MBIA may benefit from new insurance arm Fri Jun 13, 2008 4:20pm EDT By Karen Brettell NEW YORK, June 13 (Reuters) - MBIA Inc's investors are betting that the company will set up a new bond insurance subsidiary, reviving the fortunes of the parent company, though this will likely be at the expense of its existing insurance arm, MBIA Insurance Corp. The world's largest bond insurer said on Thursday that it is reevaluating its capital deployment plans, including how it will use $900 million that had previously been earmarked for MBIA Insurance. MBIA decided against passing the capital down to its insurance arm after Standard & Poor's last week downgraded the insurer from the top "AAA" and Moody's Investors Service said it is likely to cut the firm. The capital "is not needed at the current operating company for capitalization levels (given the recent downgrades) and could be deployed in another fashion," JPMorgan analysts Arun Kumar and Brett Gibson said in a report on Friday. "We believe there is a high likelihood that companies such as Ambac and MBIA attempt to activate dormant subsidiaries (over the next few months) in an attempt to capture some of the new muni business to remain somewhat active," they said. MBIA and Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz), the world's second largest bond insurer, lost their ability to write new business after the downgrades, which followed months of drama based on concerns over losses from insuring risky residential mortgage-backed debt. Concerns over their top ratings have devalued the more than $1 trillion in insurance policies written by the two companies on municipal, corporate, sovereign and asset-backed debt and created widespread losses on these securities. MBIA's shares jumped more than 7 percent on Friday as investors bet that the company may set up a newly top rated municipal bond insurer, which can pay dividends up to the parent company. In the past two weeks, debt insurance costs on MBIA dropped lower than those of its fallen insurance arm, which remains exposed to new write downs from mortgage-backed debt. This indicates perceptions that the debt of MBIA Insurance is now more risky than its parent's. The redeployment of MBIA's capital away from MBIA Insurance is a sign the company is looking at other options to revive its business, said an industry participant that declined to be named. "You don't want to just be a punching bag for the regulator, you want to be able to show 'we have some leverage too,'" he said. Regulators are concerned that restructuring bond insurers may harm existing policy holders, particularly holders of insured municipal debt. JPMorgan views MBIA as most likely to activate its dormant Capital Markets Assurance subsidiary to seek top ratings and insure muni bonds. "While this structure is disadvantageous to both the operating company and current policyholders, in our opinion, the regulators are limited in their ability to prevent it seeing as though MBIA does not need regulatory approval to use the holding company cash as an investment," they said. Ambac, meanwhile, said last week that said it wants to launch a new top-rated bond insurer, Connie Lee, which would be funded by surplus capital from Ambac and potentially one or more third parties. In this scenario, however, Ambac's insurance arm, Ambac Assurance Corp, would benefit more than the holding company as Connie Lee would operate as a subsidiary of Ambac Assurance, JPMorgan said. "The biggest question is what (bond insurers) will decide to do with existing policyholders and who will benefit the most after the process has completely unfolded," they added.
Bond insurer cuts below "AA" risky for munis, banks-BofA Wed Jun 18, 2008 3:25pm EDT NEW YORK, June 18 (Reuters) - U.S. money market funds may be forced to sell short-term municipal securities if troubled bond insurers are downgraded below "AA," potentially adding to banks' woes, according to a Bank of America report. Bond insurance arms of MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz) earlier this month finally lost their top "AAA" ratings from a major rating company because they had guaranteed massive amounts of troubled mortgage-backed debt. Standard & Poor's cut the No 1. and No 2. companies in the business to "AA," but rival rating firm Moody's Investors Service said it may cut MBIA to the "single A" category, potentially spelling trouble for money market funds and banks. Bond insurers have to be rated at least "Aa3" or "AA-" for short-term municipal bonds to be eligible for money market funds under the Security and Exchange Commission's rules. A downgrade below that level would force money market funds to return short-term munis to dealers, which provide a money-back guarantee through a put option. "That may lead to a short-term ballooning of bank balance sheets as they take on the debt before restructuring and underlying upgrading of ratings ultimately resolve the problem," Bank of America analyst Jeffrey Rosenberg wrote in a a report late on Tuesday. Brokers and banks have already been forced to write down more than $400 billion of assets and raise capital because of the global credit crisis. Bond insurers, which guarantee over $2 trillion of securities, also contributed to write-downs. Fears that guarantors may lose their top ratings roiled markets in February, but when MBIA and Ambac were finally downgraded