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$2 billion infusion will increase total bond insurance industry capital injection since January to $10 billion

The New York State Insurance Department today approved a transaction involving XL Capital Assurance, Inc. (XLCA) that will help protect the bond insurance company’s policyholders by enhancing its solvency and providing funding for an equitable commutation of volatile structured security guarantees, Superintendent Eric Dinallo announced.

“This agreement is good for all—Main Street and Wall Street, the bond insurance industry and SCA (Security Capital Assurance Limited – parent of XLCA) policyholders, municipal bond holders and structured bond counterparties", Dinallo said. “SCA’s insurance companies will go from being insolvent to having a surplus of about $1 billion. That sets the stage for raising actions that can raise the ratings of the XLCA’s municipal finance book. The agreement is good for Wall Street in that it makes possible resolutions with other counterparties. It stabilizes XL, an important insurance company, and frees it to focus on its main businesses.

“Adding stability to the bond insurance industry in the midst of the current credit crisis is good for Wall Street, which is so important to New York’s economic health, and also for cities and towns throughout New York and the nation that rely on bond insurance to reduce the cost of borrowing to meet their infrastructure needs. That’s why New York, which is the primary regulator for most of the bond insurers, has been working so hard on this project, so far with substantial success. And, it is worth noting, our joint private and public efforts have produced private sector solutions, with no government bailout.

“This agreement is a significant first step towards protecting XLCA’s policyholders. Without this agreement, SCA has determined that XLCA would be left with negative statutory capital. Generally, insurance companies whose capital becomes inadequate and which do not develop a plan to gain the necessary capital leave us with little choice but to take them over for rehabilitation, or if that is not possible, liquidation. These are difficult processes for all concerned, including policyholders. I am proud that through the efforts of all parties, XLCA is solvent and we have developed a plan to protect policyholders in the long run. An enhanced insurer with a surplus of more than $1 billion will emerge from this agreement. That is a substantial improvement by any measure. It is the start of a process that we expect will result in a high investment grade rating for the public finance book.”

Under the agreement approved by the Department, XL Capital Limited (XL), the former indirect parent of XLCA, will pay just under $2 billion – comprised of $1.775 billion in cash and 8,000,000 XL Class A ordinary shares – to SCA subsidiaries XLCA and XL Financial Assurance Limited (XLFA). In return, existing financial guarantee and reinsurance arrangements among SCA, XLCA, XLFA, and XL will be terminated, commuted or restructured.

The agreement also provides funding that will serve as the basis for restructuring or commuting insurance policies that XLCA provided to insure credit default swaps it sold to many of the world’s largest financial institutions.

As part of the transaction, there will be a commutation among Merrill Lynch International, Merrill Lynch & Co., XLCA, SCA and certain trusts. The Merrill Lynch entities will commute in whole eight ABS Credit Default Swap (CDS) agreements and dismiss related litigation in exchange for a cash payment of $500 million.

“We are pleased this commutation will substantially enhance the capital position of SCA and its subsidiaries,” Dinallo said.

Dinallo noted the agreement resulted from intensive meetings with stakeholders promoted by the Insurance Department: “As regulators, our goal is to protect policyholders and ensure the solvency of insurance companies. Our role here was to do all we could to facilitate a successful outcome. We worked extensively with all the parties involved and with fellow regulators to help reach the agreement announced today. The staff of the New York State Insurance Department, Delaware Insurance Commissioner Matthew Denn and his staff, and Chief Executive Officer Matthew Elderfield and the staff of the Bermuda Monetary Authority all deserve special recognition and thanks for the extraordinary work they did to expedite this transaction.”

“When the Department announced its three-part plan for the industry in January, we promised to actively monitor the major bond insurance companies and to work with those companies and others to help stabilize the market, continue protecting policyholders, assist in the continued availability of bond insurance and seek private sector solutions.”

“Ten billion dollars in new capital has come from the private sector, including a new entrant to the market. We will continue to work to ensure municipalities can benefit from a healthy, competitive bond insurance market to help lower the cost to taxpayers of building bridges, schools, roads, sewers and other necessities of modern life.”

The Department’s three-part plan:

  1. Attract more capital and increase capacity to protect policyholders and ensure continued availability of bond insurance, especially for municipal issuers.
  2. Resolve the status of distressed bond insurers, including preparing for receivership should that prove necessary. The Department is engaged with insurers, banks, financial advisors, credit rating agencies, other regulators and government officials, and other stakeholders in examining and developing measures to help stabilize the market.
  3. Develop stronger regulation for bond insurance. Since it is clearly time to develop new rules for the road, the Department is preparing and intends to release soon written guidance that addresses how bond insurers should conduct their business activities.


Department of Financial Services


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