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FGIC Puts Brakes on Business

Financial Guaranty Insurance Co. has stopped writing new financial guaranty business in an effort to preserve capital, joining XL Capital Assurance Inc.

FGIC, the third-largest bond insurer before the recent turmoil and credit downgrades, late Monday reported fourth-quarter and year-end financial results. The bond insurer announced a net loss of $1.89 billion for the fourth quarter, and $1.82 billion for the year-end. The losses reveal mark-to-market valuations on credit derivatives used to insure collateralized debt obligations and additional capital set aside to cover potential losses on CDOs backed by subprime and second-lien residential mortgages.

The mark-to-market valuations of credit derivative swaps led to an expected credit impairment of $750 million, and $960 million related to the widening of credit spreads, for a total before-tax loss of $1.71 billion.

The increase in capital reserves amounted to $1.23 billion before taxes in the fourth quarter, reflecting the rapid deterioration on certain residential mortgage-backed securities and asset-backed security CDOs written in 2006 and 2007.

The losses underpin the larger pressures experienced by the financial guarantor, exhibited over the last two months by rating agency downgrades. Moody's Investors Service now rates the bond insurer A3 on review for possible downgrade, Standard & Poor's assigns a rating of A on watch with developing implications, and Fitch Ratings gives it a AA-minus on negative watch.

The downgrades handcuffed FGIC's ability to write new business, leaving the insurer without a single primary market policy written in 2008. The diminished availability for bond insurance in the marketplace, with XL and FGIC ceasing to write new business, is likely to impact the market further down the road, according to Brian Tournier, director of credit analysis at Stern Brothers & Co.

"I think it has been advantageous for underwriters to have competition for bond insurance providers," Tournier said. "Anything that reduces the number of the highest quality insurance available for issuers and underwriters takes away a little bit of the flexibility."

In its recent release, FGIC reiterated its commitment to find a way to enhance its capital position and restructure operations, including possibly organizing a new financial guaranty company to provide capital support to existing public finance policies and serve as a catalyst for the writing of new business. It hired Goldman, Sachs & Co. to help it with its capital enhancement plans.

New York State regulators have been active in seeking ways to save the largest bond insurers, including FGIC. Both MBIA Insurance Corp. and Ambac Assurance Corp. sold stock and debt to raise significant capital infusions to help them remain at triple-A, while FGIC has so far fallen short.

A spokesman for the New York Department of Insurance said it was aware that FGIC was looking for options.

Last month, the company asked insurance regulators to split it into the good book of business - the municipal credits - and the bad book, which would contain all of the toxic structured-finance guarantees. On Monday, FGIC stated that significant capital would be needed for any restructuring.

FGIC is closely held by a collection of private equity and insurance firms, made up of Blackstone Group LP, Cypress Group, CIVC Partners LP, and PMI Group Inc.

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