Bond Insurer FGIC Falls Below Key Regulatory Capital Level
Wednesday March 26th, 2008 / 17h33
By Lavonne Kuykendall Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- After setting aside just over $800 million to pay expected subprime mortgage-related losses, troubled bond insurer FGIC Corp. says it has fallen below legally required statutory capital levels, which means it must come up with a plan to raise money or face stringent consequences, the company said Wednesday.
If its plan fails to meet regulatory approval, "the Superintendent of the (New York State Insurance Department) has discretion to take various remedial actions, including suspending FGIC's ability to write new policies and seeking an order to place FGIC under regulatory control," FGIC said in its 2007 financial statement, which it released Wednesday.
As its situation has deteriorated over the last few months, FGIC has already voluntarily stopped writing new insurance policies, and has applied to the regulator for permission to split itself into separate municipal and structured finance bond insurers. The move is seen as a way to protect what are considered less risky municipal bonds from securities structured and sold by investment banks and backed by consumer and commercial loans.
That move came as its largest shareholder, PMI Group Inc. (PMI), which owns a 42% share, said that it will not be contributing any capital to prop up FGIC.
Other owners are the Blackstone Group LP (BX), The Cypress Group LLC, and CIVC Partners LP. The group acquired FGIC from a General Electric Corp. (GE) subsidiary in 2003. GE retains 5% ownership to PMI's 42%, Blackstone and Cypress has 23% each and CIVC owns 7%.
A PMI spokesman said Wednesday that the company will consider whether to write off the $103 million that remains of its original $900 million investment in FGIC during the first quarter. PMI has already written down $776.1 million after-tax of that investment in the fourth quarter.
In its financial report, New York-based FGIC outlined the continuing problems it is having with credit derivatives it wrote on subprime mortgage-backed collateralized debt obligations or CDOs, complex securities that have seen skyrocketing losses in the past six months.
FGIC lost $1.89 billion in the fourth quarter mostly because of a $1.71 billion so-called mark-to-market loss on that credit derivatives portfolio. Bond insurers have argued that mark-to-market losses represent changes in the market value of their derivatives and are likely to largely reverse themselves over time.
But FGIC and other bond insurers have reported growing expectations that the on-paper losses will turn into actual payments. For FGIC, 2007 loss reserves of $800.3 million represents its estimate of how much it expects to pay out. It warned that the number could rise even more if the securities continue to deteriorate.
FGIC's financial strength rating has been cut by all three of the major ratings agencies, and Standard & Poor's said Friday that it was putting its rating on CreditWatch with negative implications, from CreditWatch with developing implications, which could mean more downgrades are coming.
Even at the $800 million level, the reserves "substantially reduced FGIC's statutory capital and surplus position," the company said in its financial report. The reduction pushed it above aggregate as well as single risk limits set by New York. The company said it has cash on hand to pay its obligations for "at least the next 12 months."
FGIC's qualified statutory capital dropped to $836.7 million at the end of 2007, down from $2.4 billion the year before.
The regulator could restrict its ability to pay cash dividends to its holding company, which could affect FGIC's "ability to meet its cash needs," the company said.
CreditSights Inc. analyst Rob Haines estimated that FGIC needs to raise around $2 billion to get itself out of trouble, which could be a difficult task to pull off.
"PMI is going to have to write FGIC off to zero unless there is someone who is willing to step in an inject money," Haines said. "They will need to get their house in order.
Shares of bond insurers and mortgage insurers both traded down recently, with PMI Group down the most of the mortgage insurers, off 7.1% recently to $6.46.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141;
lavonne.kuykendall@dowjones.com
