Bond Insurance and the Great Recession

Beginning in 2007 insurers' credit ratings came under review due to subprime mortgage exposure. This exposure threatens the insurers claims paying ability and resulted in rating downgrades.  In 2007, there were seven insurers rated triple-A by the three major rating agencies. Today none of the insurers are triple-A rated. The following is a description of some of the significant rating actions as well as actions taken by insurers since October 2007. 

In a press release dated November 5, 2007, Fitch Ratings announced that it is updating its analysis of structured financial collateralized debt obligations  (SFCDOs) insured by the financial guaranty industry (bond insurers).  The analysis relates to SFCDOs exposure to subprime residential mortgage backed securities. The analysis could result in insurers being placed on "Rating Watch Negative" and rating downgrades. [11/06/2007]

ACA Capital has been placed on Standard & Poor's "Credit Watch" with negative implications. The action follows ACA's reported $1 billion quarterly loss this week primarily due to unrealized mark-to-market losses on the Company's portfolio of Structured Credit transactions.  In its press release, ACA stated that "These unrealized losses were a direct result of the ongoing turmoil in the residential mortgage-backed securities market and the resulting depressed market valuations." [11/09/2007]

On November 8, 2007, Moody's announced that it will be evaluating the financial guarantors. In its press release Moody's indicated that it will be re-estimating capital adequacy ratios to reflect deterioration in the expected performance of credits in the guarantors’ insured portfolios, as well as updating Moody’s previous stress testing by determining the impact of higher subprime loss assumptions on the guarantors’ exposures to residential mortgage-backed securities and collateralized debt obligations of asset-backed securities.

On Thursday, November 22, it was announced that the French companies Banque Populaire and Caisse d'Epargne will buy out Natixis bank's bond insurer CIFG.  In addition, the firms will provide an estimated $1.5 billion capital injection to CIFG in order for the bond insurer to retain its AAA Fitch rating. [11/25/2007] 

On Friday, December 14, 2007, Moody's completed its evaluation of the ratings of financial guaranty companies.  As noted in their press release "The following actions are the result of that evaluation. The Aaa ratings of Financial Guaranty Insurance Company and XL Capital Assurance Inc. were placed on review for possible downgrade. The Aaa ratings of MBIA Insurance Corporation and CIFG Guaranty were affirmed, but the rating outlooks changed to negative. The Aaa ratings of Ambac Assurance Corporation, Assured Guaranty Corp, and Financial Security Assurance Inc. and the Aa3 rating of Radian Asset Assurance were all affirmed with a stable outlook."  For the companies under review, Moody's will assess the effectiveness of the companies' capital remediation plans and risk management strategies over the next few months to determine whether to confirm or downgrade ratings.   [12/15/2007] 

On December 19, 2007, Standard & Poor's completed its evaluation of the ratings of financial guaranty companies.  Standard & Poor's took the following actions: ACA Financial Guaranty was downgraded from A to CCC, Ambac Assurance Corp was rated AAA/Negative, Financial Guaranty Insurance Co. was rated AAA/WatchNegative, MBIA Insurance Corp. was rated AAA/Negative, XL Capital Assurance Inc. was rated AAA/Negative, Assured Guaranty was rated AAA/Stable, CIFG Guaranty was rated AAA/Negative, Financial Security Assurance Inc. was rated AAA/Stable and Radian Asset Assurance Inc. maintained its rating of AA/Stable.  [12/20/2007] 

On December 20, 2007, Fitch Ratings placed MBIA Insurance Corp. on negative watch. Fitch indicated that in the next four to six weeks MBIA's rating would be returned to a stable outlook if the company obtains further capital or puts into place reinsurance or other risk mitigation measures. Earlier this week MBIA disclosed that it has a $30.6 billion exposure to collateralized debt obligations potentially tied to subprime mortgages. The CDOs include various CDO-squared securities. [12/21/2007] 

On December 21, 2007, Fitch Ratings placed AMBAC Assurance Corp. on negative watch. Fitch indicated that in the next four to six weeks AMBAC's rating would be returned to a stable outlook if the company obtains further capital or puts into place reinsurance or other risk mitigation measures. Fitch indicated that in its model, AMBAC has approximately a $1 billion capital shortfall and that without the additional capital Fitch would expect to downgrade the rating to AA+. [12/26/2007] 

