Assured Guaranty Disputes Moody’s Rating Decision and Announces Future Actions

  Assured Guaranty Disputes Moody’s Rating Decision and Announces Future
  Actions

Business Wire

HAMILTON, Bermuda -- January 18, 2013

Assured Guaranty Ltd. (together with its subsidiaries, Assured Guaranty or the
Company) (NYSE:AGO) today released the following statement by Dominic
Frederico, President and Chief Executive Officer, in response to the
announcement by Moody’s Investors Service Inc. (Moody’s) of new credit ratings
for Assured Guaranty and its subsidiaries, including revised insurance
financial strength ratings of A2 (stable outlook) for Assured Guaranty
Municipal Corp. (AGM), A3 (stable outlook) for Assured Guaranty Corp. (AGC)
and Baa1 (stable outlook) for Assured Guaranty Re Ltd. (AG Re):

“We strongly disagree with Moody’s assignment of an A2 rating to AGM,
especially given Moody’s statements in its own release that AGM has capital
adequacy ‘corresponding to a high Aa score’ and insured portfolio
characteristics that are ‘high investment grade.’ Moody’s based its downgrade
on its subjective, qualitative factors of ‘Franchise Value and Strategy,’
‘Profitability’ and ‘Financial Flexibility,’ which we will refute later in
this release.

“Moody’s ratings now appear to be determined by unsupported qualitative
factors and assumptions about future product demand, future profitability and
future stock price that have little or no relevance to the Company’s actual
ability to meet all of its financial obligations with the highest certainty.
When a company’s financial strength and the quality of its insured portfolio
are no longer the dominant factors in its ‘financial strength rating,’ there
is a serious flaw in the rating process. A close reading of Moody’s release
also reveals contradictions and inconsistencies that essentially discredit it.

“After announcing its credit watch for Assured Guaranty companies in March
2012, Moody’s published a Summary Rating Rationale, which cited their key
rating factors, including their qualitative factors, and placed AGM and AGC
clearly in the Aa category. In yesterday’s report, Moody’s rated our
performance on those same qualitative factors significantly below where
Moody’s rated them just ten months ago, even though our actual performance on
each of those factors has since been stable or improved and there is general
agreement, even at Moody’s, that the economy has improved. This is further
evidence that a downgrade is unjustified.

“Another troubling aspect of Moody’s rating process is that it was conducted
without the transparency mandated under the Dodd-Frank Act and required by
Moody’s own Professional Code of Conduct, which is posted on Moody’s
website.^1 Specifically, Moody’s still has not shared material capital model
results with us, despite our repeated requests throughout the process. As
importantly, on the limited information provided, Moody’s would not discuss
underlying assumptions used to achieve these summary results nor assure us
that all Moody’s rated companies are stressed similarly.

“If we look at the three years since our last detailed Moody’s review, when
AGM and AGC were assigned ratings of Aa3, we have materially increased our
financial strength while significantly decreasing our insured exposures.
During this period of global financial stress, Assured Guaranty produced a
total of $1.8 billion in operating earnings. We increased statutory capital by
$1.4 billion and decreased our statutory insured par in force by $116 billion,
which included an $11.1 billion reduction of U.S. residential mortgage-backed
securities (RMBS). Currently, 22% of our remaining U.S. RMBS par exposure is
covered by loss mitigation agreements, further protecting Assured Guaranty’s
capital. Our solid capital position and decreasing exposure over this time
period has also resulted in a 38% reduction in our insured leverage. We also
held total claims-paying resources at approximately $12.5 billion even after
paying over $3.0 billion (before R&W recoveries) to protect policyholders.
These strong results certainly should have led, at a minimum, to a rating
affirmation.

“Additionally, over the last three years, representation and warranty (R&W)
providers have paid or agreed to pay $2.7 billion for R&W breaches in our
insured RMBS, bringing the total to date to $2.8 billion, significantly
curtailing our exposure to future adverse development in this asset class. We
have further opportunities to recover more losses from the R&W providers who
have not settled but are subject to outstanding litigation that has so far
been favorable for financial guarantors. This should further contribute to
maintaining capital adequacy.

“As to market penetration, we have been facing an extraordinarily challenging
business environment, with historic low interest rates, tight credit spreads
and ratings reviews. Moody’s seems to believe this market environment is
permanent, even though their own review for downgrade further contributed to
our challenging conditions, creating a self-fulfilling prophecy with respect
to new business levels. Despite those conditions, we have selectively insured
over 4,000 municipal transactions sold in the primary market, exceeding $57
billion in par, while maintaining our credit underwriting standards and
improving our pricing. This demonstrates both the fundamental demand for our
guaranty and our underwriting discipline. We believe Moody’s should view our
restraint under these conditions positively and certainly not assume these
market conditions are permanent.

