Bond insurer MBIA Inc. (MBI) said Wednesday evening that its insurance subsidiary MBIA Insurance Corp. will reinsure $184 billion of investment grade U.S. public finance bonds insured by its competitor Financial Guaranty Insurance Co., or FGIC. The deal resulted from a competitive process undertaken at the direction of the New York State Insurance Department and is seen as possibly enabling FGIC to avoid bankruptcy.
As per the deal, MBIA will receive unearned upfront premiums, net of a ceding commission paid to FGIC, of about $741 million in connection with the reinsurance. The transaction is subject to certain closing conditions, including approval by the New York State Insurance Department, or NYSID. Assuming receipt of the approval by the New York State Insurance Department and the satisfaction of other closing conditions, the transaction is expected to close by the end of the third quarter.
MBIA noted that the public finance portfolio consists exclusively of investment grade credits, primarily in the general obligation, water and sewer, tax-backed and transportation sectors. The portfolio does not contain any credit default swap contracts, below investment grade credits or other credits inconsistent with MBIA's credit underwriting standards.
The company said that the reinsurance will be provided on a "cut-through" basis, enabling FGIC's policyholders to receive the benefit of MBIA's reinsurance by allowing them to present claims directly to MBIA. This increases the assurance that a policyholder will be paid promptly for a claim.
MBIA said that the reinsurance transaction leverages its core public finance business and its existing surveillance and remediation expertise, and also provides attractive returns while strengthening the balance sheet. The company expects the transaction to be immediately accretive to Return on Equity, or ROE.
Reinsurance is the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim. This procedure is used by insurance companies to reduce the risks associated with underwritten policies by spreading risks across alternative institutions.
Earlier this month, MBIA announced that Standard & Poor's Ratings Services affirmed the 'AA' financial strength rating of MBIA Insurance Corp. and removed it from CreditWatch with negative implications. The company noted that all dependent ratings were affirmed as well, although the outlook for the ratings is negative. MBIA intends to set up a new company to guarantee municipal bonds.
FGIC, which is owned by The Blackstone Group LP (BX) and PMI Group Inc. (PMI), was downgraded from Triple-A rating to junk by all the three major credit rating agencies earlier this year. This means that the municipal bonds that the company insured were also downgraded, unless the issuer had its own independent higher rating. The NYSID noted that as a result of the transaction with MBIA, the bonds now reinsured could be upgraded to as high as AA.
In addition, the NYSID said that FGIC municipal policyholders will benefit from a stable reinsurer backing their policies. FGIC's structured finance counterparties will benefit from approximately $1 billion of additional capital resources supporting their policies in the form of capital release, contingency reserve release and a cash ceding commission.
The NYSID said that while the majority of FGIC municipal bonds are included in the reinsurance transaction, a small number of bonds, including bonds issued by Jefferson County, Alabama, were not included and will continue to be insured only by FGIC.
The NYSID has also approved the commutation between FGIC unit FGIC UK and French investment bank Calyon with respect to a commitment by FGIC UK to issue a $1.875 billion financial guaranty policy on a complex basket of distressed asset backed securities. FGIC UK paid Calyon $200 million for the commutation.
MBI closed Wednesday's regular trading session at $11.98, up $1.06 or 9.71% on a volume of 12.37 million shares. In after-hours trading, the stock further gained $1.27 or 10.60% to $13.25.
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