Kroll Bond Rating Agency Comments on Rating Risk and the Financial Guarantors: Déjà Vu All Over Again

NEW YORK--()--Kroll Bond Rating Agency (KBRA) has published a comment on rating risk for financial guaranty companies in light of recent rating actions by one of the incumbent rating agencies. The comment’s key points are:

  • Municipal-bond insurers are all too familiar with the ratings risk of financial guarantors after the dramatic downgrades during the credit crisis.
  • Bond insurance financial strength ratings should be heavily focused on an assessment of the likelihood a financial guarantor will meet all its obligations to policyholders when claims come due.
  • In the past, rating agencies’ overly prescriptive criteria, which explicitly incorporated assessments of market share, business lines, or competitive position, fostered behaviors detrimental to the credit profile of the entire financial guaranty industry.
  • This scenario unfolded just under ten years ago, when financial guaranty companies, pressured in part by the expectations of legacy rating agencies, reached for business that was not truly creditworthy. Many of those companies are now in run-off and their insured bondholders suffered losses.
  • KBRA believes that finding a given level of growth inadequate at a particular company and favoring certain business initiatives over others can have the domino effect of pushing bond insurers into seeking riskier business at unattractive returns.
  • In KBRA’s opinion, the legacy rating agencies do not have a favorable track record when it comes to steering bond insurers in and out of specific business lines. KBRA has never taken this approach.
  • KBRA believes far less emphasis should be placed on whether or not a financial guarantor meets certain rating agency expectations for market position and future growth, which strikes us as more of an equity research orientation.

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About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Analytical:
Kroll Bond Rating Agency
Paul Kwiatkoski, 646-731-2387
Managing Director
pkwiatkoski@kbra.com
or
Peter Giacone, 646-731-2407
Senior Director
pgiacone@kbra.com
or
Karen Daly, 646-731-2347
Senior Managing Director
kdaly@kbra.com

Contacts

Analytical:
Kroll Bond Rating Agency
Paul Kwiatkoski, 646-731-2387
Managing Director
pkwiatkoski@kbra.com
or
Peter Giacone, 646-731-2407
Senior Director
pgiacone@kbra.com
or
Karen Daly, 646-731-2347
Senior Managing Director
kdaly@kbra.com