“Our more than $4.9 billion of net deferred premium revenue and approximately
$400 million of annual investment income provide a solid base of earnings for
years to come, giving us the flexibility to pursue only business that meets
our rigorous underwriting standards.

“We are confident about our ability to serve our markets and build our
business based on our proven value proposition and our track record of solid
performance. We also have confidence that, irrespective of Moody’s action,
informed issuers and investors understand our true strength and the value our
guaranty provides.”

Today, Assured Guaranty's Board of Directors authorized a $200 million share
repurchase program.^2 This latest repurchase program replaces the prior
authorization, under which Assured Guaranty repurchased approximately 2.1
million common shares out of the 5 million common shares authorized. The funds
for this program will be provided by the parent holding company, Assured
Guaranty Ltd., and will have no impact on the capital resources of the
financial guaranty subsidiaries. Additionally, the Company:

  *intends to launch during 2013 a new municipal-only financial guaranty
    insurer to increase its penetration in the public finance market; it will
    not carry a Moody's rating;

  *will continue to pursue strategic insured bond purchases and consensual
    transaction terminations on favorable terms; and
  *will develop plans to increase capital flexibility within the Assured
    Guaranty group while maintaining the highest possible ratings at its
    principal operating companies.

Assured Guaranty’s Specific Responses to Moody’s Key Factor Comments:

Moody’s wrote: “Factor 1: Franchise Value and Strategy – Moody’s assessment of
this factor balances AGM’s position as the sole active financial guarantor to
survive the 2007-2009 US financial crisis intact against the dramatic decline
of the industry. Structured finance business, which accounted for a meaningful
portion of AGM’s pre-crisis activity, has virtually disappeared. The target
market for insuring US public finance issuance (now primarily mid-to-low
investment grade municipal bonds) has also declined, and is now less than
one-third its size in 2006. While AGM benefits from its position as the most
active player in a smaller industry, its overall business activity, as
measured by the present value of gross premiums written, remains well below
pre-crisis levels. The secular narrowing of its business opportunities and
related pressure on value creation result in our low investment-grade (Baa)
assessment of this rating factor.”

Assured Guaranty response:

  *Ten months ago, Moody’s assessed AGM’s Franchise Value and Strategy as
    single-A (a full ratings grade higher).
  *Despite having been on rating review for most of the year, facing historic
    low interest rates and tight credit spreads -- AGM insured 1,160 credits
    in 2012 in the primary market, representing $13 billion in par insured.
  *In the secondary market, we issued 610 policies representing an additional
    $1.3 billion of par in 2012.

Moody’s wrote: “Factor 2: Insurance Portfolio Characteristics – AGM’s insured
portfolio is somewhat bifurcated from a risk perspective, with a historically
low-loss core municipal book as well as exposure to certain sectors and
credits experiencing material credit stress. Based on Assured Guaranty’s
internal ratings, the portion of AGM’s 3Q2012 insured net par outstanding
considered below investment grade was roughly 3.3%. Under Moody’s scenario
analyses, AGM’s credit risk ratio (expected loss) and tail risk ratio (stress
case loss) were also consistent with a high investment-grade score for this
factor. In developing these estimates, certain adjustments were made to input
parameters for Moody’s Portfolio Risk Model to account for the 2010
recalibration of Moody’s US public finance ratings to the global scale.
However, the portfolio does have material exposure to legacy mortgage-related
risks, which are highly sensitive to weakness in the macroeconomic
environment, and large risks among individual municipal credits. We therefore
consider the company’s portfolio characteristics score to be in the A rating
range.”

Assured Guaranty response:

  *Ten months ago, Moody’s assessed AGM’s Insurance Portfolio Characteristics
    as Aa (a full ratings grade higher).
  *Since then, the percentage of AGM’s net par outstanding rated below
    investment grade has gone down from 3.6% to 3.3%, a decrease of $1.5
    billion.
  *From year-end 2011 to third quarter 2012, Assured Guaranty’s statutory net
    par to statutory capital has improved from 95:1 to 88:1.
  *From year-end 2011 to third quarter 2012, Assured Guaranty’s
    below-investment-grade U.S. RMBS net par outstanding has gone down from
    $13.2 billion to $11.5 billion, and at third quarter 2012, $4.2 billion of
    Assured Guaranty’s $19.1 billion of U.S. RMBS net par was covered by loss
    mitigation agreements.
  *Based on the limited data provided by Moody’s, it appears that their
    concern over RMBS exposures is related to their stress loss estimates,
    which we calculated could arise only if over 80% of all mortgages
    remaining in our portfolio default. This is an unrealistic assumption.
    Such a catastrophic scenario would raise serious questions as to the
    viability of our national and local governments, the private sector and
    the economy in general. Applying such extreme modeling assumptions
    selectively to Assured Guaranty is clearly inconsistent with rating
    methodologies that purportedly produce rating consistency across Moody’s
    single-scale rated universe. We are aware of no other credit that Moody’s
    requires to survive such adverse conditions in order to be rated in the Aa
    range.
  *Most market analysts have stated they believe the housing market has
    clearly turned the corner into recovery. Moody’s Analytics’ chief
    economist wrote last month that “housing is turning from an economic
    headwind into a tailwind.”