reaction was muted. Yet some systematic risk remains, Bank of America said. If bond insures are cut further, recently patched up bank balance sheets could swell with variable rate demand obligations and tender option bonds, according to the report. Tender option bonds are floating-rate securities sold by dealers and arbitrageurs to fund and profit from investments in long-term munis. They are less at risk because sponsors have already mostly amended documents to remove a link to bond insurers. But variable rate demand obligations sold by states, cities and towns are still vulnerable to the bond insurer downgrade below the "AA" level. However, planned municipal debt rating changes are likely to result in many upgrades of state and government debt issuers above the bond insurers's ratings, mitigating the systemic risk, Bank of America said. Moody's Investors Service last week said it plans to rate municipal bonds with the same scale it uses for private companies, a move expected to result in widespread muni bond upgrades. And the Securities and Exchange Commission's proposals to relax some of its rules for money market funds could also reduce the risk from the bond insures, Bank of America added. (Reporting by Anastasija Johnson, Editing by Chizu Nomiyama)
Bill Ackman Was Right: MBIA, Ambac on `Ratings Cliff' (Update1) By Christine Richard June 18 (Bloomberg) -- Bill Ackman was right: the world's largest bond insurers aren't worthy of a AAA credit rating and may be headed for the bottom of the scale. Ackman, the 42-year-old hedge fund manager who says he stands to make hundreds of millions of dollars betting against MBIA Inc. and Ambac Financial Group Inc. if they go bankrupt, will tell investors at a conference in New York today that losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent. That once-unthinkable scenario would trigger clauses in $400 billion of derivative contracts written to insure collateralized debt obligations and other securities, allowing policyholders to demand immediate payment for market losses, which have reached $20 billion, according to company filings. Downgrades of the insurers would cause a drop in rankings for the $2 trillion of debt that the companies guarantee, wiping out the value of the CDO insurance held by Wall Street firms, analysts at Oppenheimer & Co. said. ``Given the volume of credit-default swap contracts the industry has written, there is a real element of a ratings cliff across the bond insurance sector,'' said Fitch managing director Thomas Abruzzo, the first analyst to strip MBIA and Ambac of their top ratings. Ambac said today it asked Fitch to remove ratings on all of the company's subsidiaries. MBIA asked Fitch to stop assigning a financial strength rating in March. 17 Levels CIFG North America may fall first. The company's credit rating has been cut by 17 levels to CCC from AAA by Fitch since March because of concern it won't be able to make payments on $57 billion of the contracts. Ackman said CIFG ``provides a road map for what happens to a bond insurer when its capital is depleted.'' Ackman, whose $6 billion Pershing Square Capital Management hedge fund in New York returned 22 percent last year, began betting against bond insurers in 2002. In his report ``Is MBIA Triple-A?,'' Ackman was the first to say the insurer's use of derivatives to guarantee debt threatened to drain capital. MBIA, of Armonk, New York, Ambac, Security Capital's XL Capital Assurance and FGIC Corp. also have guarantees with similar clauses to CIFG that may allow policyholders to demand billions of dollars if the companies became insolvent, according to company filings. CIFG, XL Capital Assurance, and FGIC's insurance unit may all fall short of regulatory capital requirements by June 30, according to Robert Haines, an analyst with CreditSights Inc. in New York. `Highly Theoretical' Downgrades may cause Citigroup Inc., Merrill Lynch & Co. and UBS AG to write down the value of insured-debt holdings by at least $10 billion, according to Meredith Whitney, an analyst at Oppenheimer in New York. Banks and insurance companies would also be required by regulators to hold more capital to protect against losses on lower-rated debt, according to analysts at Charlotte, North Carolina-based Wachovia Corp. CIFG is working on a plan to bolster capital, spokesman Michael Ballinger said. Because MBIA has a surplus of $3.9 billion, insolvency is ``both highly theoretical and extremely unlikely,'' Kevin Brown, a spokesman for MBIA said in an e-mailed statement. Vandana Sharma, a spokeswoman for Ambac, with a $3.6 billion surplus, declined to comment, as did Security Capital spokesman Michael Gormley and New York-based FGIC's chief risk officer, John Dubel. Insurers, including MBIA and Ambac, expanded beyond municipal debt into insuring CDOs, which package pools of securities and slice them into pieces of varying risk. The move was criticized by Ackman, who said it may ultimately bankrupt the companies. Pershing Square In January, Ackman, who started a hedge fund after working at his family's commercial mortgage brokerage, estimated MBIA and New York-based Ambac faced losses on home-loan securities of almost $12 billion each, a claim the companies disputed as recently as February. Ackman said he took an interest in MBIA after asking a credit-market trader which companies didn't deserve AAA ratings. That led to his