Fifteen months after Assured Guaranty Corp. agreed to reinsure $13 billion of CIFG Assurance’s public finance portfolio, the process of transitioning from one insurer to the other is not completed, meaning insured bondholders could be at risk.

Reinsurance typically works like this: if a CIFG-backed bond defaults, CIFG will pay the bondholder principal and interest directly, while the reinsurer, Assured, will reimburse CIFG.

To simplify that process, the insurers reached an agreement 15 months ago wherein Assured would pay bondholders directly if one of the 1,300 issuers in the transaction defaulted. Assured also agreed to act as administrator of the portfolio, so that CIFG effectively ceded all surveillance and risk management responsibilities.

“Instead of people making a claim against CIFG, CIFG paying it, and then CIFG getting reimbursed on the reinsurance, we set it up so that people can go directly to Assured as our agent,” said Michael Knopf, general counsel for the insurer.

The two companies also said they were working together to novate all of the insurance policies, meaning that the CIFG policies would be canceled and replaced with new policies written by Assured. How long the novation process would take was left unclear.

“There can be no assurance as to the timing of the novation process or whether an insured credit will be successfully novated,” Assured said in a press release on Jan. 22, 2009.

Assured’s Chief Executive Officer Dominic Frederico, at the time, said the transaction would give CIFG policyholders “the financial strength and protection of Assured” and that Assured would try to make the novation process “as quick and efficient as possible.” The company also called the transaction “a definitive agreement.”

Eric Dinallo, former superintendent of the New York Insurance Department who approved the transaction, said at the time he expected the bonds in question to “go from junk to the highest investment grade.”

To date, the vast majority of the bonds have not been novated, leaving the bonds with their underlying rating, as CIFG is not rated.

The agreement for Assured to pay bondholders directly is administrative only and not legally binding. Assured wrote in the January 2009 press release, “Until novated, all covered policies will remain direct guarantee obligations of CIFG.”

 “Under the terms of our agreements with CIFG, CIFG is taking the lead in the solicitation of CIFG policyholders for the novation of covered policies to Assured Guaranty Corp.,” Assured said in an e-mailed statement yesterday. “We are continuing to work with CIFG on the novation of all reinsured policies, which are subject to applicable legal requirements for the reinsurance and other terms of our agreements with CIFG.

“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. We are committed to the novation of any reinsured bonds that meet the requisite conditions.”

While this is not necessarily problematic now, if CIFG were to become insolvent, the NYID could act as rehabilitator to liquidate the company, in which case any money owed to CIFG through reinsurance could be considered a company asset.

“The rehabilitator could tell Assured, 'Don’t pay the money directly to the policyholder, pay it to me, the rehabilitator, and I’ll decide how to allocate it,’” Knopf said.

Assured’s January 2009 press release stated: “The covered policies principally consist of investment-grade credits and do not contain any below-investment-grade credits.”
Any downgrades after October 2008, when the reinsurance agreement was originally announced, should still be reinsured by Assured, Knopf said.

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