Moody’s wrote: “Factor 3: Capital Adequacy – Our assessment of AGM’s
point-in-time capital adequacy is very strong, reflecting the relative
emphasis on municipal risks as well as loss-mitigation activities related to
RMBS. Based on our base case estimated loss distribution, AGM holds
claims-paying resources sufficient to cover losses at a confidence level
corresponding to a high Aa score. In this analysis, insured RMBS and certain
other stressed exposures are excluded from our Portfolio Risk Model, in order
to allow for a separate detailed loss assessment of those transactions.
Potential losses estimated for these stressed exposures are then combined with
the modeled losses on remaining exposures to derive an aggregate loss
distribution for the overall portfolio. However, estimates of capitalization
can vary considerably based on underlying assumptions about default
probability, loss-given default, and correlation. This kind of variability,
leads us to assess capitalization somewhat more conservatively than modeling
might suggest, but still in the Aa range for this factor.”

Assured Guaranty response:

  *Ten months ago, Moody’s assessed AGM’s capital adequacy as Aa (unchanged).
  *Moody’s assessment of AGM’s capital adequacy and their poorly disclosed
    changes to their capital risk model violate transparency requirements of
    their own policies as well as those of the Dodd-Frank Act.
  *We note that their language suggests their Portfolio Risk Model yielded an
    even better result for AGM than their assessment indicates.

Moody’s wrote: “Factor 4: Profitability – AGM sustained large losses during
the financial crisis as a result of claims related to mortgage
securitizations. However, profitability has rebounded in recent periods. For
the three years ended December 31, 2011, AGM recorded an average statutory
return on equity of 15.7%, aided by representation and warranties recoveries
from mortgage originators and sponsors of RMBS. Profitability has also been
enhanced by large opportunistic purchases of AGM-insured RMBS securities at
deep discounts, which are financially beneficial but suggest a lack of
investor confidence. Evaluated over longer time horizons, however,
profitability has weakened notably, with 5-year and 10-year average statutory
returns on equity at 0.5% and 6.8%, respectively, which lags those of its
specialty insurance and reinsurance peers and, given the low levels of new
business production, we believe AGM’s profitability will remain under
pressure. Consequently, Moody’s views AGM’s profitability to be consistent
with a score in the single-A range.”

Assured Guaranty response:

  *Ten months ago, Moody’s assessed AGM’s profitability as Aa (a full ratings
    grade higher).
  *AGM’s profitability has remained relatively stable since then.
  *Moody’s points to AGM’s return on statutory capital of 15.7% for the three
    years ending December 2011 and then needs to go back to five-year and
    10-year averages to justify its assessment. If Moody’s wants to base our
    ratings on the future, how does what happened five or ten years ago
    matter? This is an instance of selective justification.
  *Concern over future profitability ignores Assured Guaranty’s $4.9 billion
    of net deferred premium revenue, which will protect Assured Guaranty’s
    earnings for five to eight years – a claim no other specialty insurer can
    make.

Moody’s wrote: “Factor 5: Financial Flexibility – AGM’s financial leverage is
characterized by a relatively modest debt load, and operating earnings
coverage has been relatively strong over the past three years. As with
profitability, however, earnings coverage is weaker when a longer time frame
(e.g. five years) is considered. More importantly, in our view, various market
indicators (such as the firm’s low stock price relative to operating book
value per share, and its elevated CDS spreads) suggest that the firm’s
financial flexibility in accessing new funds on a cost-effective basis could
be quite constrained. For these reasons, we score AGM’s financial flexibility
in the Baa range.”

  *Ten months ago, Moody’s rated AGM’s financial flexibility Aa (two full
    ratings grades higher).
  *Since then, AGM’s CDS spreads have come in by 24%.
  *Assured Guaranty has demonstrated throughout the credit crisis its ability
    to access capital in the market when needed.
  *Since December 2007, Assured Guaranty has raised over $1.7 billion in
    equity and debt securities through multiple transactions and also executed
    an innovative $435 million reinsurance contract.
  *Given our “high Aa” capital position, there has been no need to raise
    capital during the last 10 months.

