Assured Guaranty Ltd. has agreed to reinsure $13 billion of CIFG Assurance NA's U.S. public finance book in return for unearned premium reserves of $88 million, the companies announced Thursday night.
The move comes as part of CIFG's broader plan to reduce its exposures and could provide a boost to those holding CIFG-insured bonds. After closing, the companies plan to novate the CIFG policies, essentially canceling them to replace with policies from Assured Guaranty.
"We are pleased to have the opportunity to provide CIFG NA's policyholders with the safety and security of Assured's financial strength," Dominic Frederico, president and chief executive officer of Assured Guaranty Ltd., said in a statement.
CIFG said last month it would seek a double-A or better reinsurer for its public finance book as part of a memorandum of understanding it signed with its credit default swap counterparties and insured bondholders on its asset-backed securities and commercial real estate collateralized debt obligations. CIFG also said last month that it had reached an agreement in principal to commute approximately $12 billion in structured finance exposures, in a deal that has yet to close.
At that time, the New York Insurance Department said as a result of the MOU that it would temporarily forebear on placing CIFG into rehabilitation even though it had statutory filings "indicating insolvency." The current move should help CIFG's standing.
"This transaction is certainly in line with the New York Insurance Department's goal of protecting the interests of U.S. municipal policyholders," Steve Pachella, a managing director and head of strategy at CIFG, said in an e-mail. "Going forward, we will continue to work with our counterparties to shore up our capital position as announced a few weeks ago. That continues to be our primary focus."
The deal includes the bulk of CIFG's U.S. public finance book, although the remaining portion of CIFG's book was not disclosed. The credits Assured will reinsure all meet its underwriting guidelines.
The companies expect to close the reinsurance agreement in the fourth quarter of 2008, pending regulatory approval. The New York Insurance Department declined to comment on the deal.
After the reinsurance deal closes, investors will need to agree to the replacement of their policies, Assured said. Assured will work with CIFG and issuers to complete that process.
New policies would mean bondholders will pick up Assured's triple-A rating from all three rating agencies, although Moody's Investors Service currently has Assured on review for downgrade. CIFG has ratings of Ba2 on review with direction uncertain from Moody's and B on developing watch from Standard & Poor's. Fitch Ratings withdrew its rating on CIFG last week.
It's still early to say what impact the deal will have on trading values, but it should be positive, according to Bob MacIntosh, chief economist and co-director of municipal investments for Eaton Vance.
"It's good news, and I think it will ultimately translate into better value," MacIntosh said. "But let's see it be official before we start trading that way."
In addition, Assured laid off a small portion of its staff last week. The company said it does not reflect any change in strategy or guidelines and it remains "fully committed" to the markets it is in, a spokeswoman said.
"As is prudent in current business and economic conditions, we've done a modest resizing of the staff," a spokeswoman said. "It hasn't affected any of the senior underwriters or business people - principally, its reflecting the lower levels of new business production, particularly in the structured finance business, so it's relatively minor."
Elsewhere, various news reports said the Treasury Department is considering using a portion of its $700 billion Troubled Asset Relief Program to take an equity stake in insurers, although it was not clear if bond insurers were included. The Treasury Department did not return e-mails seeking comment.
In addition, Moody's took action on two bond insurers Friday.
It downgraded Syncora Guarantee Inc. to Caa1 with direction uncertain from B2, citing higher-than-expected mortgage-related losses and the uncertainty regarding the potential outcomes of Syncora's efforts to commute its credit-default swap exposures.
Moody's placed the B1 rating of Financial Guaranty Insurance Co. on review for possible downgrade, citing further deterioration in the U.S. housing market.
