Asset Guaranty Insurance Co., already a specialty monoline bond insurer, this week carved a new niche for itself in the industry with a AA rating from Standard & Poor's Corp.
The firm, a wholly-owned subsidiary of Enhance Financial Services Group, is now the only financial guarantor with a rating lower than triple-A. Asset Guaranty acts as both a reinsurer and insurer in the traditional municipal market and in other credit-related lines of business.
Since its inception in 1988, the firm has been rated triple-A by Duff & Phelps Credit Rating Co. and has not been rated by any other rating agency.
Company officials said in interviews yesterday that the decision to seek out the new rating was partly aimed at providing more benefits to primary companies that reinsure issues through Asset Guaranty.
Now that it rates the company, Standard & Poor's will give 50% credit to primary insurers that reinsure deals with Asset Guaranty. In the past, they received none. Premiums ceded to Asset Guaranty prior to the rating will also be given 50% credit.
The rating allows Asset Guaranty to expand its primary market activity, attract investors who require two ratings, and improve the trading value of issues insured by the firm, officials at the firm said.
"The new-issue volume will determine the level of our activity [in the primary market], but we'd like to do as much as we can," said Kenneth R. Von der Heiden, executive vice president at Asset Guaranty. "If we broaden the market [of insured issues], it will have a positive effect on our trading levels in comparison to other paper."
Company officials said a triple-A rating was out of the question for two reasons. First, Standard & Poor's' $200 million capital requirement for its highest rating is about $120 million more than available. Second, Asset Guaranty is seeking only specialty deals the other primary companies reject, so a double-A is expected to suffice.
"Having the double-A clearly identifies our niche," Von der Heiden said. "By definition, we're not competing" directly with the large primaries.
Richard P. Smith, managing director at Standard & Poor's, said that Asset Guaranty's relatively small size and activity in markets outside of the traditional sphere of bond insurance prohibited the firm from obtaining a triple-A rating.
To incorporate Asset Guaranty's specialty lines, Standard & Poor's developed a "hybrid approach" whereby two rating methodologies were brought together, Smith said.
Some of Asset Guaranty's specialty businesses are more similar to traditional property/casualty businesses and "have not been analyzed from the same perspective as the municipal credit markets," so the rating agency did not have capital charges established, he said. "We worked with the property/casualty people and developed appropriate relations between premiums written and surplus, and figured out how much capital had to be applied for reinsurance."
For the firm's direct insurance activity, Standard & Poor's employed its traditional capital adequacy model. "Then we figured out how much capital is there for bond insurance, how much for specialty." Smith said. "We felt there was enough to [warrant] a double-A."
Wallace O. Sellers, chairman and chief executive officer at Enhance Financial Services, said Asset Guaranty's double-A rating was sought for strategic reasons and would provide two major benefits.
"First, the monoline financial guaranty insurers who are Asset Guaranty's largest clients should find it even more attractive to do business with Asset Guaranty, because they will now receive rating agency credit for [our] reinsurance," he said in a prepared statement.
The second major benefit is that the firm "expects to expand the market for the issuers and buyers of debt obligations we enhance, in niches not served by the primary monoline insurers."
At yearend 1992, premiums ceded to Asset Guaranty totaled $840 million, according to Standard & Poor's. Premiums ceded by Municipal Bond Investors Assurance Corp. comprised 15.8% of the total, followed by Financial Security Assurance Inc. with 10.7%, Bond Investors Guaranty Insurance Co. with 3.3%, Capital Markets Assurance Corp. with 2.3%, and Financial Guaranty Insurance Co. with 1.5%.
At the end of the first quarter of 1993, $1.2 billion of municipal issues - including those from is sister company, Enhance Reinsurance Co. - had been ceded to Asset Guaranty, a spokeswoman for Asset Guaranty said. Non-municipal issues reinsured to the specialty reinsurer, including the firm's coal reclamation business, totaled $832.5 million, she said.
On March 31, 1993, Asset Guaranty had insured $352.8 million of municipal issues and $164.8 million of non-municipal issues in the primary market.
The firm insures mostly tax-exempt utilities, multifamily housing issues, and other revenue bonds. It makes up for the higher credit risk and increased underwriting effort by charging premiums two to three times higher than business normally written by the primaries, according to Fitch Investors Service.