Insurers Retain Investment Grade Rating Despite Downgrade

By: Dr. Jay H. Abrams
Chief Municipal Credit Analyst

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MBIA and Ambac retained an investment grade rating of “Baa1” despite recent downgrades by Moody’s Investors Service.

The downgrades came in response to a reported net loss of $2.431 billion by Ambac and $1.5 billion by MBIA for the third quarter of 2008. Since losing their “AAA” ratings earlier this year, both insurers have stopped writing new bond insurance policies. Existing insurance policies remain in effect, and both insurers, in the eyes of Moody’s and S&P, still have sufficient resources to meet any claims they must pay.

A stress test analysis just completed by Standard & Poor’s shows Ambac and MBIA to have adequate resources to cover total projected losses. The projections assume a substantial need to pay claims on defaulted mortgage loans in the future.

Although Moody’s lowered the ratings on what had been the municipal bond industry’s premier insurers, the rating agency noted that each insurer still possessed aggregate resources sufficient to provide a meaningful capital cushion above expected loss levels.

A “developing” outlook was assigned to both insurers’ new ratings, “reflecting both the potential for further deterioration … as well as positive developments that could occur over the near to medium term….”

As former “Aaa”-rated insurers, both Ambac’s and MBIA’s portfolios of insured municipal bonds primarily ranges from mid “BBB” to “AA” credit quality on their own merit. As a result, the typical Ambac or MBIA insured bond came to market “wrapped” with bond insurance, essentially to provide bondholders an additional level of protection.

Vast majority of insured munis continue to perform

The vast majority of insured municipal bonds continue to meet their principal and interest payments in a timely manner, regardless of whether they are insured.

Bondholders need to remember that both Ambac’s and MBIA’s earnings performance reflect their exposure to the subprime mortgage market, not the municipal bond business on which they built their reputations.

11/10/2008