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The ratings agencies can, and will, act in capricious ways.

bantam inc jack duval municipal bonds aig earning miss - logo

Be careful what you wish for.

Just a quick update on two events from yesterday that relate to some of my writing on risk management:

  • S&P downgraded $2.27 billion of outstanding Build Illinois Bonds from AA- to BBB, and;
  • AIG reported a $0.34/share loss when the consensus estimate was for a $0.06/share gain.

Build Illinois Bond Downgrade

The State of Illinois is in dire financial straights, with a BBB- credit rating.  It has issued over $2 billion in Build Illinois Bonds, which carve out sales tax revenues, and had been rated AA-.  Under S&P’s new rating criteria, which caps the ratings of priority-lien tax revenue debt, they issued a “super-downgrade” on the Build Illinois Bonds.

This illustrates a key risk for municipal bond holders:  as states are forced to utilize more complex structures, the ratings agencies can, and will, act in capricious ways.  The worse off the general creditworthiness of the state, the more severe these moves will be to the downside.

AIG Earnings Miss

Readers of this blog know I have written extensively about environmental risk.  For instance, here and here.

Property and Casualty insurers are particularly susceptible to these risks.  AIG is running persistent underwriting losses because it is behind the curve on pricing these risks.  The earnings presentation yesterday highlighted Hurricane Florence and the typhoons that hit Japan over the past quarter.

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