NEW YORK, N.Y., January 29 – MBIA Inc. and MBIA Insurance Corporation have concluded civil settlements with the Securities and Exchange Commission (SEC), the New York State Attorney Generals Office, and the New York State Insurance Department with respect to transactions entered into by MBIA in 1998 following defaults on insured bonds issued by the Allegheny Health, Education and Research Foundation (AHERF).

MBIA is in the business of providing financial guarantees for bond issuers, such as states and municipalities, the Insurance Department explained. Through these guarantees, MBIA assures purchasers of a given bond that the bonds issuer will make interest and principal payments on time. The department said that its examination, and an investigation by the Attorney Generals Office revealed that contrary to MBIAs claims, it had suffered significant losses in 1998.

On July 21, 1998, AHERF, a Pennsylvania hospital chain, defaulted on $256 million in bonds that MBIA had guaranteed, the department said. According to the investigation, MBIA was aware at the time of the pending loss, which it internally estimated at between $95 and $100 million, exceeding the companys unallocated loss reserve of $75 million.

The department explained that its investigation showed that, rather than take a loss that would dwarf any previous loss it had suffered, MBIA entered into a fraudulent scheme to avoid booking the loss. It borrowed money to cover the AHERF losses from three reinsurers " Munich Re, Axa Re Finance, and Zurich Re " and then disguised the loan payments as insurance premiums, misleading investors on the impact of the AHERF loss on MBIAs business, said the department. MBIA had to agree to pay the three reinsurers back their money, plus a profit.

This alleged scheme allowed MBIA to avoid taking a $170 million charge to earnings in 1998 " the net present value of the $256 million in bonds " and overstate net income by approximately 25 percent, creating the perception that MBIA had weathered the AHERF loss without significant damage, according to the department.

As part of the settlement, MBIA, Inc., and MBIA Insurance Corporation have agreed to reforms and a review of their practices by an independent consultant, and will pay a total of $75 million in restitution and penalties. MBIA will also pay a $15 million civil penalty to the State of New York, and $60 million in disgorgement and restitution to shareholders.

In addition to civil penalties and restitution, MBIA has agreed to undertake the following actions:

Cease and desist with respect to any future violations of securities laws;

Restate earnings on a GAAP basis for the years 1998 to 2004 to properly account for the AHERF transaction;

Hire an independent consultant who will comprehensively review and make recommendations within six months on certain areas.

The agreement also allows for expanding the independent consultants scope if warranted.

Acting Insurance Department Superintendent Eric Dinallo said, Our examination found that MBIA violated the insurance laws and regulations of the State of New York. We are pleased they cooperated with this investigation and that those adversely affected by MBIAs conduct will be compensated.

Gary C. Dunton, MBIA chief executive officer, said, We are pleased that the AHERF-related investigations are finally behind us. MBIA cooperated fully with the regulators to resolve these matters, and we are grateful for the strong support of our employees, clients, shareholders and investors in MBIA-insured bonds during the long period while the investigations were being resolved. We are committed to earning their loyalty every day through our tradition of high integrity and excellent customer service as befits an industry leader.