Financial Guaranty Insurance Co. failed to implement a plan to put its house in order by the March 25 regulatory deadline, but instead of liquidating the company, the New York Insurance Department extended the deadline to June 15.
The regulator told FGIC in November that it had until Jan. 5 to submit a detailed “restoration” plan and until March 25 to implement it. Otherwise, the NYID would seek its “rehabilitation or liquidation.”
FGIC — once the fourth-most active municipal bond insurer before it was crippled by its exposure to risky structured finance products — met the January deadline but had not implemented the plan as of last week.
The NYID extended the deadline as FGIC announced it came to an agreement to reduce its exposure to credit default swaps it insured. The seven counterparties in the transaction, which involve a net par amount of $11.7 billion, agreed to keep from exercising certain rights that would accelerate, terminate, or assess the contracts until July 31, or until the occurrence of certain specified events.
In turn, FGIC would form a new subsidiary, capitalized with $75 million, that would “assume all of FGIC’s rights, obligations, and liabilities under the FGIC policies covering specified CDS.”
Also on Thursday, Sharps SP I LLC launched an offer to exchange, for cash, 119 different Cusips of residential mortgage-backed securities and asset-backed securities insured by FGIC, valued at $9.6 billion.
This deal would also significantly reduce the insurer’s statutory loss reserves and give a boost to its policyholders’ surplus.
A spokesman from the NYID said it will approve both transactions “if insolvency is removed. If unsuccessful, none are approved and [the] company could face formal liquidation.”
At the end of 2009, FGIC’s policyholders’ surplus was in deficit of $1.28 billion, compared to a deficit of $506 million one year before, according to year-end financial statements.
In breaching the $65 million minimum surplus required by the NYID, FGIC was blocked from paying claims last November. The company stopped writing new policies in January 2008 and has no plans to resume.
