Muni Insurers Still Need More Capital, as Moody's Confirms

I only hope that when the data is analyzed, a strength can be found. Or at least, that's FGIC's only hope. Moody's (MCO) placed the erstwhile GE (GE) subsidiary on negative watch late on Friday. When I first started my career, FGIC had the reputation for being the most conservative of the major insurers. Now they are the one in the most trouble. Moody's also put XLCA [subsidiary of SCA (SCA)] on negative watch as well. Both will need to raise capital over the next couple months if they want to keep their gilt-edged rating.

We've speculated before on this blog about FGIC, which seemed particularly vulnerable given the fact that majority owner PMI (PMI) is having their own capital problems. But it's not over yet. Moody's didn't give a number to how much capital FGIC might need, but I suspect they've given such a number to FGIC management. So the odds are good that FGIC is already working on a capital plan.

MBIA (MBI) was affirmed, but given a negative outlook. It sounds like as long as the previously announced capital plan is completed, the negative outlook will be removed. Interestingly, MBIA's current capital is below the Aaa target level, but their capital is adequate under the stressed scenario (albeit just barely). XLCA is above the target level now, but would fall below under the stressed scenario. I guess that is saying that MBIA has stuff in trouble now, but XLCA has stuff that could really blow up on them if things get worse.

AMBAC (ABK), which has been my whipping boy only because it provided enough info to do a deep dive, has been affirmed with a stable outlook. Moody's believes that AMBAC has enough capital even before the recent reinsurance deal with Assured Guaranty (AGO). This is evidence to support my conspiracy theory: that Moody's tipped off the insurers as to how much capital they'd need. That's why AMBAC was confident that reinsurance would be enough when it presented at a Bank of America (BAC) conference.

Assured, FSA (FSA), and Radian (RDN) were also affirmed with stable outlooks. Radian is the interesting story here, since its traditional mortgage insurance business has the holding company struggling, but it's actually capitalized the bond insurance business separately, and the insurance arm has very little in mortgage exposure.

This is all great news for MBIA and AMBAC, and not unexpected for FGIC and XLCA. But it's not the end of the story for any of them. I'm on record that AMBAC will wind up with larger losses than what their capital currently supports. So I think as time passes, AMBAC (and probably MBIA also) will have to raise additional capital. It's possible that losses come in slowly, and therefore the required extra capital is small enough in any given year as to not require drastic measures. That seems to be what Moody's is saying.

We'll see how the muni market reacts on Monday.

Disclosure: No positions in any company mentioned other than insured municipal bonds.