MBIA Insurance Corporation
MBIA Insurance Corporation is a company that provides insurance to municipalities issuing bonds. It is a division of publicly-traded MBIA, Inc. and is a major worldwide issuer of financial guarantee insurance.
Key Takeaways:
– MBIA Insurance Corporation backs municipal bonds in case of issuer default.
– The presence of MBIA insurance on a municipal bond typically ensures an AAA rating, making the bond more marketable to investors.
– MBIA has not written any new insurance since 2017 after S&P cut its ratings.
MBIA insurance is used to back municipal bonds and structured finance products, offering credit enhancement for bond issuers. If an issuer defaults, MBIA promises to pay interest and principal on the bonds.
In 2002, hedge fund manager Bill Ackman criticized parent company MBIA, stating that it did not deserve its AAA rating. He called for a split between the municipal bond insurance and structured finance businesses. Ackman’s concerns proved valid as MBIA suffered during the financial crisis.
The financial crisis had a significant impact on municipal bond insurers, with a substantial decline in municipal insurance. Rating agencies like MBIA and Ambac also experienced downgrades.
Since then, MBIA and other companies have tried to manage risks in a compressed market with historically low-interest rates. MBIA launched a municipal-only unit called National Public Finance Guarantee in 2014 and has not written any new insurance since 2017.
MBIA insurance previously ensured an AAA rating on municipal bonds, boosting investor confidence and marketability.
MBIA Insurance Corporation provided insurance for municipal bonds, also known as munis. City issuers purchased insurance from MBIA to increase ratings and guarantee the bonds.
Bond issuers found that purchasing MBIA insurance reduced the cost of issuing debt. Higher-rated bonds allowed for lower coupon rates when presenting to investors.
The purchase of MBIA insurance follows the same process as other types of insurance. The policyholder selects coverage amounts, and the underwriter calculates the risks to determine the insurance price. The stability of the project funded by the bond is a key risk indicator.
If the project succeeds, the issuer can pay investors without invoking MBIA’s insurance coverage. However, if the project fails, the issuer will default.
MBIA and its competitors strive to maintain high credit ratings to provide valuable services to clients and investors. A bond issuer is unlikely to purchase insurance from a company with a bad credit rating that may default on paying investors.
