MBIA Inc. yesterday closed on its transaction to reinsure a $166 billion portion of Financial Guaranty Insurance Co.'s $200 billion public finance book, following the New York Insurance Department's approval of the deal last week, the companies announced yesterday.

MBIA will receive unearned upfront premiums of approximately $639 million, net of a ceding premium paid to FGIC. The premiums will be placed in a trust immediately and released to MBIA when either MBIA Insurance Corp.'s A2 rating is removed from review for a downgrade or the passing of ninth months, as required by the New York Insurance Department. Moody's Investors Service placed MBIA Insurance's A2 rating on review for downgrade Sept. 18.

The size of the reinsurance pact shrunk $18 billion from the original announcement of the deal. MBIA said the companies are still trying to gain the consent of one of the reinsurers of FGIC's portfolio previously included in the total, and that refundings and exposure amortizations since the original announcement have reduced the size of the deal.

The companies and the Insurance Department have said bondholders will benefit from the unique form of cut-through reinsurance in the deal, in which they can go to either MBIA or FGIC with claims. The deal excluded any credit-default swap contracts, below-investment-grade credits, an "other credits inconsistent with MBIA's credit underwriting standards," MBIA said.

MBIA has said in the past its return on equity will benefit as the premiums are earned over time. FGIC's statutory capital position will increase, and with the ceding premium, it will have resources to commute other guarantees. The Insurance Department had said FGIC likely would have been insolvent without the deal.

"We are pleased to be a part of a win-win transaction for MBIA, FGIC, and FGIC's policyholders," MBIA managing director Bill Fallon said in a statement. "The transaction provides an attractive return to MBIA, additional capital for FGIC, and the security of MBIA's strong claims-paying resources for FGIC's policyholders."

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