S&P Takes Rating Actions –’Mostly Negative’- on U.S. Mortgage Insurers

Standard & Poor’s Ratings Services has issued a blanket bulletin outlining the rating actions, which it notes are “mostly unfavorable,” on several U.S. mortgage insurers and their core and dependent foreign subsidiaries.

“These changes resulted from a reassessment of our expectations for the sector,” explained S&P credit analyst James Brender. The bulletin noted that the “deterioration in the housing markets and performance of all types of mortgages (prime, Alt-A, and subprime),” has convinced S&P that revisions were needed concerning its “expectations for all U.S. mortgage insurers’ loss costs from mortgages originated in 2005, 2006, and 2007.” Even 2008 comes under scrutiny, as S&P said it is concerned recently issued loans “could be unprofitable because of falling home prices and a high percentage of new insurance written from mortgages with loan-to-value (LTV) ratios of more than 95 percent.” Even though the mortgage insurers have “announced pricing and underwriting initiatives to address this issue,” S&P said it believes it is still something that should be closely monitored.

The following contains the names and specific information about the companies affected by S&P’s rating actions:

Genworth Financial Inc.’s mortgage insurance subsidiaries: S&P has revised its outlook on Genworth Financial Inc.’s (GNW) core and supported mortgage insurance subsidiaries (Genworth MI) to negative from stable. The outlook on GNW remains stable. S&P has also affirmed its ‘AA’ counterparty credit and financial strength ratings on Genworth MI. The bulletin did note that S&P “still believes Genworth MI’s operating performance in the U.S. will compare very favorably with those of its peers for at least the next couple of years.

S&P cited “excellent enterprise risk management,” and “very low tolerances for certain attributes that increase the probability of a mortgage becoming a claim for mortgage insurance.” It also said Genworth has “by far the lowest risk in force from loans with reduced documentation and adjustable rate mortgages.” However, that hasn’t prevented Genworth MI’s underwriting results in the U.S. to suffer “because of the very challenging environment.

“The U.S. mortgage insurance operations reported a combined ratio of 134 percent in the fourth quarter of 2007. Genworth MI has excellent capitalization. The outlook on GNW remains stable because of its strong fixed-charge coverage and diversified cash flows from its retirement/protection and global mortgage insurance segments.”

Genworth MI’s underwriting results for its subsidiaries in Canada and Australia “have been very strong, and there are no indications of material deterioration,” S&P continued. To some extent this mitigates the effect of the weakness in the U.S. market, and in S&P’s analysis of the Company’s ratings. By contrast to the U.S., “Genworth MI’s combined ratios in Canada and Australia in the fourth quarter of 2007 were 31 percent and 64 percent, respectively. Each entity has a very strong competitive position as an industry leader in its respective country. Credit quality and loan performance of mortgages originated in Canada and Australia are better than in the U.S. because of more conservative lending practices. Neither entity has any exposure to U.S. mortgages–either through insurance policies or invested assets.”

S&P said it would probably revise its outlook back up to stable, if the Company experienced only “a moderate operating loss in 2008 and return to underwriting profitability in 2009. However, S&P said it “lower the ratings by one notch if its U.S. subsidiaries were to report a significant operating loss in 2008 and it is unclear at that time when the division will return to underwriting profitability. We expect that Genworth MI’s other core mortgage insurance subsidiaries will continue generating very strong results.”

PMI Group Inc.: S&P has placed the ratings on PMI Group Inc. as well as its core and dependent subsidiaries (PMI) on CreditWatch with negative implications. However it doesn’t “believe the ratings on PMI are likely to fall below ‘AA-‘,” as it exposure of insured mortgages “has less subprime exposure than those of most of its peers, and management has been proactive in addressing the growth of high-LTV loans in the mortgage insurance industry.” PMI also benefits from earnings diversity from its Australian MI operation, currently operating under more favorable economic and mortgage market conditions. Therefore, PMI’s operating performance and capitalization should compare favorably with the industry median.

“The CreditWatch placement is not related to the recent downgrade of Financial Guaranty Corp., the holding company of bond insurer Financial Guaranty Insurance Co. and an investment of PMI Group,” S&P noted. “The rating on PMI Guaranty Co. is on CreditWatch negative because it is very dependent on support from the PMI Group and PMI Mortgage Insurance Co.”

