MBNA Corp. has hit a legal bump in its road into the insurance business.

TIG Holdings Inc., the underwriter for MBNA's automobile insurance program, sued the card issuer last month in U.S. District Court for the Northern District of Texas.

New York-based TIG is asking the federal court to confirm its interpretation of a provision in the contract. The insurer is seeking pricing changes that it says MBNA refuses to grant.

Citing high loss and expense ratios, TIG told investment analysts last week that its insurance program "has been performing below expectations."

Under its interpretation of a clause in the MBNA contract-a five-year deal that started in August 1996-TIG is entitled to a "minimum return standard" of 15% over the contract's life, said Mary Hennessy, the insurer's president and chief operating officer.

But TIG said it lost $6.8 million underwriting the MBNA program in the second quarter. Thanks to an insurance policy of its own to hedge against poor performance, TIG's actual loss came to $2.8 million.

In a turnaround attempt, TIG sought to raise its premiums and change underwriting procedures in several states. The company said MBNA then stopped referring business to it.

An MBNA spokesman would not comment on the status of its program, except to say: "The auto insurance business has been a terrific part of MBNA. We expect it to continue to be an important part of our overall business."

MBNA would not say whether it is looking for a new auto insurance partner.

The No. 2 credit card issuer said in its 10-Q Securities and Exchange Commission filing for the first quarter that it earned $8.2 million from insurance.

The Wilmington, Del., company has been developing auto insurance over the past two years. As of yearend 1997, MBNA was licensed to sell insurance in 40 states.

Its insurance services division, formed in 1996, acts as an agency marketing to its customers and to members of the more than 4,600 affinity organizations it serves.

In 1997, its "major focus" was automobile insurance, according to the MBNA annual report. It seeks to capitalize on a correlation between responsible driving habits and the "stability and financial habits" of cardholders.

MBNA last year launched life and disability products. It also has sold credit insurance for more than 10 years, with 1.4 million customers at yearend 1997.

The insurance dispute follows hefty investments in system upgrades. Last year, MBNA spent $100 million and made 100,000 system changes, according to its yearend 1997 10-Q filing. Many of them were attributed to the development of the consumer finance and insurance services businesses.

"We hope that we can come to some agreement where we can return this program to profitability," Ms. Hennessy said.

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