N.Y. Regulators Secures XL Capital Solvency

In what New York's superintendent is calling a precedent-setting agreement, the insurance department has approved a $2 billion infusion of cash to XL Capital Assurance (XLCA) Inc.. ensuring the bond insurer's solvency.

"It's a good agreement for everyone--for the Main Street municipal bond holders, for Wall Street policy or CDS [credit default swap] holders, for the bond insurance industry," said Insurance Superintendent Eric Dinallo.

During a telephone news conference, Mr. Dinallo said Security Capital Assurance Ltd., the parent company of XL Capital Assurance, has gone from being close to insolvent, to a solvent company with more than $1 billion in surplus.

Under the deal announced late today, Bermuda-based XL Capital Ltd., the former parent company of XLCA, will pay less than $2 billion, in a combination of cash and stock, to XLCA and XL Financial Assurance Ltd.

In return, existing financial guarantee and reinsurance arrangements among the SCA and XLCA, XLFA and XL will be terminated, commuted or restructured.

The deal also calls for commutation of credit default swaps between Merrill Lynch, along with others trusts, SCA and XLCA, where eight CDS agreements will be commuted and litigation dismissed in exchange for a cash payment of $500 million.

The deal does not involve any funding from the state, Mr. Dinallo said.

He described this as a good template going forward because it avoids companies going into rehabilitation, something he said might have a negative impact on the bond insurance industry as a whole.

He said XLCA was in the most critical of positions, requiring the attention of the department, characterizing the company as "headed toward rehabilitation."

On other bond insurers, he said the department is "actively working on other situations," adding there is the potential for another transaction.

The department released a three-part plan to deal with the solvency of bond insurers going forward that includes:

o Attracting more capital and increasing capacity to benefit bond insurers and municipal issuers, who need the coverage for municipal projects.

o Resolve the status of distressed bond insurers--including preparation of receivership, if necessary.

o Development of stronger regulation for bond insurers. The department said it would be releasing new regulations soon.