Warren Buffett's Berkshire Hathaway Inc. is starting a new bond insurer.  The insurer, Berkshire Hathaway Assurance Corp received a license on Friday. [12/29/2007] 

On Wednesday, Fitch Ratings affirmed MBIA's AAA rating with a stable outlook.  In contrast, today Moody's Investors Service placed MBIA on review for a possible rating downgrade. In addition, Moody's placed AMBAC on review for a possible rating downgrade yesterday. Also on January 16, 2008, Standard & Poor's announced that it is reexamining all bond insurers after determining that losses from subprime mortgages will be worse than anticipated. [1/17/2008]

On January 18, 2008, Fitch Ratings downgraded AMBAC's rating to AA while continuing to leave the company on Negative Rating Watch.  In its release, Fitch stated that the decision to downgrade the rating by two notches and the continuation of the Negative Rating Watch "reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction; uncertain capital markets and the impact of Ambac's recent decisions on future financial flexibility; the company's future capital strategy; ultimate loss levels in its insured portfolio; and the challenges in the financial guaranty market overall." AMBAC abandoned plans this week to raise $1 billion in capital after a 70 percent decline in its shares during the prior two days. [1/20/2008]

On January 24, 2008, Fitch Ratings downgraded XL Capital Assurance's rating to A while continuing to leave the company on Negative Rating Watch.  In its release, Fitch stated that the decision to downgrade the rating came after its parent company Security Capital Assurance announced that it would not raise additional capital at the present time. [1/25/2008]

On February 5, 2008, Fitch Ratings placed MBIA and CIFG Financial Guaranty on Rating Watch Negative. The action comes less than a month after Fitch had confirmed MBIA's rating as stable.  Fitch also released an announcement regarding the next phase of its analysis of financial guarantors.  In its announcement, Fitch indicated that "in light of consensus movement towards a view of increased loss projections for U.S. subprime residential mortgage backed securities (RMBS) that is now held by various market participants and observers, including Fitch, that the agency will be updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry. Fitch believes it is possible that modeled losses for structured finance collateralized debt obligations (SF CDOs) could increase materially as a result of these updated projections. The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the U.S., and the speed with which adverse information on underlying mortgage performance is becoming available." Fitch also indicated that "A material increase in claim payments would be inconsistent with 'AAA' ratings standards for financial guarantors, and could potentially call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels." [2/05/2008]

As bond insurance ratings continue to be reviewed, New York Governor Elliot Spitzer and other witnesses testified on the insurance problem before Congress today.  Spitzer suggested that the bond insurance problem could become a "financial tsunami" that causes damage throughout the economy.  [2/14/2008]

On February 22, 2008 Moody's Investors Service placed CIFG under review for a possible rating downgrade.  Moody's indicated that "The rating action reflects the weakened capital profile of the group as a result of its mortgage and mortgage-related CDO exposures, as well as uncertainty over CIFG's future strategic direction."  Moody's also indicated that although CIFG increased capital by $1.5 billion in December, the company's capital is no longer adequate at the Aaa level due to continued deterioration of the mortgage markets.  [2/22/2008]

On February 25, 2008 Standard & Poor's Rating Services announced several rating actions which included lowering the rating of Financial Guaranty Insurance Co. to 'A' and lowering the rating of XL Capital Assurance Inc. to 'A-'.  [2/25/2008]

On March 6, 2008 Moody's Investors Service downgraded CIFG Guaranty's rating from Aaa to A1 with a stable outlook. CIFG is the smallest and most recent entrant to the financial guaranty sector. In its release, Moody's said "Although capitalization is not currently a constraint on the rating, Moody's believes that, short of a major strengthening in the firm's operations, meaningful gains in franchise value, and long term support from strong and committed parents, CIFG is unlikely to establish a credit profile consistent with a higher rating in the near term." 

