| MBIA Inc. - Aug. 28, 2008 - by Colleen McCarthy
NEW YORK—MBIA Inc., the largest U.S. bond insurer, has agreed to reinsure $184 billion of municipal bond risk from competitor Financial Guaranty Insurance Co., in a transaction brokered by the New York State Insurance Department.
The deal, announced Wednesday, is expected to "help FGIC avoid bankruptcy and boost MBIA's muni-bond practice," said New York State Insurance Superintendent Eric Dinallo, who has made helping the bond insurance industry a priority.
Under the reinsurance agreement, Armonk, N.Y.-based MBIA will receive $741 million of unearned premiums on FGIC's municipal bond guaranty contracts. In exchange, MBIA will pay FGIC $197 million in the form of a ceding commission, regulators said in a conference call Wednesday.
The transaction will leave MBIA with more earnings and cash flow, Mr. Dinallo said.
Earlier this year, FGIC's financial ratings were downgraded to junk status by Moody's Investors Service and Standard & Poor's Corp. This transaction helps FGIC avoid insolvency by freeing up capital, reserves and other resources for its remaining capital, regulators said.
As a result of the MBIA transaction, the reinsured bonds could be rated as high as AA.
Mr. Dinallo said the agreement involved a unique form of "cut-through reinsurance" that will allow FGIC's municipal bond policyholders to submit claims to either FGIC or MBIA, "increasing the assurance that a policyholder will be paid promptly for a claim," he said.
Typically, policyholders can only use cut-through reinsurance after the insurance company that issued the policy goes bankrupt.
This arrangement also features the use of cut-through reinsurance retrospectively for existing policies, as opposed to its more common function as being offered to help sell a new policy, regulators said.
"We believe that cut-through reinsurance could prove invaluable in helping lift the ratings of municipal bonds now covered by other bond insurers," Mr. Dinallo said in statement.
In addition, the New York State Insurance Department has approved a commutation deal between FGIC subsidiary FGIC UK Ltd. and Calyon, a French bank, the department announced. The deal calls for FGIC UK to pay Calyon $200 million to cancel a $1.875 billion financial guaranty policy on an asset-backed securities portfolio, according to a statement.
The New York State Insurance Department said similar agreements could be in the works.
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