The prospects for the existing bond insurers took another hit Friday, with one knocked below triple-A, another handed an ultimatum, and all of them confronted by the prospect of more competition.
Fitch Ratings sent the insurer financial strength rating for MBIA Insurance Corp. to AA, and insurance regulators threatened further action against Financial Guaranty Insurance Co. if a plan to raise new capital was not finalized in the next month. New York insurance superintendent Eric Dinallo said in an interview with the Financial Times that he was working with a number of investment banks to form a triple-A rated bond insurance subsidiary.
The downgrade to MBIA moved the IFS rating of MBIA Insurance to AA from AAA, and moved it to negative outlook, Fitch said.
A "key basis for the rating action" is MBIA's claims-paying capital of $16 billion, which falls short of triple-A standards - but well within the levels needed for a AA credit - in a worst-case scenario by between $3.4 billion to $3.8 billion, the rating agency said. In considering the downgrade, Fitch looked at the bond insurer's capital levels, recently updated business plan, and insured portfolio quality.
The review of the portfolio took a fresh look at the potential losses felt by the five bond insurers with the most exposure to collateralized debt obligations. In it, Fitch analysts took the CDOs out of the capital model and evaluated them on a deal-by-deal basis to arrive at the capital shortfall.
"That review has led us to believe that each company is going to experience a greater level of expected losses over the life of these assets," said Tom Abruzzo, Fitch managing director.
The downgrade marks the first time MBIA has been sent below AAA, and puts it in a similar gradation with fellow monoline Ambac Assurance Corp. MBIA and Ambac are rated Aaa by Moody's Investors Service and AAA by Standard & Poor's, and Ambac is also rated AA by Fitch.
MBIA Inc., the parent of the monoline, has taken recent steps to address rating agency concerns. It has stopped writing structured finance business for at least the next six months and stopped writing credit default swap contracts entirely. Fitch said these moves may help the insurer return to a AAA rating in the future. "This will possibly aid MBIA's return to AAA capital standards in the future, and more importantly, limit the risk of volatility in the insured portfolio over the intermediate term," Fitch said in the release.
Thursday, MBIA announced its role in insuring a $373 million portion of a $3 billion North Texas Tollway Authority new issue, the largest primary market deal MBIA has guaranteed this year.
In early March, MBIA asked Fitch to withdraw its insurer financial strength rating and Friday, the monoline promptly answered Fitch's downgrade.
"We respectfully disagree with Fitch's conclusions," said MBIA Inc. chief fianancial officer, Chuck Chaplin. "MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high-quality insured portfolio, factors which we believe enable MBIA to meet severe economic stress scenarios."
While Fitch clearly intoned that MBIA has a viable future in the financial guaranty business, the future is far less certain for FGIC.
NYS insurance regulators continue to work towards a plan that would bring more capital into the bond insurer, but a spokesman for the insurance department said Friday it has one month to come up with a plan. In the event that a plan is not put forth, regulators could enforce a host of options intended to protect the policyholders.
In one possibility, the insurance department could prevent FGIC from writing any new business. The department could then help the insurer manage the outstanding policies for existing policyholders, in a condition called runoff. FGIC has already voluntarily decided to stop writing new business, which it described as an effort to preserve capital. However, a "runoff" scenario may not be the best outcome for policyholders. While the insurer would continue to stand behind the policies it had already written, the financial guarantor's rating would not be restored to triple-A without more capital.
The insurance department is usually concerned with the insolvency of insurance companies, but Dinallo and Sean Dilweg, the insurance commissioner for Wisconsin, have said in the past they are most concerned about the ratings.
"For these monoline insurance cases, the ratings are so vital," Dilweg said in a March 13 interview. "Capital is definitely a piece of that."
The company released its final 2007 financial numbers last week, which showed that it tapped its statutory capital reserves and drew them down to $261 million, dangerously close to breaching statutory capital levels mandated by insurance law. In the event they do sink below, they would have to develop a plan to raise capital back above the line before they would be allowed to write further business.
FGIC is rated Baa3 by Moody's, BB by Standard & Poor's, and BBB by Fitch.