likely experience a trading disparity relative to the more established ‘AAA’ financial guarantors for some period of time. In prior years, most of AGC’s direct business was underwritten in credit derivative form. The company has, however, consciously moved to a financial guaranty focus and for 2004, 75 percent of its $13 billion of direct par written, was in financial guaranty form. While underwriting business in derivative form is generally the same from a default risk perspective, Fitch cautions that business written in such fashion may subject the company to increased liquidity risk, as the company could be required to pay claims immediately upon the notification of a default. Additionally, AGC is required to post collateral with various counterparties in the event of specified mark-to-market depreciation with its derivative exposures. Additionally, AGC is exposed to termination rights with several of their derivative counterparties, which could require them to immediately settle negative marks in the event AGC’s rating was lowered below specific levels. With that said, this risk is limited due to the quality of business underwritten by AGC. Additionally, where AGC underwrites new business in derivative form, it has been focused more recently on entering derivative transactions with counterparties who are not requiring collateral support arrangements.
“AGC is a financial guaranty insurance company providing predominantly direct credit enhancement protection to both structured and municipal finance, as well as a minimal amount of financial guaranty reinsurance to unaffiliated ‘AAA’ rated third party financial guarantors. As of year-end 2004, AGC maintained $74 billion of net par in force outstanding.”
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