Risk Management

MBIA Restates, Sets Reserve

At issue are agreements entered into by MBIA Insurance in 1998 with AXA Re Finance S.A., Munich Re, and Converium Re.
Stephen TaubNovember 8, 2005

MBIA Inc. announced that it has set aside $75 million to settle several regulatory probes and will restate its financial results going back to 1998.

The holding company for MBIA Insurance Corp., which provides financial guarantee insurance, added that it would file its delayed third-quarter results no later than November 14 and its amended 2004 annual report “as soon as practicable.”

According to the company, the $75 million figure is based on discussions with the Securities and Exchange Commission, the New York Attorney General’s Office, and the New York State Insurance Department. Those discussions concern agreements entered into by MBIA Insurance in 1998 with AXA Re Finance S.A., Munich Re, and Converium Re, previously known as Zurich Reinsurance North America.

In March, the company restated its financials with respect to agreements with Converium Re. The current restatements stem from corrections to accounting for agreements with Munich Re and AXA Re; MBIA will now treat them as deposits because they did not satisfy the risk-transfer requirements for reinsurance accounting under SFAS 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts” and under Regulation 108 of the New York
State Insurance Department.

The company stressed that the restatement will not have a significant effect on its financial position.

MBIA added that it is restating results from 2001 to 2005 for derivative transactions that do not comply with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, even though these transactions “were highly effective from an economic standpoint.” The cumulative effect of these changes is a non-cash earnings increase of $6.8 million. MBIA noted that even though this amount is not material, since the company is restating its financial results for the Munich Re and AXA Re agreements, it will restate each quarter and year affected by the prior method of accounting.

In August, MBIA also announced that the SEC may bring civil charges stemming from a reinsurance arrangement it made several years ago with a unit of the Pittsburgh-based Allegheny Health, Education, and Research Foundation. A Wells notice alleged violations of federal securities laws “arising from MBIA’s action to retroactively reinsure losses it incurred from the AHERF bonds MBIA had guaranteed, including, but not limited to, its entering into excess of loss agreements and quota share agreements with three separate counterparties.”