Some bond insurers at risk of insolvency-report

By Anastasija Johnson

NEW YORK, June 9 (Reuters) - Bond insurers CIFG Guaranty, Financial Guaranty Insurance Co and XL Capital Assurance may breach capital requirements in this quarter, triggering a chain of events that could push them into insolvency, according to an analyst report.

The bond insurers could be taken over by regulators if capital levels fall below the required minimum and they are unable to raise more money.

That would force the insurers to make massive payouts on derivative contracts, which would likely wipe out all of their resources, CreditSights analyst Rob Haines said in a report published late on Sunday.

"A breach of the minimum requirement could set into motion a chain of events that would leave the company insolvent," Haines said in a report.

The insurers sold protection on assets including residential mortgage-backed debt and corporate and sovereign bonds using credit default swaps, as opposed to a traditional guarantee.

Under terms of these credit default swap contracts, if a regulator takes control of an insurer, the company would immediately need to pay out the full amount of the insurance. In return, it would receive the insured debt, which in the case of mortgage-backed securities may recover very little.

The industry regulator, the New York State Insurance Department, requires bond insurers to maintain a minimum surplus capital of $65 million and gives companies 90 days to remedy the situation if capital falls below that level.

CIFG Guaranty, Financial Guaranty Insurance Co (FGIC) and XL Capital Assurance could breach statutory requirements as soon as this quarter due to additional write downs on mortgage-backed debt, Haines said.