CIFG Holding Emerges From Deficit in 4th Quarter

CIFG Holding Inc. yesterday said it came out of deficit in the fourth quarter, placing its policyholders’ surplus in positive territory, according to company executives. However, officials said any deterioration in its insured portfolio could immediately throw the firm back into deficit.

At the end of August, the company reported a deficit of nearly $300 million, according to David Buzen, chief operating officer, chief financial officer and president. Bruzen was promoted to president last week.

The company swung to a surplus of around $276 million by year-end, he said.

CIFG Holding is the parent company of three regulated entities, including the New York-based municipal bond guarantor CIFG Assurance NA, France-based CIFG EU, and the reinsurer CIFG Guaranty. The reinsurer recently relocated from Bermuda to New York and is currently working with regulators to merge with CIFG Assurance.

CIFG Assurance has been in run-off since the implosion of structured finance products clobbered its insurance book. By the end of 2008, CIFG Assurance was nearly $2.5 billion short of the $65 million minimum policyholders’ surplus required by its main regulator, the New York Insurance Department. At its peak, CIFG Holding’s insured portfolio was worth $110 billion, company executives said. As of Dec. 31, 2009, it had been reduced to $45 billion.

Massive restructuring began in January 2009 when CIFG Holding cut a deal with its policyholders to forfeit the insurance on a range of structured finance products. In exchange, the policyholders — which include some of the world’s biggest banks — received $1.3 billion in cash and a 90% stake in CIFG Holding.

In taking over the parent company the policyholders appointed a new chief executive officer, Lawrence P. English, a turnaround specialist with close to four decades of experience in the insurance business.

When English joined CIFG Holding, he said the company figured the commutation deal had returned it to solvency with about $700 million in capital, but things got worse in early 2009 and it found itself in deficit, again, by mid-year.

“When the smoke cleared at the end of the second quarter [of 2009], that pro-forma statutory surplus had changed to a statutory deficit of $300 million,” English said, attributing the losses to rapid deterioration in the value of the company’s residential mortgage-backed securities.

While other bond guarantors, namely Ambac Assurance Corp. and MBIA Inc., have worked to return to the market, English said CIFG has “no illusions” of a return, adding that it exists solely to wind down its complex portfolio.

“Going down the road, we have an enormous amount of risk, and one of our mantras around here is ruthless objectivity,” he said. “We want to unwind these deals on the most favorable economic terms we can to keep the company solvent, to keep it from going under, but it’s going to be a painful process and it’s going to go on for a while.”

English said about one-third of the $45 billion insured portfolio is on their watch-list, meaning the assets have deteriorated significantly.

“Any one of those deals could go bad. We have more to do in terms of defeasing future liabilities,” he said.

“This company still today has some $45 billion exposure, in risk, on some 350 deals — most of them credit default swaps on things that still include residential mortgages, commercial mortgages, highly-leveraged corporate bonds — and all of that risk sits on this little veneer of $300 million in capital,” English added.

Buzen said when the company was in business, its loss base was almost considered irrelevant because it was assumed triple-A deals could lose, at most, 5% or 10% of principal.

“Now, we find out those ratings meant nothing, the subordination meant nothing, and the foundation of that scale was built on swamp land,” he said. “So that when a deal goes bad we could lose all the exposure, and some deals we have are multiples of our capital base.”

Even in an optimistic scenario the unwinding will take several years, Buzen said, but predictions are tough because the timeline is entirely dependent on the direction of the economy, particularly as it relates to refinancing in the commercial real estate market.

“These corporate loans that are leveraged buy-out loans — if we start seeing massive defaults in that area, we’re going to be right back in the insolvency category again,” English added. “So we’re not going to really know until we see how our portfolio, in a microeconomic sense, stabilizes, and that’s going to have a lot to do with what happens in the macro economy.”

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