Fitch Ratings yesterday downgraded Financial Guaranty Insurance Co. to BBB from AA, citing limited liquidity as a result of the bond insurer's exposure to the subprime market. The outlook is negative.

According to Fitch, FGIC has $5 billion of claims-paying resources, an amount below capital guidelines for single- to triple-A ratings. The bond insurer would need to increase its liquidity by $5.1 billion to $5.3 billion to fall within a AAA rating and $800 million to $1.7 billion to fall within an A rating, Fitch said.

"The downgrade on FGIC is based on Fitch's updated assessment of the company's capital position, a review by Fitch of FGIC's updated business plan, consideration of various qualitative rating factors, and an update on Fitch's current views of U.S. subprime-related risks," according to Fitch's press release.

Moody's Investors Service rates the bond insurer A3 on review for possible downgrade and Standard & Poor's assigns a rating of A on negative watch.

The downgrade follows FGIC's announcement last week that it would stop taking on new business in order to save money. Yesterday, the monoline and the New York Department of Insurance denied newswire reports that the department would take over the bond insurer's operations due to potential losses for the company. Earlier this month, FGIC reported a net loss of $1.82 billion for 2007, including a net loss of $1.89 billion in the fourth quarter.

FGIC yesterday released its consolidated financial statement for 2007. That document indicates that FGIC increased its total loss and loss adjustment expense to $1.267 billion at the end of 2007, up substantially from $40.29 million the year before as a result of exposure to securities backed by subprime mortgage loans.

To raise that amount, FGIC tapped into its statutory capital and surplus, reducing that pool to $261 million from $1.13 billion, a move that could place the company in a poor light with the state insurance department.

"As a result of this reduction, as of Dec. 31, 2007, FGIC's aggregate net liability under its insured exposures exceeded the aggregate risk limit prescribed by New York State insurance law and FGIC's insured exposure under certain individual policies exceeded the applicable single risk limits prescribed by New York State insurance law," according to FGIC's financial statement for 2007.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.