“In light of Moody’s need to rely on subjective, qualitative factors to arrive
at these ratings,” added Mr. Frederico, “we can only conclude that Moody’s has
chosen to make assessments that do not reflect reality in order to reach a
predetermined conclusion.

“We believe Moody’s action negatively impacts all investors and encourage all
affected parties to write Moody’s Board of Directors, the SEC and Treasury to
prevent, in the future, unjustified, unsupported and inconsistent ratings
impacting the market.

^1 According to its Code of Professional Conduct, Moody’s “will publicly
disclose… any material modifications to its rating methodologies and related
significant practices, procedures, and processes,” make “such material
modifications…subject to a ‘request for comment’ from market participants
prior to their implementation” where feasible and appropriate, and “will
publish sufficient information about its loss expectations and cash flow
analysis relating to a structured finance Credit Rating so that a financial
market professional can understand the basis for the Credit Rating.” The code
may be found at http://www.moodys.com/Pages/reg001003.aspx.

^2 This repurchase authorization may be implemented in the open market, in
privately negotiated transactions, block trades, accelerated repurchases
and/or through option or other forward transactions.

Assured Guaranty Ltd. is a publicly traded Bermuda-based holding company. Its
operating subsidiaries provide credit enhancement products to the U.S. and
international public finance, infrastructure and structured finance markets.
More information on Assured Guaranty and its subsidiaries can be found at
www.assuredguaranty.com.

Cautionary Statement Regarding Forward-Looking Statements:

Any forward-looking statements made in this press release reflect the
Company's current views with respect to future events and financial
performance and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such statements involve risks and
uncertainties that may cause actual results to differ materially from those
set forth in these statements. For example, Assured Guaranty's expectations
about its future R&W recoveries, including from litigation, demand for its
insurance, future losses in its insured portfolio, its ability to obtain
capital from external sources, its ability to pursue strategic initiatives and
other forward-looking statements could be affected by a rating agency action,
including a ratings downgrade, a change in outlook, the placement of ratings
on watch for downgrade, or a change in rating criteria, at any time, of
Assured Guaranty or any of its subsidiaries and/or of transactions that
Assured Guaranty's subsidiaries have insured, all of which have occurred in
the past, and may occur again in the future, developments in the world's
financial and capital markets that adversely affect issuers' payment rates,
Assured Guaranty's loss experience, its access to capital, its unrealized
(losses) gains on derivative financial instruments or its investment returns,
changes in the world's credit markets, segments thereof or general economic
conditions, the impact of ratings agency action with respect to sovereign debt
and the resulting effect on the value of securities in the Company's
investment portfolio and collateral posted by and to the Company, more severe
or frequent losses implicating the adequacy of Assured Guaranty's expected
loss estimates, the impact of market volatility on the mark-to-market of the
Company's contracts written in credit default swap form, reduction in the
amount of insurance opportunities available to the Company, deterioration in
the financial condition of the Company's reinsurers, the amount and timing of
reinsurance recoverables actually received, the risk that reinsurers may
dispute amounts owed to the Company under its reinsurance agreements, the
possibility that the Company will not realize insurance loss recoveries or
damages expected from originators, sellers, sponsors, underwriters or
servicers of residential mortgage-backed securities transactions, the
possibility that budget shortfalls or other factors will result in credit
losses or impairments on obligations of state and local governments that the
Company insures or reinsures, increased competition, including from new
entrants into the financial guaranty industry, changes in accounting policies
or practices, changes in laws or regulations, other governmental actions,
difficulties with the execution of Assured Guaranty's business strategy,
contract cancellations, Assured Guaranty's dependence on customers, loss of
key personnel, adverse technological developments, the effects of mergers,
acquisitions and divestitures, natural or man-made catastrophes, other risks
and uncertainties that have not been identified at this time, management's
response to these factors, and other risk factors identified in Assured
Guaranty's filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements.
These forward-looking statements are made as of January 18, 2013, and Assured
Guaranty undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.

Contact:

Assured Guaranty Ltd.
Robert Tucker, 212-339-0861
Managing Director, Investor Relations and Corporate Communications
rtucker@assuredguaranty.com
or
Michael Walker, 212-261-5575
Managing Director, Fixed Income Investor Relations
mwalker@assuredguaranty.com
or
Ross Aron, 212-261-5509
Vice President, Equity Investor Relations
raron@assuredguaranty.com
or
Ashweeta Durani, 212-408-6042
Vice President, Corporate Communications
adurani@assuredguaranty.com
 
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