Bond insurer Financial Security Assurance (FSA) last week reported a fourth-quarter 2008 net loss of $476 million, compared to a net loss of $89.3 million for the same quarter in 2007.

FSA attributed the quarter and annual results to loss expenses related to guarantees of RMBS and negative fair-value adjustments on credit derivatives in the insured portfolio. It reported a net operating loss of $365.2 million for the fourth quarter 2008, compared to a net operating income of $87.9 million for the fourth quarter of 2007.

FSA also recorded a net loss of $1.26 billion for the year. The results represent only its financial guaranty business and not its troubled financial products unit, which provides guaranteed investment contracts.

FSA is a subsidiary of Financial Security Assurance Holdings, which Assured Guaranty  has agreed to acquire from Dexia.

“In this unprecedented economic maelstrom, FSA took substantial measures to strengthen its protections of FSA-insured bond holders,” chairman and chief executive officer Robert Cochran said in a statement. “During the year, we paid over $600 million in claims to protect policyholders from loss. We also increased loss reserves dramatically based on a view of the extent of economic deterioration and added over $1 billion to total claims-paying resources.”

The proposed transaction between Assured and FSA received a boost on Friday when the European Commission approved $16.9 billion in French and Belgian guarantees for FSA’s financial products unit, which is not included in Assured’s acquisition. Dexia needed the guarantees because it and the governments will assume all responsibilities and risks of the FP business, and FSA Inc. had already backed GICs in that portfolio.

The European Commission also said it is opening an in-depth investigation into the restructuring of Dexia but that the guarantees are necessary for the sale of FSA, which is “essential for Dexia’s recovery.” Dexia had already received capital injections and guarantees from European governments.

“The commission is required to check that the large amount of aid provided to Dexia is accompanied by realistic projects to address the problems that led to the current situation,” said European Union competition commissioner Neelie Kroes. “We cannot reach a favorable conclusion at this stage on the plans submitted to us.”

Assured plans to hold a shareholders’ meeting today to approve financing for the FSA acquisition.

FSA, which avoided guaranteeing the collateralized debt obligations that doomed other insurers, benefited early last year when most of its competitors were downgraded. It was the municipal market’s top insurer in 2008, wrapping 1,418 issues with a par value of $39.2 billion.

But by mid-year, FSA faced pressure from its direct residential mortgage-backed securities exposures and troubles within its FP unit, for which Dexia had to provide additional support. The insurance business had pre-tax loss expenses of $2.09 billion last year, “primarily driven by actual and projected credit deterioration in the insured RMBS portfolio,” FSA said in its earnings release.

Dexia had been looking to reduce its exposure to FSA since last fall when the governments of France, Belgium, and Luxembourg all stepped in with support. In November, Dexia agreed to sell the insurance unit to Assured.

FSA Inc. has insured 95 issues with a par value of $879.6 million this year, according to Thomson Reuters. Assured Guaranty Corp. has wrapped 324 issues with a par value of $6.8 billion

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