Moody's Investors Service on Thursday stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, citing their impaired ability to raise capital and write new business.
Moody's said earlier this month it was likely to cut the ratings of Ambac Assurance and MBIA Insurance as plunging share prices and the high cost of accessing the debt markets made it challenging for the two largest bond insurers to raise new capital.
Demand for their insurance wraps has also effectively dried up on concerns over losses the companies will take from insuring risky residential mortgage-backed debt.
Standard & Poor's stripped both insurance arms of their top ratings on June 5.
Moody's cut Ambac Assurance three notches to "Aa3," the fourth highest investment grade, and downgraded Ambac Financial three notches to "A3," the seventh highest investment grade, from "Aa3."
MBIA Insurance was cut five notches to "A2," the sixth highest investment grade, and MBIA Inc was cut five notches to "Baa1," three steps above junk, from "Aa2."
The outlook for all companies is negative, due to uncertainty of their ongoing business plans. A negative outlook indicates an additional downgrade is more likely over the next 12-to-18 months.
In a statement on Thursday, MBIA said it was "disappointed" and "baffled" by Moody's analysis and believed the company's financial condition is strong and supports a higher rating.
"With $16 billion in claims-paying resources ... we have more than enough capital to meet obligations to policyholders," the company said. "This is an issue of ratings and not solvency."
MBIA said Moody's action will give some holders of guaranteed investment contracts the right to terminate the contracts or to require that additional collateral be posted. The company said it has "more than sufficient" liquid assets to meet those requirements.
Ambac also responded to Moody's action with disappointment and said in a statement on Thursday that it disagreed with the rating agency's "negative outlook designation."
"The company's strong capital base, even under Moody's stress-case scenarios, will allow it to manage through the current credit crisis," the statement said.
Ambac said it expects to see "concrete positive results" from its remediation efforts, and added that the downgrade would have no material impact on its obligations to collateralize its guaranteed investment contracts and swaps in its financial services segment.
Ambac has said it wants to launch a new top-rated bond insurer, called Connie Lee, and MBIA has said it retained at the holding company level $900 million in capital that had been previously earmarked for its bond insurance arm as it reevaluates its options.
Ambac said on Thursday it would proceed with plans related to the capitalization of the Connie Lee Insurance Company.