Sell Side

S&P Drops XLCA, CIFG; FGIC on Watch

CHICAGO - Standard & Poor's on Friday downgraded the ratings of two insurers, XL Capital Assurance Inc. and CIFG Assurance NA, to the respective ratings of BBB-minus and A-minus, and placed Financial Guaranty Insurance Corp.'s BB on CreditWatch with negative implications.

XLCA's credit, knocked down three notches to the lowest investment-grade rating of BBB-minus from A-minus, remains on negative watch. The latest downgrade of XLCA and XL Financial Assurance Ltd. , both subsidiaries of Security Capital Assurance Ltd., reflects the agency's assessment that the level of potential losses the companies' face from their 2005-2007 vintage resident mortgage-backed securities exposure is higher than previous estimates.

"In our view, XLCA and XLFA's combined capital cushion is inadequate at the previous rating level to absorb those losses, resulting in a shortfall of approximately $500 million. The companies have presented various strategies to address the capital shortfall, but in our opinion, management has been unsuccessful in its efforts," the report read.

The downgrade comes as the companies are moving toward a restructuring plan that relies on a near-term business strategy of participating in the financial guarantee reinsurance markets and selected areas of primary insurance.

"In our view, the success of the reinsurance strategy is dependent upon the ability of the companies to attract willing cession partners in a crowded financial guarantee reinsurance market," analysts wrote. The credit remains on the negative watch because of the risks associated with executing the restructuring plan.

XLCA carries an A3 rating from Moody's Investors Service but its on review for a possible downgrade to BB with a negative outlook from Fitch Ratings.

Standard & Poor's dropped CIFG's credit two notches to A-minus from A-plus and maintained it on negative CreditWatch, reflecting the rating agency's view that the company has lagged the industry in par volume in recent years and has generally failed to develop a strong franchise.

"Because of this, and given our opinion that total insured business volume will be off for the industry in the near term, we believe that the company is highly prone to damage to its franchise," analysts wrote.

The insurer is currently looking at a long-term restructuring with a focus on the domestic public finance market and selective participation in global structured finance and global infrastructure markets. The credit remains on the negative watch due to the risks associated with the restructuring. Analysts said the current rating level reflects a consolidated margin of safety that is well above the agency's required level at that rating, strong parental support, and, a positive view of the restructuring.

CIFG chief executive John Pizzarelli said in a statement: "We appreciate Standard & Poor's thoughtful analysis. At the same time, we are continuing to focus on improving CIFG's capital position by implementing strategic alternatives with respect to the company's problematic credits."

Moody's rates CIFG Ba2 with the credit under review with an uncertain direction while Fitch rates it at an "evolving" CCC.

Standard & Poor's kept FGIC's credit at BB for the time being, but said its placement on negative watch is due to concerns regarding the magnitude of projected RMBS and related collateralized debt obligation losses when compared with the company's claims-paying resources.

"Furthermore, restructuring scenarios under consideration raise the concern that the surviving corporate entity, FGIC, and the remaining policyholders may be disadvantaged compared with other classes of policyholders - in particular, municipal policyholders," analysts wrote. More information on the company's future direction that could impact the rating is expected in the coming weeks.

Moody's rates FGIC Baa3 on review for a downgrade while Fitch rates it BBB with a negative outlook.

The action Friday on the three insurers followed Standard & Poor's move earlier in the week to downgrade MBIA Insurance Corp. and Ambac Assurance Corp. to AA. Both also remain on the negative watch.


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