MBIA Insurance Corporation

What Is MBIA Insurance Corporation?

MBIA Insurance Corporation is a company that provided insurance to municipalities that issue bonds. A division of the publicly-traded MBIA, Inc. (MBI), MBIA Insurance Corporation was a primary worldwide issuer of financial guarantee insurance.

How MBIA Insurance Corporation Works

MBIA insurance was used to back municipal bonds and structured finance products, and as an avenue to credit enhancement for municipal bond issuers, as MBIA's insurance promised to pay interest and principal on any bonds that suffer an issuer default.

Bill Ackman, hedge fund manager, said in 2002 that parent company MBIA did not deserve its AAA rating and called for a split of the municipal bond insurance business from the structured finance business. This was due to the fact that MBIA’s credit default swaps sold on mortgage-backed collateralized debt obligations were going to be an issue eventually, Ackman claimed. The hedge fund manager was correct as MBIA crashed during the financial crisis. 

Municipal bond insurers were hit hard with the financial crisis. The majority of newly issued municipal bonds carried insurance before the crisis. However, the fallout from the crisis has forced a large decline in municipal insurance. As well, major rating agencies, such as MBIA and Ambac, saw their ratings pushed down. 

Since then, market share has remained compressed as interest rates remain at historical lows. Companies such as MBIA have attempted to manage risks. In 2014, MBIA started a municipal-only unit called National Public Finance Guarantee. MBIA also has not written any new insurance since 2017 after S&P cut its ratings.

Special Considerations

The presence of MBIA insurance on municipal bonds previously ensured an AAA rating or its equivalent from the major rating agencies, which made the bonds much more marketable to investors.

MBIA Insurance Corporation provided insurance to back municipal bonds, also known as munis. In order to boost investor confidence, many cities (the issuer of municipal bonds) purchased insurance through MBIA Insurance Corporation to get a higher rating and guarantee the bonds.

Bond issuers found they could lower the total cost of issuing debt by purchasing MBIA insurance, as the higher rating the bonds garner, the lower the issuer could adjust the coupon rate when presenting to investors. 

Requirements for MBIA Insurance Corporation

MBIA insurance is purchased the same way other types of insurance are, with the policyholder selecting specific amounts of coverage and an underwriter calculating the risks to the insurer of providing this coverage in order to determine the price of the insurance. The risks are calculated by the likelihood that the bond issuer will default on the bond and MBIA will have to pay out to investors, so the stability of the project the bond funds is the key indicator of risk.

If the project succeeds and raises the money the issuer predicts it will, the issuer can easily pay investors without a need to invoke MBIA's insurance coverage. If the project does not succeed, the issuer will not have the funds to pay investors and will default.

MBIA and its competitors tried to keep their own credit ratings at the highest levels, as this made their services much more valuable to clients and investors. A bond issuer is unlikely to pay for insurance from a company with a bad credit rating that might default on paying out to investors.