MBIA has agreed to provide reinsurance for the majority of FGIC’s investment grade U.S. public finance insured portfolio.
The transaction, expected to close by the end of next month, will put MBIA’s claims paying resources behind approximately $184 billion of general obligation, water and sewer tax-backed and transportation bonds already insured by FGIC.
The reinsurance will allow bondholders, should they have claims, to go directly to MBIA for payment. As a result of this transaction, ratings on the MBIA re-insured bonds are likely to be upgraded to MBIA’s higher rating level.
This year, both MBIA and FGIC have seen their financial strength ratings fall out of the “AAA” categories as a result of exposure to sub-prime and CDO securities. MBIA, however, still retains solid investment grade ratings (A2/AA) while FGIC fell to non-investment grade status (B1/BB).
The agreement was put together by New York State Insurance Commissioner Eric Dinallo. New York regulators have been actively working with the bond insurance industry to ensure that existing municipal bond insurance remains in force for both issuers and bondholders who expected their bonds to enjoy the extra level of protection bond insurance provides.
Insurers hoping to write new policies
Bond insurers have also been working to reduce their mortgage-related exposures with the hope that they can once again restore their financial credibility and reenter the market to write new policies.
In return for taking on FGIC’s low-risk portfolio, MBIA will receive unearned upfront premiums of approximately $741 million from FGIC.
This transaction allows FGIC to free up previously committed capital and claims paying resources that can now be used to settle their prior commitment to provide insurance for a large Collateralized Debt Obligation (CDO) transaction with Calyon, a French bank.
While the sub-prime crisis has clearly taken its toll on the bond insurers, traditional municipal bonds continue to perform at historical levels and meet debt obligations in a timely fashion.