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Moody's Drops FGIC, XL Capital to Junk

CHICAGO — Moody's Investors Service stripped Financial Guaranty Insurance Co. and XL Capital Assurance Inc. of their investment-grade insurer ratings on Friday as another struggling bond insurer, ACA Capital Holdings Inc., entered into a fifth forbearance agreement with its counterparties that temporarily waives various penalties triggered by its downgrade last year.

Moody's downgraded the FGIC subsidiary that provides bond insurance to B1 with a negative outlook from Baa3 while downgrading the parent holding company, FGIC Corp., to Caa2 from B3.

The action concludes a review for a possible downgrade launched at the end of March and "reflects the company's severely impaired financial flexibility and the company's proximity to minimum regulatory capital requirements relative to our estimations of expected case losses," the Moody's report read.

"The rating action also considers the likelihood that FGIC's previously announced restructuring plan will ultimately result in the company retaining the higher-risk portion of the insured portfolio without the premiums associated with its lower-risk business," Moody's added.

FGIC's statutory surplus for the first quarter was $366 million, about $300 million above the statutory minimum regulatory requirement.

"Moody's has estimated losses on FGIC's insured portfolio of residential mortgage-backed securities that are significantly higher than the company's reserves for these transactions," analysts wrote. A negative view of the credit remains because of the uncertainty over the size of losses and other risks, such as regulatory intervention.

FGIC is rated BB on negative watch by Standard & Poor's and BBB with a negative outlook by Fitch Ratings.

Moody's lowered XL Capital Assurance to B2 with a negative outlook from A3 while downgrading XL's parent, Security Capital Assurance, to Ca from B3. The rating agency's review of the credit for a possible downgrade began on March 4 and was due primarily to the company's "severely impaired financial flexibility and the company's proximity to minimum regulatory capital requirements relative to our estimations of expected case losses," Moody's wrote.

SCA has reported about $750 million in cumulative losses stemming from it exposure to mortgage-related securities. For the first quarter, XLCA had $167 million of statutory surplus, about $102 million above the statutory minimum regulatory requirement.

The negative outlook reflects analysts' concerns over the uncertainty of losses and the potential risks for regulatory intervention.

"SCA has stated that it continues to work toward mitigating the financial stresses impacting the company, including the commutation, restructuring or settlement of its obligations with its collateralized debt obligation counterparties and the commutation or settlement of various reinsurance arrangements with XL Capital Ltd.," analysts wrote.

XL Capital Assurance is rated BBB-minus on negative watch by Standard & Poor's and BB with a negative outlook by Fitch.

The downgraded followed Moody's action Thursday stripping Ambac Assurance Corp. and MBIA Insurance Corp. of their top insurer ratings.

In other insurance-related news Friday, ACA announced it had entered into a fifth forbearance agreement with its structured credit and other counterparties that will remain in place through 6 p.m. Eastern Daylight Time on July 15.

Under the agreement, the counterparties have waived all collateral posting requirements, termination rights and policy claims. The agreement marks the fifth entered into between the insurer and its 29 counterparties since Standard & Poor's the only rater that assigns a rating to ACA downgraded its single A rating to CCC on Dec. 19.

Absent the forbearance agreements, the company would have been required to put up about $1.7 billion in collateral, which it could not afford.

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