Bond Insurance .

• Bond Insurance

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Merrill Lynch - CDO controversies

1 In April 2009, bond insurance company MBIA sued Merrill Lynch for fraud and five other

violations


Classic car - Modern classics

1 In the UK the Modern Classic definition is open to the discretion often by Insurance Brokers and Insurance Companies who

regard a Modern Classic as a vehicle that is considered collectible regardless of age.Firebond Insurance PLC Practical

Classics Magazine advertising 1997 The usage of the vehicle limited to

recreational purposes and/or restricted mileage, is also taken into account.


Bond insurance

1 Bond insurance is a form of credit enhancement that generally results

in the Credit rating|rating of the insured security being the higher of (i) the claims-paying rating of the insurer and (ii) the rating the bond would have absent insurance (also

known as the “underlying” or “shadow” rating)


Bond insurance

1 The premium requested for insurance on a bond is a measure of the perceived risk of failure of the

issuer. It can also be a function of the interest savings realized by an issuer

from employing bond insurance or the increased value of the security

realized by an owner who purchased bond insurance.


Bond insurance

1 The economic value of bond insurance to the investor purchasing or holding insured securities is based upon

(i) the additional payment source provided by the insurer if the issuer fails to pay principal or interest

when due (which reduces the probability of a missed payment to the joint probability that both the issuer

and insurer default), (ii) rating downgrade protection so long as the insurer is more highly rated than the issuer, (iii) improved liquidity, and (iv) services provided by the

insurer such as credit underwriting, due diligence, negotiation of terms, surveillance, and remediation.[http://www.afgi.org/underwriting.htm Association of

Financial Guaranty Insurers-Underwriting]


Bond insurance - Terminology

1 Companies whose sole line of business is providing a particular type of insurance, in

this case bond insurance, are called monoline

insurers.[http://www.afgi.org/monoline.htm Association of Financial Guaranty Insurers-

Advantages of the Monoline Structure] Note that the insurance term “monoline” means

only that these companies do not have other insurance lines, such as life or

property/casualtyhttps://store.theartofservice.com/the-bond-insurance-toolkit.html

Bond insurance - Municipal Bond Insurance and the Monolines

1 Municipal bond insurance was introduced in the U.S. in 1971 by

American Municipal Bond Assurance Corp. (subsequently renamed



1 The 1990s then saw the combination of the municipal bond insurance business with the ABS insurance

business, and also saw the expansion of bond insurance into Europe, Asia,

Australia, and Latin America



1 before being spun off in 2006 and subsequently renamed Syncora Guarantee Inc.; and CIFG (2001).[

http://www.encyclopedia.com/doc/1G1-20103847.html New Bond Insurance Firm, American Capital Access, Insures Its First Primary Market Issue] PR Newswire,

December 18, 1997[ http://www.publicbonds.org/major_players/insurers.htm BOND INSURERS], publicbonds.org, Corporate Research

Project / Good Jobs First access 2010 4 11[ http://www.munibondadvisor.com/BondInsurance.htm

Bond Insurance], WM Financial Strategies, http://www.munibondadvisor.com, access 2010 4 11 This

era also saw the emergence of new reinsurance|reinsurers, such as Ram Reinsurance Company Ltd



1 The financial crisis that began in late 2007 negatively impacted the bond insurers

and even threatened the continued existence of some industry members.

[ http://www.goodfinancialcents.com/is-municipal-bond-insurance-dead/ Is

Municipal Bond Insurance Dead? ] by Jeff Rose on August 14, 2009, Good Financial Cents, goodfinancialcents.com accessed

2010 4 15



1 Continuing the trend of reorganization in 2009, Ambac

ceased writing business and was ultimately split into (i) a “segregated account” subject to a rehabilitation order by the Wisconsin Office of the Commissioner of Insurance (“OCI”)

and (ii) a “general account” for ongoing operations, limited to

municipal bond insurancehttps://store.theartofservice.com/the-bond-insurance-toolkit.html

Bond insurance - Monoline exposure to residential real estate

1 Bond insurance of residential mortgage-backed securities (RMBS)

commenced in the 1980s but expanded at an accelerated pace in the 2000s, leading up to the 2008

financial crisis



1 Unlike mortgage insurance, bond insurance generally provides for unconditional payment of claims, although the insurer reserves the

right to pursue contractual or other available remedies



1 Notably, AGM and AGC did not insure such CDOs, which has allowed

Assured Guaranty to continue its bond insurance business with strong

credit ratings.


