Guaranty Insurers Excess Capital Drops

Excess capital for most financial guaranty insurance companies' declined during most of last year, Fitch ratings said.

The New York-based firm released results of its study of companies through its capital model, Matrix, for the period ending Sept. 30, 2006.

Thomas J. Abruzzo, managing director, Fitch Ratings, said the “notable exceptions” to this trend include Financial Security Assurance Inc. (FSA) and MBIA Insurance Corp. (MBIA).

Fitch's initial report highlighting Matrix statistics produced results from a period that ended on or before June 30, 2006.

The rating firm said around the middle of this year it will issue this report for all companies based on year-end 2006 data, and will then produce quarterly updates beginning with June 30, 2007 results.

Fitch today released Sept. 30, 2006 results for: Ambac Assurance Corp. (Ambac); Assured Guaranty Ltd.; CIFG Guaranty (CIFG); Financial Guaranty Insurance Co. (FGIC); FSA; MBIA; Radian Asset Assurance Inc. (Radian); and Security Capital Assurance Ltd. (SCA, the parent company for XL Capital Assurance Inc. and XL Financial Assurance Ltd.).

Mr. Abruzzo said the primary driver in the decline of excess capital has been the industry's aggressive growth rate during the course of 2006 in the face of a very challenging underwriting environment.

He said the environment had been characterized by historically tight credit spreads. “Additionally, a greater proportion of that growth has been driven by larger individual transaction sizes, which tend to get more negatively impacted in the tail of the loss distribution,” Mr. Abruzzo observed.

As of Sept. 30, 2006, all of the “triple-A” financial guarantors rated by Fitch maintained more than enough capital to meet the minimum capital requirements for their given rating threshold, Fitch said.

The company said it was important to note that Fitch's implementation of Matrix occurred after the financial guarantors had already underwritten the majority of their business in 2006. Fitch said it has yet to taken any rating actions as a result of deficiencies in Matrix results, as the agency recognizes the timing lag of business underwritten in 2006.

Fitch noted it is “providing a reasonable period to cure any capital deficiencies in the 2006 Matrix simulations, as long as any deficient company institutes a capital enhancement plan that will effectively resolve any capital shortfalls.'

The rating firm said in most instances, it does not view resolution of weak Matrix results as being a challenge, as every company will have various capital management solutions available to help improve its model results.

A complete list of Financial Results for the previously named financial guarantors is in the Special Report titled “Financial Guarantors – 3rd Quarter 2006 Matrix Capital Model Results,” which is available online at www.fitchratings.com.