FGIC Downgraded Six Notches by Moody’s; Latest Guarantor Bitten by Mortgage Exposure

Bond guarantor Financial Guaranty Insurance Company saw its insurance financial strength rating dropped from Aaa to A3, Moody’s Investor’s Service said late Thursday. The downgrade comes on the heels of a similar downgrade to monoline XL Capital Insurance on February 8, which also saw Moody’s cut its ratings to A3. The six-notch ratings cut is a strong blow to FGIC, which had previously been downgraded to AA by Fitch Ratings at the end of January, and means that numerous mortgage-backed securities wrapped by the firm will also be downgraded, Moody’s said. From the press statement:

Moody’s believes that FGIC’s relatively significant exposure to the mortgage sector is indicative of a risk posture somewhat greater than the peer group overall … FGIC’s participation in higher risk segments of direct RMBS and ABS CDO segments in 2006 and 2007, in particular, contributed to this view. Going forward, Moody’s believes FGIC’s strategic direction may change meaningfully, introducing further uncertainty into FGIC’s credit profile. FGIC’s profitability is likely to remain depressed in the near to intermediate term as losses on mortgage related exposures are incurred.

The rating agency said that a reassessment of the insurer found that the estimated capitalization needed to maintain a Aaa rating at FGIC would be “in the range” of $9 billion, as compared to current claims paying resources of $5 billion. It also said it expected lifetime paid losses on FGIC’s insured portfolio to be approximately $2 billion. For more information, visit http://www.moodys.com.

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