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Correction - Fitch Announces Various Rating Actions on Mortgage Insurers
(This is a correction for a press release that was published February 25, 2008. It corrects the
CMG Mortgage Insurance Company
U.S statutory capital dollar amount to $280 million.)
Fitch Ratings
today announced a number of negative rating actions on the mortgage insurance (MI) sector (see full list below). The actions are mainly driven by continued weakness in the U.S. mortgage markets, highlighted by marked deterioration in performance for mortgages backed by subprime and reduced or limited documentation (Alt-A) borrowers. While initially the current situation was impacted mainly by the subprime mortgage sector, deterioration has begun to spill over to other mortgage asset classes, such as adjustable-rate, negative amortizing, reduced documentation (Alt-A), and second-lien mortgages. The major factors driving the deterioration in mortgage performance indicators has been the poor underwriting process demonstrated by many mortgage lenders the past few years, combined with the continued and accelerating national home price decline which has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Additionally, this phenomenon has created an incentive to 'walk away' from mortgage debt for those borrowers whose current estimated home values are below their current mortgage balances. Fraud has also played a key role. These developments remain especially relevant for mortgages originated in the past few years. The continued trouble in the U.S. mortgage market has led to sharp increases in delinquencies for the MI companies, particularly for loans originated in the 2005-2007 vintage years. With reduced options to refinance or cure troubled credits, Fitch believes a greater percentage of these delinquent borrowers will end up in foreclosure in the years ahead, which will translate into higher claims and losses over this time period. Fitch believes the highlighted concerns over problems in the mortgage markets will continue to pressure, as it did in 2007, the bottom lines of most MI companies for the foreseeable future. In addition, Fitch believes stress in the mortgage markets which has been incorporated into our updated model stress scenarios (see Fitch commentary from Feb. 8, 2008 titled 'Fitch Provides Updated Commentary on Mortgage Insurers'), especially in the 2005-2007 vintage years, will increase the level of capital necessary to achieve their current ratings. This assessment factors in material benefit that Fitch believes the MIs will receive from lender captive mortgage reinsurance company arrangements that have been entered into over the years. As a result of expected future losses to be realized by the industry over the next several years, Fitch believes a number of the major players in the industry will need to raise significant additional equity in the near future or risk
Having
their ratings downgraded. Fitch recognizes this process could be difficult given the challenging market environment currently being experienced. Except for the most conservative players in the US MI sector, Fitch does not anticipate existing players returning to healthy levels of profitability until late-2009 or more likely 2010. While all of the mortgage insurers rated by Fitch have been affected by the deterioration in today's mortgage environment, the extent of the trouble varies by company, as each insurer has differing levels of exposure to product sectors of concern (i.e., prime, subprime, Alt-A, or negative amortization). Furthermore, the companies have different organizational structures, with some benefiting from diversified parent companies or from MI operations based in international markets. While the majority of the U.S. private mortgage insurance industry's risk in force relates to mortgages that conform to government sponsored entities (GSE) underwriting guidelines, the industry as a whole does have material exposure to non-conforming loans, both in the subprime and Alt-A sectors, and in many cases with the additional risk of untested loan products layered on top (i.e., negative amortization or interest-only loans). A large portion of this exposure is housed through the MIs' bulk and modified pool business lines. Additionally, significant portions of these non-conforming loans are geographically concentrated in soft markets such as California and Florida, where home price depreciation has been especially pronounced. To be sure, the national home price decline has had a negative impact on mortgage performance across all sectors of insured loans within the 2006 and 2007 vintages, not just higher-risk segments, and this phenomenon has already led to significant increases in reserves for all of the mortgage insurers. Fitch provides the following rating actions on the MI companies as listed below: CMG Mortgage Insurance Co.: Fitch has affirmed the 'AA' IFS rating of
CMG Mortgage Insurance Company
