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Standard & Poor's on Wednesday cut its ratings on Ambac Financial Group
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S&P cut Ambac Assurance three notches to BBB, the second lowest investment grade.
Ambac Financial's [ABK
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] rating was also cut three notches to BB, two steps below investment grade, from BBB.
"The downgrade stems from our view that Ambac is effectively in run-off," S&P said in a statement.
When an insurer enters run-off it continues to pay for existing liabilities but stops writing new business. "Loss reserving increases have depleted surplus, boosting the likelihood of regulatory intervention, and we believe Ambac's prospects for writing new business are negligible," S&P added.
Ambac Assurance has been decimated by its exposures to residential mortgage-backed debt, which includes protection sold on the securities through collateralized debt obligations.
Ratings downgrades of the risky securities caused the insurer's policyholder surplus, which is the excess of assets insurers hold over legal obligations to pay for policy liabilities, to drop to $394 million in the first quarter, from $1.6 billion at the end of the prior quarter.
"As the company's book of business runs off, it could become concentrated and lack sufficient sector diversity," S&P said.
Exposures to risky mortgage-backed debt issued from 2005 to 2007 and supporting debt payments at parent Ambac Financial may both erode Ambac Assurance's capital adequacy, S&P said.
"We could lower the ratings again if, upon review of the insured portfolio, we determine that Ambac's capital position has weakened," the rating agency said.
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