Also this week, Ambac Financial Group raised $1.5 billion in a sale of shares and convertible units.  On March 5, 2008, Moody's indicated that "Moody's believes a "successful equity offering, in combination with Ambac's other capital strengthening activities and risk management initiatives, would likely result in the confirmation of Ambac's Aaa insurance financial strength rating."  [3/07/2008]

On Friday, March 7, Fitch Ratings downgraded CIFG Guaranty's rating from Aaa to AA- while retaining a negative watch. Also last week, MBIA requested to have its Fitch rating withdrawn. MBIA indicated that "Fitch's ratings process differs in many significant respects from those of the other rating agencies, which affects how investors assess value."  [3/09/2008]

On March 12, several actions were taken on insurers' ratings. Fitch Ratings affirmed Ambac Assurance Corp.'s AA rating with a negative outlook, Standard & Poor's downgraded CIFG Guaranty's rating from Aaa to A+ while retaining a negative watch, and Moody's Investors Service confirmed Ambac's Aaa rating with a negative outlook.  Congressional hearings are now underway addressing the current status of bond insurers and the current turmoil in the municipal market.  [3/13/2008]

On March 24, 2008, Standard & Poor's placed Financial Guaranty Insurance Co. (FGIC) on CreditWatch with negative implications.  This action follows several rating downgrades from AAA to A. On March 17 FGIC announced that it had stopped writing new financial guaranty business in an effort to preserve capital.  The company has also told New York regulators that it may spit into two units: a unit with subprime-exposed structured finance and a municipal bond insurance unit.  [3/24/2008]

On March 26, 2008, Fitch Ratings downgraded Financial Guaranty Insurance Co. ("FGIC") to BBB, with a negative outlook, from AA.  In its release, Fitch noted that "FGIC's $5 billion claims paying resources as of Sept. 30, 2007 is commensurate with capital guidelines for a 'BBB' IFS rating."  Also on March 26 Fitch downgraded XL Capital to BB, with a negative outlook, from A.  [3/27/2008]

On March 31, 2008, Fitch Ratings downgraded CIFG Guaranty. to A-, with a negative outlook, from AA-.  In its release, Fitch noted that "The downgrade of CIFG and its affiliates is based on Fitch's updated assessment of CIFG's capital position, a review by Fitch of CIFG's updated business plan, consideration of various qualitative ratings factors, and an update on Fitch's current views of U.S. subprime related risks."  Also on March 31, Moody's downgraded FGIC to Baa3 while retaining it on review for possible downgrade.  [4/01/2008]

On April 4, 2008, Fitch Ratings downgraded MBIA Insurance Corp. to AA, with a negative outlook, from AAA.  In its release, Fitch noted that "This action follows Fitch's placement of MBIA's ratings on Rating Watch Negative on Feb. 5, 2008, and is based on Fitch's current views on capital adequacy, the company's updated business plan, consideration of various qualitative ratings factors, an update on Fitch's current views of the portfolio quality of MBIA's insured portfolio, and an analysis of MBIA Inc.'s investment management service (IMS) operations and holding company activities."  [4/05/2008]  

Financial Security Assurance Inc. (FSA), one of only two bond insurers to remain AAA rated by Fitch, Moody's and Standard & Poor's, announced a first quarter loss of $421.6 million today. Moody's announced that it will reassess FSA's mortgage exposure risk.  According to Moody's "The company incurred significant losses during the first quarter, with $333 million of loss reserve charges on direct home equity lines of credit and closed-end second lien residential mortgage-backed securities."  [5/14/2008]  

Today Moody's Investors Service downgraded the insurance financial strength rating of CIFG Assurance to Ba2, from A1, and kept the rating under review with direction uncertain.  Moody's said that "the rating actions reflect the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements in New York and Bermuda due to expected significant increases in modeled loss reserves on ABS CDOs."  [5/21/2008]  

On Friday, Fitch Ratings downgraded the insurance financial strength rating of CIFG Assurance to CCC, from A-, and kept the rating under review on "Rating Watch Evolving."  Fitch said "The downgrade is based, in part, on recent conversations with CIFG's management, in which the company has indicated it could be at greater risk of falling below regulatory minimum capital requirements, if the company's loss provisions increase in future periods which could trigger an insolvency proceeding by regulators."  [6/01/2008]  

