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06 Mar 2008
Moody's confirms BluePoint Re's Aa3 rating, changes outlook to negative
New York, March 06, 2008 -- Moody's Investors Service has confirmed the Aa3 insurance financial strength
rating of BluePoint Re Limited (BluePoint Re). This rating action
reflects Moody's updated assessment of BluePoint Re's risk
adjusted capitalization in light of the company's exposure to the
US residential mortgage market and concludes the rating review initiated
on February 1, 2008. The rating outlook is negative.
OVERVIEW OF RATING APPROACH
As outlined in Moody's Rating Methodology for Financial Guarantors,
we have evaluated BluePoint Re 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 BluePoint Re'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
basis, while loss estimates for ABS CDOs were derived using a stochastic
simulation model which applied stress to specific underlying collateral
tranches within the CDOs. Estimated tranche-level losses
were computed based on the structure of those tranches (e.g.
attachment and detachment points) and estimates of their performance relative
to the average.
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. For ABS CDOs, consideration was given
to the specific contractual features within associated CDS contracts.
These factors resulted in aggregate present value discounts to principal
loss estimates of approximately 9% for RMBS and 11% for
ABS CDOs. 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 BluePoint Re's portfolio, as assessed
by Moody's according to the approach outlined above, estimated
capitalization required to cover stress-case losses at the Aa3
"target" level (i.e., 1.3x the
"minimum" Aa3 level) would be in the range of $455
million. This compares to Moody's estimate of BluePoint Re's
claims paying resources of approximately $506 million. Despite
an increase in the amount of capital required to cover mortgage related
risks, BluePoint Re remains adequately capitalized for its rating
level, in part, because the company entered this difficult
market environment with a strong capital position. Moody's
further noted that in the most likely or "expected" scenario,
it estimates that BluePoint Re's insured portfolio will incur lifetime
losses of approximately $106 million in present value terms,
and that BluePoint Re's current claims-paying resources cover
this expected loss estimate by roughly 4.6x.
KEY RATING FACTORS -- BUSINESS AND FINANCIAL PROFILE
In Moody's opinion, BluePoint Re's significant exposure
to mortgage-related risk could have consequences for its business
and financial profile, and affects our opinion about the company's
other key rating factors.
With respect to underwriting and risk management, Moody's
believes that BluePoint Re's risk posture has been aggressive in
some sectors. In Moody's view, the ABS CDO exposure
written by the company through its direct CDS underwriting platform is
indicative of this strategy. In addition to these ABS CDO exposures,
which account for roughly 5% of the company's total net par
outstanding, BluePoint has also reinsured RMBS transactions from
the primaries, accounting for another 5% of par outstanding.
Together, these exposures represent roughly 40% of BluePoint
Re's stress-case losses.
BluePoint Re's core profitability may be affected over the medium
term by stress within its RMBS and ABS CDO portfolios. Moody's
also notes that underwriting volumes could drop as investors remain cautious
about assuming additional exposure to financial guaranty companies.
Given the capital positions of the primary financial guarantors we expect
greater use of reinsurance in the near term. Moody's believes
that BluePoint Re, with its strong client relationships and well
diversified portfolio, is positioned to gain from this favorable
environment. Moody's also noted that some of the primary
companies have announced changes to their underwriting strategy going
forward, and the impact of these changes on demand for reinsurance
In terms of financial flexibility, BluePoint Re, like other
financial guarantors, benefits from paying loss claims only over
an extended period of time, typically scheduled interest and principal
at maturity. Moody's notes that, in contrast to most
other financial guarantors, BluePoint Re is more exposed to liquidity
risk in its CDS contracts due to payment and settlement terms, including
rating triggers. Moody's commented that BluePoint Re,
as a Bermuda domiciled reinsurer, holds Regulatory 114 trusts in
favor of the primary financial guaranty ceding companies which,
to some extent, reduces the risk of capital diversion.
BluePoint Re is a wholly-owned subsidiary of Wachovia Corporation.
Beyond Wachovia's initial $300 million investment in BluePoint
Re, however, the only formal commitment made by Wachovia is
a promise that it will not upstream any dividends until October 2009.
Moody's said that the lack of formal support from BluePoint's
parent limits the firm's financial flexibility, which is a
RATING OUTLOOK: NEGATIVE
The rating outlook is negative, reflecting continued uncertainty
regarding both the ultimate performance of mortgage and mortgage-related
CDO exposures, as well as BluePoint Re's future underwriting
prospects given its reliance on the primary financial guarantors for business.
Moody's will continue to evaluate developments at the company and
communicate any changes in our opinion as appropriate.
OVERVIEW OF BLUEPOINT RE LIMITED
BluePoint Re Limited is a wholly owned subsidiary of Wachovia Corporation,
a diversified financial services company.
Financial Institutions Group
Moody's Investors Service
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service
No Related Data.
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