Moody's Investors Service took away the "triple-A" financial strength rating of bond insurers MBIA Insurance Corp. and Ambac Assurance Corp. yesterday, citing their exposures to the mortgage market.

Concluding a Moody's review that began June 4, the insurance financial strength ratings of MBIA were dropped to "A2" from "Aaa." Ambac was lowered to "Aa3" from "Aaa."

Both firms ratings were dropped June 5 by Standard & Poor's from "triple-A" to "double-A." Earlier this week Ambac asked Fitch to no longer rate it.

Moody's also downgraded the surplus note ratings of MBIA Insurance Corp. to "Baa1" from "Aa2," and the senior debt rating of the holding company, MBIA, Inc., to "Baa2" from "Aa3."

Action on MBIA, Moody's said, reflects the firm'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.

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," said Moody's.

The rating agency said that while the group remains strongly capitalized, and has substantial embedded earnings in its existing insurance portfolio, MBIA's insured portfolio remains vulnerable to further economic deterioration.

Moody's said MBIA noted the leverage contained in its sizable portfolio of resecuritization transactions, including some commercial real estate collateralized debt obligations, better known as CDOs.

The outlook for MBIA ratings is "negative," Moody's said, reflecting the material uncertainty about the firm's strategy and the non-negligible likelihood of further adverse developments in its insurance portfolios or operations.

MBIA, it was noted, 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.

Moody's said 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 said it 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.

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, Moody's said.

Moody's said that beyond MBIA's affected mortgage-related exposures, portfolio risks appear to be well contained

Strong premium accretion, investment earnings and portfolio amortization should help to offset any resulting impact on MBIA capital adequacy from an economic downturn, Moody's added.

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 a transformation.

In other action on Ambac, Moody's downgraded the ratings for Ambac Financial Group Inc. senior unsecured debt to "A3" from "Aa3."

Moody's said it took action based on Ambac's overall credit profile in the current environment, including the company's significantly constrained new business prospects, its impaired financial flexibility, and increased expected and stress loss projections among its mortgage-related risk exposures relative to previous estimates.

The outlook for the Ambac ratings was set as "negative," reflecting what Moody's said are uncertainties regarding the company's strategic plans going forward, as well as the possibility of further adverse developments in its insured portfolio.

Moody's noted, however, that these risks are mitigated somewhat by the company's substantive capital cushion at the current rating level, adding this was an important consideration in arriving at the "Aa3" insurance financial strength rating.

Moody's-rated securities that are guaranteed or "wrapped" by Ambac were also downgraded to "Aa3," except those with higher public underlying ratings.

Moody's said that the uncertainty about the ultimate performance of Ambac's mortgage-related exposures continues to adversely affect market perceptions of the firm.

It noted that Ambac has recorded more than $3.3 billion of cumulative loss reserves and credit impairments on its mortgage-related portfolio, and said the company's financial flexibility has deteriorated substantially since its $1.5 billion capital infusion in March.

The insurer's market capitalization decline makes it extremely difficult to economically address potential capital shortfalls should markets continue to worsen, Moody's said.

Moody's added that, beyond Ambac'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 non-mortgage-related structured segments, Moody's said, are performing well.

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Moody's Removes AAA Rating For MBIA, Ambac

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