Bond insurance - Business model

1 Municipal bond insurance premiums are generally paid up-front as a lump

sum; while non-municipal bond insurance premiums are generally paid in periodic installments over

time



1 In addition to credit enhancement, bond insurance provides other benefits to investors, including

improved liquidity for the insured securities, surveillance of the underlying transactions, and remediation of the underlying transaction, should that prove

necessary



1 Until the 2008 financial crisis, the bond insurers suffered few material losses, with notable exceptions in the municipal sector

including the losses experienced by Ambac in 1984 on its exposure to the Washington Public Power Supply System (WPPSS), which was the

subject of an adverse court ruling (see The History of Bond Insurance, below), and by MBIA in 1998 on its exposure to Allegheny

Health, Education and Research Foundation (AHERF), which declared bankruptcy



1 Some argued that if the rating agencies had rated municipalities on

the same scale they rated corporations, then the municipalities would have been rated much higher to begin with, and thus there was no

real need for bond insurance



1 States to New Global Ratings Scale, by Lisa Lambert, April 19, 2010]

Although penetration of insurance in the municipal bond market is far

lower than when numerous triple-A insurers were active, the ability of

Assured Guaranty to continue insuring municipal bonds at premium

levels above historical averages is evidence that a market continues to exist for municipal bond insurance


Bond insurance - 1970s - 1990s

1 The first monoline insurer, American Municipal Bond Assurance

Corporation (now Ambac), was formed in 1971 as an insurer of

municipal bonds. Municipal Bond Insurance Association (now MBIA)

was formed in 1973.[http://publicbonds.org/major_players/insurers.htm Major Players],

publicbonds.org, Corporate Research Project / Good Jobs First, accessed

2010 4 11 The companies sought to help municipalities and other public

entities secure better access to cheaper funding.



1 This proved to be a watershed moment for the bond insurance

industry, igniting steady growth in demand for many

years.[http://www.referenceforbusiness.com/history/Lo-Me/MBIA-Inc.html

Reference for Business, Encyclopedia of Business]



1 The monoline insurers thus took over the municipal

bond insurance market.


Bond insurance - 1990s - 2000s – Expansion of structured finance activities

1 The 1990s saw continued expansion of the monolines into non-municipal and

international sectors as U.S. domestic municipal bond insurance was becoming

more of a “commodity.” See, for example, the 1994 BusinessWeek article on MBIA.

[ http://www.businessweek.com/archives/1994/b337465.arc.htm Ninety-Five Percent Of Our Profits Are Locked In, BusinessWeek: May 30,

1994, Tim Smart, Charlie Hoots]


Bond insurance - 2007 – Subprime crisis and credit crunch

1 Structured credit issuance ceased, and many municipal bond issuers spurned bond insurance, as the

market was no longer willing to pay the traditional premium for monoline-

backed paper.[http://www.bloomberg.com/ap

ps/news?pid=newsarchivesid=aSt9mAsai4Mw

refer=home Muni Insurance Worthless as Borrowers Shun Ambac,

Bloomberg.com, Dec


Bond insurance - 2009 and beyond

1 National remains poised to reenter the municipal bond insurance market

upon successful resolution of pending litigation


Insurance - Property

1 * Surety bond insurance is a three-party insurance guaranteeing the performance of

the principal.


Chapter 9, Title 11, United States Code - Partial list of municipal bankruptcies

1 * 'Jefferson County, Alabama', November 2011, over $4 billion in debt (largest

Chapter 9 bankruptcy until 2013 Detroit bankruptcy filing,) from sewer revenue bonds tainted by an interest rate swap

bribery scandal with JPMorgan and county commissioner Larry Langford, and bond

insurance credit rating collapse in the late-2000s subprime mortgage crisis, followed

by the occupation tax being declared unlawful in Alabama


Interbank lending market - Increase in counterparty risk

1 Concerns about structured investment vehicles (SIVs) and Bond

insurance|mortgage and bond insurers were growing


Indirect economic effects of the subprime mortgage crisis - Effect on municipal bonds and bond insurers

1 By Bond insurance|insuring municipal bond issues, those bonds achieve higher debt

ratings


Subprime crisis impact timeline - 1980ndash;1989

1 * The RTC decides to sell the massive amount of bad real estate debt it

holds to investors. In order to do this, it decides to use the tools of

securitization and structured finance, such as overcollateralization, bond

insurance, and subordination (finance)|subordination. This results

in transforming the bad debt into various new products that had high enough ratings to attract investors.


Magnetar Capital - Tavakoli

1 In her diagram of the capital structure, she noted that the bond insurance|Monoline insurers were

major investors


Greek financial crisis - Hedge funds

1 Their reluctance to take losses stems from their reckoned investment

strategy, which would bring profit from a formal default on Greek bonds via a pay-out from the Credit default

swap|bond insurance


Berkshire Hathaway Assurance

1 'Berkshire Hathaway Assurance' is a bond insurance company created by

Berkshire Hathaway, Inc. in December, 2007.


Berkshire Hathaway Assurance - History

1 Berkshire created this government bond insurance company in

December, 2007 to insure Municipal bond|municipal and state bonds


Detroit bankruptcy - From bankruptcy filing to eligibility ruling

1 Notably, bondholder representatives and municipal bond insurance companies chose not to file an

objection to eligibility


Mapfre - International Expansion

1 2011. MAPFRE RE opens an office in Paris. MAPFRE Internacional becomes the majority shareholder of Middlesea Insurance (Malta).

MAPFRE and Euler Hermes sign a memorandum of understanding to jointly develop their credit and bond insurance businesses in Spain, Portugal and Latin America. MAPFRE Asistencia sets up a

subsidiary in Australia for travel insurance on line distribution. MAPFRE has direct

presence in five continents.


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