report and his decision to take a short position in MBIA and Ambac stock, selling borrowed stock, expecting to repurchase it later at a lower price. Ackman also bought credit- default swaps on MBIA and Ambac debt. The swaps would rise in value if doubts about the companies grew. Pershing Square profited as MBIA tumbled 91 percent in the past 12 months and Ambac plunged 98 percent in New York Stock Exchange composite trading. Security Capital is down 99 percent. Investor Bets Instead of writing standard insurance policies for the CDOs, the companies provided guarantees in the form of credit-default swap contracts, financial instruments that allow one party to assume the risk of a security defaulting in exchange for a fee from another. The contracts were designed to mirror insurance policies, said Bob Mackin, the Albany, New York-based executive director of the Association of Financial Guaranty Insurers. Unlike insurance, the swaps include so-called termination clauses that can be triggered if a company becomes insolvent, Mackin said. The feature requires insurers to compensate CDO holders for any drop in value, or mark-to-market loss, on the securities. Moody's wrote in 2006 that the companies were ``well insulated from liquidity risk,'' because credit-default swaps ``protect the guarantor from ever having to pay claims on an accelerated basis.'' Moody's spokesman Abbas Qasim declined to make analysts available for this story. `Serious Consequences' The credit ratings of some CDOs have tumbled so far that the insurers have recorded combined unrealized losses of at least $20 billion. Some companies' termination payments would eat up all their claims-paying resources, according to filings and rating company reports. ``It doesn't make sense for companies and regulators to have gone knowingly into this, given the very serious consequences,'' said Lawrence Hamilton, an insurance attorney with Mayer Brown LLP in Chicago. ``At the time, the possibility of a bond insurer becoming insolvent seemed so remote.'' If a company's surplus to policyholders -- or assets over liabilities -- falls below zero, it's considered insolvent under New York State Insurance Department rules and would be taken over by Superintendent Eric Dinallo, unless it comes up with a plan to correct the impairment, Deputy Superintendent Michael Moriarty said in an e-mailed statement. Moriarty wouldn't comment on the likelihood of the department taking over the companies under that scenario. `Extremely Alarming' In a June 8 report, CreditSights' Haines wrote that ``statutory surplus levels at some of the monoline financial guarantors are extremely alarming.'' Companies may avoid making the termination payments by raising capital or reducing loss reserves. CIFG and FGIC are seeking ways to raise capital, they said. MBIA and Ambac have said they don't anticipate losses will be large enough to erode their surpluses. Even in an insolvency, regulators may step in to halt the payments or banks may decide not to demand compensation, Abruzzo said. ACA Financial Guaranty Corp. has reached five agreements with banks since December, allowing it to avoid posting collateral on CDOs it guaranteed using swaps. ACA has been cut to CCC by S&P. Fitch is assuming in its ratings that regulators will allow the payments, Abruzzo said. CIFG, FGIC CIFG, based in Hamilton, Bermuda, had a surplus of $80 million at the end of the first quarter, down from $103 million, according to filings. It set aside more than $100 million for losses in the first three months of the year. Security Capital's XL Capital Assurance booked about $200 million of losses in the first quarter, shrinking its surplus to $167 million, according to company filings. SCA, based in Hamilton, Bermuda, wouldn't be able to cover termination payments on swaps if they were triggered, according to regulatory filings. XL is rated BB by Fitch, A3 by Moody's and BBB- at S&P. FGIC had a cushion of $366 million at the end of March, compared with loss reserves of about $1.8 billion taken in the past year, according to company filings. FGIC is rated BBB by Fitch, Baa3 at Moody's and BB by S&P. MBIA and Ambac may need to raise capital to avoid becoming insolvent if loss reserves continue at the recent pace, Haines said. The companies were both cut to AA from AAA by Fitch and S&P. Moody's said on June 4 that it probably will also reduce its ratings. S&P spokeswoman Mimi Barker declined to make analysts available for this story. `Nightmare Scenario' In the past two quarters, MBIA's insurance unit set aside reserves of $2 billion to cover losses on $51 billion of guarantees on home-equity securities and CDOs backed by subprime mortgages. Ambac booked about $2 billion of loss reserves, leaving it with a statutory surplus of $3.6 billion. It guaranteed around $47 billion of CDOs and home-equity debt. While both companies are above the regulatory capital requirements, S&P said in a February report that in a ``stress case scenario,'' MBIA may be forced to pay a total $7.9 billion in claims on a present-value basis and Ambac may be forced to pay $6.2 billion. ``That's what puts these companies into the nightmare scenario,'' CreditSights' Haines said. To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net
man even the super duper senior senior AAA new ABX index is down to 57! a few more bil writedowns for mbi abk almost seems overdue.
