Abstract: ACA Financial Guaranty used to get good insurance ratings from Standard & Poor's. But, at the time of US Mortgage Market Crisis, Standard & Poor's downgraded these ratings. This cut in ratings exposed ACA Financial Guaranty to the risk of generating huge losses.
Insurance Ratings for ACA Insurance are provided by Standard & Poor's, the reputed insurance rating company. These insurance ratings give a clear picture of the financial strength of ACA.
In December 2007, Standard & Poor's downgraded the ratings that they earlier assigned to ACA Financial Guaranty. In this period, because of the problems in US mortgage market, Standard & Poor's downgraded the ratings of some companies, which were involved in providing guarantee debts related to home loans. ACA was one among these companies.
The rating of ACA Financial Guaranty was downgraded to the level of “CCC” from the level of “A”. By Standard & Poor's this cut in rating, the people who were mostly affected were the investors, who purchased insurance protection from ACA Financial Guaranty.
Investment Banking Organizations, including, Merrill Lynch, Canadian Imperial Bank of Commerce were also adversely affected as they insured their securities through ACA Financial Guaranty. By this cut in rating of ACA Financial Guaranty, these investment banks were exposed to huge losses.
An analysis of Standard & Poor's showed that, after the rating downgradation, ACA Financial Guaranty's portfolio of insurance contracts could generate a loss of $2.2 billion.
For fighting these losses, ACA Financial Guaranty thought of inventing some long lasting solutions. As a solution to these financial problems, ACA Financial Guaranty decided to raise new capital. The company also thought of renegotiating the insurance contracts in order to turn them into long-term contract.
But, the amount of capital, that ACA Financial Guaranty required to raise to compensate the financial losses generated by rating downgradation, was not decided in December. The company was also thinking about the source of capital infusion.