Moody’s Investors Service Friday downgraded the insurer financial strength of MBIA Insurance Corp. to Baa1 with a developing outlook from A2 on review for downgrade.
“Today’s rating action concludes a review for possible downgrade that was initiated on September 18, 2008, and reflects Moody’s view of MBIA’s diminished business and financial profile resulting from its exposure to losses from US mortgage risks and disruption in the financial guaranty business more broadly,” Moody’s said.
MBIA Inc. chairman and chief executive officer Jay Brown said in a statement the company disagrees “with Moody’s approach to capital modeling for mortgage-related losses, particularly its 'stress on stress’ methodology” but that the action has “very little direct impact on MBIA.”
The company has rebalanced its portfolio since the second quarter and has sufficient liquidity to meet all termination payments on its guaranteed investment contracts the downgrade will trigger, Brown said.
“Our policyholders and debt holders can rest assured that we will meet our obligations to them on time and in full and that we are doing everything we can to ensure that MBIA weathers the current financial crisis,” Brown said.
The downgrade comes two days after MBIA reported an $806.5 million net loss for the third quarter, including an increase of $961 million in case loss reserves for its second-lien residential mortgage-backed securities exposures. MBIA’s loss reserves on direct insured RMBS exposures are now “broadly consistent” with Moody’s, but its credit-related impairments on its exposures to collateralized-debt obligations of asset-backed securities fall $1.5 billion below Moody’s expectations, the rating agency said.
Moody’s cited expectations of greater losses on mortgage-related exposures, even greater than expected losses in extreme stress scenarios — possibly beyond just mortgages — MBIA’s diminished business prospects, and its limited financial flexibility for the downgrade. It said MBIA’s future rating will depend on a number of factors, such as greater clarity about mortgage performance, any possible commutations of exposures, MBIA’s remediation efforts and the outcome of any federal efforts to stem the rising rate of mortgage defaults.
Moody’s noted that MBIA’s deal to reinsure Financial Guaranty Insurance Co.’s $166 billion U.S. public finance book adds premium income “during a time of limited new business activity” for MBIA.
Moody’s Wednesday downgraded Ambac Assurance Corp. to Baa1 with a developing outlook from Aa3, after Ambac Financial Group Inc. posted a $2.431 billion net loss for the third quarter. Moody’s had put both insurers on review for downgrade Sept. 18.
The downgrade to Ambac triggered termination payments and collateral postings that would have led to a $3.2 billion shortfall at Ambac’s financial products unit, but Wisconsin regulators gave the company approval to use resources at Ambac Assurance to plug the gap.