NEW YORK, April 13 (Reuters) - Moody’s Investors Service on Monday cut its ratings on Ambac Financial Group’s ABK.N bond insurance arm into junk territory, after the rating agency increased its expectation of losses in residential mortgage-backed securities.
Moody’s cut Ambac Assurance, the second largest U.S. bond insurer, five notches to Ba3, three steps below investment grade, from Baa1. Ambac Financial Group was also downgraded six notches to Caa1, seven steps below investment grade, from Ba1.
“The downgrade of Ambac’s ratings primarily reflects weakened risk adjusted capitalization, as Moody’s loss estimates on residential mortgage-backed securities have increased significantly,” Moody’s said in a statement.
These higher loss estimates increase the estimated capital required to support mortgage exposures, Moody’s said.
Ambac Assurance’s claims-paying resources remain above Moody’s expectation of losses the insurer is expected to take, but its cushion has been significantly eroded and losses in more extreme scenarios would exceed the company’s resources, Moody’s said.
Ambac had around $3.5 billion of qualified statutory capital at year-end 2008, “but remains vulnerable to increases in case loss reserves over the near to medium term,” Moody’s said.
Ambac Financial Group posted a $2.34 billion loss for the fourth quarter in February as it set aside more money for troubled mortgage debt. For details, see [IDnN24447684]
Moody’s outlook on Ambac Assurance and Ambac Financial Group is “developing,” indicating the rating may be raised, lowered or left unchanged.
The outlook reflects the potential for further deterioration in Ambac’s insurance portfolio, or the potential for government actions to stall the trend of increasing mortgage defaults, Moody’s said. (Reporting by Karen Brettell; Editing by Leslie Adler)