MOODY’S SAYS BOND INSURERS CAN WITHSTAND SUBPRIME RISKS

Bond insurers can easily handle the fallout from exposure in subprime Residential Mortgage Backed Securities (RMBS), a new report by Moody’s said.

An earlier analysis by Standard & Poor’s reached a similar conclusion.

Moody’s analyzed the level and types of exposure the insurers have from RMBS compared with expected losses in the RMBS sector. Moody’s concluded that, if actual losses materialize, the conservative underwriting of transactions issued in 2006-2007 would result in minimal impact on the bond insurers.

Both Standard & Poor’s and Moody’s continually monitor the insured credit portfolios of the bond insurers, as well as their capital structure, since the insurers carry high financial strength ratings from the rating agencies.

The new Moody’s report also examined bond insurer exposures to Collateralized Debt Obligations (CDO) and reached a similar conclusion. CDOs are securities in which structured loans are packaged into tiers, each with a different level of risk. Bond insurers typically insure only those tiers with the greatest debt service coverage and lowest levels of risk.

Three major insurers, Radian Asset Assurance, Assured Guaranty Corp. and Financial Security Assurance, have no “meaningful” exposure to the CDO market as they have insured very few of these securities in recent years.

As part of its review, Moody’s subjected each insurer’s subprime portfolio to a series of stress tests, far in excess of actual losses experienced, or anticipated to occur under a severe loss scenario. Moody’s notes that most guarantors are “… facing today’s challenging mortgage markets from a position of financial strength, with solid capital ratios and ample reinsurance capacity.”

Moody’s concludes its report by noting that maintenance of high financial strength ratings is fundamentally critical to the bond insurance industry. As a result, a highly rated guarantor could be expected “… to take whatever action is feasible to preserve its rating during times of stress.”

Last summer, Standard & Poor’s had issued a similar report, noting that under the worst case, all bond insurers carrying an S&P rating were expected to handle their subprime exposures adequately with resources at their disposal.

10/03/07