(CMG MI) and revised the Rating Outlook to Negative from Stable. While Fitch believes that CMG MI is in a better position to weather the current problems than most of its peers in the US MI industry, weakness in the U.S. mortgage markets is still expected to have some impact on the company's performance. CMG MI maintains a higher-quality book of business than most of its peers as its portfolio is focused on insuring loans underwritten and originated by credit unions, a niche sector which has historically performed better than the rest of the mortgage market due to more stringent underwriting standards. CMG MI also benefits from a smaller exposure to pooled second lien mortgages than some of its competitors. In Fitch's opinion, CMG MI's book of business will continue to exhibit superior performance relative to its peers and Fitch believes the company will remain profitable throughout the current economic cycle. Fitch has historically viewed the operational support provided to CMG MI by its two parent companies, CUNA Mutual Insurance Society ('AA-') and PMI Group, Inc. ('AA'), favorably. However, given the current conditions in the US mortgage market, Fitch's rating assessment of CMG MI is tending to view the company as more of stand-alone credit. That being said, weakness being experienced at PMI is tending to be a negative drag on CMG MI, at least over the near-to-intermediate term. That being said, CUNA remains a solid and dedicated parent which continues to support CMG MI. At Sept. 30, 2007, CMG MI maintained consolidated U.S. risk in force of $4.05 billion and consolidated U.S. statutory capital of $280 million for a risk to capital ratio of 14.5:1. Fitch has affirmed the following rating and revised the Rating Outlook to Negative from Stable: CMG Mortgage Insurance Co.: --Insurer Financial Strength (IFS) 'AA'. Genworth Mortgage Insurance Corp: Fitch has affirmed the 'AA' insurer financial strength rating of Genworth Mortgage Insurance Corp. (GMICO) and its operational affiliates. The Rating Outlook on the ratings remains Stable. The affirmation of GMICO's IFS ratings reflects the company's conservative underwriting which has resulted in an insured portfolio that compares favorably to that of the company's peers with relation to exposure to riskier mortgage products and geographies. As a result of GMICO's more conservative underwriting, GMICO has been able to outperform its peers from a financial performance perspective. GMICO also benefits from ownership by a diversified holding company as well as an established international mortgage insurance presence. Today's rating affirmation recognizes GMICO's better risk characteristics than its competitors, however Fitch believes the company will nonetheless be negatively affected by the overall state of the U.S. mortgage market which will make it difficult to generate capital internally within the U.S. mortgage insurance operations. Additionally, the expectation for higher losses translates into a higher amount of required capital to support previously underwritten business. That said, while Genworth's prior business now consumes more capital, Fitch continues to view GMICO's current capital levels as consistent with the 'AA' IFS rating. However, given that
Genworth Financial Inc
.'s international mortgage insurance operations derive significant capital support from the U.S. mortgage insurance operations, the anticipated negative pressure on the U.S. mortgage insurance operations may constrain growth in international markets. As of Sept. 30, 2007, GMICO and its consolidated U.S. mortgage insurance affiliates maintained consolidated U.S. risk in force of $28.5 billion and consolidated U.S. statutory capital of $2.5 billion for a risk to capital ratio of 11.3:1. Fitch has affirmed the following ratings: Genworth Mortgage Insurance Corporation Genworth Residential Mortgage Insurance Corporation of North Carolina Genworth Financial Assurance Corporation Genworth Financial Mortgage Insurance Pty Ltd Genworth Financial Mortgage Insurance Limited --IFS at 'AA'. Genworth Seguros de Credito a la Vivienda, S.A. De C.V. --IFS at 'A'; --National IFS at 'AAA(mex)' . The Outlook on the ratings is Stable. Mortgage Guaranty Insurance Corp.: Fitch has placed the 'AA' insurer financial strength (IFS) ratings of Mortgage Guaranty Insurance Corp. and MGIC Australia as well as the 'A' long term issuer rating of MGIC Investment Corp. on Rating
Watch Negative
. These rating actions incorporate Fitch's revised view on ultimate loss expectations, particularly on the 2005-2007 vintage years, and its impact on the company's capital position. MGIC maintains relatively higher exposure to soft markets and riskier product classes through its bulk and pool business lines relative to most of its competitors and Fitch believes these products are likely to perform considerably worse than recent history. As a result, although MGIC has historically maintained a healthy capital base, the present stressful mortgage environment has resulted in a modeled capital shortfall for the company at the 'AA' rating threshold. If within the next several months, MGIC is able to obtain additional capital resources to address this shortfall, Fitch would expect to affirm MGIC's ratings, with a Negative Rating Outlook, reflecting the financial stress associated with the present mortgage environment. Assuming MGIC does not raise additional capital to support its franchise, Fitch will downgrade MGIC's rating to 'AA-'. As of Sept. 30, 2007, MGIC maintained U.S. risk in force net of reinsurance of $53.5 billion and consolidated U.S. statutory capital of $5.9 billion for a risk to capital ratio of 9.1:1. Fitch has placed the following ratings on Rating
Watch Negative
: Mortgage Guaranty Insurance Corporation MGIC Australia Pty Ltd --Insurer financial strength (IFS) at 'AA'. MGIC Investment Corporation --$200 million 5.625% senior notes due Sept. 15, 2011 at 'A'; --$300 million 5.375% senior notes due Nov. 01, 2015 at 'A'; --Long-Term Issuer Rating at 'A'. PMI Mortgage Insurance Co.: Fitch has placed the IFS ratings of PMI Mortgage Insurance Co. (PMI) and its operational affiliates as well as the long-term issuer ratings of The PMI Group, Inc. (TPG) and PMI Capital I (see list below) on Rating
Watch Negative
. These rating actions incorporate Fitch's updated view on ultimate loss expectations and its impact on the company's capital position, particularly with respect to the company's large exposure to Alt-A, interest-only and high LTV loans. Adding to the overall concern is the potential for further negative pressure on earnings for TPG related to its significant investments in financial guaranty insurers
FGIC Corp.
