Moody's Investors Service yesterday affirmed the insurer financial strength rating for MBIA Insurance Corp. at Aaa, removed the credit from negative watch, and assigned a negative outlook.
Moody's had the bond insurer on review for possible downgrade, but yesterday's rating actions reflect MBIA's efforts to improve its capital position and alter its business structure to reduce the volatility associated with its insured portfolio, Moody's said.
In evaluating the risks in MBIA's portfolio, Moody's said MBIA could incur $4 billion in losses under the most likely scenario. The rating agency also estimated stress-case losses to be in the range of $13.7 billion, compared to estimated claims-paying resources of $16.1 billion. This results in a total capital ratio of 1.2 times, Moody's said.
"[The capital ratio] is significantly in excess of the "minimum" Aaa level, but short of the 1.3x Aaa "target" level by about $1.7 billion," Moody's said.
In a letter to shareholders yesterday, newly elected chief executive officer Joseph "Jay" Brown said MBIA would seek to separate its municipal business from its structured finance business, as well as cease insuring new derivative contracts and not write any guarantees on asset-backed security collateralized debt obligations for about six months.
"We are very pleased that Moody's has now joined Standard & Poor's in affirming our triple-A rating, adding to the growing confidence among our shareholders and issuers that MBIA continues to play a vital role in the bond market," Brown said Tuesday in a statement.
To that end, Moody's said MBIA's business prospects in public finance look safe. The rating agency said it expects the company to reestablish a "strong" market position based on its relationships with issuers, prominent market position, and ability to navigate several market sectors within public finance. Moody's did say it will take some time for MBIA to rebound.
However, bond insurance penetration in the municipal market fell to 28.1% in January, according to Thomson Financial.
On Monday, Standard & Poor's affirmed MBIA's AAA rating and moved its outlook on the credit to negative.
His current role at MBIA is the second for Brown. He also served as CEO from 1999 to 2004, and was at least partly responsible for getting MBIA to write more business in the structured finance arena. His recent comments in speaking out against structured products and credit derivatives leave some market participants doubtful.
"What troubles me is that in reading Moody's release, they seem to admit that the structured finance area still poses a risk that is not consistent with a Aaa rating, but that they believe management will solve this problem," said Dick Larkin, senior vice president and director of research with Herbert J. Sims & Co. "This is basically the same management that put MBIA into this hole in the first place."
When asked about it in an interview on CNBC yesterday afternoon, Brown said the move to go further into writing policies on structured products was not one of his better decisions.