Moody's Investors Service said it may downgrade the financial strength rating of bond insurers Ambac Assurance Corp. and MBIA Inc., saying both companies face financial hurdles that need to be overcome in the face of the subprime mortgage crisis.
The New York-based rating service said any downgrade would "likely fall within the 'Aa' range, although a downgrade to the 'single-A' rating category is also possible."
Moody's said it is concerned that Ambac cannot cover potential shortfalls in the company's capital position as it has seen substantial decline in its market capitalization and high current spreads on its debt securities. The rating agency also questions the insurers ability to regain lost market and improve its underwriting.
Concerning MBIA, Moody's said it remains concerned about how losses in the mortgage market from the subprime crisis, where the company underwrites mortgage-backed securities, will affect the company. It also noted that "significant decline" in the company's stock price "is making it increasingly challenging" for it to address capital shortfalls.
The rating agency said it remains concerned about the company's ability to attract new business as well.
In response, MBIA Chairman and CEO Jay Brown released a statement saying, "We disagree with Moody's decision today."
He said the company understood the rating agency would hold off on any additional action for six-to-12 months after issuing a negative outlook in February, unless the environment or MBIA's position changed materially.
Since then, he said, there has been no change and the company's financial position has improved.
"There is no question about our ability to cover all policyholder claims, from a regulatory or any other standpoint," he said.
He further blamed Moody's for creating "instability" around its ratings, which has contributed to its difficulty in writing new business.
"We believe the actions we have taken to date make a review of our ratings unnecessary at this time," said Mr. Brown, adding that the company would still continue to cooperate with the rating agency.
During an investor's conference today sponsored by Keefe, Bruyette & Woods Inc., in New York, Doug Renfield-Miller, executive vice president for Ambac said, "We have strong liquidity and capabilities."
He said that from a capital standpoint, the company is $500 million above loss targets set by Moody's and $700 million above Standard & Poor's. The problem lies on the reliance on models that optimize stress losses used by the rating firms.
"We believe from a capital liquidity standpoint we are 'triple-A,'" Mr. Renfield-Miller said.
He said the company made mistakes, taking on risks in collateralized debt obligations it should not have, and has learned from that. He added that most of the CDOs were sold off. He said the losses from those deals have had an "out-sized impact" on the perception of the company, but the carrier is generating good earnings despite the fact it is not writing much new business, something that Moody's threat of downgrade will not help.
Adding insult to injury, yesterday Standard & Poor's said it was replacing Ambac with Lorillard Inc., the cigarette maker, in its S&P 500.
(This story was updated at 4:47 p.m.)
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