MBIA's Financial Restatement May Foreshadow Others

By Michael Ha

NU Online News Service, March 10, 4:10 p.m.EST? The bond insurer MBIA's restatement of its financialresults to correct for its past use of finite reinsurance mayforeshadow other possible restatements from companies beinginvestigated for these products, an analyst said.[@@]

The Armonk, N.Y.-based MBIA restated its earnings going back to1998 because of its finite reinsurance agreements the insurer madewith Converium Re. The seven-year financial restatement will cutMBIA's stated income by $54 million overall.

The insurer's restatement deals with the company's use ofnon-traditional finite reinsurance, said Standard & Poor'sdirector David Veno, whose firm maintains a "triple-A" financialstrength rating with a "Stable" outlook. Mr. Veno said: "Based onthe fact that they are restating earnings, it doesn't appear that[the deal with Converium Re] was a legitimate reinsurancearrangement."

The insurer's deal with Converium Re involved $265 million thatMBIA had insured for bonds issued by Allegheny Health Education andResearch Foundation, which went bankrupt in 1998.

MBIA's Converium Re transaction--and other suspectnon-traditional finite reinsurance arrangements--has been drawingregulators' attention recently. MBIA received subpoenas lastNovember from the Securities and Exchange Commission and New YorkAttorney General Eliot Spitzer's office regarding theseproducts.

Other companies that received subpoenas on these productsinclude American International Group, Ace Ltd., St. Paul Travelers,Zurich Reinsurance and Berkshire Hathaway's General Re.

Finite reinsurance products have drawn investigators attentionafter some companies were found to have used them to smooth theirearnings picture and distort their true financial strength.

MBIA's announcement may mean there could be more suchrestatements in the future from companies whose use of finitereinsurance products are now under scrutiny, according to FitchRatings. "There is a real possibility that there will be otherstatements from insurers with past involvement in finitereinsurance," said Fitch's managing director Michael Barry.

Year by year, MBIA is cutting its 1998 income to $386 millionfrom $433 million. The 1999 profit will be cut by $6 million, whilethe 2000 earnings is down by $4 million. The 2001 profit is cut by$3 million and 2003 income down by $238,000. On the other hand, therestatement will add about $6 million to MBIA's 2003-2004profit.

MBIA said these changes won't have any material impact. Ratingsagency Moody's Investors Service affirmed its "Aaa" insurancefinancial strength rating and an "Aa2" senior debt rating.