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MBIA Inc. has launched a separate bond insurance company focused on public finance and said it will no longer use credit derivatives to back insurance across its businesses.
The company, whose shares jumped 19 percent in premarket trade, said in a statement on Wednesday that it had transferred all of its public finance business to the new company, National Public Finance Guarantee Corp., which has yet to be rated by credit rating agencies.
In a letter to shareholders, Chief Executive Jay Brown wrote that this was not “a good bank/bad bank split.” He also said MBIA was in a position to pay all expected claims in the future, “even under severe global economic conditions like we are currently experiencing.”
National, which will operate only in the United States, has a portfolio of $537 billion in U.S. public finance business. This includes the public bond business of Financial Guaranty Insurance Co., which was reinsured by MBIA in August, and MBIA’s public finance business, which was known as MBIA Insurance Corp.
MBIA said it paid National $2.89 billion as a premium to reinsure the policies and capitalized the company with $2.09 billion.
Brown said MBIA was no longer using credit derivatives, such as credit default swaps, because the price fluctuations of these instruments made the company’s financial statements too volatile.
MBIA said it intends to return to the international public and structured finance markets when “its ratings and market conditions permit.”
MBIA and other bond insurers have been hard hit by the credit crunch, which began more than a year ago. MBIA lost its “triple-A” credit rating after posting billions of dollars of losses from exposure to mortgages and complex debt instruments.
Ambac Financial Group, another major bond insurer that has also been downgraded, is also seeking to revive its business by reactivating a unit called Connie Lee as a new municipal bond insurer.
(Reporting by Elinor Comlay; Editing by Lisa Von Ahn and John Wallace)