CIFG Assurance is working on another restructuring as the deteriorating economy has once again crippled the bond insurer’s financial strength, the New York Insurance Department confirmed yesterday.

CIFG, which is based in Bermuda, is required by state law to maintain at least $65 million in policyholder’s surplus, or excess of assets over liabilities.

By the end of 2008, the credit crisis and recession had clobbered CIFG’s insurance book so brutally that the company was more than $2.5 billion shy of the minimum surplus.

In January, the company cut a deal with its policyholders. In exchange for $1.3 billion in cash and a 90% stake in CIFG, the policyholders agreed to forfeit the insurance on their collateralized debt obligations composed of asset-backed securities and commercial real estate loans.

Not having to insure these toxic securities anymore meant CIFG could free up more than $4 billion that had been reserved to pay claims. That reduced the company’s liabilities, bringing its policyholder’s surplus into compliance with the statutory minimum.

But the first half of 2009 was not kind to CIFG.

The insurer reported “significant deterioration” in its book of insurance policies covering securities backed by mortgage loans.

More people are defaulting on their mortgages and, thanks to the weak housing market, the homes that act as collateral on the mortgages are not worth as much.

RealtyTrac reported yesterday that foreclosures in September jumped 28% from September 2008.

Legislation designed to ease the damage from foreclosures has not helped yet.

CIFG has burned through more than $12 million in cash this year. It had to sock away nearly $410 million to post collateral for a reinsurance affiliate.

The policyholder’s surplus, which was $87.9 million at the end of the first quarter, now stands at a deficit of $298.1 million.

Hampton Finer, deputy superintendent of the New York Insurance Department, said the state is working with CIFG to figure out ways to pare down its exposure to bad credit and bring its policyholder’s surplus back to the $65 million minimum.

The stronger capital position achieved in the restructuring earlier this year did not last more than a quarter.

Standard & Poor’s, which had upgraded CIFG’s financial strength rating to BB in January following its first restructuring, slashed the rating back down to CC in June.

“We weren’t planning on having a second round,” Finer said. “We obviously hoped that six months later we weren’t looking at a company that was once again insolvent. That’s why these additional actions became necessary.”

As long as CIFG is in violation of statutory capital requirements, it is subject to regulatory seizure.

Because borrowing money or selling stock to investors is a long shot, Finer said CIFG’s second restructuring will likely resemble its first: paying policyholders to forego their insurance.

Another possibility is a tender offer for some of the bonds the company insures, a tactic Syncora Holdings used in a restructuring Finer said seems to have worked.

Syncora earlier this year became the first bond insurer to default on a municipal bond policy, when it failed to honor a claim from Jefferson County, Ala.

The NYID in April had frozen Syncora’s claims-paying because it was short of the minimum policyholder’s surplus.

Syncora at the end of the second quarter reported a deficit of $544.5 million.

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