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FGIC: Investors In Talks To Back Bond Business

Apr 15, 2008 Market Outlook

FGIC: Investors In Talks To Back Bond Business

Last Update: 4/15/2008 3:07:26 PM

By Lavonne Kuykendall
Of DOW JONES NEWSWIRES

Weeks after first outlining its plans to split its bond-insurance business into
public and private units, FGIC Corp. says it has identified investors that may be
interested in providing the capital necessary to pull it off.

FGIC said Tuesday it began discussions with potential investors and “other
parties” regarding the company’s plan, which involves restructuring its insurance
operations to form a new financial guaranty insurer. It has hired Goldman Sachs
Group Inc. (GS) to assist.

A new insurer would inherit and build on its current public-finance business,
which includes bonds issued by municipalities and for public uses, but would not
likely include its troubled structured-finance business, which includes
bank-issued bonds backed by residential loans.

Possible deals include raising capital, selling all or part of the company, or a
bulk reinsurance transaction on all or parts of FGIC’s business.

In February, Berkshire Hathaway Inc.’s (BRKA, BRKB) Warren Buffett said his newly
formed bond-insurance company offered to reinsure the public-finance businesses
of the major bond insurers, including FGIC, for 1.5 times the remaining premiums
due on the policies. The other insurers offered the deal were MBIA Corp. (MBI)
and Ambac Financial Group Inc. (ABK), who both turned it down.

One potential candidate for a capital infusion, mortgage insurer and part-owner
PMI Group Inc. (PMI), has already said it will not put more money into FGIC.
Another part owner, General Electric Co. (GE), posted disappointing earnings of
its own last week.

PMI is FGIC’s largest shareholder with 42% of its common stock. Affiliates of
Blackstone Group LP, Cypress Group LLC and CIVC Partners LP owned about 23%, 23%
and 7% of FGIC Corp.’s common stock, respectively, and an affiliate of GE owned
about 5% of FGIC Corp.’s outstanding common stock at the end of December.

A FGIC spokesman could not provide any information on who the investors are, or
how much capital FGIC is seeking, but any such deal will almost certainly be
scrutinized by New York insurance regulators, who have suggested they would be
open to a split plan.

In a February congressional hearing on the state of the bond-insurance industry,
New York Insurance Commissioner Eric Dinallo said he would consider the type of
split FGIC is considering. In such a move, his “first priority” would be to
protect the municipal side of the bond business, he said.

“We cannot allow the millions of individual Americans who invested in what was a
low-risk investment lose money because of subprime excesses,” Dinallo said at the
hearing. Dinallo’s spokesman did not immediately return a call asking for
comment.

Last month, FGIC reported that it set aside significant reserves for expected
losses in its subprime and second-mortgage portfolio. The reserve boost reduced
the company’s statutory capital position to the point that its aggregate net
liability under its insured exposures exceeded the aggregate New York regulatory
risk limits, and FGIC’s insured exposure under certain individual policies
exceeded the applicable single risk limits prescribed by New York state insurance
law.

The company said then that it stopped writing new business in order to preserve
capital and began considering “various alternatives” to raise more capital,
restructure its operations and minimize losses.

The proposed restructuring would require regulatory approval and “significant new
capital investment,” the company said in March.

After FGIC released its fourth-quarter financial report in March, the major
rating agencies downgraded the insurer and its units.

Although FGIC’s strategic plan will focus on building its municipal-bond
business, it has seen some troubles there, too.

Last week, it announced that it is working with Jefferson County, Ala., to
develop solutions to that county’s debt crisis. FGIC, along with bond insurer
Security Capital Assurance Ltd. (SCA) are insurers for that county’s securities.

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