Financial Guaranty Insurance Corp. has been blocked from paying claims until it repairs its tattered finances under an order from New York State regulators.
Once the fourth-most active bond insurer, FGIC was the recipient of an unceremonious letter from the New York Insurance Department on Tuesday.
The NYID requires bond insurers to maintain at least $65 million in statutory capital, which is essentially assets in excess of liabilities.
At the end of the third quarter, FGIC’s capital was shy of this minimum by more than $800 million.
The company’s balance sheet has been ravaged by claims and expected losses on structured-finance deals, mainly securities backed by mortgage debt. Among the costliest types of products are collateralized debt obligations secured by subprime mortgage-backed securities, FGIC said.
The NYID froze the company from paying claims until its capital is restored.
FGIC has until Jan. 5 to submit a detailed “surplus restoration plan” and until March 25 to meet its target for capital strength.
If the company fails to submit a suitable plan, the NYID “shall seek an order of rehabilitation or liquidation of the company forthwith,” regulators wrote in an order.
This order follows a similar order issued to Syncora Guarantee Inc., which was suspended from paying claims earlier this year for the same reason. Syncora is believed to be the first insurer to default on a municipal bond claim, after it failed to honor a claim from Jefferson County, Ala. FGIC also insures Jefferson County debt, with policies covering its sewer revenue warrants.
FGIC has outlined its plan to bolster its capital. The plan, presented in a press release from the insurer, is similar in some respects to the steps Syncora took to restore its capital, though the NYID has yet to lift its freeze on Syncora.
FGIC said it intends to buy some of the mortgage bonds it insures. Much of the damage to its capital stems from money the company set aside to pay anticipated claims on these bonds. Once the company owns the bonds, it would not have to reserve money to pay claims on them anymore.
FGIC also plans to offer to pay the owners of some of its insured bonds to swap their bonds for debt that is identical except that it is no longer insured. That way, the company would not have to keep money aside to pay claims on that debt.
FGIC has more than $2.1 billion set aside to cover potential losses on defaulted debt.
The NYID’s order also prohibits FGIC from insuring any new deals, but this is a formality: FGIC has not insured a deal since January 2008 and has no plans to.
FGIC was the fourth-most active insurer in 2007, according to Thomson Reuters, wrapping $29.62 billion in municipal deals.
FGIC’s $184 billion municipal insurance book is now reinsured by MBIA under a deal brokered by the NYID last year. MBIA's public finance subsidiary, National Public Finance Guarantee, issued a statement Wednesday affirming its coverage of FGIC's insured municipal bonds.
FGIC is owned by PMI Mortgage Insurance, Blackstone Group, Cypress Group, and CIVC Partners.