as I understand market to market losses and writedowns on bond insurers dont count towards statutory capital. I called the s&p back in dec and the guy who rates Channel RE triple AAA told me that. the provision for losses do count, hence the board will soon start to cheerlead housing on every uptick of newhome sales
Moody's downgrades MBIA's rating to A2; outlook is negative New York, June 19, 2008 -- Moody's Investors Service has downgraded to A2, from Aaa, the insurance financial strength ratings of MBIA Insurance Corporation (MBIA) and its affiliated insurance operating companies. In the same rating action, Moody's also downgraded the surplus note rating of MBIA Insurance Corporation to Baa1, from Aa2, and the senior debt rating of the holding company, MBIA, Inc. (NYSE: MBI) to Baa2, from Aa3. Today's rating action concludes a review for possible downgrade that was initiated on June 4, 2008, and reflects MBIA's limited financial flexibility and impaired franchise, as well as the substantial risk within its portfolio of insured exposures and a movement toward more aggressive capital management within the group. The rating agency said that while the group remains strongly capitalized, estimated to be consistent with a Aa level rating, and benefits from substantial embedded earnings in its existing insurance portfolio, these other business factors led to the lower rating outcome. Furthermore, MBIA's insured portfolio remains vulnerable to further economic deterioration, particularly given the leverage contained in its sizable portfolio of resecuritization transactions, including some commercial real estate CDOs. The outlook for the ratings is negative, reflecting the material uncertainty about the firm's strategy and the non-negligible likelihood of further adverse developments in its insurance portfolios or operations. As a result of today's rating action, the Moody's-rated securities that are guaranteed or "wrapped" by MBIA are also downgraded to A2, except those with higher public underlying ratings. A list of these securities will be made available under "Ratings Lists" at www.moodys.com/guarantors. Moody's said that substantial uncertainty about the ultimate performance of MBIA's mortgage related exposures continues to adversely affect market perceptions of the firm, greatly impairing its financial flexibility and ability to write new insurance. MBIA has recorded approximately $2.1 billion in cumulative loss reserves and impairments associated with its mortgage related portfolio, mostly from second lien mortgage backed securities and asset-backed CDOs (ABS CDOs). Moody's noted that, over the last few months, MBIA has written little new business, and its financial flexibility has deteriorated substantially as evidenced by the significant decline in the company's stock price and high current spreads on its debt securities, making it extremely difficult to economically address potential capital shortfalls should markets continue to worsen. Moody's has re-estimated expected and stress loss projections on MBIA's insured portfolio, focusing on the company's mortgage-related exposures as well as other sectors of the portfolio potentially vulnerable to deterioration in the current environment. Based on Moody's revised assessment of the risks in MBIA's portfolio, estimated stress-case losses would approximate $13.6 billion at the Aaa threshold and $9.4 billion at the A2 threshold. This compares to Moody's estimate of MBIA's claims paying resources of approximately $15.1 billion. Moody's noted that its stress case estimates for MBIA's residential mortgage-related exposures increased by roughly $500 million to $5.9 billion, which was largely offset by insured portfolio amortization since year-end 2007. Relative to Moody's 1.3x "target" level for capital adequacy, MBIA is currently $2.6 billion below the Aaa target level and is $2.8 billion above the A2 target level. The rating agency noted that MBIA's recent decision to retain at the holding company the $1.1 billion in proceeds from its most recent equity offering is indicative of a more aggressive capital management strategy, and is a negative credit consideration for the insurance company's rating. Such decision, however, puts the holding company in a strong liquidity position, said Moody's, providing additional comfort about the firm's ability to manage the effect of acceleration and collateralization in its GIC business triggered by the downgrade. MBIA has indicated that the firm does not intend to issue additional dilutive capital