June 11 (Bloomberg) -- MBIA Inc. won't contribute $900 million to its bond-insurance unit, downgraded from AAA by Standard & Poor's last week, as the company re-evaluates its business strategy.

The holding company will keep the money, raised through the sale of shares in February, as it considers options for ``supporting the bond insurance market,'' Armonk, New York-based MBIA said in a statement sent by Business Wire. The funds aren't needed to pay claims at the insurance unit, MBIA said.

``Our landscape has changed,'' Chief Financial Officer C. Edward Chaplin said in the statement. S&P and Moody's Investors Service ``made it clear that, at this point, maintaining Triple-A ratings for MBIA Insurance Corporation would be dependent on other factors besides the amount of capital or claims-paying resources we have,'' he said.

MBIA, Ambac Financial Group Inc. and other bond insurers stumbled after expanding beyond municipal bonds to guaranteeing securities linked to subprime mortgages and home-equity loans that are now defaulting at record rates. MBIA and Ambac, which had been trying to preserve their AAA status, balked when credit- rating companies raised the standards that would have to be met.

``They're walking away from their policyholders and their surplus noteholders,'' William Ackman, managing partner of hedge fund Pershing Square Capital Management LP, told reporters today at a conference in New York. Pershing Square had set up trades designed to profit from a decline in MBIA and Ambac shares, which have plunged more than 90 percent in the past year.

Higher Standards

MBIA raised $2.6 billion last quarter as ratings companies said MBIA Insurance Corp. needed more capital to protect the AAA ranking as losses on subprime mortgage securities mounted. Moody's said June 4 it's likely to lower the rating despite the additional capital. S&P cut its rating to AA a day later.

While MBIA said in February that most of the proceeds from its capital raising would be contributed to its insurance unit, it still retained the money at its holding company in May. MBIA said May 12 that after talks with regulators, it would move $900 million within 30 days. It reversed course after last week's ratings actions, which were based on potential loss scenarios.

``We continue to believe that rating agencies' stress cases will begin to move down over the next 12 to 18 months as more hard data demonstrates the actual severity of projected mortgage- related losses,'' MBIA Chief Executive Officer Jay Brown, said in a letter to shareholders released today. ``The capital required to support our existing insurance company portfolio will continue to decrease over the next few years in a dramatic fashion.''

Dinallo

New York Insurance Superintendent Eric Dinallo said he expects MBIA to honor the agreement they reached this year.

New York state regulators ``will only approve transactions by MBIA that conform with the spirit and goals of our three point plan for the bond insurance industry announced in January -- increase capacity, protect policyholders and develop new regulations for bond insurance,'' Dinallo said in a statement.

The bond-insurance unit raised $1 billion of capital in January by selling so-called surplus notes. The New York insurance department can restrict payment on the notes if it determines the unit needs to preserve capital.

New Unit

Brown, in the letter, said MBIA is weighing the option of starting a separate AAA insurer that solely guarantees public finance debt. Doing so is dependent partly on whether the ratings companies ``will establish and articulate clear capital and other requirements that will allow both our shareholders and outside investors to earn an acceptable return,'' he said.

MBIA, which counts private-equity firm Warburg Pincus LLC and Martin Whitman's Third Avenue Management LLC as its largest shareholders, has plunged 93 percent in the past year. Ambac's biggest investors, Fidelity Management & Research Co. and Davis Selected Advisers, have watched that stock drop 98 percent.

MBIA fell 16 cents to $4.85 today in New York Stock Exchange composite trading. Ambac was up 3 cents to $1.90.

MBIA posted a $2.4 billion first-quarter net loss compared with profit of $198.6 million a year earlier. Ambac had a loss of $1.66 billion, compared with $213.3 million a year earlier.

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

Last Updated: June 11, 2008 18:58 EDT