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MBIA splits muni bond insurance into "separate" entity

Back from the dead... Bloomberg reports that MBIA is trying to separate its muni bond business from the rest:

MBIA Inc., the largest bond insurer, will split its municipal bond insurance business from the mortgage-related debt guarantees that led to the loss of its top credit ratings. The shares surged as much as 42 percent.

Armonk, New York-based MBIA transferred guarantees on about $537 billion of municipal bonds to MBIA Insurance Corp. of Illinois, which it plans to move to New York and rename as National Public Finance Guarantee Corp. It also paid the new entity $4.98 billion in premiums and dividends, MBIA said today in a statement.

MBIA is seeking to revive its core business after guarantees on complex mortgage-backed securities and other debt saddled it with potential losses as U.S. home foreclosures soared and the market for the securities froze. The loss of its AAA ratings last year crippled its ability to write new muni-bond insurance, creating an opportunity for rivals to take market share.


Standard & Poor’s today lowered its financial-strength ratings on the MBIA Illinois unit, acquired in 1989, one level to AA- from AA, saying its capital so far is “marginally below our ‘AA’ standard.” S&P also said the unit was downgraded because of “uncertain business prospects.”

It's not clear what customers will think of the new company. The tainted monolines have essentially been out of the market, while the whole industry shrinks. The interesting thing is that Assured Guaranty, which avoided most of the toxic insurance, has been hammered by the market of late. Assured Guaranty is down as much MBIA in the last year (but keep in mind that MBIA had a massive plunge the year before.)

MBIA Insurance Corp.’s share of new insured municipal debt issues in the U.S. plummeted to 2.5 percent last year from 22 percent in 2007, according to data compiled by Thomson Reuters.

The portion of new municipal issues that were insured last month slid to 15 percent, according to Thomson. Assured Guaranty Corp., the bond insurer backed by billionaire Wilbur Ross, said it provided guarantees on $2.8 billion, or 81 percent.

Municipal borrowers used insurance on 18 percent of the bonds they sold in 2008, down from 47 percent in 2007 amid concern about the health of the guarantors, according to data compiled by Thomson Reuters.


The new insurer, which might not be able to win AAA ratings, may not need them, according to Steve Stelmach and Amy DeBone, analysts at Friedman, Billings, Ramsey Group Inc. in Arlington, Virginia.

“Should National be able to attain double-A ratings, we believe that a significant portion of public finance market that remains below double-A rated would benefit from a wrap,” they wrote in a report today. “However, market acceptance of the new bond insurer remains an open question.”

Brown said MBIA intends to raise capital for the new company “well in excess” of historical requirements for AAA ratings, which the insurer had until June, when both Moody’s Investors Service and S&P stripped the company of their top rankings.

I don't know how costly any capital raising for the new entity will be. It is likely to be high unless MBIA can tap the TARP program.

I think muni bonds are kind of risky right now, given the increasing budget problems faced by many municipalities and quasi-government entities. However, it comes down to the insurance underwriting skills. I don't think anyone has much faith in the skill of these bond insurers but this is their business (if you can't underwrite insurance properly you shouldn't be in the business.) Ironically, the fact that they can only insure low quality muni bonds (less than AA) will likely force them to do more homework than what seems to have happened in the past with high quality bonds: a rubber-stamp-type analysis.

MBIA and Ambac will report earnings within the next 2 weeks. It's likely to be ugly and call into question their solvency since the credit markets collapsed in the last quarter. I hope the monolines disclose further information about Alt-A mortgages, credit card loans, auto loans, and so on. Subprime had been the focus in the last 2 years but we are past that now--for the most part.


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