Assured Guaranty Re Ltd. has relieved PMI Guaranty Co. of its reinsurance portfolio related to downgraded bond insurer Financial Guaranty Insurance Co.

AG Re, the double-A rated reinsurance subsidiary of Assured Guaranty Ltd., will take on about $900 million of additional exposure to FGIC in the arrangement. Under the agreement, PMI Guaranty will also pay Assured about $9 million. This represents the unearned premiums already collected by the financial guaranty subsidiary of PMI Group, which is also part owner of FGIC.

The agreement was dependant on regulatory approval, which was recently obtained, according to a PMI Group press release.

PMI Guaranty has also agreed to reimburse AG Re for any losses it pays on two exposures, up to a limit of $22.9 million. The successful completion of the deal was contingent on this provision, according to David Penchoff, the president of AG Re.

"The bulk of the portfolio is very low-risk public finance," Penchoff said. "It was just these two transactions that were more problematic."

PMI Guaranty has placed the nearly $23 million in funds in a trust account, and expects to incur expenses of $18 million as a result of the agreement.

The FGIC reinsurance book brings the AG Re exposure to FGIC to more than $8 billion. At the end of 2007, Assured had $7.8 billion in exposure to FGIC.

"This is a nice trade for us but we have significantly more exposure," Penchoff said.

As one of the strongest reinsurers in the market, AG Re has taken many obligations off the hands of other bond insurers looking to free up capital and maintain their ratings. As those ratings have continued to fall, the fortunes for the market's different reinsurance companies have diverged.

Earlier this week, Standard & Poor's downgraded Radian Group Inc. to A with a negative watch, from AA, in part because of the potential for declining profits at the company's reinsurance business.

"We believe that business growth for [Radian's] reinsurance business is uncertain in view of the downgrades of many of Radian Asset's reinsurance clients and their potentially shifting reinsurance needs," said Standard & Poor's analyst Robert Green in the rating report.

However, an earlier report stated that AG Re was well positioned to capitalize on further opportunities in the market for reinsurance.

"In our view, AG Re is well positioned to provide reinsurance capacity to the primary, direct bond insurance companies," Standard & Poor's said. "Its stable rating and outlook positively differentiate it from the four competing companies that offer monoline reinsurance."

Also yesterday, Standard & Poor's affirmed the AAA rating and stable outlook of AG Re's sister company, Assured Guaranty Corp.

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