Both Assured Guaranty Ltd. and MBIA Inc. have shrunk their legacy structured finance exposures significantly from peak levels since the financial crisis. As a result, these exposures have become less of a credit risk for Assured; however, they remain a serious risk factor for MBIA Inc.'s subsidiary, MBIA Insurance Corp., according to a report from Moody's Investors Service.
"Both Assured Guaranty and MBIA are now focusing on expanding their footholds in the US public finance market, but their structured finance exposures will remain a credit factor for several years, for a number of reasons," says James Eck, a Moody's Vice President - senior credit officer.
Although both Assured and MBIA's structured exposures are amortizing rapidly, reducing uncertainty about ultimate losses, their portfolios still contain large amounts of CDOs and RMBS. These two asset classes produce the majority of the firms' expected claims payments. The two firms also have sizeable exposures to below-investment-grade securities, but the exposure for MBIA's subsidiary, MBIA Insurance Corporation, is significantly larger than Assured's relative to capital.
CDOs, which constitute the largest structured finance exposures for both firms, have also declined rapidly, owing to not just amortization but also policy terminations and commutations. However, a number of CDO transactions are still highly stressed despite the generally improving environment, with the potential for additional claims in the event of further deterioration.
With regard to RMBS, both insurers have assumed sizeable put-backs and excess spread recoveries. Failing to realize these recoveries would weaken capitalization, which would be particularly critical for MBIA Insurance Corporation, given that its booked recoveries account for more than 100% of its qualified statutory capital.
"It's going to be a while before these exposures have essentially run off and can no longer generate material losses," adds Eck.
