MBIA splits municipal business into separate company

By Angela McDaniels

Tacoma, Wash., Feb. 18 - MBIA Inc. has established a new U.S. public finance financial guarantee insurance company, which is expected to be named National Public Finance Guarantee Corp. and will be based in New York.

"This is not a good bank/bad bank split, although that is how I expect many observers will report on the change," MBIA chief executive officer Jay Brown said in a letter to shareholders included in a news release. "This is a split along structured finance and U.S. public finance lines that was essential as a first step to transform the company, stabilize the business and help unfreeze the U.S. public finance capital markets.

"Our U.S. public finance policyholders need to know that our municipal business will operate as a separate entity and will not subsidize our structured business - this split formalizes our commitment."

National will not use credit derivatives to guarantee new insurance transactions, MBIA said in a separate news release, and the company will conduct business only in the United States.

In order to create the new company, MBIA Insurance Corp. transferred the stock of MBIA Insurance Corp. of Illinois, a public finance financial guarantee insurance company, to a new intermediate holding company that is directly below MBIA. MBIA Illinois will be renamed National Public Finance Guarantee.

National's $537 billion portfolio includes the U.S. public finance policies originally insured by MBIA Insurance and those reinsured from Financial Guaranty Insurance Co.'s U.S. public finance portfolio.

"All of the existing affected policyholders will have the direct benefit of reinsurance provided by National through the cut-through provision in the reinsurance agreement and second-to-pay policies, which give MBIA and FGIC policyholders the ability to make a claim for payment directly against National," Brown noted.

MBIA Insurance paid about $2.89 billion to National as a premium to reinsure the policies covered by the reinsurance and assignment agreements, and National has been further capitalized with $2.09 billion.

Ratings have not yet been announced for National, but Brown said MBIA plans to capitalize National at a level well above the historical capital requirements for AAA ratings.

"This may not be the case immediately but we plan to raise sufficient new third-party capital (at a deliberate pace) on terms that are beneficial to our existing shareholders," he said in the letter.

MBIA Insurance and National received regulatory approvals from New York and Illinois before executing the restructuring.

MBIA is a holding company based in Armonk, N.Y., whose subsidiaries provide financial guarantee insurance, fixed-income asset management and other specialized financial services.

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