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Daily Insurance Industry News
Sunday 21st of January 2018
December 7, 2007

Bond insurers look to reserves as Moody’s warns of shortfall

by Gill Montia

Story link: Bond insurers look to reserves as Moody’s warns of shortfall

MBIA, the bond insurer, has reported that it intends to increase its cash reserves.

The move follows a warning from Moody’s, the credit ratings agency, which has described the financial guarantor as “somewhat likely” to run short of funds.

The company is now “pursuing capital contingency plans”, which could include curtailing new underwriting and an issue of new shares.

Insurers such as MBIA guarantee the interest payments on a bond and will make payments if the underlying asset collapses.

The US sub-prime mortgage crisis has led Moody’s to believe that MBIA may not be unable to cover claims on the bonds it insures, despite its Triple-A rating with the major credit rating agencies.

The very possibility that MBIA and, by implication, other insurers may not be able to honour their payment guarantee will push down the prices of all the bonds insured.

This could make it more expensive and difficult to borrow money and put further pressure on the money markets.

In its report, Moody’s suggests that other large mortgage bond insurers, such as Ambac, Security Capital Insurance and Financial Guaranty Insurance, could find themselves short of cash.

MBIA guarantees $653 billion of bonds that have been issued by mortgage lenders, local government and companies.

Figures for the end of September show that MBIA had sufficient reserve to pay $14.3 billion of claims.

 

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