About FGIC UK Limited

Non-Compliance with Solvency II Capital Requirements at 31 December 2016

FGIC UK Limited (“FGIC UK”) is a wholly owned subsidiary of Financial Guaranty Insurance Company, a New York stock insurance corporation, which in turn is a wholly owned subsidiary of FGIC Corporation, a Delaware corporation.

FGIC UK, whose primary regulator is the Prudential Regulation Authority (“PRA”), voluntarily ceased writing financial guaranties in January 2008 and, on 1 July 2009, filed a voluntary variation of permission with the UK Financial Services Authority to remove its ability to write new insurance contracts, which was approved on 10 July 2009.

Under the European Union’s Solvency II Directive (2009/138/EC) (“Solvency II”), which became effective on 1 January 2016, FGIC UK is subject to certain methods and bases for calculating capital resources and capital resource requirements, including the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR).   FGIC UK’s Own Funds at 31 December 2016 are £20.7m and FGIC UK’s MCR is £29.4m and its SCR is £117.7m.   FGIC UK therefore has a capital deficit of £8.7m against the MCR and £96.9m against the SCR at 31 December 2016.

The primary differences driving non-compliance with the MCR and the SCR are highlighted below:

  • FGIC UK has included a substantial risk margin in its estimated Solvency II Balance Sheet at 31 December 2016.   The risk margin is intended to be the premium that another insurer taking on the liabilities at the valuation date would require over and above the best estimate of technical provisions.   It is calculated using a cost-of-capital approach.   Since FGIC UK’s insured portfolio has a very long duration (over 30 years), the risk margin is a material consideration for FGIC UK.

  • FGIC UK’s SCR includes an amount for catastrophe risk based on its two largest exposures.   Since FGIC UK’s top two exposures represent over 13% by number and over 35% by Gross Par in Force of FGIC UK’s outstanding insured exposures at 31 December 2016, the catastrophe risk element is a material consideration for FGIC UK.   Approximately 92% of the SCR at 31 December 2016 relates to catastrophe risk.

FGIC UK has notified the PRA about this non-compliance with the Solvency II capital requirements and about the limited access to incremental capital available to FGIC UK to remediate this non-compliance.

FGIC UK has already ceased, and has no plans to recommence, writing new business.   FGIC UK’s overriding business strategy is to run off its remaining insured portfolio in an orderly and efficient manner, seeking to maximise protection for policy holders and value for shareholders.

As a potential means to remediate this non-compliance, FGIC UK is exploring ways to reduce its insured exposure through commutations, reinsurance transactions and other methods on appropriate economic and other terms.   The ability to meaningfully reduce insured exposure is impacted by many factors beyond the control of FGIC UK, and such opportunities may be limited, given the nature of FGIC UK’s insured portfolio.

2016 FGIC UK Limited SFCR