MBIA Rises Most in 4 Weeks on Dinallo-Brokered Reinsurance Deal
By Christine Richard
Aug. 28 (Bloomberg) -- MBIA Inc. rose the most in four weeks after New York State Insurance Superintendent Eric Dinallo helped broker an agreement for the company to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co., winning new business after losing its top AAA rating.
The world's largest bond insurer jumped as much as 20 percent in New York Stock Exchange composite trading after the Armonk, New York-based company said yesterday it will receive premiums of about $741 million as part of the contract.
``MBIA wouldn't do the deal unless they thought they were going to make money,'' said Timothy Graham, who helped Bermuda- based reinsurer LaSalle Re Ltd. avoid insolvency as its chief restructuring officer. ``So, they probably got a pretty good deal.''
The company, which slid 79 percent in New York in the past 12 months, is showing it can survive without the top AAA rating it held since 1990. MBIA is facing competition from the new insurance unit of Warren Buffett's Berkshire Hathaway Inc. as well as Assured Guaranty Ltd. and Financial Security Assurance Inc. MBIA led bond insurers posting record losses after straying from the business of backing municipal bonds to guaranteeing collateralized debt obligations that have tumbled in value.
Stock Trading
MBIA climbed $2.27, or 19 percent, to $14.25 at 9:36 a.m. in New York trading after reaching $14.40 earlier in the day. The stock is up from the low this year of $3.90 on July 11.
``They're bringing on a huge surplus of unearned premiums,'' Dinallo said yesterday during a conference call announcing the agreement as part of an effort to restore confidence in the bond insurers. The agreement may boost MBIA's credit rating, he said.
FGIC Corp., the parent of Financial Guaranty, has been among the worst hit of the bond insurers over recent months. The New York-based company, owned by Blackstone Group LP and PMI Group Inc., was downgraded from a top AAA insurance rating to being ranked below investment grade by the three main rating companies.
MBIA is rated A2 by Moody's Investors Service, five grades below Aaa, and AA at Standard & Poor's, two below AAA. S&P affirmed the company's credit rating on Aug. 15 and said bond insurers are taking steps to shore up their businesses.
The agreement followed a ``competitive process'' overseen by Dinallo's office and the specifics of the transaction must still be submitted for approval, the statement said. Discussions took 90 days, Dinallo said today in an interview on CNBC.
Could be `Invaluable'
MBIA is in competition with the FGIC municipal business for about 80 percent of the unearned premiums. Buffett said in February he would take on municipal bond obligations for MBIA, FGIC and Ambac Financial Group Inc. for 150 percent of the premiums. Buffett's backing would have given the debt an AAA rating. MBIA is ranked five grades lower.
MBIA's reinsurance may give FGIC's municipal bondholders a higher credit rating, Dinallo said. So-called cut-through insurance ``could prove invaluable in helping lift the ratings of municipal bonds,'' he said.
The cut-through reinsurance allows a policyholder to file a claim directly with either FGIC or MBIA and means bondholders can avoid delays in payment if FGIC becomes bankrupt.
`Same Bucket'
The accord may not raise the price of municipal bonds because investors place little value on some insurance guarantees, said Kenneth Naehu, who oversees fixed income investments for Bel Air Investment Advisors LLC in Los Angeles, which manages $5 billion.
``MBIA, Ambac and FGIC, all three are being thrown in the same bucket,'' Naehu said. ``The bonds are trading as if they don't exist, as if there is no insurance.''
FGIC also said it settled an agreement to provide $1.875 billion of insurance on mortgage-tied CDOs and will pay $200 million to Credit Agricole SA's Calyon unit. Ambac and Security Capital Assurance Ltd. over the past two months have extricated themselves from guarantees on $5.1 billion of CDOs with $1.35 billion of payments to Merrill Lynch & Co. and Citigroup Inc.
CDOs package pools of securities, including those backed by subprime mortgages, and slice them into pieces of varying risk.
Moody's said in June said its new B1 rating on Financial Guaranty reflects the unit's ``severely impaired financial flexibility and the company's proximity to minimum regulatory requirements.''
FGIC has set up loss reserves to pay expected claims of $1.8 billion mainly on securities backed by home loans, according to Moody's.
The two transactions may be enough to prevent regulators from having to step in and take over FGIC, Dinallo said.
FGIC focused on the municipal bond market until it was sold by General Electric Co. in 2003. Under its new owners, the company began insuring securities tied to assets such as consumer loans and mortgages, according to the company's Web site.
The bond insurance industry is beginning to ``stabilize,'' Dinallo said on CNBC.
``People are still trying to get comfortable with which parts of the bond market require insurance,'' he said. Bond insurance remains the ``only option'' for many issuers, he said.
To contact the reporter on this story: Christine Richard in New York at
crichard5@bloomberg.net
Last Updated: August 28, 2008 09:43 EDT
