MBIA and Ambac in further ratings review

The two largest monoline insurers, MBIA and Ambac, were placed on review for downgrade by Moody's Investors Service yesterday.

Ambac, rated Aa3 by Moody's, and MBIA, rated A2, are heavily dependent on ratings for their CDS insurance business. The agency took the action as a result of a review of the cumulative loss projections assigned to subprime residential mortgage-backed securities (RMBSs).

The previous estimated loss on 2006 vintage subprime RMBSs was in a 14%-18% range, but the rating agency now applies a 22% assumption over the life of those exposures. The stress case assumption has also been revised to more than 30%.

"Because both Ambac and MBIA are meaningfully exposed to the risk of US subprime mortgages and other residential mortgage products, the revised assumptions are expected to have a significant impact on the firms' capital positions, and multi-notch downgrades are possible," said the rating agency in yesterday's rating release.

The companies themselves have reacted with dismay to the further blow to their ratings. Ambac "expressed surprise and disappointment" with the action in a release put out yesterday.

"Ambac believes Moody's ratings actions continue to cause confusion, uncertainty and the risk of material economic damage if their assumptions ultimately prove to be too onerous," said Michael Callen, chief executive of Ambac.

MBIA also put out a release querying whether the 22% loss assumption should in fact be further stressed, calling the current environment the very definition of stress.

"Moody's will spend the next few weeks running its models using stress assumptions on top of what is obviously already an actual stress case," said Jay Brown, chief executive of MBIA. "While we will work with them to point out the inherent flaws in their logic, we believe our owners should take this as yet another upward revision in model assumptions forged in the heat of a panic-driven market."

See also:

Bank monoline exposures creep up in second quarter

FGIC in MBIA reinsurance deal

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