Ambac and MBIA posted strong second-quarter earnings, thanks to mark-to-market gains the firms were required to take according to accounting rules. Both firms have been wrestling with the financial impact of their exposure to the nation’s housing markets and sub-prime mortgage backed securities.
At the same time, American Capital Access (ACA) reached a settlement with both Maryland regulators and creditors that will allow the former “A”-rated insurer to keep its outstanding municipal bond insurance in force.
Besides municipal bonds, ACA also insured approximately $65 billion of complex mortgage related securities, which have experienced severe credit deterioration. That mortgage exposure was responsible for ACA’s financial strength rating to fall to “CCC.” As a result of its agreement, creditors will take a “backseat” to holders of municipal bonds and allow sufficient claims paying ability to remain with ACA to meet any obligations that may arise in the future from policies ACA has written. Policies remaining insured total 726 with a par value totaling $7.3 billion, according to Maryland’s insurance commissioner.
ACA to honor outstanding muni bond policies
Under the agreement, ACA will write no new business, but will honor outstanding municipal bond policies. Maryland regulators will closely monitor ACA’s remaining business operations until the insurer’s demise, slated to occur when the last bond insured is no longer outstanding.
Ambac’s net income for the quarter ended June 30, 2008, was $823.1 million, up from $173 million a year ago. Revenues from net premiums written were down substantially at $123.8 million from last year’s $221 million, primarily due to the downgrades the insurer received from Standard & Poor’s (AA) and Moody’s (Aa3). The downgrades from the “AAA” level reflected the exposure both companies have to the sub-prime market.
Ambac also indicated that its plans to write new insurance through its Connie Lee subsidiary are progressing. Wisconsin state insurance officials are currently reviewing Ambac’s proposal and are expected to give their consent. Rating agency approval has also been sought to allow municipal bonds to be insured at the “AAA” level. Ambac is hopeful Connie Lee can be up and running by October 2008, restoring Ambac’s role as a top-rated bond insurer.
MBIA net income jumps in quarter
MBIA reported $1.7 billion of net income for the quarter, up from $211.8 million for the quarter ended June 30, 2007. A gain of $3.3 billion was recorded based on pre-tax unrealized gains of credit derivatives carried by MBIA on its balance sheet.
MBIA stated it did not see any reason to increase reserves for additional losses in the sub-prime housing market above that which it has already taken. The insurer also stressed that it is more than sufficiently capitalized to meet its responsibilities to policyholders and investors of MBIA insured bonds. Despite its recent rating downgrade by S&P (AA) and Moody’s (A2), MBIA indicated it steadily improved its capital position over the first six months of 2008. Although new business was down, capital previously pledged to insurance policies for terminated, matured, and amortized bonds all expired, and is once again available to meet other insured liabilities.
Both insurers reported that their municipal bond portfolios continued to perform well, in line with expectations. Liquidity also remained strong for both, with Ambac ending the quarter with cash and short-term securities equaling $1.6 billion, and MBIA at $1.4 billion.