Monoline Insurance Company
What Is a Monoline Insurance Company?
A monoline insurance company is an insurance company that gives guarantees to debt issuers, frequently as credit wraps that improve the credit of the issuer.
These insurance companies initially started giving wraps to municipal bond issues, however presently give credit enhancement for different types of bonds, for example, mortgage-backed securities and collateralized debt obligations.
Understanding a Monoline Insurance Company
Issuers of debt securities will frequently go to monoline insurance companies to either help the rating of one of their debt issues or to guarantee that a debt issue doesn't become downgraded. The way that an insurance company can give this lift in rating or prevention in downsizing is by giving a credit wrap.
The credit wrap gives comfort to investors as it safeguards against any losses in the security by consenting to pay back a certain portion of the interest or principal on the loan or to buy back a few defaulted loans in a portfolio. It is essentially insurance on a debt security.
The ratings of debt issues that are protected by credit wraps frequently mirror the wrap supplier's credit rating. Alongside giving credit wraps, monoline insurance companies likewise give bonds that safeguard against default in transactions that deal with physical goods.
Likewise with the definition of monoline, monoline insurance companies just offer one type of support. They are not in that frame of mind of giving various insurance products, like accident protection, home insurance, and bond insurance. Zeroing in on one specific type of insurance product considers mastery in that specific area of the insurance market.
Thusly, a monoline insurance company is any insurance company that spotlights on giving one type of insurance product; nonetheless, the term is frequently utilized with insurance companies that give protection on debt securities.
Monoline Insurance Companies and the 2008 Financial Crisis
Monoline insurance companies were profoundly engaged with the financial crisis of 2008, basically due to certain business choices.
Insurance Activities and Investments
Monoline insurers composed bond insurance to upgrade the quality of collateralized debt obligations, most quite those backed with residential mortgages. Too, a portion of these insurers partook as counterparties in credit default swaps, selling an assurance of payment to the buyer of a swap in the event that the credit quality of a collateralized debt obligation weakened.
Likewise, these monoline insurance companies sold guaranteed investment contracts to the municipal bond or structured finance security issuers in cases in which the issuer didn't need all the proceeds initially.
Monoline insurance companies additionally invested in both municipal bonds and structured finance debt securities. A few invested vigorously in bonds that they insured, including collateralized debt obligations backed by residential mortgages.
In every one of these choices, adverse selection and moral hazard enormously disturbed the risks to these insurers. Besides, regulations were not adequate to monitor monoline industry tasks, capital adequacy, and risk.
Risk Impact
Monoline insurers worked in relative secrecy until the financial crisis of 2008 and were among its earliest casualties. Regulators and investors misjudged the increased risk that monoline insurers took on by venturing into corresponded product lines. They additionally misjudged the effect and degree of their dependency on credit ratings.
The financial crisis of 2008 almost ran the whole monoline insurance industry into annihilation. There were nine primary monoline firms at that point: MBIA, Ambac, FSA, FGIC, SCA (quoted as XL Capital Assurance), Assured Guarantee, Radian Asset Assurance, ACA Financial Guarantee Corporation, and CIFG.
Most companies were situated in and ran out of the states of New York or Wisconsin, with auxiliaries in several European countries. One-fifth of business reported on the balance sheets of these companies was international, and securities guaranteed by financial guarantors were held in portfolios around the world.
During and after the financial crisis, all of the monoline insurance companies saw a downgrade in their credit ratings and a negative financial impact on their balance sheets.
Features
- Insurance on bonds and other debt securities is given by guarantees as credit wraps.
- A monoline insurance company is an insurance company that is centered around giving just a single specific type of insurance product.
- Monoline insurance companies are regularly associated with insurance companies that give insurance on bonds.
- Credit wraps further develop the credit rating of a debt issuance or forestall a downgrade.
- Monoline insurance companies were vigorously engaged with the 2008 financial crisis as they insured and invested in numerous residential mortgages that in the long run defaulted.
