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MBIA pays $75 million to settle finite charges

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ARMONK, N.Y.—Another round of finite reinsurance probes came to a close last week with MBIA Inc.'s $75 million settlement of securities fraud and finite risk-related charges leveled by state and federal regulators.

The settlements end investigations into the Armonk, N.Y.-based financial guarantee insurer for allegedly using sham reinsurance transactions to mask a $170 million bond loss incurred in 1998 on its guarantee of bonds issued by a bankrupt unit of Allegheny Health, Education & Research Foundation of Pittsburgh.

Regulators alleged that MBIA avoided taking the $170 million earnings charge by entering into fraudulent contracts with three reinsurers--AXA Re Finance S.A.; Munich Reinsurance Co.; and Converium Re, previously known as Zurich Reinsurance (North America) Inc.--and improperly booking those loans as reinsurance. MBIA restated earnings twice during 2005 in relation to the AHERF deal.

MBIA neither admitted nor denied wrongdoing in separate agreements, one with the U.S. Securities and Exchange Commission and the other with the New York State Insurance Department and New York attorney general.

Independent review

Under the agreements, $60 million will be paid in policyholder restitution and $15 million will be paid as a civil penalty to New York.

In addition, MBIA consented to a cease-and-desist order relating to future violations of securities laws, and agreed to retain an outside consultant to review other questionable accounting issues.

Within six months, the independent consultant must review and provide recommendations for MBIA's accounting and disclosure of its investment in Capital Asset Holdings GP Inc. and its accounting for and disclosure of its exposure to the US Airways 1998-1 Repackaging Trust, among other things.

Mark K. Schonfeld, director of the SEC's Northeast regional office, said: "This case arose out of our industrywide investigation of the abuse of finite insurance and reinsurance policies to burnish the books of public companies. Here, MBIA purchased a sham reinsurance policy to make a $170 million loss disappear from its financial statements. In fact, MBIA was simply reimbursing its reinsurers the full amount of the covered losses."

Investor protection

In a statement, New York Attorney General Andrew Cuomo said his office will continue to "focus on investor protection and on pursuing corporations that spread misleading information to dupe investors and regulators."

"We are pleased that the AHERF-related investigations are finally behind us," said MBIA's chief executive officer, Gary C. Dunton, in a statement.

In the wake of the settlement, rating agencies including Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings said MBIA's ratings would not be affected.

MBIA accounted for the settlement in November 2005, when it set aside $75 million in reserves for expected settlements of regulatory investigations (BI, Nov. 14, 2005).

New York-based Moody's noted in a statement, however, that while MBIA's settlements conclude several issues under investigation, they still leave "others open to further review by an independent consultant."

"Specifically, the settlements do not mention Channel Reinsurance Ltd., nontraditional reinsurance agreements (beyond those related to AHERF), MBIA's sale of credit default swaps on its main insurance company, and the firm's methodology for determining loss and case reserves, all of which were the subject of subpoenas," Moody's said.

Channel Re, a Bermuda company formed by MBIA, along with RenaissanceRe Holdings Ltd., Partner Re Ltd. and Koch Financial Corp., had been a subject of regulators' scrutiny of MBIA.

In earlier settlements since widespread regulator investigations began in 2004, a number of other insurers--including American International Group Inc., ACE Ltd. and Zurich American Insurance Co.--shelled out millions to resolve allegations of finite insurance-related wrongdoing.

Pembroke, Bermuda-based RenaissanceRe has yet to finalize a proposed $15 million settlement, while Max Re Capital Ltd., also of Bermuda, in November reopened a probe into its accounting of certain finite contracts.