MBIA's bond insurer unit loses top rating from Fitch

NEW YORK (Reuters) - MBIA Inc's (MBI.N) insurance arm on Friday lost its top rating from Fitch, which said the biggest bond insurer in the world fell as much as $3.8 billion short of what it needed to keep the highest rating.

Earlier this year even the possibility of downgrades of major bond insurers roiled financial markets. But Fitch's action comes after several insurers have already lost their triple-A ratings, and was not a surprise to investors who are already discounting the value of MBIA insurance.

But still, the news is not positive for MBIA, which guarantees about $680 billion of debt and needs to appear robust and stable to win new business.

MBIA's shares fell 68 cents, or 4.8 percent, to close at

$13.61.

MBIA Insurance Corp still carries the top ratings from Moody's Investors Service and Standard & Poor's. The bond insurer believes these agencies better understand the risks in its portfolio, and asked Fitch last month to stop rating it.

MBIA raised $2.6 billion of capital earlier this year, and has made other moves to boost its ability to pay claims, such as deciding in February not to guarantee new asset-backed securities for six months.

Standard & Poor's and Moody's Investors Service affirmed MBIA Insurance Corp's triple-A ratings in February, and Chief Executive Jay Brown, told Reuters then that he expected those ratings to stand for 12 to 18 months.

Fitch said MBIA would needs another $3.4 billion to $3.8 billion of capital to maintain a "AAA" credit rating.

The company faces a host of potential head winds, Fitch said. MBIA will have trouble improving its credit quality until it can win more bond insurance business, particularly in the municipal bond sector. MBIA's franchise has suffered less than other bond insurers, Fitch noted.

Fitch estimates that MBIA's repackaged mortgage bonds, known as its structured finance collateralized debt obligation portfolio, will suffer losses of $3.1 billion to $4.9 billion.

Additionally, MBIA's investment management business appears to be taking on more risk than it ought to, Fitch said.

MBIA Insurance Corp saw its ratings fall to "AA," the third highest, from "AAA." Fitch also cut the parent company by three notches to "A," the sixth highest, from "AA." Fitch said MBIA's outlook for MBIA is negative, which means more cuts are possible over the long term.

Tom Spalding, portfolio manager at Nuveen Investments in Chicago, said the prices of municipal bonds insured by MBIA are unlikely to cheapen after the Fitch downgrade, but price improvement will slow.

"Retail will still buy MBIA insurance, but I don't think institutions are going to be quite as aggressive," Spalding said.

The prices of MBIA-insured munis have been edging higher since Standard & Poor's and Moody's Investors Service affirmed the guarantor's triple-A rating, Spalding said.

Some municipal issuers started using MBIA again because rival Financial Security Assurance, owned by Dexia SA (DEXI.BR)(DEXI.PA), which boasts untainted top ratings from three agencies, has gotten too expensive, Spalding said.

MBIA Chief Financial Officer C. Edward Chaplin said in a statement on Friday,"We respectfully disagree with Fitch's conclusions." He said that MBIA's balance sheet is among the strongest in the industry, and the company has over $17 billion in claims-paying resources. The company said it believes those factors will allow it to meet "severe economic stress scenarios."

MBIA had asked Fitch to withdraw its ratings on March 7, and on March 10 the insurer explained that Fitch does not rate as many of the securities in MBIA's portfolio as S&P and Moody's. That means Fitch does not understand the securities' risk as well, and therefore can't assess MBIA's risk as well, the insurer said.

On March 24 Fitch said it planned to keep rating the company for at least a few months.

(Reporting by Dan Wilchins and Anastasija Johnson; Editing by Leslie Adler/Andre Grenon)