US CREDIT-Regulators could block bond insurer payments

By Karen Brettell

NEW YORK, June 25 (Reuters) - Policy holders on structured
credit products guaranteed by bond insurers may not get paid
even if the contracts are triggered, as regulators may block
payments to protect the interests of municipal policy holders.

Any attempt by MBIA Inc (MBI.N) to set up a new insurance
subsidiary that can upstream dividends to the holding company
could also be scuttled for the same reason, analysts said.

Reserves set aside to cover losses from insuring risky
mortgage securities has depleted capital levels at insurers,
sparking concerns that some may breach statutory minimum
regulatory capital minimums.

Companies that fall below the minimum requirements risk
being seized by regulators, which in turn would trigger the
immediate payment on insurance they sold with credit default
swaps.

And this would make the companies insolvent, as they would
not have enough to pay out what would be billion of dollars in
claims.

The New York State Insurance Department, however, "has
authority to block payments on a credit default swap," said Rob
Haines, analyst at CreditSights in New York. "Regulators have a
lot of power."

"In our opinion, it is very likely the regulators will
refuse to honor the accelerated demands on the grounds that the
holders of the swaps would receive preferential treatment
versus the traditional policyholders, which for the most part
are the municipal policyholders," he added in a recent report.

David Neustadt, a spokesman for the New York State
Insurance Department, said the department won't speculate on
hypothetical events. "Our job is to protect policyholders and
our decisions are made on that basis," he added.

Haines views FGIC, XL Capital Assurance, part of Security
Capital Assurance SCA.N, and CIFG Guaranty at risk of
breaching their minimum capital levels in the second quarter.

FGIC's owners include mortgage insurer PMI Group Inc
(PMI.N) and private equity firms Blackstone, Cypress Group and
CIVC Partners LP. CIFG is owned by Banque Populaire and Caisse
d'Epargne, which together own French bank Natixis (CNAT.PA)

MBIA

Any plan by MBIA to set up a new insurance subsidiary to
focus on municipal insurance may also come under pressure from
regulators, analysts said.

MBIA Inc has been considered a less risky credit than its
insurance subsidiary, MBIA Insurance Corp, since the company
said it will keep $900 million it had previously earmarked for
its insurance arm at the holding company level.

Credit default swaps on MBIA Insurance Corp surged higher
than its lower rated parent, inverting its traditional
relationship, as market participants bet that the parent
company could receive dividends from a new, untainted insurance
unit.

"The parent company's creditworthiness is a function of the
cash flows from the subsidiaries," said Ricardo Kleinbaum,
analyst at BNP Paribas in New York.

However, "we do not think that MBIA can set up a new bond
insurance entity that will generate sufficient revenues to earn
a 'triple-A' ratings at the outset," he said. "The regulators
might well restrict dividend payments out of a new insurance
unit to the parent company, MBIA Inc."

CreditSights' Haines agreed: "MBIA is not going to get a
new insurance company off the ground. First off, the regulators
have to approve that new insurance subsidiary after MBIA kind
of snubbed them in terms of the $900 million."

The company would also need more capital than $900 million
to achieve top-AAA ratings, he said, and "there is no way they
would get AAA having a MBIA name on them right now because it's
a damaged franchise," he added.

MBIA spokeswoman Elizabeth James countered that MBIA
already has enough financial flexibility to capitalize a new,
"AAA" rated insurance subsidiary. "We would not be reliant upon
dividend approval from our regulators to fund this investment,"
she said.

There are also ways of structuring a new company so that it
is separate from MBIA Insurance and MBIA Inc, she said. "We
believe there would be strong interest from third parties to
invest in an MBIA sponsored U.S. municipal bond insurer."

Meanwhile, an influential labor group said on Wednesday it
is stepping up pressure MBIA to keep its promise to put $900
million into the insurance unit, citing the need to protect
pension funds that invest in municipal bonds. For details, see
[ID:nN25462114]
(Editing by Leslie Adler)