MBIA (NYSE:MBI):
Dear Owners,
A lot has changed, and not a lot has changed, in our environment since I last wrote to you a month ago. Although the market digested our first quarter results on May 12th without much commotion, the announcement late the following day that Moody’s would reassess the ratings of your company (and others) initiated a tumultuous three weeks, hitting a low last week when Moody’s placed all MBIA entities on review for downgrade and S&P downgraded our insurance company, MBIA Insurance Corporation, to Double-A and our holding company, MBIA Inc., to Single-A minus.
So what has really changed since late February when both of these rating agencies affirmed the Triple-A status of our insurance companies?
The real answer is I don’t know today, nor will I ever be able to point to a single set of data points to identify what caused the change in their ratings opinions. There was never a discussion of a specific amount of additional capital that would be required by either agency to maintain a Triple-A. But based on our discussions with the rating agencies and in trying to think about their challenges, what I believe has really changed in the past three months is that both Moody’s and S&P have far less comfort in forecasting a worst case housing-related stress case loss scenario and a belief (accurate) that we would no longer dilute shareholder capital ad infinitum to maintain an ever-changing capital cushion to support the Triple-A ratings. As such, they both reached a conclusion that our current insurance operations required a change in assessment. Given that both rating agencies’ opinions are based on a consensus view of rating committees (comprising a large number of individuals with different perspectives) and the fact that public opinion about how the housing market will play out has not yet firmed up and continues to be debated heavily among investors and in the media, it is not that surprising that they are less willing to risk the chance that they are wrong.
The decision reached by both agencies has fundamentally changed how we now need to think about capital issues at MBIA. Earlier this year, we raised dilutive capital based on the belief that the trade-off in dilution would be more than made up by maintaining the consolidated Triple-A franchise and realizing its future returns. Given that the agencies have taken the option of maintaining the Triple-A rating of MBIA Insurance Corporation off the table, we have turned our attention to what are the best steps we can take to increase shareholder value while maintaining our human resource strength and adequate capital for our existing policyholders and proceeding with our transformation plan to operate multiple business entities under a different franchise structure. We confirmed to the market today that we will not be making capital contributions to MBIA Insurance Corporation given the changes in ratings status last week, especially since that additional capital would not preserve its Triple-A ratings as it was originally intended.
One key action item at this point is to continue to pursue opportunities to support the bond insurance market as a whole in conjunction with the New York State Insurance Department and other stakeholders. In addition, we will assess what would be required of us by the rating agencies and regulators to use one of our two fully licensed subsidiaries as a Triple-A subsidiary for new public finance business. We have received a wide variety of third-party interest in providing capital directly to such a “Newco” and we have a substantial amount of liquidity available provided by our shareholders, so having adequate capital is not an obstacle.
