New York says cancelling bond insurance legal
by Lisa Lambert
WASHINGTON (Reuters) - U.S. municipal bond issuers may cancel their bond insurance without risk of breaking the law under certain conditions, according to a letter from the New York Insurance Department obtained by Reuters on Thursday.
Concerned that recent downgrades, or threats of downgrades, of insurers' credit ratings could taint their bonds' marketability, issuers had sought to break away from insurance companies such as MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N).
But, according to the letter dated May 9 and posted to the department's Web site on Tuesday, some of those companies "recently have refused or been reluctant to cancel or terminate policies... either on the belief that cancellation or termination might violate the New York Insurance Law or simply because the insurance policies state that they are noncancelable."
Municipalities then asked the insurance department to clarify the law.
The insurance regulator will not object to any cancellations if an insurance policy does not include a "non-cancellation" provision, the letter said.
A spokesman from the department said, they may also cancel policies that contain the provision as long as the issuers, insurer and bondholders all agree.
Insurance is regulated on a state-by-state basis, with New York having authority over most bond insurance companies because they are headquartered in that state.
The letter, which was signed by Robert Easton, the department's deputy superintendent and general counsel, urged issuers to make the decision to end insurance coverage only after a thorough evaluation. The department, he wrote, "suggests that the insurer work with the issuer and bondholders to ensure that cancellation or termination is not completed precipitously."
At the same time, he wrote, the insurers should "apply a single set of non-discriminatory criteria in determining whether to consent to cancellation or termination of policies."
In order to obtain higher ratings, and be considered investment grade by money market funds, issuers bought bond insurance to take advantage of the insurers' historically high credit ratings.
When the insurers' ratings were downgraded, or threatened with downgrades, this winter due to their exposure to subprime mortgage-related securities, the bonds were left with lower ratings and aftershocks were felt throughout the muni markets.
(Reporting by Lisa Lambert)
