Fitch investors Service plans today to release a study of municipal bond insurers that awards Financial Guaranty Insurance Co., the only insurer with a Fitch rating, a "gold medal" for the lowest overall default risk in the industry.

The report, entitled "Bond Insurers' Crystal Ball," uses a five-part test to determine how much risk municipal insurers have in their portfolios. Fitch said AMBAC Indemnity Corp. has the second lowest exposure, followed by Municipal Bond Investors Assurance Corp., which "squeezes by" Capital Guaranty Insurance Co. for third place.

Rounding out the top seven are Capital Markets Assurance Corp., Connie Lee Insurance Co., and Financial Security Assurance Inc.

Fitch formally rates only FGIC, at AAA. No other insurers are known to be currently pursuing the agency's rating.

David Litvack, vice president in the bond insurance area at Fitch and the principal author of the report, explained why the agency performed the study. "We feel risk underwriting is a fundamental strength of the industry, but it's also an area where the bond insurers vary widely," he said.

But MBIA officials, more accustomed to topping industry rankings than settling for bronze medals, took issue with several of the agency's assumptions.

"Fitch's effort to quantify portfolio risk is arbitrary," said David H. Elliott, president and chief operating officer of MBIA. "It is difficult if not impossible to gauge credit quality without an in-depth review of individual credits."

He said unlike Fitch, Moody's Investors Service and Standard & Poor's Corp. are able to do the required credit-by-credit analysis because they already rate most of the underlying securities.

The Fitch study is based on an analysis of five categories: capital charge, single risk, credit quality, bond sector, and geographic diversification. The overall rankings are attained by averaging the findings in each category.

Fitch said Capital Guaranty topped the list in the most important component, capital charge. FGIC and AMBAC were second and third, respectively.

In the single risk category, which measures vulnerability to obligations secured by a single revenue source, CapMAC had the lowest exposure and AMBAC was second.

Fitch conceded its analysis is subject to debate, since "the evaluation of a bond insurer's portfolio risk is generally considered more an art than a science."

Michael Gallagher, senior vice president of marketing at Capital Guaranty, agreed, pointing out that if Fitch had expanded its definition of geographic diversity to include concentration in four states instead of just three, his firm would have replaced MBIA as the bronze medal winner in the overall competition.

"We're pleased with the rankings, but there is a certain level of arbitrariness," Mr. Gallagher said.

Robert J. Genader, senior executive vice president at AMBAC, said the report is valuable in educating the industry, but he noted that portfolios are comprised almost entirely of top-notch credits. "We're really talking about defining the top of the cream of the crop," Mr. Genader said. "It's the difference between a Mercedes and a BMW."

Fitch noted that CapMAC, Capital Guaranty, and Connie Lee have never had a loss. MBIA, the largest of the bond insurers, has the lowest average loss ratios.

The analysis also pointed out that several insurers are moving into non-municipal activities. FSA and FGIC, for example, are insuring the most non-municipal volume.

"Certain asset-backed transactions pose special risks because they lack the time-tested structures and essential purpose of municipal bonds," Fitch said. "Newer securitized assets, such as commercial real estate, boat loans, and timeshare revenues, lack the historical payment experience associated with assets like residential mortgages."

Betsy Halpern, managing director of corporate communications for FSA, said the company's higher mix of asset-backed deals hurt FSA in the Fitch rankings, because the rating agency assigns a higher capital charge to asset-backeds. The municipal portion of FSA's portfolio is rated on a par with the other major insurers, she said.

"We think it is very important to remember that portfolio quality is only one measure of insurer strength," Ms. Halpern added. "It must be viewed in relation to the amount and nature of capital and other resources available to pay claims."

The Fitch report makes the same point. "A relatively high portfolio risk would not necessarily prevent an insurer from securing a Fitch AAA," the agency said. "However, the riskier the insured book, the more critical the need to compensate in other areas."

Richard A. Price, a managing director at top-ranked FGIC, called the Fitch report "a step in the right direction to help evaluate and compare the underlying credit quality of the bond insurers' portfolios."

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