SAN FRANCISCO (MarketWatch) - Bermuda-based bond insurer Assured Guaranty shares fell five percent but later recovered strongly yesterday after UBS analyst Brian Meredith downgraded the company.

Mr. Meredith cut his rating on Assured to neutral from buy after a 75 percent surge in the stock so far this year. Assured was one of the few bond insurers that didn't sell many guarantees on mortgage-related securities that soured as the mortgage meltdown turned into a global financial crisis.

Rivals including Ambac Financial and MBIA Inc. have lost crucial top credit ratings and have stopped selling new guarantees as they try to survive. That leaves Assured as one of the few bond insurers able to write new business.

However, Moody's Investors Service said earlier this year that it may downgrade Assured's Aa2 rating.

Without that stamp of approval, the insurer may struggle to sell new guarantees. That's because the business of bond insurance involves the sale of the insurer's own rating to other borrowers, such as municipal governments. Without a top rating, issuers may be unwilling to purchase guarantees.

"A downgrade below the AA level would significantly hurt Assured Guaranty's ability to write new business and hurt its share price," Mr. Meredith wrote in a note to investors yesterday.

"Moody's has been very unpredictable and therefore a downgrade is a risk. We expect a conclusion of the review soon."

Assured may also suffer more losses on the mortgage securities that it did guarantee, the analyst added.

Assured shares fell 5.3 percent to $19.03 during afternoon action but recovered to finish down one percent on $19.90.

The stock is up 19 percent in the past year, while shares of Ambac and MBIA are down 77 percent and 59 percent respectively.

If Assured Guaranty can hold on to its AA ratings, the insurer "is in a very good fundamental position as the only monoline able to write new municipal bond insurance," Meredith noted. "Demand for municipal bond insurance remains robust," he added.