Financial Guaranty Insurance Co. yesterday secured a triple-A claims-paying rating from Fitch Investors Service, a move that could start an avalanche of new bond insurance ratings from Fitch.
FGIC's new tripe-A allows it to boast three top grades from the premier rating services. If the marketplace determines the new rating adds value to FGIC-backed municipals -- by increasing the trading level of the bonds themselves -- the other major financial guarantors would quickly follow suit.
Already, another bond insurer -- Financial Security Assurance Inc. -- is reported to be close to purchasing a Fitch tripe-A, and all of the other financial guarantors have held exploratory discussions with Mark H.S. Cohen, managing director of financial guaranty ratings at Fitch.
A spokeswoman at FSA denied that a Fitch rating is imminent. "We are not planning to get a Fitch rating at this time," she said.
The Bond Buyer reported that FGIC was entertaining the purchase of a Fitch AAA in September 1990. FGIC over the past three years has backed 20% to 25% of the insured new-issue municipal bond market, putting it third behind Municipal Bond Investors Assurance Corp. and AMBAC Indemnity Corp. in terms of market share. In the first half of 1991, the firm insured $5.53 billion of new-issue tax-exempts for 24% of the industry's penetration.
FGIC, meanwhile, was pleased to be the first one out of the gate with three triple-As. "One never knows for sure, but I'm hopeful that we can develop a trading advantage over time," said Stephen Berger, chairman and chief executive officer of FGIC.
Fitch, according to a special report by Mr. Cohen, gave FGIC superior marks in each of the five categories the agency emphasizes in its ratings criteria -- capital adequacy, management and business strategy, risk underwriting, ownership and asset quality.
The insurer's capital adequacy benefits greatly from "little or no" dividend pressure from owner General Electric Capital Corp., a policy that allows the firm to retain nearly all of its internally generated capital, according to the report.
FGIC withstands Fitch's various stress tests with "more than adequate levels of qualified statutory capital, loss reserves, and sources of future capital," Mr. Cohen wrote. And despite a concentration of reinsurance with the two largest domestic firms -- Capital Reinsurance Co. and Enhance Reinsurance Co. -- the ability to take back both exposure and unearned premiums "is an important safeguard," the Fitch report says.
Mr. Berger emphasized that the stress tests showed FGIC currently has unused capital conservatively shoring up both the firm's credit quality and the safety of investors holding insured long-term bonds. Market wisdom would recommend such capital be put to work underwriting debt, but Mr. Berger said that depends on the quality of business available.
"I wouldn't want to sit around with excess capital" if the right opportunities presented themselves, but they have not, he said. "When they do, we will."
In the management-strategy category, Mr. Cohen praised FGIC's "dept of experience" and then moved on to one of the industry's stickiest topics -- pricing. Without shedding much light on how FGIC links risk underwriting to premium pricing, Mr. Cohen said the insurer's pricing model "is appropriate and fundamental for a bond insurer's long-term financial strength."
Mr. Cohen also highly regarded FGIC's underwriting strategies. The firm's multi-layered review process is "well-defined and stringent," according to Mr. Cohen. Furthermore, he praised FGIC's technique of selecting bond issues which it deems will show improved credit quality, "but where higher premium rates can still be obtained due to continued market uncertainty."
Sources in the industry have described this "rifle-shot" strategy as a premium-oriented activity that enables FGIC to boost income without assuming proportionally larger market shares. The technique frustrates competitors, but they admit little can be done to prevent it.
Mr. Berger said, "We are not a market-share company."
The Fitch report also analyzed FGIC's structured finance activities, the newest underwriting sector and an area where analytical information has been somewhat scarce. After balancing the considerable pricing rewards against risks foreign to the municipal market, Fitch says FGIC's approach has been "prudent" and "carefully focused."
In a detailed discussion of the legal risks pertaining to structured deals, Mr. Cohen wrote that FGIC has insulated itself -- through measures such as altering the transaction to protect the firm in event of bankruptcy or securing an outside letter of credit -- that troubles within deals are extremely unlikely to result in claims.
On ownership, Fitch could hardly be more favorable to FGIC. General Electric Capital Corp. is the nation's second-largest financing company, eclipsed only by GMAC Credit Corp., and has more than $74 billion in assets, the report notes.
"Fitch considers GE Capital an ideal institutional investor based on its exceptional financial strength, its demonstrated commitment to FGIC, and the sound syndergistic reasons for staying in the bond insurance business," the report says.
The asset quality of FGIC also gets good grades from Fitch. The agency notes that, at the end of June 1991, 89% of the firm's investment portfolio was in long-term bonds, most of which were high quality municipal securities. The "double jeopardy" risk cited by analysts in the past -- where an insurer could be hit by defaults that result in both claims and investment losses -- is mitigated by geographical diversification in the portfolio, high credit quality, and a 20% weight of Treasury-backed prerefunded bonds.
The FGIC AAA also marks the introduction of Fitch's rating guidelines, a new set of financial gauges for risk tolerance and capital adequacy. Mr. Cohen developed what he calls "multiple simulated depression scenarios" that subject a firm to "an unprecedented level of defaults."
Mr. Berger of FGIC, on the other hand, declined to say the Fitch standards were any tougher than already exist at Moody's or Standard & Poor's. "Tougher is not the right word," Mr. Berger said. "Frankly, I was not perturbed by standards that they might raise; we could meet whatever criteria they threw at us."
Just how conservative and rigorous the guidelines are remains to be seen, but the criteria could have a dramatic impact on the bond insurance world. Certain insurers desirous of the Fitch rating, for example, may not qualify at first blush and have to restructure aspects of their firm to comply with the agency's requirements for a triple-A, Mr. Cohen said.
Such a development is not without precedent: When AMBAC Indemnity Corp. purchased a Moody's triple-A in 1987, the rating was conditional on a $200 million infusion from owners Citibank, Xerox Financial Services, and Stevens Inc.