Markets & Finance

S&P Cuts Ratings on Mortgage Insurers


The agency lowers debt ratings on MGIC, Old Republic, PMI, and Radian amid further deterioration in the housing market

From Standard & Poor's RatingsDirectOn Apr. 8, Standard & Poor's Ratings Services lowered its counterparty credit rating on MGIC Investment Corp. (MTG) to BBB from A- and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries to A from AA-. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI) to A from A+ and its counterparty credit and financial strength ratings on ORI's core subsidiaries to AA- from AA. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI) to BBB+ from A and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. and Europe to A+ from AA. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN) to BBB from A- and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries to A from AA-. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

"The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance," explains Standard & Poor's credit analyst James Brender. When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets. The deterioration in the housing markets has also been worse than our expectations. Now, we believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%.

As a result of the deterioration in the housing and job markets, Standard & Poor's believes mortgage insurers' operating results for 2008 and 2009 will compare unfavorably with our previous expectations. Our current forecasts predict that most companies will not generate an underwriting profit until 2010, but individual results will vary.

Capital adequacy and available liquidity indicate that the mortgage insurers' near-term ability to satisfy claims from existing resources remains strong. Some companies will likely need to raise additional capital to support their current level of new business because claims from existing business will deplete some capital. All the mortgage insurers that we downgraded today have capital adequacy ratios above Standard & Poor's minimum for a AAA rating. However, we expect the capital adequacy ratios to decline in 2008 because of operating losses. The insurers have very liquid investment portfolios, but the financial flexibility of some of their holding companies has weakened.

"Despite the challenging environment for mortgage insurers, there are some long-term positive factors for the industry," Brender adds. "The most important of these is the rigor the industry has shown in reducing its exposure to higher risk products, such as mortgages with reduced documentation or high loan-to-value ratios or to properties in declining housing markets." Mortgage insurers have also benefited from a trend toward higher FICO scores and more fixed-rate mortgages. Other positive factors include greater demand for mortgage insurance, higher persistency, and lower expense ratios. These could make the 2008 vintage profitable despite significant home price depreciation.

Fannie Mae and Freddie Mac (collectively, the government-sponsored enterprises; GSEs) will review the mortgage insurers that now have ratings below AA- and decide whether they are still eligible to insure mortgages sold to the GSEs. In the short term, replacing the capacity provided by those mortgage insurers that Standard & Poor's rates below AA- would be extremely difficult. Standard & Poor's estimates that firms now rated below AA- accounted for 58% of the industry's flow market share in 2007. The other mortgage insurers do not have the capital to absorb all of this volume. Standard & Poor's would likely downgrade any mortgage insurer that loses its eligibility to insure mortgages sold to the GSEs.

In addition to the rating actions on mortgage insurers, Standard & Poor's lowered its counterparty credit and financial strength ratings on PMI Guaranty Co. to A+ from AA, removed them from CreditWatch negative, and assigned a negative outlook. Standard & Poor's also placed its AA counterparty credit, financial strength, and financial strength ratings on Radian Asset Assurance Inc. on CreditWatch negative.


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