Monday, April 14, 2008 0 comments ++[ CLICK TO COMMENT ]++

FGIC Planning To Start New Bond Insurer

It's quite speculative at this point but FGIC is planning to start a new bond insurer:

The company, parent of struggling bond insurer Financial Guaranty Insurance Co., said it's started talking with potential investors about strategic alternatives, including launching a new business that would focus on the global municipal bond market.

This new company would also assume FGIC's existing muni bond and international infrastructure business, it added.

Starting a new bond insurer--it's actually more like spinning off the muni bond business--is consistent with what FGIC has indicated in the past. The main strategy being pursued by FGIC is to split its muni bond business from the structured product business.

Its FSA bond insurance unit lost its AAA rating so "spinning off" the muni bond business would make sense. FGIC is one of the top 3 bond insuers so it has extensive expertise and infrastructure to write municipal bond insurance. Without the AAA rating, all these resources are wasted and they need to be sold off, spun off, or some such thing.

The real question is how the split will be structured. I think the monolines will be able to split to some degree. I posted about how property & casulty insurers such as Cigna "split" in the past. Unlike the Cigna case where the parent was well capitalized and was simply trying to ring-fence the asbestos and tainted soil liabilities, I'm not really sure how the claims-paying ability will be split for the monolines. The argument against the bond insurers is that they are undercapitalized so a split probably requires further capital injection, which is probably the last thing anyone involved in the industry want to do now.

My guess is that the split will not occur. Instead, FSA will go into run-off and the muni bond assets (buildings, brands, etc) will be sold, along with the employee committments to some other party. Berkshire Hathaway would be the obvious target but Buffett has indicated that he doesn't want anything to do with those that got into this mess in the first place. Another likely party to take over FGIC's operations (assuming my views are correct) is Assured Guaranty or CIFG. It would be a coup for AGO if it can buy all the assets of FGIC (likely at distressed prices).

In the short term a successful split or liquidation of FGIC is bad news for Ambac. The last thing Ambac needs is the formerly #3 bond insurer rise from the ashes with the new backing. In the long run, none of this has much impact because, if the split is successful then Ambac can do the same thing. In fact, MBIA is planning to split within 5 years.


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