Moody's Investors Service said this week it expects Enhance Financial Services Group to suffer farther losses on its commercial real estate exposure, but Enhance officials disputed that assessment.
Through its main operating subsidiaries, Enhance Reinsurance Co. and Asset Guaranty Reinsurance Co., Enhance Financial Services currently has exposure to 18 commercial real estate transactions with a par value of $329 million, Moody's said in a report issued Monday.
Fourteen of the 18 deals, totaling $307 million par value, are of "speculative grade quality," the rating agency's report says. "It is Moody's current assessment that there is significant potential for additional loss on the commercial real estate segment of [Enhance Financial Services'] insured portfolio."
Enhance reacted quickly to the report.
"Our ongoing review of our commercial real estate exposure makes us considerably more positive than Moody's is," the firm said in a statement released the same day as the rating agency's report. "We do not anticipate significant future claims and we categorically dispute both the premises and conclusions of Moody's report on our commercial real estate exposure."
With the exception of three transactions on its "watch list," all other deals "continue to perform as expected," Enhance said, although company officials declined to specify which transactions are under review.
To date, Enhance has sustained $21 million of losses stemming from three commercial real estate deals it reinsured for Financial Security Assurance Inc., which issued the original guarantee on the deals. Enhance still has a $64 million par value exposure to the deals with Tollman-Hundley Hotels, Heron International, and Universal Hotels.
Moody's said "there remains significant risk of further losses" on the three transactions.
Although Enhance's claims-paying resources are sufficient at this time," Moody's said, the firm would have to infuse capital to protect its Aa3 corporate debt rating and Enhance Reinsurance Co.'s Aaa claims-paying ability rating should further losses of a "significant" nature be incurred.
Moody's officials declined to specify what level of losses would endanger Enhance's rating.
Wallace O. Sellers, chairman and chief executive officer of Enhance, said the need for a capital infusion in the face of large losses "goes without saying."
Enhance's statement said the Moody's report "contained no new information" on the firm's commercial real estate exposure, and Sellers echoed that sentiment.
"We have spent a lot of time on these issues and we are unaware of any changes that have happened that would change our opinion that there will be few if any losses," he said. "These are the same things we've been talking about for six months to a year."
Laura Levenstein, vice president and supervisor at Moody's, said the report was issued because, in addition to the losses already realized, "It came to light that some of the remaining exposure was becoming speculative. There is more uncertainty now with respect to some of the remaining exposure."
Levenstein declined to give specifics on which issues had become more speculative or for what reason, but said FSA had ceded to Enhance all of the 14 issues deemed speculative.
FSA officials said they were precluded from commenting because the firm is in registration for an initial public stock offering.
While there has been no change to Enhance's exposure to the deals themselves, FSA recently announced it will restructure its commercial real estate portfolio. Market sources speculate that Moody's might have reevaluated Enhance's commercial real estate book in conjunction with its review of FSA's restructuring, leading the rating agency to issue the report.
The report does not appear to have affected Enhance's publicly traded stock, which closed up 38 cents per share on Monday to close at $19.75 and down 25 cents per share yesterday.
Sources at the other rating agencies that cover Enhance did not share Moody's pessimistic outlook on the firm's commercial real estate book.
Kris Rao, a director at Standard & Poor's Corp., said there are a few deals in Enhance's portfolio for which the company might have to take additional reserves, "but it certainly does, not jeopardize their claims-paying ability rating."
Standard & Poor's rates the claims-paying ability of Enhance Re AAA and Asset Guaranty AA.
Rao said the rating would not suffer because Standard & Poor's has built in expected future losses through higher capital charges and because Enhance is strongly capitalized and has p high margin of safety.
Donald Paston, vice president at Duff & Phelps Credit Rating Co., which rates both Enhance Re and Asset Guaranty triple-A, said, "We just recently completed a review of Enhance affirming their triple-A rating. When we put Enhance through our stress test we simulate heavy losses, and it is our assumption that even given a heavy downturn they pass the triple-A stress test with capital remaining."
