Fitch cuts "AAA" rating of FGIC insurance unit

By Dena Aubin

NEW YORK (Reuters) - FGIC Corp's bond insurance arm lost its top "AAA" rating from Fitch Ratings on Wednesday, a blow to the insurer's business model, which could also cause downgrades to more than 100,000 municipal bonds.

Fitch cut FGIC's "AAA" insurer financial strength rating by two notches to "AA," saying the insurer does not have the capital required for a top rating. It also cut parent company FGIC Corp's long-term rating by three notches to "A" from "AA," the third-highest investment grade.

The ratings may be cut again because of uncertainty about the company's business model, losses and capital strategy, Fitch said in a statement.

FGIC is owned by a group including mortgage insurer PMI Group Inc (PMI.N: Quote, Profile, Research, Stock Buzz) and private equity firms Blackstone Group (BX.N: Quote, Profile, Research, Stock Buzz), Cypress Group and CIVC Partners LP. The group agreed to acquire FGIC from General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) in 2003 for about $1.675 billion.

Top ratings are crucial to bond insurers because without them, their insurance loses much of its value. The insurance has also allowed states and cities to sell debt with top ratings, lowering their borrowing costs.

Fitch warned in December that the loss of FGIC's "AAA" rating could also trigger downgrades to as many as 114,800 municipal bond issues it insures.

FGIC is the fourth-largest bond insurer, with about $314.8 billion of outstanding bonds insured as of the end of September, most of it municipal bonds. The total also included about $31 billion of mortgage-backed securities and $28 billion of collateralized debt obligations.

The ratings cut added to selling pressure in the stock market, where concerns about downgrades of bond insurers had already triggered selling. For details, see .N