MBIA Inc. said Monday it has enough cash and government securities in its assets-liability management portfolio to meet any potential termination payments on its insured guaranteed investment contracts if Moody's Investors Service downgrades MBIA Insurance Corp.'s A2 rating, which was put on review last week.
A multiple-notch downgrade could require termination payments of up to $7.9 billion, MBIA said. It currently has $8.1 billion in cash and government securities in its asset-liability management portfolio, consistent with the rebalancing effort it undertook over the past two quarters.
Ambac Financial Group Inc. said Friday it estimates it does not have enough in its GIC asset portfolio to cover the collateral requirements and terminations from any potential downgrades to Ambac Assurance Corp.'s Aa3 rating, which was also put on review last week. Downgrades could result in a shortfall of between $1 billion and $2.1 billion, Ambac said.
Ambac placed its $850 million recapitalization of Connie Lee Insurance Co. on hold pending the rating review. It had hoped to begin writing new business as early as the fourth quarter.
Insurance penetration has plummeted amid downgrades to insurers, and in August, less than 10% of bonds came to the market insured. But some say the lack of capacity has led to pent-up demand for the product. Market participants have told Moody's, for instance, that in a market with muni-only, triple-A insurers, penetration could rebound to as high as 35%.
"Despite Moody's action, we believe that our Connie Lee initiative is still viable, and, in fact, needed more than ever," Ambac said in a statement.
Ambac also said the Treasury Department's plan to buy up to $700 million in illiquid assets from banks and other financial institutions could "change the financial landscape entirely." The plan could help the insurers, but the impact of any upgrades could be limited, Merrill Lynch & Co. municipal strategist Philip Fischer wrote in a report yesterday.
"This legislation has the potential to improve the ratings for these companies," he wrote. "However, most insured municipal bonds are currently priced without regard to their insurance, so potential upgrades are unlikely to have a market-wide impact."
