New York state's top insurance regulator said on Thursday that bond insurer Ambac Financial Group may need more capital.
"I think it's possible that they may need to raise additional capital," Insurance Superintendent Eric Dinallo said on Bloomberg Television. "I think we should take a step back and observe one thing, which is in the wake of the (earnings) numbers that Ambac came out with, you see the market, the across-the-board market response was calm."
Ambac , a bond insurer that struggled to raise capital earlier this year, on Wednesday posted a $1.66 billion first-quarter loss after setting aside $1 billion to cover future payouts on mortgage bonds.
Dinallo had worked with the company to raise extra capital at the beginning of the year, but he said economic conditions will determine if the amount was adequate.
"People had asked me, 'Is this enough of a capital raise?' I was very honest, I said, 'It's not time for a victory lap,"' Dinallo recounted. "You can't really be certain because it's hard predicting the economy. The mortgage losses will drive, and the defaults will drive, whether the capital is OK."
While municipal bonds have low default rates and rarely require an insurance payout, bond insurers such as Ambac and rival MBIA fell into trouble when they guaranteed shaky mortgage-backed securities.
Credit ratings agencies then threatened to downgrade or downgraded their credit ratings based on concerns the companies did not have enough capital to cover a bond default as well as the disintegration of the securities relying on mortgages.
But Dinallo also said there was still demand for bond insurance from smaller municipalities.
"The bond insurance market is still vibrant -- people are interested in getting into the market -- but Ambac and MBIA still have to prove their business models," he said.
He also encouraged the companies to be more transparent about their respective exposure to mortgage-backed securities, known as collateralized debt obligations.