Lack of confidence in the ability of bond insurers’ to maintain triple-A ratings has now given way to unwarranted concern about the solvency of these companies. The Regulators in New York for MBIA (MBI) and Wisconsin for Ambac (ABK) have repeatedly said they have no concern about the ability of Ambac and MBIA to pay current and future claims and the rating agencies agree, since their rating opinions now converge around double-A to single-A levels.
State bond insurance regulations are formulated and enforced for the sole purpose of protecting the interest of policy holders i.e., the ability to pay claims. Rating agency rating opinion gradations at any point in time do not drive regulatory action. These parties are consonant only when both conclude the ability to pay claims is in doubt. In rating agency speak it means a non investment grade rating (double-B or lower). Regulators use one or more of several control interventions. Do you know or care about what the credit ratings are on your homeowners or auto insurance companies?
Loss of the market’s confidence and confirming rating downgrades has hurt shareholders much more than policy holders (the owners of insured Ambac and MBIA bonds). The default protection remains, however, and that protection may be undervalued now in the tax exempt market; there is only upside potential.
Moody’s (MCO) and S&P (MHP) are now weighing the inability to write a significant level of new business and a very constrained ability to raise capital on par with capital resources necessary to support a particular claims paying rating. In light of these developments, it seems to me that MBIA’s decision to not downstream money to its insurance subsidiary was a rational choice.
It is interesting to note that Moody’s, for instance, modestly increased stress case loss projections for both insurers that was offset by exposure runoff since their last projections. On a capital sufficiency basis, Moody’s pegged MBIA at double-A and Ambac as exceeding the triple-A target level.
In any event, whether you agree or disagree with the Regulators and Ratings Agencies, the prognosis for the Companies should be clear by the time 4th quarter results are posted.
Why Clarity by January 2009?
The collapse of mortgage underwriting standards drove, on an income adjusted basis, residential real estate prices in the most recent bubble well beyond levels of the prior late 1980’s real estate bubble. It should be no surprise then that the near overnight restoration of mortgage standards would trigger unprecedented velocity of price correction. As a result, clarity as to peak to trough real estate prices and mortgage loss expectations for insurers and the real estate market in general should be evident sooner rather than later. For more on this point, you may wish to review “U.S. Housing: The Big Picture by the Numbers” Seeking Alpha March 27, 2008.