Bond insurer Assured Guaranty has a bone to pick with Standard & Poor's over the rating agency's new bond insurance rating criteria.

Assured President and Chief Executive Dominic Frederico, speaking to a group of analysts Wednesday at an insurance conference held by Keefe, Bruyette & Woods, criticized the agency's revised leverage test, new capital requirements, and a test applied to an insurer's exposure to its largest obligors.

The conference was held on the same day that S&P's released a new report further clarifying its revised criteria, apparently ruling out another round of industry comment. The report said "we do not believe the revisions that we made to the proposed criteria warranted the publication of an additional" request for comment.

Frederico said S&P's leverage test "got worse, not better" under its revised insurance criteria despite feedback from the industry. He said the new capital requirements "appear to be without any empirical support" and the largest obligors test used for munis is now the same as that used to evaluate CDOs. He added that "if there is one thing I think we would all agree hasn't worked through the financial crisis is the CDO Evaluator."

Frederico's criticism of S&P's revised insurer criteria is not the first heard from the industry.

In early September, the agency held a conference call explaining the criteria that was met with criticism from most analysts and investors on the line. The conference call came after S&P in January issued a "request for comment" that allowed market participants to provide feedback on its proposed rating criteria. S&P took comments for 60 days and issued its revised criteria in late August.

The agency sought to revise its bond insurance rating criteria after the meltdown in the housing market resulted in huge losses for the monoline insurers, which had relied on their now long gone triple-A ratings to drive their financial guaranty businesses. Assured's muni bond insurer, Assured Guaranty Municipal Corp., with its 'AA'-plus ratings, is the only active monoline in the muni industry.

At the conference, Frederico said Assured told S&P of its concerns regarding the leverage test, specifically that it ignores credit quality and does not include unearned premium reserves as part of the capital base, which is a significant source potentially to pay future losses.

"Standard & Poor's reaction to that was they totally ignored it," Frederico said.

He also called the leverage test "a bit misleading" in that it only qualifies for a company that is triple-A rated. "If you have a leverage test, it's a leverage test - why would you say it only affects triple-A rated?"

Frederico said that in reducing the number of municipal issuer categories to four from 16, S&P ignored market comments. The agency now combines different types of risk into a single category, such as muni utility districts, general obligation bonds, private higher education, and solid waste.

"The four categories cut across too many very diverse issuers and once again, that comment was not taken up - we've not had any changes in the final" criteria, he said.

Prior to the revision, the rating agency used a study of municipal defaults in the Great Depression as the basis for current capital charges. "We all know that the Hempel study didn't change over the years, yet all of a sudden we had significant capital increases," Frederico said.

S&P is now using the CDO Evaluator, a set of analytical tools, as the methodology to generate capital charges.

"It is concerning that we took a municipal market that appeared to be at least reasonably assessed from both the capital and loss potential and now put into a CDO Evaluator, which obviously there is a huge question as to how effective that specific methodology is," Frederico said.

S&P originally applied a single-risk limit test and that was replaced by the largest obligors test used in the CDO Evaluator. Frederico voiced frustration with the 40% figure for each of the first four tests. "There has never been a default on a state general obligation, so how could you ever assume that you could lose 40% of the outstanding issue?" he asked.

When Frederico plugged Assured's number into the test, the maximum limit the company could hold for these obligors on average was $1.75 billion for test one, $1.17 billion for test two, $175 million for test three, and $583 million for test four.

The problem, Frederico said, is that in the preliminary criteria the single-risk limit on Assured was $4.1 billion for a state general obligation.

"How can you take what was under their own methodology permissible at $4.1 billion and reduce it down to $583 million for test number four and tell us we have 60 days to implement our corrective measures?" he asked. "It makes very little sense."

A spokesman for S&P defended the agency's new criteria.

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