Radian Group Inc.: S&P has already lowered its ratings on Radian Group Inc. and its core and dependent mortgage insurance subsidiaries (Radian MI) by one notch and placed the ratings on CreditWatch with negative implications. S&P warned that the “ratings on Radian MI could be lowered multiple notches or affirmed with a negative outlook. Our primary concerns are operating performance and risk management.” S&P also explained that whet it had affirmed Radian MI’s ratings last November, the rating agency had forecasted a “combined ratio of 120 percent-140 percent for the firm’s portfolio of insured first-lien mortgages. Now, we believe the combined ratio will be significantly greater than that because of the factors described above.”

S&P did note that its ‘AA’ rating and stable outlook on Radian Asset Assurance Inc. “remains unchanged, as Radian Asset’s capital position and operating capabilities are largely independent of those of the mortgage insurance company. Management has also stated that it is willing to take whatever reasonably practicable steps necessary to protect Radian Asset from the weaker holding company and affiliates. However, if the senior debt rating on Radian Group were to fall into the ‘BBB’ category, and if the Radian MI financial strength ratings were to fall in the ‘A’ category, we would be looking for management to take more tangible and substantial steps toward greater governance and financial independence.”

Triad Guaranty Inc.: S&P has placed its ‘AA’ counterparty credit and financial strength ratings on Triad Guaranty Insurance Corp. (Triad) and its ‘A’ counterparty credit rating on Triad Guaranty Inc. on CreditWatch with negative implications. Those ratings could be “lowered multiple notches or affirmed with a negative outlook, but they should remain within the ‘A’ category,” said S&P. Primary concerns are operating performance, historical risk management, and capitalization. S&P said it “believes Triad’s loss ratio for 2008 will compare very unfavorably with our forecast of 120 percent that we published in a report on Dec. 28, 2007.”

The same report indicated that “Triad’s capitalization was weaker than that of its peers.” S&P said it “views Triad’s exposure to loans with reduced documentation or potential for negative amortization as a higher risk tolerance than Standard & Poor’s considers consistent with very strong ratings. Poor operating performance–coupled with recent growth in risk in force–could cause Triad’s capitalization to deteriorate below a level acceptable for a ‘AA-‘ rated mortgage insurer.”

United Guaranty Corp.: S& P has revised its ratings outlook to negative from stable for United Guaranty Corp. (UGC) and its core and dependent subsidiaries (UGC MI) because of an identical outlook revision for American International Group Inc. (AIG). S&P indicated that it “considers the UGC MI companies to be core subsidiaries of AIG, so the ratings move in tandem with those on AIG’s other core insurance subsidiaries.”

S&P also pointed out that it has revised its outlook on UGC MI and has lowered its counterparty credit and financial strength ratings on United Guaranty Residential Insurance Co. of NC (UGRIC-NC) to ‘AA-‘ from ‘AA+’. UGRIC-NC is a subsidiary of UGC. The Company “only provides default protection for second-lien mortgages (seconds), “S&P explained, noting that the downgrade reflects “a change in its opinion of UGRIC-NC’s importance to UGC. Previously, Standard & Poor’s viewed UGRIC-NC as a core subsidiary of UGC and its parent, AIG; therefore, we equalized its ratings with other core members of the group. Now, we view UGRIC-NC as strategically important to AIG. The ratings on UGRIC-NC reflect its stand-alone financial strength, strategic importance to AIG and explicit support from AIG. Since the support agreement is not a guarantee, Standard & Poor’s caps the rating on the beneficiary at one notch below the counterparty credit rating on the support provider.”

The bulletin further noted that “there were also some U.S. mortgage insurers that we took no rating action on. They were listed as follows:

California Housing Loan Insurance Fund – “We took no action on the ratings on the California Housing Loan Insurance Fund (CaHLIF). Although CaHLIF has a very geographically concentrated insured loan portfolio, its disciplined underwriting guidelines, which disqualify borrowers with FICO scores of less than 620 and adjustable rate mortgages, have enabled it to continue to generate strong underwriting profits.

CMG Mortgage Insurance Co. – “There was no change to the ratings on CMG Mortgage Insurance Co. Although the firm has had an increase in delinquencies, its niche focus and low risk tolerance has enabled it to continue to generate strong underwriting profits.”

MGIC Investment Corp. – “The ratings on MGIC Investment Corp. and its core and dependent subsidiaries remain on CreditWatch, where they were placed on Jan. 24, 2008, with negative implications.”

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search.

Source: Standard & Poor’s