WHAT IS MBIA Insurance Corporation
MBIA Insurance Corporation is a company the provides insurance to municipalities that issue bonds. A division of publicly-traded MBIA, Inc, MBIA Insurance Corporation is a primary worldwide issuer of financial guarantee insurance. Used to back municipal bonds and structured finance products, MBIA insurance is used as an avenue to credit enhancement for municipal bond issuers, as MBIA's insurance promises to pay interest and principal on any bonds that suffer an issuer default.
The presence of MBIA insurance on a municipal bond typically ensures an AAA rating or its equivalent from the major ratings agencies and also makes the bonds much more marketable to investors.
BREAKING DOWN MBIA Insurance Corporation
MBIA Insurance Corporation provides insurance to back municipal bonds, also known as munis. It is purchased by the issuer of the bond as a way to get a higher rating and guarantee the bonds. Bond issuers may find they can even lower the total cost of issuing debt by purchasing MBIA insurance, as the higher rating the bonds garner can allow the issuer to lower the coupon rate to investors.
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. If the project does not succeed, the issuer will not have the funds to pay investors and will default.
MBIA and its competitors try to keep their own credit ratings at the highest levels, as this makes 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. MBIA keeps its credit rating high by diversifying their insured portfolios across nation, sector and asset classes, and also by keeping certain measures of financial leverage below dangerous thresholds. This means that they do not take on too many clients that are high-risk, even though they could charge these clients higher premiums. The net present value of those higher premiums does not exceed the financial loss that could occur from those clients defaulting and the insurer having to pay out the covered amount.