Monolines tested for the first time

While financial guarantors have navigated the rough waters of the current economic downturn reasonably well, questions persist over exposure to troubled sectors of the ABS market. Industry analysts are also closely monitoring the increased competition, which could lead to decreased underwriting standards for monolines.

Moody's Investors Service addresses these concerns in a new report, which was issued last week. The rating agency concludes that while its outlook for the industry remains stable, "the occurrence of certain adverse events or developments could potentially change our view." 

But Moody's points out that the current crossroads is an unprecedented one for the financial guarantor industry. "Given their exposure to consumer ABS and MBS transactions, as well as corporate risk embedded in CDOs and other commercial structured vehicles, the current economic downturn may be the first true test of the financial guarantors’ expanded business strategy." 

Moody's chief concern seems to be the competitive aspect of maintaining market share. With eight insurers now offering primary market insurance, versus the four traditional names, Moody's is concerned that increased competition may lead to either decreased premium fees or a lowering of underwriting standards in order to penetrate new markets, particularly non-U.S. markets. 

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