What is 'Monoline Insurance Company'

A monoline insurance company is an insurance company that provides guarantees to issuers, often in the form of credit wraps, that enhance the credit of the issuer. These insurance companies first began providing wraps for municipal bond issues, but now provide credit enhancement for other types of bonds, such as mortgage-backed securities and collateralized debt obligations.

BREAKING DOWN 'Monoline Insurance Company'

Issuers will often go to monoline insurance companies to either boost the rating of one of their debt issues or ensure that a debt issue does not become downgraded. The ratings of debt issues that are securitized by credit wraps often reflect the wrap provider's credit rating. Along with providing credit wraps, monoline insurance companies also provide bonds that protect against default in transactions that deal with physical goods.

History of Monoline Insurance Companies

Monoline insurance companies were deeply involved in the economic crisis of 2008, primarily due to four strategic actions.

Monoline insurers wrote bond insurance to enhance the quality of collateralized debt obligations, most notably those backed with residential mortgages. As well, some of these insurers participated as counterparties in credit default swaps, selling an assurance of payment to the buyer of a swap if the credit quality of a collateralized debt obligation deteriorated. In addition, these monoline insurance companies sold guaranteed investment contracts to the municipal bond or structured finance security issuers in cases in which the issuer did not require all the proceeds initially. Monoline insurance companies also invested in both municipal bonds and structured finance. Some invested heavily in bonds that they insured, including collateralized debt obligations backed by residential mortgages.

In each of these decisions, adverse selection and moral hazard tremendously aggravated the risks to these insurers. In addition, regulations were not adequate to monitor monoline industry operations, capital adequacy and risk.

Monoline insurers operated in relative anonymity until the financial crisis of 2008 and were among its earliest victims. Regulators and investors underestimated the increased risk that monoline insurers took on by expanding into correlated product lines. They also underestimated the effect and extent of their dependency on credit ratings.

The financial crisis of 2008 nearly ran the entire monoline insurance industry into extinction. There were nine primary monoline firms at the time: MBIA, Ambac, FSA, FGIC, SCA (quoted as XL Capital Assurance), Assured Guarantee, Radian Asset Assurance, ACA Financial Guarantee Corporation and CIFG. Most companies were based and ran out of the states of New York or Wisconsin, with subsidiaries in several European countries. One-fifth of business reported on the balance sheets of these companies was international, and securities guaranteed by financial guarantors were held in portfolios around the world.

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