Bond insurer Assured Guaranty Ltd. has reached a three-part deal with Radian Asset Assurance Inc. that expands Assured Guaranty’s portfolio and business.
Assured Guaranty’s subsidiary, Assured Guaranty Municipal Corp., has agreed to reassume insuring $12.9 billion of securities that it had earlier transferred to Radian.
Radian is paying Assured $86 million for insuring the bonds. The securities consist of 96% public finance exposure and 4% structured finance credits. Assured Guaranty expects it will receive an incremental $1.9 million present value from future installment premiums.
Assured Guaranty Corp. will reinsure about $1.8 billion of Radian Asset public finance bonds. Radian is paying Assured $22 million for reinsuring the sum. Bondholder claims will still be made to Radian, but now Radian could make claims with Assured for any defaults.
Both the reassumed and reinsured portfolios are composed of selected credits that meet Assured Guaranty’s underwriting standards, Assured Guaranty reports.
In addition, Assured Guaranty will acquire Municipal and Infrastructure Assurance Corp. Assured will pay Radian $91 million for MIAC. When purchased, MIAC will have cash and cash-equivalent assets of $75 million. MIAC is licensed to provide financial guaranty insurance and reinsurance in 38 U.S. jurisdictions, including the District of Columbia.
The companies expect the first two parts of the transaction to be completed this week. The purchase of MIAC is subject to regulatory approval and is expected to close by the end of March.
“This transaction helps us achieve success on several strategic fronts, including increasing our adjusted book value per share by approximately $0.37, based on expected inter-company reinsurance amounts, and increasing the size of our insured portfolio by approximately $15 billion,” said Dominic Frederico, president and chief executive officer of Assured Guaranty.
“The acquisition of MIAC enhances our flexibility to respond to changes in the financial guaranty industry,” he said.
In 2011, Assured insured a little over $15 billion of bonds. By acquiring the $14.7 billion of bonds for insurance, “we essentially did a full year’s worth of business in the first quarter,” said Robert Tucker, managing director of investor relations and communications at Assured Guaranty. Taking on the new bonds increases the amount of U.S. public finance Assured has insured by about 3.6%.
“This deal is expected to increase Radian Asset’s statutory capital by $100 million in the first quarter of 2012,” said Radian CEO S.A. Ibrahim. “With this one transaction, we made great strides toward improving our capital position and further preserving our holding company liquidity.”
Commenting on the deal, Alan Schankel, managing director of fixed-income research at Janney Capital Markets, said: “I think it’s good for both companies, but it won’t have a huge impact on the muni market.”
Schankel said he believed the $12.9 billion of bonds regained by Assured already were effectively wrapped by Assured and thus would not experience any rating upgrades. Tucker said that the $1.8 billion of bonds are still backed by Radian. What has changed is that if Radian pays the claims, it can turn to Assured Guaranty to reimburse it for the claims, he said.
Assured Guaranty Corp. and Assured Guaranty Municipal Corp. have ratings of Aa3 with negative outlooks from Moody’s Investors Service and AA-minus with a stable outlook from Standard & Poor’s. Radian has a Ba1 rating on review from Moody’s and a B-plus rating from S&P.
In September, the National League of Cities announced that it was working with Radian Group to form a public finance mutual bond insurance company. There was some speculation that Radian’s MIAC would be used for this purpose.
Asked on Wednesday how the deal might affect the league’s insurance company plans, spokesman Greg Minchak said, “We’re still going through it and trying to digest the implications of what the deal means to us.”
Standard & Poor’s announced Wednesday that the deal would not affect its ratings on Assured Guaranty Ltd.’s subsidiaries, Assured Guaranty Municipal Corp., Assured Guaranty Corp., and Assured Guaranty Re Ltd., all of which are rated AA-minus.