UK: Credit Crunch: Monoline Insurers

Last Updated: 31 July 2008
Article by Belinda Schofield and Chris Chapman

Monoline insurers have in recent times provided essential insurance for structured finance products like collateralised debt obligations and credit default swaps. However with the major monoline insurers being downgraded, and confusion over credit risk the demand for reliable guarantees is increasing. This is likely to bring changes to the monoline insurance industry.

To view the article in full, please see below:

Full Article

Monoline insurers have in recent times provided essential insurance for structured finance products like collateralised debt obligations and credit default swaps. However with the major monoline insurers being downgraded, and confusion over credit risk the demand for reliable guarantees is increasing. This is likely to bring changes to the monoline insurance industry.

A version of the article that appeared on Finance Week online on Wednesday 18th June is below . The article looks at the evolution of the monoline insurers, their role in the world economy and the challenges they face.

Since the article was written, both MBIA and Ambac have also had their financial strength rating downgraded from triple-A by Moody's. Further to this in the last week, FSA and Assured Guaranty have both had their financial strength rating placed on review by Moody's.

The repercussions of the sub-prime mortgage crisis have thrust monoline insurers into the limelight. Unlike traditional insurers, these firms write insurance for one line of business only, consequently the name 'mono'. They guarantee an estimated $2.4 trillion of outstanding debt. But who are they exactly, what do they do and how will recent events change their industry?

The monoline insurers' origins are in the US municipal bond sector and the largest still operate from the US, although they insure both domestically and abroad, including in the UK. The first of them started out in the 1970s only insuring municipal bonds (a debt security issued by a state, municipality or county to finance its capital expenditures). The monolines' business has expanded since then, to infrastructure projects, and the insurance of other structured finance products, like collateralised debt obligations (CDOs) and into the credit default swaps (CDS) market.

In the private structured finance arena, monoline insurers guarantee payments of corporate bond principal and interest against issuer defaults. They provide credit enhancement to capital markets transactions, providing financial investors and issuers with financial security and liquidity. The credit enhancement enables the public authorities, or companies offering the bonds, to save on interest costs because of the reduced risk for investors. In essence, the monolines extend their high credit ratings to 'paper' they consider sound, in return for a premium. They are an exclusive group, with the three biggest - MBIA, Ambac and FSA - controlling about 70% of the market.

A credit default swap is like an insurance policy against a credit default, though for technical reasons it is not, strictly speaking, 'insurance'. The huge worldwide CDS market accounts for a significant part of monolines' business, as it does for the financial markets generally. While monolines only write a small proportion of the total CDS market, some estimates suggest they sold up to 50% of the CDSs purchased to hedge against defaulting sub-prime related securities.

The monolines' share prices have plummeted this year as the depth of the sub-prime crisis has been revealed. Over the 52 weeks to June 2008, Ambac's share price had fallen 97%, while MBIA's had dropped 90%.

There have been well-publicised concerns that the loss of ratings at the monolines will automatically devalue the trillions of dollars of securities they have insured. The New York Attorney General's Office has threatened government intervention, including breaking the monolines up into good business (the backing of municipal bonds) and bad business - CDOs and the like. Some commentators say that a forced break-up of the historical business of monolines was never likely. It would have unfairly favoured public issuers, like New York itself, over investors in private issues who had already priced their investments on the basis that money from the monolines' municipal business would be available for their benefit.

Although some smaller monolines have failed, until recently the big players have managed to hold on to their all-important ratings. In fact, MBIA recently revealed its involvement in twenty-four new municipal bond issues in the last quarter, suggesting a climb back into the market.

At the beginning of June MBIA and Ambac both had their triple-A ratings cut by Standard & Poors, in line with an earlier cut by Fitch while Moodys promised to follow suit. The consensus has been that cuts by all three rating agencies would probably spell the end of their businesses. It remains to be seen whether they can instead change their business approaches and live to fight another day. Whatever the ultimate outcome, reports suggest that at least three banks, UBS, Citigroup and Merrill Lynch are likely to have to find another $10bn to account for the most recent downgrades.

Regardless of the future for MBIA and Ambac, the rest of the monoline industry is likely to change the way it operates in the future. For a start, market participation is shifting, with monolines less exposed to sub-prime, such as FSA, gobbling up market share and new players, like Warren Buffet's Berkshire Hathaway, entering the arena. Business structures may also change.

In the future, monolines might split new business along the lines of the New York Attorney General's February suggestion - with one set of reserves allocated to municipal bonds and another to riskier securities. Commentators argue that the problems for monoline insurers were brought about by their unwise foray away from municipal bonds and into other structured finance products. Municipal bonds were perceived as having a very low chance of default and so gave the monolines a secure position. The potential rewards of the new products brought new risks. That might not be enough, with municipal authorities in the US questioning the value monolines have provided in the past and the adequacy of their reserves - which some estimate at 1/150th of the value of their outstanding guarantees. One group of states has even proposed setting up a publicly run competitor. That debate is likely to continue, with the monolines insisting that their business models are conservative and properly stress-tested and their reserves adequate - distinguishing the theoretical total value of their guarantees from their realistic exposure.

Those monoline insurers that survive the turmoil might reap benefits. Although overall investor demand for CDOs and other complex financial products could fall, some say the general confusion over credit risk will increase demand for reliable guarantees. Recent evidence suggests that, with the right reserves in place, premiums are currently three times what they were before the sub-prime crisis. So there are incentives to stay in the industry, if possible.

The monolines business models will also be examined in another way - by litigation, primarily in the US. Historically, with their very low loss ratios, monolines have been relatively litigation-free. They have prided themselves on prompt claims payment. Now, some monolines in financial difficulty are disputing payments and finding themselves on the receiving end of court proceedings - or they are bringing litigation themselves to challenge commitments and free-up capital reserves. Some policy wordings and CDSs will be examined in court for the first time. All of this, along with the media attention, will encourage a greater understanding of the monolines and their role in the financial markets.

A version of this article first appeared on Finance Week online. Since the article was written, both MBIA and Ambac have also had their financial strength rating downgraded from triple-A by Moody's. Further to this in the last week, FSA and Assured Guaranty have both had their financial strength rating placed on review by Moody's.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 30/07/2008.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.