New York, February 26, 2008 -- Moody's Investors Service has confirmed the Aaa insurance financial strength
ratings of MBIA Insurance Corporation and its affiliated insurance operating
companies. Moody's has also confirmed the Aa2 rating on surplus
notes issued by MBIA Insurance Corporation, and the Aa3 senior unsecured
ratings of parent company, MBIA Inc. These rating actions
reflect Moody's assessment of MBIA's ongoing efforts to strengthen
its capital position in light of its troubled mortgage and mortgage-related
CDO exposures, as well as changes the company is implementing to
reduce the volatility associated with its insured portfolio. The
rating outlook is negative.
OVERVIEW OF RATING APPROACH
As outlined in Moody's Rating Methodology for Financial Guarantors,
we have evaluated MBIA along five key rating factors: 1) franchise
value and strategy, 2) insurance portfolio characteristics,
3) capital adequacy, 4) profitability, and 5) financial flexibility.
Of these factors, capital adequacy is given particular emphasis.
To estimate capital adequacy, Moody's has applied its traditional
portfolio risk model for determining stress losses on the non-mortgage
related portion of MBIA's insured portfolio and alternative stress tests
for the mortgage and mortgage-related CDO exposure. For
mortgage-related exposures, stress losses were estimated
using assumptions consistent with a scenario where 2006 subprime first
lien mortgages realize an average of 21% cumulative pool losses,
with other vintages and products stressed accordingly. Stress-level
losses for RMBS transactions were assessed on a transaction-by-transaction
basis, while loss estimates for ABS CDOs were derived using a stochastic
simulation model which applied stress to specific underlying collateral
tranches within the CDOs. Estimated tranche-level losses
were computed based on the structure of those tranches (e.g.
attachment and detachment points) and estimates of their performance relative
to the average.
Losses estimated under the approach described above were present valued
to reflect estimates of the payout pattern that would emerge, based
on the collateral type. For ABS CDOs, consideration was given
to the specific contractual features within associated CDS contracts.
These factors resulted in aggregate present value discounts to principal
loss estimates of approximately 9% for RMBS and 33% for
ABS CDOs. Non mortgage risks are discounted within the portfolio
model based on estimates of payout patterns as well.
In comparing estimated stress losses to claims paying resources and associated
rating levels, Moody's combines an estimated loss distribution for
mortgage risks with one for non-mortgage risks, assuming
a correlation between the two that ranges from 90% (for Aaa) down
to 30% (for Baa3). Claims paying resources are then compared
to the indicated capital need, at the target benchmark (1.3x
capital needed to cover stress-case losses).
KEY RATING FACTORS -- CAPITAL ADEQUACY
Based on the risks in MBIA's portfolio, as assessed by Moody's according
to the approach outlined above, estimated stress-case losses
would be in the range of $13.7 billion. This compares
to Moody's estimate of MBIA's claims paying resources of approximately
$16.1 billion, resulting in a total capital ratio
of about 1.2x, which is significantly in excess of the "minimum"
Aaa level, but short of the 1.3x Aaa "target"
level by about $1.7 billion. Moody's said that,
as outlined in its rating methodology, the shortfall in capitalization
from the Aaa target was considered in relation to MBIA's plans for
closing the gap through a combination of capital strengthening measures,
and was determined to be consistent with a Aaa rating. Moody's
further noted that in the most likely or "expected" scenario, MBIA's
insured portfolio will incur lifetime losses of approximately $4
billion in present value terms, and that MBIA's current claims-paying
resources cover this expected loss estimate by roughly 4x.
Over the past two months, MBIA has completed transactions to raise
$1.6 billion in equity and $1 billion in surplus
notes, demonstrating a strong commitment to its policyholders.
MBIA is considering a number of initiatives that should enable it to meet
the Aaa target threshold over the next six to twelve months. Moody's
said that the already announced dividend elimination and six-month
suspension of new structured finance underwriting, in combination
with normal portfolio runoff and targeted reinsurance strategies,
should significantly contribute to that objective.
KEY RATING FACTORS -- BUSINESS AND FINANCIAL PROFILE
In Moody's opinion, MBIA's significant exposure to mortgage-related
risk has had consequences for its business and financial profile beyond
the associated impact on capitalization, and affects our opinion
about MBIA's other key rating factors. Nonetheless,
despite some of the recent challenges faced by the company related to
investor confidence, Moody's believes that MBIA is better-positioned
relative to certain less-established competitors with respect to
business franchise, prospective profitability and financial flexibility.
With respect to underwriting and risk management, Moody's
believes that MBIA's significant exposure to the mortgage sector
is indicative of a risk posture somewhat greater than would be consistent
with a Aaa rating going forward. Moody's also believes that
the company's non-core asset management activities,
including GICs, place incremental negative pressure on its ratings.
