The New York State Insurance Department said yesterday a deal has been struck that insures the solvency of Financial Guaranty Insurance Company (FGIC) and protects the company's book of municipal bonds.

Under the agreement, announced late yesterday after stock markets closed, Armonk, N.Y.-based MBIA Inc. will provide reinsurance for $184 billion of municipal bonds currently insured by New York-based FGIC. According to MBIA, the company will receive unearned upfront premiums, net of ceding commission paid to FGIC, of approximately $741 million.

The deal was struck after an auction undertaken at the direction of, and overseen by, the New York State Insurance Department that sought reinsurance for the bulk of FGIC's municipal bonds.

During a conference call with reporters, New York Superintendent of Insurance Eric R. Dinallo said that many insurers showed interest in the business and the deal would assure the solvency of FGIC.

“This will help the municipal book by adding a layer of financial protection for the municipal policyholders,” said Mr. Dinallo. “And in general, it will benefit all other policyholders by improving FGIC's capital position.”

The deal was done on a “cut-through” basis that will allow policyholders to go directly to MBIA to settle their claims if they elect to do so, instead of relying on FGIC to settle the claim.

This is especially important for those concerned with FGIC falling into insolvency, which Mr. Dinallo emphasized is not the case for FGIC under this deal. The transaction is still subject to final approval by his department.

Simultaneously, the department also approved a commutation agreement between FGIC and its subsidiary, FGIC UK, and French bank Calyon.

FGIC UK issued a financial guaranty policy of up to $1.88 billion on collateralized debt obligations for Calyon. According to FGIC, under that agreement all three parties agree not to “pursue actual and potential monetary claims” against one another. FGIC UK paid Calyon $200 million for the commutation.

With the reinsurance deal, Mr. Dinallo said it is the hope that rating agencies will elevate the municipal bonds from their current “junk bond” status and raise the FGIC rating to MBIA's current “double-A” rating.

The deal is part of an overall three-point departmental plan which brings in new capital for guaranty insurers, protects policyholders of distressed companies and develops new rules to prevent similar problems, said Mr. Dinallo.

The problems began when the subprime mortgage market collapse exposed guaranty insurers to potentially billions of dollars in losses. Rating agencies and investors have been concerned the carriers do not have enough reserve to cover the potential losses, despite assurances from the companies. This led to downgrades in the companies' ratings and efforts on the part of the companies to improve their capital positions.

Mr. Dinallo and the New York Insurance Department for months now have been actively pursuing financial arrangements to secure the solvency of the companies, most recently securing a deal between XL Capital and Syncora Holdings, Ltd., which improved Syncora's solvency.

Mr. Dinallo said the only remaining guaranty insurer left under distress that the department is dealing with is CIFG Assurance. He said progress is being made to resolve issues with that firm.

Special Reports /

Dinallo Shepherds A Deal To Bolster FGIC

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