Fitch Ratings downgraded the Insurer Financial Strength (IFS) rating of Assured Guaranty Corp. (AGC) to 'AA-' from 'AA', and the IFS rating of Financial Security Assurance Inc. (FSA) to 'AA' from 'AA+'.
Fitch has also downgraded the debt ratings of the U.S. holding companies - Assured Guaranty US Holdings Inc. (AGUSH) and Financial Security Assurance Holdings Ltd. (FSA Holdings) to 'A-'. The ratings have been removed from Rating Watch Negative and assigned a Negative Rating Outlook.
Fitch said the ratings actions primarily reflect increased expectations of credit losses arising from the companies' residential mortgage securitization exposures. To date, most of the claims activity experienced by AGC and FSA has been from exposures to securitizations of second lien mortgages.
During 2009, however, Fitch's performance expectations for certain first lien residential mortgage backed securities (RMBS) categories -- specifically Alt-A and Option ARM -- have weakened sharply. As a result, loss estimates related to first-lien RMBS exposures have been revised upward appreciably.
The Assured companies have substantial exposure to these first lien RMBS sectors - AGC and Assured Guaranty Re Ltd.'s (AG Re) combined direct net par exposure was about $7.2 billion at June 30, 2009 and FSA's net par exposure was $4.1 billion.
Fitch said that within that amount, FSA has about $2.6 billion exposure to Option ARM mortgage securitizations, and most of this is to so-called 'junior' 'AAA' classes - which are subject to relatively higher loss given default compared to other classes originally rated 'AAA'.
In addition to RMBS exposures, there are other areas of concern in the insured portfolios of these companies. In particular, $7.1 billion of combined direct net par exposure to trust preferred collateralized debt obligations (CDOs) in AGC and AG Re's portfolios continues to experience negative performance trends.