The bond insurance sector reported more losses for the first quarter, renewing concerns of ratings downgrades.

Moody’s Investors Service said deepening losses at MBIA Inc. and Ambac Financial Group Inc. may imperil their Aaa credit ratings less than three months after affirming the top grade.

The two largest bond insurers recorded a total $6.7 billion of first-quarter charges for losses on home-equity loans and collateralized debt obligations, “elevating existing concerns about capitalization levels relative to the Aaa benchmark,” Moody’s said yesterday in a report.

This has been an ongoing headache for the financial sector and for the normally stable bond market in general.  It has caused severe disruptions for both bond issuers and investors.

Borrowing costs have skyrocketed for a number of municipal lenders as a byproduct with many states getting fed up with bond insurance all together.  Investors are finding the secondary market growing increasingly illiquid as the prices of bonds are tied into the ratings of the underlying insurer.

The auction rate bond market has completely collapsed with many analysts feeling it will never recover.  Auction rate bonds are a type of bond that provide short term interest rates for issuers of long term debt.  It was also popular for investors as it provided higher yields than regular money markets.

As the market collapsed the investors were stuck with securities they were unable to sell and the interests rates for borrowers shot up to as high as 20 percent, forcing many of them to refinance their debt into fixed securities at substantial costs.

American International Group Inc. reported a $7.81 billion loss for the first quarter in a earnings report released after the market closed on Thursday.  While AIG’s core insurance business is doing reasonably well,  the mounting losses are stemming from it’s high risk exposure to the slumping housing market.

For the second quarter in a row, the company has had to write-down the value of it’s credit default swap contracts and mortgage backed securities portfolio.  The company reported another $15 billion in pre-tax write-downs after taking $11 billion in write-downs last quarter.

The company also announced plans to raise $12.5 billion in additional capital through the sale of stock and the issuance of fixed income bonds.  These efforts will be hampered somewhat due to the fact it’s stock value took a big hit Friday, as well as the fact that ratings agencies downgraded the company’s credit rating, which will make borrowing more expensive.

A number of analysts have revised AIG’s earnings estimates downwards for the rest of the year as they expect the company’s misfortunes to continue until the housing market can rebound.  Earlier this week the SEC also announced that financial institutions must become more transparent with their bookkeeping.

As the many woefully inaccurate earnings estimates have proven, it has been difficult for analysts and regulators alike to put a value and asses risk on the complex securities and financial products these companies deal in.

In a sign that the credit crisis maybe nearing an end, the financial services sector including the insurance industry is beginning to heat up with merger and buyout activity.  The insurance industry has faired better than their counterparts in the commercial banking and securities brokerage sectors, amidst the fallout of the sub prime collapse.

Insurance companies have taken their fair share of lumps and losses will eventually eclipse what was paid out for Hurricane Katrina.  For the most part it was in isolated pockets like bond insurance that chose to deal directly with mortgage backed securities.  However, the underlying nature of much of the industry has let it avoid most of the shortsightedness of the rest of the finance world.

Due to the type of financial products insurance companies sell, they must be much more risk adverse, which has served them well in a faltering economy.  The must also maintain much stronger capital positions in order to meet claims obligations, thus they have large cash reserves on hand and haven’t been affected as much by the credit crunch.

A growing concern for the future is the drop in investment income that makes up the bulk of the profits for the industry.  Though with stocks prices depressed, companies that have weathered this storm the best are out looking for deals.

As is with life, the strong will survive while the weak will get gobbled up by their larger brethren.