On June 4, 2008, Moody's Investors Service placed Ambac Assurance Corp. and  MBIA Insurance Corp. on review for a possible downgrade. With respect to Ambac, Moody's noted that "The action reflects growing concerns over Ambac's overall credit profile, including significantly constrained new business prospects and financial flexibility, as well as possible increased expected and stress loss projections among its mortgage-related exposures."  With respect to MBIA, Moody's noted that "We place MBIAs Aaa insurance financial strength rating on review for downgrade given the company's diminished new business prospects and financial flexibility, coupled with the potential for higher expected and stress losses within the insurance portfolio. A downgrade is the most likely outcome of this review, with the strength rating likely to fall within the Aa range, although a downgrade to single-A is also possible." [6/05/2008]  

This week The Bond Buyer  released an article on the rankings of Municipal Bond Insurers for the first half of 2008.  It was no surprise that Financial Security Assurance (FSA) lead with 1,099 issues and Assured Guaranty Corp was second with 486 issues.  Other previously AAA insured insurers came in as follows: MBIA 35, Ambac 29, FGIC 2, CIFG 7 and XL Capital 3.  In addition, the volume of insured issues is down substantially.  Through June, $53.7 billion of issues were insured compared to $122.5 billion by June of 2007.  [7/20/2008]  

On July 21, 2008 Moody's Investors Service placed the Aaa insurance financial strength ratings of Financial Security Assurance Inc. (FSA) and Assured Guaranty Corp under review for a possible downgrade.  FSA and Assured Guaranty are presently the only remaining firms that have triple-A ratings from the three major rating agencies. As noted above, FSA and Assured Guaranty now dominate the bond insurance market.  However, in addition to reviewing each of the companies portfolios, Moody's noted that "the review for downgrade also reflects the significant reduction in overall market demand for financial guaranty enhancement."
[7/23/2008]  

On July 29, 2008 Moody's Investors Service placed the insurance financial strength rating of XL Capital Assurance on rating review with direction uncertain and Fitch Ratings downgraded XL from BB to CCC with evolving credit watch. The rating change follows the completion of agreements with Security Capital Assurance and Merrill Lynch that are intended to boast capital. [7/30/2008]

On August 2008 Standard & Poor's confirmed the AA rating of Financial Security Assurance while changing the outlook to negative from stable. The negative outlook reflects the possibility that the market for FSA's bond insurance may diminish. [8/06/2008]

On September 18, 2008 Moody's Investors Service placed the Aa3 insurance financial strength rating of Ambac Assurance Corporation and the A2 insurance financial strength rating of MBIA Insurance Corporation (MBIA) on review for possible downgrade. The action follows Moody's upward revision to cumulative loss projections for subprime RMBS exposure. In its press release, Moody's also noted that the review of Financial Security Assurance and Assured Guaranty are expected to conclude shortly. (See the "Subprime Glossary" for a definition of RMBS.) [9/21/2008]

Today Standard & Poor's placed Financial Security Assurance (FSA) on CreditWatch Negative. The action came after FSA's parent company Dexia was downgraded.  Standard & Poor's noted that FSA's franchise has been damaged by its mortgage-related losses and that "Now, with the additional uncertainty about Dexia's credit profile and, potentially, its strategic direction, business prospects for FSA could be further impaired."
[10/08/2008]

Today Fitch placed Financial Security Assurance (FSA) on Watch Negative. The action is due to the uncertainty regarding the support that will be provided by its parent company Dexia as well as continued challenges to FSA's core franchise.  Fitch noted that if downgraded it is unlikely that the rating would fall below AA. 
[10/09/2008]

Today Moody's downgraded Ambac to Baa1 with outlook developing. In its release, Moody's indicated that rating action reflects "Ambac's diminished business and financial profile resulting from its exposure to losses from US mortgage risks and disruption in the financial guaranty business more broadly."   [11/05/2008]

Today Moody's downgraded MBIA to Baa1 with outlook developing. In its release, Moody's indicated that rating action reflects "Today's rating action concludes a review for possible downgrade that was initiated on September 18, 2008, and reflects Moody's view of MBIA's diminished business and financial profile resulting from its exposure to losses from US mortgage risks and disruption in the financial guaranty business more broadly."   [11/08/2008]

Today bond insurer Assured Guaranty Ltd. announced that it will buy the insurance business of Financial Security Assurance Holdings Co. from Belgian-French financial services group Dexia SA for $722 million.  The transaction is contingent on rating agencies Moody's, Standard & Poor's and Fitch confirming that the triple-A financial strength ratings of both Assured Guaranty and FSA won't be hurt.
[11/14/2008]

