Insurer may spin off municipal bond unit

ALBANY, N.Y. -- New York regulators are eager to consider splitting Financial Guaranty Insurance Co.'s core bond insurance businesses to protect municipal credit ratings against costly downgrades and stem troubles in the debt markets.

In a statement Friday, FGIC said would like to organize a new domestic financial guarantee insurer in New York to "provide support for public finance obligations previously insured by FGIC."

Analysts said other bond insurers are likely to make similar moves to split their exposure to riskier financial instruments.

"Other bond insurers will be tempted to follow suit, especially the ones that have already been downgraded by at least one ratings agency," said Donald Light, a senior analyst at Celent of Boston, a financial research and consulting firm.

State Insurance Superintendent Eric Dinallo, who has spoken sympathetically about FGIC's need for a split of its municipal insurance business, said he hopes that won't happen to other mortgage insurers.

He said talks are going well with the other bond insurers, including MBIA Inc. and Ambac Financial Group Inc.

"There's a lot of interest and they're just going to have to figure out how to economically execute on it," he said. "But I think there's a much higher degree of optimism on those two companies."

Dinallo said rating agencies have given bond insurers a week or two to strike a deal.

Bond insurers have struggled in recent months as ratings agencies have worried the companies would not have enough capital to cover a potential spike in claims. Ratings agencies are worried rising delinquencies and defaults on mortgages will lead to an increase in defaults among bonds backed by the troubled loans.

That in turn would force insurers to pay out claims. Bond insurers pay principal and interest when issuers fail to make payments.

A ratings downgrade of bond insurers would make it more expensive for cities and towns to borrow money.

On Thursday, FGIC's critical financial strength rating was cut by Moody's to "A3" from "AAA." Bond insurers essentially need a "AAA" rating to book new business. Moody's said FGIC needs access to $9 billion to maintain the "AAA" rating, but the company currently has access to just $5 billion.

Standard and Poor's and Fitch Ratings had previously downgraded FGIC.