Bond Insurer Says Its Risk Exceeded Legal Limits

The bond insurer FGIC said on Wednesday that its exposure to mortgage losses exceeded legal risk limits and that it might raise loss reserves because of litigation related to the stricken German bank IKB.

FGIC, the parent of the bond insurer Financial Guaranty Insurance Company, filed a lawsuit this month accusing IKB, which is government-owned, of fraud in providing incomplete information on $1.9 billion of debt that FGIC had agreed to insure.

FGIC also said in a statement that it had a substantially reduced capital and surplus position through Dec. 31. As a result, insured exposures exceeded risk limits required by New York State insurance law, the company, which is based in New York, said.

“This is a bombshell,” said Rob Haines, senior insurance analyst at CreditSights in New York. “They are actually in violation of New York insurance law. If they don’t remediate this, the state has the ability to take control of the company.”

Mr. Haines estimated that FGIC would need to raise about $2 billion to stabilize the company.

A spokesman for the New York insurance superintendent, Eric R. Dinallo, said his office was reviewing the new FGIC information and declined to comment.

FGIC, in notes to its consolidated financial statements, said it planned to submit a plan to the New York superintendent to reduce its risk. FGIC also said it had voluntarily ceased writing new business to preserve capital.

Bond insurers have been facing increasing pressure on their ratings as some companies expanded into insuring complex debt tied to deteriorating American mortgages.

Once a little-known lender, IKB took center stage last year as Germany’s first subprime casualty when its investments in the market for risky mortgages soured.

The affair has become an embarrassment for Germany as a banking center. The government has stepped in to try to save IKB from collapse.

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