Financial Guaranty Insurers' Subprime Impact Rated

The impact on financial guaranty insurance companies from subprime residential mortgage backed securities (RMBS) transactions will likely be minimal according to Moody's Investors Service.

Moody's in a recent report reviewed the guarantors' risk exposure to RMBS and asset backed securities (ABS) collateralized debt obligations (CDOs) that contain subprime exposure.

The firm concluded that:

o The risks presented by the direct insurance of subprime RMBS transactions should be contained because the credit enhancement levels (that is, the cumulative losses assumed by third parties before the guarantors have to pay claims) are generally well in excess of Moody's current estimates of the ultimate cumulative losses these transactions may suffer.

o Examining claims on insured ABS CDOs, Moody's found that most of the guarantors would experience zero expected claims on their insured ABS CDOs, in the base case--at 10 percent average cumulative losses--and none would incur material claims.

However, Moody's warned that further deterioration in the U.S. subprime residential mortgage market--up to 14 percent cumulative subprime losses on average--could have significantly different net effects on individual guarantors, given their unique risk and franchise profiles.

Under the more stressful scenario, Moody's said, guarantors with sizable ABS CDO exposure such as MBIA Inc., which Moody's rates Aaa, would remain adequately capitalized for its rating,

But AMBAC Financial Group, Financial Guaranty Insurance Company, Security Capital Assurance and CIFG Holding financial guaranty companies and CDCIXIS financial guaranty holdings would all need to undertake capital strengthening measures to maintain their Aaa ratings, Moody's said.

FSA (Aaa), Assured (Aaa) and Radian Asset (Aa3) have not insured meaningful volumes of ABS CDOs in recent years, Moody's noted.

Stanislas Rouyer, a senior vice president and author of the report, emphasized that Moody's stress model results are highly sensitive to the underlying inputs, some of which are based on broad assumptions about specific CDO debt collateral composition and performance.

Moody's Managing Director Jack Dorer said the firm "will continue to refine our ABS CDO analysis while monitoring the impact of any changes to subprime cumulative loss expectations, as well as any underlying rating actions, should they occur, on the credit profile of the guarantors."

The rating agency said it believes that because ratings are so important to the industry's value proposition, a highly rated financial-guarantor with a strong ongoing franchise would likely take whatever action is feasible to preserve its rating during times of stress.

"Beyond the immediate disruption to the guarantors' business opportunities due to chaotic conditions within the global credit markets," Mr. Dorer said, "these events are likely to be a positive catalyst for financial guarantor business growth over the medium term, as credit re-prices to levels that increase demand for their core product."

The report is titled "Financial Guarantors' Subprime Risks: From RMBS to ABS CDOs."