and Ram Holdings Ltd. Given our updated stressed assessments, which incorporate additional pressure against business underwritten in the past three years, Fitch believes PMI currently has a capital shortfall at the 'AA' IFS rating. Fitch's current assessment of PMI incorporates a view that TPG maintains additional financial flexibility through unutilized capital available at several affiliates. Given the stress being experienced in the U.S., Fitch would expect PMI to engage in a capital enhancement plan to bolster the company's financial position over the next several months. Failure to execute upon a plan could pressure PMI's IFS rating by up to two notches in the near-term. As of Sept. 30, 2007, PMI maintained U.S. risk in force of $33.6 billion and consolidated U.S. statutory capital of $3.7 billion for a risk to capital ratio of 9.6:1. PMI's Australian s
UBS
idiary's operations benefit from stringent capital standards required by the Australian regulatory authorities, which, combined with a high level of regulatory oversight and a strict corporate governance regime, s
UBS
tantially ringfence the Australian s
UBS
idiary from the capital adequacy concerns regarding its parent. Consequently any downgrade of this s
UBS
idiary would be limited to one notch. Fitch has placed the following ratings on Rating
Watch Negative
: PMI Mortgage Insurance Co. PMI Guaranty Co. PMI Insurance Co. PMI Mortgage Insurance Company Limited (PMI Europe) PMI Mortgage Insurance Ltd. (PMI Australia) --IFS 'AA'. The PMI Group, Inc. --Long-term Issuer Rating at 'A'; --$250 million 6% senior notes due 2016 at 'A'; --$150 million 6.625% senior notes 2036 at 'A'; --$45 million 5.568% senior notes due 2008 at 'A'. PMI Capital I --$52 million 8.309% trust preferred securities 2027 at 'A-'. Radian Guaranty Inc.: Fitch has placed the 'AA-' insurer financial strength ratings of Radian Guaranty Inc. and its operational affiliates as well as the long-term issuer ratings of Radian Group Inc. on Rating
Watch Negative
. These rating actions incorporate Fitch's updated view on ultimate loss expectations and its impact on the company's existing capital position. This revised view also factors in the implications to the consolidated Radian Group Inc. given the company's exposure to subprime mortgages through its structured mortgage insurance business line as well as Radian Group's exposure to net interest margin and second-lien mortgage insurance. Given Fitch's more pessimistic view of business underwritten in the past few years, Fitch believes that the current capitalization of Radian's consolidated US mortgage insurance business is below the level required at the 'AA-'IFS rating. Absent obtaining additional capital resources over the next several months, it is likely that the ratings of the U.S. mortgage insurance operating s
UBS
idiaries and Radian Group may be lowered by one notch. The current ratings and Rating Watch Evolving status of Radian Asset Assurance Inc., the financial guaranty s
UBS
idiary of Radian Group were unaffected by this action. As of Sept. 30, 2007, Radian Guaranty maintained consolidated U.S. risk in force of $34.3 billion and consolidated U.S. statutory capital of $3.5 billion for a risk to capital ratio of 9.7:1. Fitch has placed the following ratings on Rating
Watch Negative
: Radian Guaranty Inc. Radian Insurance Inc. Amerin Guaranty Corp. --IFS at 'AA-'. Radian Group Inc --Long-term Issuer Rating at 'A-'; --$250 million 7.75% senior notes due June 1, 2011 at 'A-'; --$250 million 5.625% senior notes due Feb. 15, 2013 at 'A-'; --$250 million 5.375% senior notes due Feb. 15, 2015 at 'A-'. The following ratings remain on Rating Watch Evolving: Radian Asset Assurance Inc. Radian Asset Assurance Ltd. --IFS at 'A+'. Market Street Custodial Trusts I-III --$150 million money market preferred custodial trust securities at 'BBB+'. Republic Mortgage Insurance Corp.: Fitch is taking no rating action on the 'AA' insurer financial strength rating of Republic Mortgage Insurance Corp. The Rating Outlook on the rating remains Negative. Fitch believes that the Negative Rating Outlook continues to adequately reflect concerns related to RMIC's insured portfolio in light of Fitch's revised loss expectations for the 2006 and 2007 vintage collateral performance. While Fitch's revised loss expectations, indicate that RMIC's stand alone capitalization