May 7 (Bloomberg) -- MBIA Inc. has yet to pass on $1.1 billion of capital to its insurance subsidiary, three months after raising the money to defend the unit's AAA credit rating.

The cash, raised in a February stock sale, is being held at the parent company while Armonk, New York-based MBIA develops a plan for the company's legal and operating structure, MBIA Chief Executive Officer Jay Brown said in a letter to shareholders released yesterday.

``Given the more than adequate liquidity in both our insurance and asset management businesses, there is no compelling reason to move this cash at this point,'' Brown said.

MBIA was criticized by Fitch Ratings, which said on April 4 the decision raised the risk that the cash may not end up as capital for the insurance unit as MBIA had promised. While Fitch downgraded MBIA to AA from AAA, Moody's Investors Service and Standard & Poor's cited the capital raising as a reason for keeping the insurance unit at AAA.

Regulators are waiting for MBIA to contribute the funds, according to New York State Insurance Department Deputy Superintendent for Property and Capital Markets Michael Moriarty.

``It was never our expectation that the funds raised would go anywhere other than to the insurance subsidiary,'' Moriarty said. MBIA spokesman Jim McCarthy declined to comment.

MBIA and Ambac Financial Group Inc. were required to raise more capital earlier this year after the credit-rating companies said bonds they'd insured backed by subprime mortgages were more likely to default. MBIA's Brown said he also planned to split the insurance company to separate the business of backing municipal bonds from that of guaranteeing bonds backed by assets such as mortgages and credit-card receivables.

Negative Outlook

``S&P and Moody's are being a bit disingenuous by affirming the AAA on the insurance company based on their ability to raise capital, even though the capital isn't there,'' said Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co. ``The rating seems unjustifiable.''

MBIA said in a February statement that it would ``contribute most of the proceeds of the offering to the surplus of its subsidiary, MBIA Insurance Corporation, to support its business plan.''

Moody's assigned a negative outlook to MBIA's rating in part because the money wasn't transferred to the insurance unit, Stanislas Rouyer, an analyst in Moody's financial guarantor group, said in an e-mailed statement.

``The proceeds from the capital raise remaining at the holding company is one of the factors considered in our negative outlook,'' Rouyer said.

Liquidity Demands

Fitch, a unit of Paris-based Fimalac, said MBIA's insurance unit needs $3.8 billion, in addition to capital already raised, to warrant a AAA. MBIA in March asked Fitch to stop rating its debt because of disagreements over the model Fitch uses to estimate losses. Fitch relies on other ratings companies for data and its analysis is limited, MBIA said.

``Since a significant portion of the capital that was recently raised by MBIA Inc. still resides at the holding company level, the insurance company's capital position could become pressured in the future by possible liquidity demands at the holding company,'' Fitch analyst Thomas Abruzzo said in a report.

`Strong Statement'

S&P isn't concerned that MBIA hasn't passed on the cash, spokeswoman Mimi Barker said in an e-mailed statement.

``S&P did not assume that the funds would be downstreamed immediately,'' Barker said. The $2.6 billion of additional claims-paying resources is ``a strong statement of management's ability to address the concerns relating to the capital adequacy of the company,'' the statement said.

Over the past six months MBIA raised a total $2.6 billion of capital. The insurance unit raised $1 billion in a surplus note offering and the parent company sold $500 million of stock to private-equity firm Warburg Pincus LLC in January.

By contrast, Ambac sent $1.4 billion of the $1.5 billion it raised in March to its insurance company, keeping $100 million at its holding company, according to Peter Poillon, head of fixed- income investor relations at the New York-based company.

MBIA's investment-management business has become riskier over the past year because of declines in the value of some securities, Fitch said. MBIA engages in derivative transactions at its holding company that could require posting of collateral and has allowed the holding company to guarantee market values of some investment pools, according to Fitch.

Withstanding Stress

The company will report impairments in some securities held by its asset management business when it announces first quarter earnings next week, Brown said in the letter to shareholders. Those impairments aren't expected to create liquidity problems, he said.

``I can tell you that our asset management business was specifically designed to withstand the stress in today's markets,'' Brown said in the letter. MBIA will provide more details when it reports first-quarter results next week, Brown said.

The capital is part of the $17 billion in claims paying resources Moody's and S&P required for a top rating, said Jim Ryan, an analyst with Morningstar in Chicago. MBIA's holding company may choose to keep it because once the capital is sent to the insurance company, it could require insurance department approval to take out.

``Holding on to the cash gives them more flexibility,'' Ryan said.

While MBIA management may want the benefit of having the capital to support two companies at once, Moody's and S&P should insist it be allocated to one or the other, Rosner said.

``The rating agencies affirmed based on the assumption that the capital is there; they should be saying `show me the money,''' Rosner said.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: May 7, 2008 17:59 EDT