US CREDIT-MBIA may benefit from new insurance arm
Fri Jun 13, 2008 4:20pm EDT Email | Print | Share| Reprints | Single Page| Recommend (0) [-] Text [+]
By Karen Brettell NEW YORK, June 13 (Reuters) - MBIA Inc's (MBI.N: Quote, Profile, Research, Stock Buzz) investors
are betting that the company will set up a new bond insurance
subsidiary, reviving the fortunes of the parent company, though
this will likely be at the expense of its existing insurance
arm, MBIA Insurance Corp. The world's largest bond insurer said on Thursday that it
is reevaluating its capital deployment plans, including how it
will use $900 million that had previously been earmarked for
MBIA Insurance. MBIA decided against passing the capital down to its
insurance arm after Standard & Poor's last week downgraded the
insurer from the top "AAA" and Moody's Investors Service said
it is likely to cut the firm. The capital "is not needed at the current operating company
for capitalization levels (given the recent downgrades) and
could be deployed in another fashion," JPMorgan analysts Arun
Kumar and Brett Gibson said in a report on Friday. "We believe there is a high likelihood that companies such
as Ambac and MBIA attempt to activate dormant subsidiaries
(over the next few months) in an attempt to capture some of the
new muni business to remain somewhat active," they said. MBIA and Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz), the world's second
largest bond insurer, lost their ability to write new business
after the downgrades, which followed months of drama based on
concerns over losses from insuring risky residential
mortgage-backed debt. Concerns over their top ratings have devalued the more than
$1 trillion in insurance policies written by the two companies
on municipal, corporate, sovereign and asset-backed debt and
created widespread losses on these securities. MBIA's shares jumped more than 7 percent on Friday as
investors bet that the company may set up a newly top rated
municipal bond insurer, which can pay dividends up to the
parent company. In the past two weeks, debt insurance costs on MBIA dropped
lower than those of its fallen insurance arm, which remains
exposed to new write downs from mortgage-backed debt. This
indicates perceptions that the debt of MBIA Insurance is now
more risky than its parent's. The redeployment of MBIA's capital away from MBIA Insurance
is a sign the company is looking at other options to revive its
business, said an industry participant that declined to be
named. "You don't want to just be a punching bag for the
regulator, you want to be able to show 'we have some leverage
too,'" he said. Regulators are concerned that restructuring bond insurers
may harm existing policy holders, particularly holders of
insured municipal debt. JPMorgan views MBIA as most likely to activate its dormant
Capital Markets Assurance subsidiary to seek top ratings and
insure muni bonds. "While this structure is disadvantageous to both the
operating company and current policyholders, in our opinion,
the regulators are limited in their ability to prevent it
seeing as though MBIA does not need regulatory approval to use
the holding company cash as an investment," they said. Ambac, meanwhile, said last week that said it wants to
launch a new top-rated bond insurer, Connie Lee, which would be
funded by surplus capital from Ambac and potentially one or
more third parties. In this scenario, however, Ambac's insurance arm, Ambac
Assurance Corp, would benefit more than the holding company as
Connie Lee would operate as a subsidiary of Ambac Assurance,
JPMorgan said. "The biggest question is what (bond insurers) will decide
to do with existing policyholders and who will benefit the most
after the process has completely unfolded," they added. (Editing by Chizu Nomiyama)
