Some of the municipal bond market's biggest insurers are making significant changes in leadership and structure in efforts to address their current problems stemming from exposure to subprime mortgage-backed securities.

Take Joseph "Jay" Brown, who has just come back at the helm of MBIA Inc. as chief executive officer and chairman, the board's call, following the resignation of former CEO Gary Dunton. The change in leadership is effective immediately, the bond insurer said Tuesday.

Brown returns to MBIA, parent of financial guarantor MBIA Insurance Corp., where he served as chief executive officer and chairman from 1999 through May 2004.

Also, Ambac Financial Group Inc. denied reports last week that it would split into two companies resembling the "good bank/bad bank" structure put forth by New York State Gov. Eliot Spitzer and New York State Insurance Superintendent Eric Dinallo, and reported by The Wall Street Journal Tuesday.

Meanwhile, rival Financial Guaranty Insurance Co. has already asked the regulator for a license to split its business.

It is apparent that the U.S. insurance industry is in for a dramatic shakeup.

Ambac spokeswoman Vandan Sharma would not confirm reports that the company would sell $2 billion in discounted shares to existing investors, although she did say that Ambac is pursuing various capital plans.

The latest moves by the so-called "monocline" bond insurers, which refers to reinsurers that guarantee the timely repayment of bond principal and interest when an issuer defaults, reflect the changing nature of both the municipal market and the structured finance markets.

As these markets have shifted, changes in leadership and risk management have become necessary and caused the companies to reevaluate their business models.

Triple-A Challenges

Brown takes over at MBIA at a time when the triple-A rating of MBIA Insurance is in jeopardy, and when market support for the monoline insurance companies is at a historic low. In a letter to shareholders, the new chairman said MBIA faces "the most serious challenges in its 34-year history."

In an interview with SourceMedia sister publication The Bond Buyer, Brown said that in evaluating MBIA's current situation, it is clear to him that whether it is collateralized debt obligations or other kinds of synthetic wrapped securities, they do not work very well in the financial guaranty model.

"[Tuesday] morning, I told the employees that asked the question that as of this morning, we aren't doing anymore [derivatives]," Brown said. "We are just not going to do that type of business going forward."

Brown also said the current model for financial guaranty companies can make it difficult to raise capital. As an example, he mentioned the more than $2 billion that MBIA has raised in the past few months, calling it "expensive capital."

Interesting Circumstances'

"We've been confronted with an interesting set of circumstances that demonstrate that the way the model is currently constructed creates real obstacles to raising capital on an efficient basis," Brown said.

Looking down the road as far as five to 10 years, Brown continued, MBIA will exist in more entities and subdivisions than it currently does, in a structure aimed at getting the company through its current struggles. Brown said the company would not look to separate its business into the "good bank, bad bank" model.

Brown also said in the interview that on Friday he spoke to Dinallo. The talk centered around the future of the financial guaranty business and the credit ratings issue, to which banks and other counterparties are exposed in the form of guarantees pledged by MBIA and other insurers, Brown said.

"We're trying to learn from what [insurance regulators] are doing and we will see if there are any particular opportunities to do something quicker," Brown said. "It's not to solve our issues, because we don't think we have problems, but to be responsible to the banks."

MBIA's announcement comes after a weekend that saw further developments among its bond insurance peers. Ambac and CIFG N.A., parent of financial guarantor CIFG Guaranty, updated their risk management departments in an effort to gain a better handle on the current situation.

On Monday, market sources confirmed that CIFG chief risk officer Chuck Webster left the triple-A bond insurer the week of Feb. 17.

At Ambac, David Wallis is slated to become the insurer's chief risk officer, following the departure of William McKinnon. Wallis had been head of portfolio and market risk management, and he will oversee a risk department that will retain individual approaches to public finance and structured finance, the company said in a release.

Ambac's Sharma said the elevation of Wallis to chief risk officer reflects Ambac's continued evaluation of its various lines of business. Sharma mentioned the unsettled state of the structured finance markets.

"We don't have any certainty about how the whole structure finance business is going forward," Sharma said. "It's premature to say what you will write and what you will not write without doing the work."

MBIA's Brown said that while the bond insurers are experiencing problems, he does not foresee a permanent decline in the use of bond insurance. Bond insurance gained traction among investors and issuers after the New York City fiscal crisis in the 1970s, and since then, it has experienced periods of growth and contraction. Opponents of bond insurance have been most upset by the growth, Brown said.

"The people that hated [bond insurance] the most were the sophisticated bond investors because they felt they could buy bonds uninsured, they did not need us to analyze them," Brown said. "But there are lots of little people-and medium-sized people-that buy bond insurance for peace of mind."

Looking at the environment for bond insurance in the near term would not be an accurate way to gauge the prospects for the industry over the long term, he said.

"No one should look at this week, last week, or the last three months as indicative of how this business will behave over the next decade," Brown said.

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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