Moody's affirms Financial Security Assurance at Aaa
New York, March 11, 2008 -- Moody's Investors Service has affirmed the Aaa insurance financial strength
ratings of Financial Security Assurance Inc. and its affiliated
insurance operating companies. Moody's has also affirmed the Aa2
senior unsecured ratings of parent company, Financial Security Assurance
Holdings Ltd. These rating affirmations reflect Moody's assessment
of FSA's strong capital position despite some deterioration in its HELOC
book, as well as the firm's strengthened market position.
The rating outlook remains stable.
OVERVIEW OF RATING APPROACH
As outlined in Moody's Rating Methodology for Financial Guarantors,
we have evaluated FSA along five key rating factors: 1) franchise
value and strategy, 2) insurance portfolio characteristics,
3) capital adequacy, 4) profitability, and 5) financial flexibility.
Of these factors, capital adequacy is given particular emphasis.
To estimate capital adequacy, Moody's has applied its traditional
portfolio risk model for determining stress losses on the non-mortgage
related portion of FSA's insured portfolio and alternative stress tests
for the mortgage and mortgage-related CDO exposure. For
mortgage-related exposures, stress losses were estimated
using assumptions consistent with a scenario where 2006 subprime first
lien mortgages realize an average of 21% cumulative pool losses,
with other vintages and products stressed accordingly. Stress-level
losses for RMBS transactions were assessed on a transaction-by-transaction
Losses estimated under the approach described above were present valued
to reflect estimates of the payout pattern that would emerge, based
on the collateral type. These factors resulted in aggregate present
value discounts to principal loss estimates of approximately 8%
for RMBS. (FSA's two ABS CDO exposures did not generate any
loss under Moody's 21% stress scenario.) Non mortgage
risks are discounted within the portfolio model based on estimates of
payout patterns as well.
In comparing estimated stress losses to claims paying resources and associated
rating levels, Moody's combines an estimated loss distribution for
mortgage risks with one for non-mortgage risks, assuming
a correlation between the two that ranges from 90% (for Aaa) down
to 30% (for Baa3). Claims paying resources are then compared
to the indicated capital need, at the target benchmark (1.3x
capital needed to cover stress-case losses).
KEY RATING FACTORS -- CAPITAL ADEQUACY
Based on the risks in FSA's portfolio, as assessed by Moody's according
to the approach outlined above, estimated stress-case losses
would be in the range of $4.5 billion, including approximately
$1.1 billion from its mortgage exposures, with home
equity lines of credit (HELOC) being the main contributor. This
compares to Moody's estimate of FSA's claims paying resources of approximately
$6.5 billion, resulting in a total capital ratio of
over 1.4x, which exceeds the 1.3x Aaa "target" level.
Moody's further noted that in the most likely or "expected" scenario,
FSA's insured portfolio will incur lifetime losses of approximately $1.2
billion in present value terms, and that FSA's current claims-paying
resources cover this expected loss estimate by over 5x.
In February 2008, FSA received a $500 million capital injection
from its parent, the Dexia Group, to shore up the guarantor's
financial resources, helping the firm maintain capital resources
above Moody's "target" total capital ratio at a time
of high underwriting growth for the firm and greater credit uncertainty.
KEY RATING FACTORS -- BUSINESS AND FINANCIAL PROFILE
In Moody's opinion, the current level of stress in the market has
benefited FSA's business prospects relative to many of its peers,
who have experienced a decline in market share in light of credit concerns
over large ABS CDO and mortgage exposures. FSA has been able to
take advantage of the current environment by generating high quality business
at historically strong premium rates. FSA's broad and deep relationships
with issuers, as well as its prominent market position and execution
capabilities in several market sectors, provide the company with
a solid foundation from which to capitalize on today's market conditions.
The rating agency added that FSA's large underwriting volume is
also an important indicator of the perceived value of financial guaranty
insurance by the capital markets more generally. Financial guarantors
perform a valued credit and underwriting intermediation function that
has translated into improved market pricing and liquidity for the insured
securities. Moody's believes, however, that FSA's
current competitive strength is likely to weaken somewhat as financial
market conditions normalize and as certain other guarantors gain or regain
With respect to underwriting and risk management, Moody's believes
that FSA's conservative underwriting strategy has resulted in a generally
high-quality and well-diversified insurance portfolio,
but that single risk and sectoral concentrations such as those evidenced
by the company's second lien mortgage portfolio will need to be
monitored closely going forward.
Moody's added that, while FSA's ABS CDO exposure is
modest, the company has approximately $80 billion of exposure
to pooled corporate debt obligations (CDOs). The majority of this
exposure is in synthetic form, with the rest being CLOs and to a
smaller extent mostly older vintage CBOs. The rating agency believes
that the risks presented by such exposures are manageable by FSA given
the conservative underwriting strategy of the firm, with all deals
originated since 2003 being Aaa at origination or attaching above Aaa
subordination levels in the case of synthetic transactions.
Moody's also believes that the company's non-core asset management
activities, including GICs, place incremental negative pressure
on its ratings. The rating agency noted that FSA had to correct
a material weakness in internal controls over financial reporting of hedging
transactions in 2005, and that it recently received a Wells Notice
from the SEC. The SEC staff is considering recommending a civil
injunctive action and/or administrative proceedings against FSA,
alleging violations of some anti-fraud provisions of the Securities
Exchange Act of 1934 and Securities Act of 1933. This action by
the SEC follows a lengthy investigation of practices in the municipal
GIC market. FSA, along with other financial institutions,
received a subpoena from the SEC in November 2006. The U.S.
Attorney's Office for the Southern District of New York has also been
pursuing a criminal investigation into these matters. Moody's
will continue to follow the situation for material developments.
FSA's near term profitability is expected to be somewhat volatile,
as new business production is likely to remain strong for some time and
as possible additional credit losses are realized. However,
some earnings stability is provided by the company's large in-force
portfolio, which will continue to provide significant premium revenue
In terms of financial flexibility, FSA, like other financial
guarantors, benefits from its ability to pay claims over an extended
period of time, typically scheduled interest and principal at maturity.
Moody's said that FSA's ownership by Dexia is considered to be a
strength, as evidenced by its capacity and willingness to provide
FSA with additional funding at a time when some publicly traded guarantors
were struggling to raise capital in very challenging market conditions.
Moody's believes that holding company liquidity is adequate, supported
by dividend capacity from Financial Security Assurance Inc.
OVERVIEW OF FINANCIAL SECURITY ASSURANCE
Financial Security Assurance, Inc. is the main operating
company of Financial Security Assurance Holdings Ltd. (FSA Holdings,
Aa2 senior debt rating) and the parent of other wholly-owned financial
guaranty insurers in a stacked structure. FSA Holdings is a subsidiary
of Dexia Credit Local (senior debt at Aa1, BFSR at B+),
which is the largest operating company within the Dexia Banking Group.
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service