in the current environment and that it will review its strategic options for redeploying the holding company funds, including possible stock buybacks. Moody's said that, beyond MBIA's affected mortgage related exposures, portfolio risks appear to be well contained as reflected by its core low-risk municipal book and high average underlying ratings. Most structured finance sectors outside of residential mortgage related products are performing well, although certain exposures, such as some commercial real estate CDOs, because of their leveraged structure and sector concentration, may be more sensitive to severe economic or sector deterioration. While portfolio losses could increase in a sharp economic downturn, strong premium accretion, investment earnings and portfolio amortization should help to offset any resulting impact on capital adequacy. Moody's noted, however, that downward rating pressure could occur if MBIA's capital position eroded through the extraction of capital or due to further increases in projected stress loss estimates. Moody's will continue to evaluate MBIA's ratings in the context of the future performance of the company's mortgage-related exposures relative to expectations and resulting capital adequacy levels, as well as changes to the company's strategic and capital management plans as a single-A rated company. In February, MBIA announced a long-term strategic objective of separating its municipal insurance, structured insurance and asset management businesses into distinct legal entities. Moody's said that management's recent decision to retain at the holding company the $1.1 billion in proceeds from its latest equity raise suggests that the firm is contemplating a more accelerated timeframe for such transformation. LIST OF RATING ACTIONS The following ratings have been downgraded: ⢠MBIA Insurance Corporation -- insurance financial strength to A2 from Aaa, and surplus notes to Baa1 from Aa2; ⢠MBIA Insurance Corporation of Illinois -- insurance financial strength to A2 from Aaa; ⢠Capital Markets Assurance Corporation -- insurance financial strength to A2 from Aaa; ⢠MBIA UK Insurance Limited -- insurance financial strength to A2 from Aaa; ⢠MBIA Assurance S.A. -- insurance financial strength to A2 from Aaa; ⢠MBIA Mexico S.A. de C.V.'s -- insurance financial strength to A2 from Aaa (the firm's Aaa.mx -- national scale rating -- is affirmed); ⢠MBIA Inc. -- senior unsecured debt to Baa2 from Aa3, provisional senior debt to (P) Baa2 from (P) Aa3, provisional subordinated debt to (P) Baa3 from (P) A1, and provisional preferred stock to (P) Ba1 from (P) A2; ⢠North Castle Custodial Trusts I-VIII -- contingent capital securities to Baa2 from Aa3; Established in 1974, MBIA provides financial guarantees to issuers in the municipal and structured finance markets in the United States, as well as internationally. MBIA also offers various complementary services, such as investment management and municipal investment contracts.
the problem with this kind of insurance is that if there is no risk there is no need for bond insurance. high risk bonds should get higher interest rates. the idiots insuring bonds is a oxymoron. bonds are suppose to be no risk if you are only getting 10%
MBIA 'baffled' by Moody's analysis after ratings cuts, says funds will meet its obligations NEW YORK (AP) -- Bond insurer MBIA Inc. said late Thursday it was "baffled" by Moody's Investors Service decision to cut several of its ratings on the company. Moody's slashed MBIA's insurance financial strength rating for MBIA Insurance Corp. to "A2" from "Aaa," its surplus note rating for MBIA Insurance to "Baa1" from "Aa2," and the senior debt for MBIA to "Baa2" from "Aa3." MBIA said Moody's assertion that it is strongly capitalized and benefits from substantial embedded earnings in its insurance portfolio "would seem to support sustaining a 'Aa' rating while satisfying Aaa minimum capital requirements." The "Aaa" rating its Moody's highest. "With $16 billion in claims-paying resources ... we have more than enough capital to meet obligations to policyholders," Armonk, N.Y.-based MBIA said in a release. "This is an issue of ratings and not solvency." Deutsche Bank analyst Darin C. Arita said MBIA's $1.4 billion of liquid assets could be used to capitalize a new subsidiary to write new business. He kept a "Hold" rating and $6 price target, implying he expects the stock to slip 7 percent below Thursday's $6.45 close. MBIA shares have fallen 65 percent so far this year. what a hoot. Next stop AA downgrades