Assured Guaranty Ltd. doesn’t like Standard & Poor’s new proposed rating methodology for bond insurers like (ahem) Assured Guaranty Ltd.
In fact, Assured’s CEO let rip in a Tuesday conference call:
Lastly, as the only active bond insurer today, we believe that our track record of maintaining operating profitability throughout the financial crisis speaks to the quality of our management team, the rigors of our risk management and underwriting process and the strength of our balance sheet. Based on our track record, it is hard to understand how we could be facing what would be our third S&P rating evaluation in just the last 12 months. Somewhere in this rating process, reality has to matter.
And well, he might take the S&P methodology personally, seeing as Assured is the last active bond insurer in the US market. It’s also already been stripped of its triple-A rating by S&P, so any further downgrades will basically spell the end.
Most of Frederico’s beef has to do with S&P’s proposed leverage test, which would require an insurer have a maximum leverage ratio of 75:1 on its municipal book and 20:1 on structured finance, to achieve a triple A at S&P. As Bond Buyer recounts, according to JP Morgan analysts, Assured’s actual leverage ratio was 101:1 as of the third quarter, suggesting its rating under the new criteria would be an A or A-.
Here’s Frederico on leverage:
On page 7 we refer to the leverage test. So, obviously, we’d applaud and agree that a leverage test would be a good tool to use as part of an overall rating evaluation. However, the leverage test that’s proposed only looks at a segment of our capital and specifically it excludes the unearned premium reserves. And as you all imagine, as you look at our book now being 75% municipal, the majority of that premium is paid up front. It represents cash or investments on our balance sheet in an offsetting reserve, it’s available and as typically any premium is to pay expenses, pay losses and to result in profits. And to exclude that when it’s available funds from any calculation of leverage we think is an oversight and is something that we would hope could be easily amended.
And also capital charges:
So on page 12, we highlight some of the capital charges proposed in the new regulation. As you can see the increases are somewhat substantial for a state general obligation, the BBB capital charge goes up 425%. The A capital charge goes up 500%. And once again these are percentage increases that we cannot find any historical or depression basis for. These things well exceed anything that would be experienced in any observed results including the depression of 1929 and we’ll talk about the Hempel Study for the Great Depression years.
And structured finance, with a little dig at S&P’s own ratings ability:
So as we look at the crisis there are two issues. The issues have caused significant harm. We appreciate that. But an overall increase of stress loss or capital levels of 10 times doesn’t appear justified, especially when you look at what is today still AAA-rated by both ourselves and S&P. And as we say in this slide, 59% of our structured finance portfolio is rated AAA and for that to have a ten-fold increase in capital charges doesn’t appear to be justified, rational or supportable by recognized or noted experience.
The full transcript in the usual place.
Related link:
Death throes of the monolines - FT Alphaville