On November 19 Standard & Poor's downgraded Ambac by three notches from AA to A.  In its release Standard & Poor's indicated that "The rating action on Ambac reflects our view that the company's exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company to the potential for further adverse loss development." [11/22/2008]  

On November 21, 2008, Moody's downgraded the rating of Assured Guaranty Corp from Aaa to Aa2 and of Financial Security Assurance Inc. (FSA) from Aaa to Aa3.  As a result of these rating actions, there are no longer any bond insurers rated triple-A by all three of the major rating companies. While the downgrade of FSA was in part attributable to exposure to losses on mortgages, both companies are being affected by fewer new business opportunities due to weaker confidence in the bond insurance industry. [11/22/2008]

On February 18, 2009, MBIA Insurance Corp. ("MBIA Corp") split the company in two. All of its public finance business will now be under its subsidiary MBIA Insurance Corp of Illinois ("MBIA Illinois") which the company expects to rename National Public Financial Guarantee Corp. MBIA Corp will retain all of its structured finance portfolio. Following MBIA's announcement, Standard & Poor's downgraded MBIA Corp to BBB+ and assigned a AA- rating to MBIA Illinois. Moody's downgraded MBIA Corp to B3 and placed Baa1 rated MBIA Illinois on review for upgrade. [2/21/2008]

On March 17 shareholders of Assured Guaranty approved the acquisition of Financial Security Assurance.  The transaction is expected to close in the second quarter of the year and is conditioned on the confirmation from major rating agencies that there will not be an adverse impact on the combined company's rating. As a result of rating downgrades of other bond insurers, Assured Guaranty and Financial Security Assurance have been the only significant insurers in 2009.

Also progressing is the licensing of a new insurer, Municipal and Infrastructure Assurance Corporation ("MIAC").  MIAC expects to focus on the primary municipal market and to obtain triple A ratings from the major rating companies.  [3/21/2009]

Today Moody's Investors Service downgraded Berkshire Hathaway Assurance Corp. to Aa1 with a stable outlook. The downgrade means that once again there are no longer any insurers rated Aaa by Moody's. Moody's noted that "Today's rating actions reflect the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession,"  [4/08/2009]

On May 4, Fitch Ratings downgraded the AAA rating of Assured Guaranty Corp. (AGC) to AA with a rating watch evolving. Fitch noted that "mortgage-related exposures are a particular area of concern and potentially represent a material source of credit risk. Additionally, AGC has exposures to $7.3 billion of trust preferred securities collateralized debt obligations (TruPs CDOs) and certain other structured finance transactions which have been subject to ratings downgrades. These adverse credit developments, in the aggregate, have created pressure upon the company's capital position vis-a-vis its current ratings level."   [5/05/2009]

On May 11, Fitch Ratings downgraded the AAA rating of Financial Security Assurance Inc. (FSA) to AA+ with a rating watch negative. Fitch noted that "the ratings of FSA were placed on Rating Watch Negative last October based on concerns about the financial products business and limitations on support from Dexia. Today's rating action primarily reflects Fitch's view of the residual risks retained by FSA following the transfer of its financial products business to Dexia. Although the transaction has not closed, Fitch anticipates the sale to Assured Guaranty Ltd. (Assured) will proceed as planned and views the agreed-upon structure as more consistent with an 'AA+' level of risk."   [5/11/2009]

On July 1, Assured Guaranty Corporation completed its acquisition of Financial Security Assurance. Except for Berkshire Hathaway Assurance Corp., which has not been not been a significant insurer since its formation, Assured Guaranty Corporation is now the only remaining highly rated bond insurer. In 2009 approximately 12.5% of new municipal debt was insured (compared to over 60% prior to 2007).  Of that amount, Assured Guaranty insured 70.6%.  A new insurer, Municipal and Infrastructure Assurance Corp. is waiting for ratings in order to begin insuring bonds. [7/2/2009]

On February 24, Fitch Ratings withdrew the rating of Assured Guaranty Ltd. and its subsidiaries.  Assured Guaranty requested the withdrawal following an October announcement by Fitch that it was withdrawing the financial strength ratings on all insured bonds for which it does not provide an underlying rating on the issuer. With this action, Fitch Ratings no longer rates any of the bond insurers. [2/26/2010]