S&P Announces Rating Actions on Five Major Mortgage Insurers

Standard & Poor’s Ratings Services announced a number of rating actions, covering five mortgage guarantee insurers: Radian Group, Mortgage Guaranty Insurance PMI Group, Triad Guaranty and Old Republic. The sector has been severely affected by the subprime mortgage crisis, which poses a real threat to their financial stability.

Nonetheless, S&P sees some positive signs. It said “all mortgage insurers reported an increase in earned premium in the third quarter of 2007 because of higher persistency and increased penetration of mortgage originations. The specific rating actions taken, and a summary of the reasons is as follows:

S&P affirmed its ‘A’ counterparty credit rating on Radian Group Inc. and its ‘AA’ counterparty credit and financial strength ratings on Radian’s mortgage insurance subsidiaries (Radian MI); however, S&P maintained its negative rating outlook on all of the companies. “Although Radian reported a net loss of $704 million for the third quarter, Radian MI’s results were either consistent with or better than our forecast,” noted S&P credit analyst James Brender. S&P added that while the performance of Radian MI’s core product–first-lien mortgage insurance–was encouraging, “this segment will still record underwriting losses until at least 2009.

S&P lowered its counterparty credit and financial strength ratings on Mortgage Guaranty Insurance Corp., MGIC Indemnity Co., and MGIC Australia Pty Ltd. (collectively referred to as MGIC) to ‘AA-‘ from ‘AA’. S&P also lowered its counterparty credit rating on MGIC Investment Corp., the holding company, to ‘A-‘ from ‘A’. But S&P has removed all these ratings from CreditWatch, where they were placed on Oct. 17, 2007, with negative implications. The outlook on all these companies is now stable. “The downgrades primarily reflect the challenges confronting the mortgage and housing sectors,” Brender explained. “We also expect MGIC’s near-term results to compare somewhat unfavorably with those of its peers because of MGIC’s higher risk tolerance, particularly for borrowers with low credit scores.” Consequently, S&P indicated that it “believes MGIC will report underwriting losses in 2007, 2008, and 2009.” However, the rating agency added that the current ratings “are based on MGIC’s excellent capitalization, which will enable the group to weather this very difficult period in the mortgage insurance industry. We still view MGIC’s competitive position as very strong, and we believe changes in long-term fundamentals will enable MGIC to generate underwriting profits by 2010.”

S&P removed its ‘A’ counterparty credit rating on PMI Group Inc. (PMI) and its ‘AA’ counterparty credit and financial strength ratings on PMI’s mortgage insurance subsidiaries (PMI MIC) from CreditWatch with negative implications, and affirmed its ratings on all the companies, albeit with a negative outlook. “The affirmation of the ratings on PMI MIC is based on the company’s excellent capitalization, which will enable it to weather a very difficult period in the mortgage insurance industry,” Brender explained. He noted that S&P “views PMI MIC’s competitive position as very strong, and we believe changes in long-term fundamentals could enable PMI MIC to generate underwriting profits in 2009. These positive factors are offset by the challenges confronting the mortgage and housing sectors. These challenges will lead to weak operating performance in 2007 and 2008.”

S&P lowered its counterparty credit and financial strength ratings on Triad Guaranty Insurance Corp. (Triad) to ‘AA-‘ from ‘AA’, as well as its counterparty credit rating on Triad Guaranty Inc., the holding company, to ‘A-‘ from ‘A’ and assigned a stable outlook.
“The downgrades reflect the challenges confronting the mortgage and housing sectors,” Brender indicated. He explained that S&P “believes it is more difficult to estimate the losses from Triad’s insured loan portfolio than some of its peers. Triad has an above average concentration of risk in-force (RIF) from products that have not been tested in a difficult environment. For example, Alt-A loans and mortgages with potential for negative amortization.” These constituted 23 percent and 13 percent of primary RIF as of Sept. 30, 2007, respectively. Neither of these products represented a material percentage of production during the last downturn in the mortgage and housing sectors.

S&P has removed its ‘A+/A-1’ counterparty credit rating on Old Republic International Corp. and its ‘AA’ counterparty credit and financial strength ratings on ORI’s insurance subsidiaries from CreditWatch, where they were placed on Oct. 29, 2007, with negative implications. It has also affirmed these ratings with a negative outlook. Brender explained that the “negative outlook reflects our expectations that operating results for ORI’s mortgage and title operations will be inconsistent with the ratings until at least 2009. We placed the ratings on CreditWatch after ORI announced its third-quarter 2007 results. The primary reason for the CreditWatch placement was our concern regarding the operating performance of Republic Mortgage Insurance Co. and Republic Mortgage Insurance Co. of NC (collectively RMIC), the group’s mortgage insurance subsidiaries. RMIC reported a loss ratio of 162 percent in the third quarter compared with 43 percent in the same quarter of 2006.” He also indicated that S&P “expects RMIC to report a significant underwriting loss in 2008 because of the challenging conditions in the housing and mortgage sectors.”

Source: Standard & Poor’s – www.standardandpoors.com