Moody's notes, however, that MBIA is making major changes
to its underwriting and risk management strategies in an effort to reduce
performance volatility within its insured portfolio. MBIA is developing
a principles-based approach to financial guaranty underwriting,
significantly narrowing the range of exposures that it will pursue in
order to limit the company's exposure to extreme loss outcomes in
the event of market crises such as that in US residential mortgages and
CDOs holding these mortgages. The company has indicated that it
will avoid certain structured finance business, and will no longer
underwrite derivatives contracts as it believes that the volatilities
these create are inconsistent with the business model. In Moody's
opinion, the company's commitment to focusing on reduced single
and correlated risk concentrations across its portfolio represents a critical
element to its risk management plan going forward.
MBIA's near term profitability is likely to remain below historical
levels, as new business production remains lackluster for some time,
especially given the firm's temporary moratorium on structured finance
underwriting and as possible additional credit losses are realized.
However, some stability is provided by the company's large
in-force portfolio, which will continue to provide significant
premium revenue for years.
The ability of the company to reestablish its strong market position in
the US public finance market will take time but should be facilitated
by the firm's strategy to separate its municipal, structured
finance and asset management businesses into distinct legal entities over
time. In Moody's opinion, however, MBIA's
broad and deep relationships with issuers, as well as its prominent
market position and execution capabilities in several market sectors,
provide the company with a good foundation from which to regain a solid
market position in the US public finance guaranty business.
In terms of financial flexibility, MBIA, like other financial
guarantors, benefits from its ability to pay claims over an extended
period of time, typically scheduled interest and principal at maturity.
Moody's has also considered in its rating review the potential for
calls on liquidity at MBIA in the context of available resources,
including the investment profile of the operating insurance entities and
its asset management activities. MBIA's financial leverage
profile could increase if incurred losses further erode shareholders'
equity. Moody's believes that holding company liquidity is
currently adequate, supported by dividend capacity from MBIA Insurance
Corporation and strong debt service coverage available through cash and
investments held at the holding company level.
VIEWS ON POSSIBLE SPLIT OF MUNICIPAL AND STRUCTURED BUSINESSES
MBIA has indicated that it intends, over time, to pursue the
public sector and structured finance businesses through distinct legal
entities. Moody's current ratings for MBIA do not reflect
the impact of such an organizational change. The ratings appropriate
for separate insurers operating under such a strategy would depend on
their specific business and financial characteristics, including
capitalization and underwriting frameworks. In this scenario,
Moody's believes that the structured finance guarantor would be
more challenged than its public finance affiliate to maintain a Aaa rating,
due to the relatively greater complexity of risks and higher risk concentrations
evident in that sector of the market. Those risks are more muted
within a single-company structure where more granular and lower-risk
public finance exposures provide diversification across risk and time
dimensions. Moody's further believes that guarantors splitting
their business among distinct legal entities might have a greater incentive
to allocate capital in favor of the public sector guarantor, given
the somewhat greater importance attached to Aaa ratings by customers in
that market. The effect of these structural changes would likely
be to reduce the risk of downgrade for the guarantor's insured municipal
debt and to increase the risk of downgrade for the insurer's other
RATING OUTLOOK: NEGATIVE
The negative outlook on MBIA's ratings reflects remaining uncertainties
as the company finalizes its capital plan and implements its strategy.
Moody's believes that MBIA's plan to regain its footing is
reasonable and that the company is committed to maintaining a strong credit
profile, although some credit and execution risks remain in the
near term, especially given the weakened state of the US economy.
The rating agency added that the rating outlook could return to stable
within the next six to twelve months, as visibility improves on
the firm's likely losses from mortgage-related exposures,
and as the details and effectiveness of MBIA's strategies become
more apparent. A return of the rating outlook to stable would depend
on strengthening capital to meet the target Aaa benchmark and successful
execution of contemplated changes in risk strategy.
LIST OF RATING ACTIONS
The following ratings have been confirmed:
MBIA Insurance Corporation -- insurance financial strength at Aaa,
and surplus notes at Aa2;
MBIA Insurance Corporation of Illinois -- insurance financial strength
Capital Markets Assurance Corporation -- insurance financial strength
MBIA UK Insurance Limited -- insurance financial strength at Aaa;
MBIA Assurance S.A. -- insurance financial strength
MBIA Mexico S.A. de C.V. -- insurance
financial strength at Aaa and Aaa.mx (national scale rating);
MBIA Inc. -- senior unsecured debt at Aa3, provisional
senior debt a (P) Aa3, subordinated debt at (P) A1, and provisional
preferred stock at (P) A2;
North Castle Custodial Trusts I-VIII -- contingent capital
securities at Aa3.
OVERVIEW OF MBIA INC.
MBIA Inc. (NYSE: MBI) is the parent of MBIA Insurance Corporation,
which provides financial guarantees to issuers in the municipal and structured
finance markets in the United States as well as internationally.
MBIA also offers various complementary services such as investment management
and municipal investment contracts. MBIA reported a net loss for
2007 of approximately $1.9 billion, and had shareholders'
equity of about $3.6 billion as of 12/31/07.
Financial Institutions Group
Moody's Investors Service
Moody's confirms MBIA's Aaa rating, changes outlook to negative
Senior Vice President
Financial Institutions Group
Moody's Investors Service