CHICAGO — Sixteen months after finalizing its agreement to reinsure a portfolio of $13 billion in CIFG Assurance NA-backed bonds, Assured Guaranty Corp. has decided to exclude from the pact the policy covering $83.3 million of debt issued in 2006 by the Xenia Rural Water District in Iowa.
CIFG has challenged the decision, which could lead to litigation. It is especially pressing to both CIFG — which sought the reinsurance agreements after falling below investment grade — and to Xenia policyholders, as the distressed district has dipped into reserves to cover interest payments and is seeking to shed some of its debt as part of an asset sale under a fiscal recovery plan. The water district was stripped of its investment-grade rating by Standard & Poor’s last summer
Assured — which yesterday had its triple-A bond insurer rating and negative outlook affirmed by Standard & Poor’s — said it notified CIFG on May 10 of its determination that the insurance policies on the Xenia bonds “are not covered policies under the reinsurance agreement and accordingly not subject to novation to AGC. CIFG may dispute this determination,” according to an update for CIFG policyholders posted late last week on Assured’s website.
While the reinsurance pacts were finalized early in 2009, the process known as “novation” — by which all covered policies would be transferred and become directly guaranteed obligations of Assured — is still ongoing.
Assured spokeswoman Betsy Castenir declined to comment on the reasons behind the insurer’s rejection of the policy.
“We have discussed the reasons why Xenia is not covered under our reinsurance agreement with CIFG and will not comment further,” she said. “We continue to work with the parties to the transaction to resolve the situation in our role as administrator of the Xenia policy.”
Market participants said Assured may try to argue that the Xenia bonds were not investment grade, although at the time the reinsurance agreement was executed they carried an investment grade.
The decision to not cover Xenia’s bonds surprised CIFG. The firm believed its contract with Assured to reinsure the $13 billion was solid and came only after a period during which Assured conducted due diligence on the policies before reaching final agreements in October 2008 that were then formally executed Jan. 22, 2009. Assured in that review rejected about $1 billion of CIFG’s municipal portfolio.
CIFG said it received Assured’s notice on May 11 and a premium check reimbursing it for the Xenia policy, but Assured did not state the reasons for the rejection.
“CIFG believes that Assured’s determination is in error, and that no grounds exist to justify Assured’s unilateral refusal to reinsure and novate the Xenia policy. CIFG has challenged Assured’s determination and put Assured on notice that it expects Assured to honor both its contracts with CIFG and its obligations to Xenia policyholders … In the interim, CIFG will continue to stand by its obligations to policyholders,” a statement posted on the insurer’s website yesterday said.
CIFG general counsel Michael Knopf said he is also concerned that Assured might try to reject other policies should they become distressed credits.
Under the agreements, Assured is acting as CIFG’s administrator on all of its municipal policies and providing reinsurance for a covered portfolio of $13 billion that includes roughly 1,300 issuers. As part of its responsibilities, Assured is handling the processing of loss claims, surveillance, and other risk-management services.
To streamline the process and allow policyholders a direct claim to insurance from Assured, the agreement calls for the two insurers to work out the transfer of policies through a novation process to Assured that would in effect result in the portfolio being covered by new policies. More than a year after the final agreements, that process is still ongoing.
“AGC is continuing to work with CIFG on the novation of all covered policies, which are subject to applicable legal requirements for the reinsurance and other terms of AGC’s agreements with CIFG,” the firm’s website reads. “There can be no assurance as to the timing of the novation of any policy or whether any particular CIFG policy will be novated to AGC, and CIFG remains the insurer on any CIFG policy unless and until the policy is novated to AGC.”
