Moody's Investors Service warned of possible downgrades Wednesday on ratings of the bond insurer units of Assured Guaranty Ltd. and Financial Security Assurance Holdings Ltd. over concerns about their insured portfolios.

Moody's has an insurance financial strength rating on Assured Guaranty Corp. of Aa2, two steps below the top rating, and a rating of Aa3, three steps below AAA, on Financial Security Assurance Inc.

Moody's stripped Assured and FSA of their coveted AAA ratings in November. They were the last two of the original seven top-rated bond insurers.

For bond insurers, losing a top rating means losing business, as issuers effectively borrow their insurer's rating and gravitate to the highest-rated companies.

Moody's said Wednesday that despite recent improvements in Assured's market position, the expected performance of its insured portfolio — especially as related to mortgages — has substantially worsened. Though Assured was the leading bond insurer in the first quarter, its expected future earnings stream from higher public finance volumes is not enough to offset the deterioration in its insured portfolio resulting from the weak economy.

The rating agency said FSA's U.S. mortgage portfolio has deteriorated further and could hurt the company's capital adequacy, profitability and market traction.

Assured plans to acquire FSA, which would vault it to the second spot among bond insurers. The deal is expected to close at the end of the second quarter.

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