CIFG, a French bond insurer, was always something of a curiosity in the bond insurance sector, with its European ancestry, significant subprime exposure through both RMBS and CDOs and public spats with rating agencies.
Like its larger rivals MBIA and Ambac, between 2007 and 2009 CIFG suffered a punishing fall from grace and a series of multi-notch rating downgrades. The most recent of these came late on Wednesday, when Moody’s cut the insurer’s rating to Ca from Caa2.
The move was tantamount to kicking CIFG while it was down, since the insurer is already in breach of its regulatory capital requirements and is essentially in what is known as run-off mode, which describes a situation in which an insurer continues to pay claims on existing policies but ceases to write new business.
Various rating agencies, including Moody’s, have been warning for months that it was on the brink. Moody’s, which said it would cease to rate CIFG, issued the following statement on Wednesday:
material deterioration in CIFG’s insured portfolio adversely affected the guarantor’s capital adequacy profile and Moody’s believes that CIFG may no longer have sufficient financial resources to pay all insurance claims. CIFG Assurance, the New York domiciled primary financial guarantor reported a $298 million statutory deficit in its second quarter financial statements, increasing its gross loss reserves by $339 million due to worsening performance trends in its RMBS and CDO portfolios.
The firm also reported $410 million provision for reinsurance as CIFG Guaranty, its Bermuda-based affiliate, was unable to fully fund the Reg. 114 trust; CIFG Assurance cedes approximately 90% of its insured risk to CIFG Guaranty. Moody’s added that the risk of regulatory intervention is meaningful given CIFG’s failure to meet minimum regulatory capital requirements. This in turn could influence the pace of commutations with counterparties, potentially on terms that imply a distressed exchange.
In 2007 – when both Fitch and Standard & Poor’s were still remarkably sanguine about the company’s prospects – CIFG received a $1.5bn bailout from its grandparent companies, Banque Populaire and the Caisse d’Epargne.
That injection slowed, but did not stop, the rot. Less than a year later, CIFG said it would be tearing up some of its insurance agreements with investment banks in exchange for cash and equity. Shortly after that, the insurer said it would be re-insuring a $13bn book of business with Assured Guaranty. These moves helped CIFG cut its risk profile, but they also undermined revenues and cash flow.
The outlook for CIFG is bleak – regulatory seizure is a real possibility before the end of the first quarter of 2010. The insurer’s slogan has long been “the value within“; at this point, it’s not clear there’s any value left.
Related links:
MUNI WATCH: Market Shrugs As Big Bond Insurers Teeter – Dow Jones
Settlement risk: ISDA’s CDS monoline lists – FT Alphaville