NY Insurance Dept to Step Up Oversight of Bond Insurance

According to Insurance Superintendent Eric Dinallo, New York's Department of Insurance, the primary domestic regulator for each of the top five U.S. bond insurers, will step up oversight of the troubled financial guaranty insurance sector with an eye toward attracting capital and ensuring the continued availability of coverage.   
  
Several weeks after confirming he had encouraged holding company Berkshire Hathaway, parent of automobile insurance Geico and reinsurer General Re, to launch a New York-licensed, $105 million bond insurance operation dubbed Berkshire Hathaway Assurance Corp., Dinallo said he was "currently in discussions with other parties about possible future capital investments."   
  
The regulator offered that news, along with a three-part plan that he hopes will stabilize New York-based bond insurers. Under the plan, Dinallo said in a statement, the department is "drafting new regulations that would redefine the future activities of bond insurers," and continues to engage "insurers, banks, financial advisors, credit rating agencies, other regulators and government officials, and other stakeholders in examining and developing measures to help stabilize the market."   
  
"As we demonstrated with the invitation to Berkshire Hathaway, the department has a proactive approach to dealing with market problems, and we will continue to implement measures we believe are appropriate in response to the current issues facing the bond insurance market," Dinallo said.   
  
Financial guaranty insurers cover losses from specified financial transactions, guaranteeing investors in debt instruments timely principal and interest payments in the event a default occurs. Historically focused on insured bonded municipal debt, several of the sector's major writers have been stung in recent months by their exposure to residential mortgage-backed securities, collateralized debt obligations, and other structured products tied to the housing market.   
  
New York-based Ambac Financial Group (NYSE: ABK) reported a fourth-quarter loss of $3.3 billion the morning of Jan. 22, driven by $5.21 billion of write-downs on Ambac's portfolio of insured credit derivatives. The company last week announced a plan to turn to the equity markets in search of a $1 billion capital infusion to avoid rating agency downgrades, but abandoned that plan just two days later.   
  
Armonk, N.Y.-based MBIA Inc., Ambac's chief rival, announced earlier this month it would issue $1 billion in 25-year surplus notes, slash shareholder dividends by $80 million annually, and add $123 million to its loss reserves. That announcement came less than a month after securing a separate $1 billion capital-infusion commitment from private equity firm Warburg Pincus. MBIA has warned investors it expects to report $737 million in losses and $3.3 billion in write-downs for the fourth quarter of 2007.   
  
In 2006, the top five writers of financial guaranty insurance in the United States, according to A.M. Best Co. state/line product information based on direct premiums written, were: Ambac Financial Group, with 27.2% market share; MBIA Group, with 19.5%; Financial Security Assurance Group, with 19.3%; Financial Guaranty Insurance Co., with 12.9%; and XL America Group, with 10.6%.