The Municipal Bond Insurers Crisis – Part I

The potential downgrading among at least eight bonds insurers has caused a flurry of media speculation. MBIA and Ambac are leading the pack in attempting to ward off potential credit-rating downgrades. The announcement that at least six triple–A rated guarantors have a shortage of capital has caused a loss of confidence and falling stock prices for the firms in question.

Some misinformation has been reported in the financial media in recent months as well, predicting the demise of the bond insurance industry. This news has made many investors fearful, causing a widespread liquidity crisis and credit rating downgrades. Even though new business volume, premium rates and profitability at some companies are approaching historically high levels, exposure to the subprime mortgage market and lack of an appropriate capital cushion did place financial guarantors' triple–A ratings in question.

Moody's recently announced results of a review of financial guarantors' ratings as well as their plans for strengthening capitalization. Standard and Poor's Ratings Services latest announcement of ratings actions emphasized that their stress test went deeper and wider than before. While most insurers were able to retain their triple–A rating, some of their outlooks changed due to their inability to meet capital adequacy test.

Assured Guaranty's and FSA's triple–A ratings were affirmed by S&P, Moody's and Fitch with a stable outlook. S&P affirmed Ambac's triple–A rating but revised their outlook to negative while Moody's review affirmed a triple–A rating with a stable outlook. Fitch placed Ambac on a negative rating watch. MBIA's triple–A rating was affirmed, but S&P and Moody's revised their outlook from stable to negative, while Fitch placed them on a negative rating watch. XLCA/SCA maintained their triple–A rating, but received a mixed review: S&P revised their outlook to negative, Moody's has it under review for a downgrade and Fitch lists a negative rating watch. CIFG held on to their triple–A rating with a negative outlook from S&P and Moody's while Fitch gave them a stable outlook. FGIC's triple–A rating was affirmed with a negative credit watch from S&P and Fitch while Moody's put them under review for a downgrade. All firms are in various stages of raising capital to provide a larger cushion to respond to further market deterioration (as of January 3, 2008).

The negative outlook can extend for as long as two years, giving insurers' time to adjust, but credit watches will be reviewed in three months.  It is difficult to predict the long term effects.  Further market deterioration is uncertain but the rating agencies will continue their watch while the insurers will look for a cushion to sustain them.