The triple-A insurer financial strength ratings for Ambac Assurance Corp. and MBIA Insurance Corp. were placed on review for a possible downgrade yesterday by Moody's Investors Service.
The rating agency had both bond insurers on a negative outlook before today's action.
"We've been observing a number of indicators that we are continually building into our analysis," said Jack Dorer, managing director at Moody's. "Our view evolves as new information in the market comes about."
The action reflects Moody's concerns about the bond insurers' exposure to second-lien mortgages, as well as their inability to write new business and the fact that the market has not gained renewed confidence in the health of the companies, Dorer said. Low stock prices and widening spreads on credit default swaps tied to the bond insurers' parents, MBIA Inc. and Ambac Financial Group, Inc., led in part to the actions.
Moody's said the review was most likely to lead to a downgrade of MBIA to Aa from Aaa, with the potential to fall as far as single-A, while the Ambac review would likely result in a downgrade to Aa.
"It is not surprising in the current environment that they have not been able to write business but the ability to write business is a key part of maintaining a triple-A rating," Dorer said.
MBIA chief executive officer Jay Brown took umbrage at the action, saying it reflects the rating agency's changing requirements for Aaa ratings. In a conference call with reporters after the announcement, Brown said the company was alerted to the impending action about 30 minutes before it was made public.
"When Moody's affirmed our rating with a negative outlook in February, we believed that it would refrain for six to 12 months from taking additional ratings actions unless the environment or MBIA's position changed materially," Brown said in a statement. "Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved."
Moody's also referenced Ambac's falling stock price and widening CDS spreads as evidence that it will be increasingly difficult for the company to raise needed capital. And as Brown did, Ambac CEO Michael Callen also expressed disappointment. He said Ambac has presented Moody's with a plan to use its already-licensed subsidiary, Connie Lee Insurance Co., to service the municipal market.
"The timing of Moody's announcement is unfortunate since we believe that the uncertainty surrounding Ambac is temporary," Callen said. "Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations."
Moody's said the difficulty for both bond insurers to regain market confidence in their ratings, in light of unknown future losses in mortgage-related securities or resulting from the U. S. economic downturn, led to the review.
The announcement may cause MBIA to hasten plans to restructure itself into separate entities, one to write structured finance business and the other to write municipal business, Brown said in the call.
"If our current structure is not the right one, maybe we will have to go into a multi-company structure sooner than I thought," Brown said.
As a result of the announcement, MBIA will keep the $900 million slated for the bond insurer at the holding company level. Previously, the company had announced its intention to downstream the funds to the bond insurer, and Brown said he had already alerted the New York state insurance regulators to the decision not to downstream the funds.
The capital at the holding company level could be used as seed capital for a new insurance entity likely used to write new municipal business. MBIA will discuss the option with Standard & Poor's and Moody's before deciding if the timing is right to pursue that option, Brown said.
Brown said business confidence may have suffered because of ratings volatility, which he said erodes market confidence in the bond insurers. He said it has been difficult to keep up with the rating agencies' expectations, and that MBIA will not raise additional capital.
Completion of the review is expected in the "next few weeks," Moody's said.