FGIC in MBIA reinsurance deal

Financial Guaranty Insurance Company (FGIC), the New York-based monoline insurer, has signed a reinsurance deal with MBIA, the Armonk, New York-based monoline. The deal, which sees MBIA reinsure $184 billion of municipal bonds, was overseen by the New York State Insurance Department.

The portfolio of affected loans is solely comprised of investment-grade public finance insurance contracts, with no credit default swaps (CDS) included in the underlying portfolio.

The deal is subject to final approval by the regulator and is expected to close in late September, according to MBIA.

“Assuming the terms of the reinsurance deal meet regulatory requirements, it should provide substantial improvement for everyone – the holders of FGIC municipal and structured policies, the policyholders of MBIA, and both companies,” said New York State Insurance Department superintendent Eric Dinallo yesterday.

The company will receive a $741 million upfront premium for the transfer, which is a “cut-through” reinsurance deal. This means existing FGIC policyholders have the right to claim contracts against the reinsurer directly, rather than going through FGIC.

In December 2007, monoline insurers Ambac and Assured Guaranty enacted a similar reinsurance deal. On that occasion $29 billion of municipal wraps were transferred. At the same time, the New York regulator has approved the commutation of $1.875 billion of distressed asset-backed security CDSs. FGIC paid French investment bank Calyon $200 million to cancel the high-risk contracts.

See also: Ambac clears deck of $1.4 billion CDO squared
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