Tuesday, February 05, 2008

Fitch: May Cut Monoline Insurer Ratings, "regardless of capital levels"

by Bill McBride on 2/05/2008 04:04:00 PM

From Fitch:

Fitch Ratings announced today 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 believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors -- even more problematic than the previously discussed increases in 'AAA' capital guidelines, which has been the primary focus of recent analysis of the industry. Expected losses reflect an estimate of future claims that Fitch believes would ultimately need to be paid by a guarantor. 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.

Fitch expects in addition to increases in expected losses, that its capital guidelines are likely to increase materially as well.

An increase in both expected losses and capital guidelines would place further downward pressure on the ratings of those five financial guarantors - Ambac Assurance Corp. (Ambac), CIFG Guaranty (CIFG), Financial Guaranty Insurance Co. (FGIC), MBIA Insurance Corp. (MBIA) and Security Capital Assurance Ltd. (SCA), the parent company of XL Capital Assurance Inc. - that Fitch has previously identified as having material subprime exposure within their insured portfolios. Ratings on three of these guarantors - Ambac, FGIC and SCA - were recently downgraded by Fitch, and their ratings remain on Rating Watch Negative. In separate releases in conjunction with this announcement, Fitch has also placed the 'AAA' insurer financial strength ratings of CIFG and MBIA on Rating Watch Negative.
emphasis added
This bears repeating: The new modeled losses could "call into question the appropriateness of 'AAA' ratings for those affected companies, regardless of their ultimate capital levels." Regardless of capital levels. That really says it all.

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