Risk Management

Bond Insurer Is Latest Probe Target

If MBIA is hurt by the investigation, the availability of bond insurance could suffer. That could hike the cost of capital for companies that can't...
Stephen TaubNovember 23, 2004

The government’s probe of the insurance industry has extended to a major insurer of bonds.

Last week, a day after completing the sale of $350 million of 30-year bonds, MBIA Inc. reported that it received identical subpoenas from the Securities and Exchange Commission and the New York Attorney General’s office. The documents requested information related to “non-traditional or loss mitigation insurance products” sold by MBIA to customers from January 1, 1998 to the present.

If MBIA is severely hurt by the insurance investigation—and there currently is no indication that it has committed any wrongdoing—it could weaken the availability of bond insurance coverage and potentially raise the cost of capital for companies that are unable to obtain the insurance.

Since MBIA coverage guarantees the timely payment of principal and interest, companies and municipalities that buy the insurance are able to lower the interest rate they must pay investors when issuing new paper. That, in turn, reduces their cost of capital.

While the subpoenas don’t identify specific transactions, MBIA said it believes the documents were issued in connection with an industry-wide investigation of non-traditional insurance products. The bond insurer said it intends to cooperate fully with the SEC and the attorney general’s request for documents.

In 1998, MBIA executed a reinsurance transaction in order to smooth its earnings after suffering losses from the collapse of a Philadelphia hospital group earlier that year, according to the Wall Street Journal. The paper, citing thestreet.com, said MBIA had insured $265 million of the group’s bonds.

MBIA paid three reinsurance companies $3.8 million to cover up to $170 million of any losses it suffered from the default, according to the paper. It noted that analysts compared this move to buying fire insurance after a fire.

As part of the transaction, MBIA guaranteed to engage in further transactions with the reinsurers, according to the Associated Press, which stressed that the company fully disclosed the transaction in its regulatory filings.

In a separate item, reinsurance giant Swiss Reinsurance Co. said it received subpoenas from state and federal regulators concerning its sale of non-traditional insurance products.