level is below the 'AA' IFS rating threshold, Fitch notes RMIC benefits from its ownership by Old Republic International Corp., a diversified holding company with significant operations in property/casualty and title insurance in addition to mortgage insurance. That said, Fitch views the holding company's recent significant investments in two of RMIC's competitors, namely The PMI Group, Inc. and MGIC Investment Corp., as creating increased correlation between the fortunes of RMIC and that of the holding company. In addition, Fitch is also monitoring the performance of ORI's consumer credit indemnity (CCI) program which is underwritten by Old Republic Insurance Company and consists of first loss coverage to pools of primarily second lien residential mortgage loans. While ORI's CCI business has historically performed very well and has yet to experience the problems seen by competitors providing similar credit protection, Fitch believes that the performance of ORI's credit indemnity product line is closely correlated with the performance of its mortgage insurance business. As of Dec. 31, 2007, Republic Mortgage Insurance Corp. maintained consolidated U.S. risk in force of $21.9 billion and consolidated U.S. statutory capital of $1.7 billion for a risk to capital ratio of 13.1:1. Fitch has taken no action on the following ratings, and the Rating Outlook remains Negative: Republic Mortgage Insurance Co. --Insurer Financial Strength 'AA'. Old Republic International Corp. --Issuer Default Rating 'AA-'; --Short-term IDR and
Commercial
paper 'F1+'. Triad Guaranty Insurance Co.: Fitch takes no rating action on the 'AA-' IFS rating of Triad Guaranty Insurance Co. and the 'A' long-term issuer rating of Triad Guaranty, Inc (see list below). These ratings remain on Rating
Watch Negative
. However, based on Fitch's revised view of ultimate loss expectations, particularly with respect to the company's large exposure to negative amortization products which represented over 13% of the company's primary and modified pool insured exposure, combined with the fact that Triad currently maintains the highest operating leverage in the MI industry with a risk to capital ratio of 20.5:1 at Dec. 31, 2007, Fitch believes Triad currently maintains capital well below levels necessary to maintain an 'AA-' rating. Absent obtaining additional capital resources within a short timeframe, it is likely that Fitch will lower the ratings of Triad and Triad Guaranty Inc. several more notches, with the IFS rating possibly falling below the 'A' category. If capital is strengthened within the noted timeframe, Fitch would expect to affirm the ratings At Dec. 31, 2007, Triad Guaranty Insurance Co. maintained consolidated U.S. risk in force of $11.9 billion and consolidated U.S. statutory capital of $585 million for a risk to capital ratio of 20.5:1. The following ratings remain on Rating
Watch Negative
: Triad Guaranty Insurance Corporation: --Insurer Financial Strength (IFS) at 'AA-'. Triad Guaranty, Inc.: --Long-Term Issuer at 'A-'; --$35 million 7.9% fixed coupon senior notes due Jan.15, 2028 at 'A-'. United Guaranty Residential Insurance Co.: Fitch is taking no rating action on the 'AA+' insurer financial strength rating of United Guaranty Residential Insurance Co. The Rating Outlook on this rating remains Stable. While Fitch views the consolidated capital of UGRIC and its U.S. mortgage insurance affiliates to be pressured, particularly when taking into account the performance of United Guaranty Corp.'s pooled second lien mortgage insurance exposure, UGC and its U.S. mortgage insurance s
UBS
idiaries derive significant implicit and explicit support from its parent company,
American International Group, Inc.
(AIG). At Sept. 30, 2007, United Guaranty Residential Insurance Co. and its U.S. first lien and second lien mortgage insurance affiliates maintained consolidated risk in force of $28.6 billion (including approximately a $0.3 billion component of international business), and consolidated U.S. statutory capital of $2.1 billion for a risk to capital ratio of 13.9:1 The following rating remains unchanged: United Guaranty Residential Insurance Company --Insurer financial strength (IFS) 'AA+'. The Outlook on these ratings remain Stable. The following ratings also remain unchanged and remain on Rating
Watch Negative
: Ezer Mortgage Insurance Company Ltd. --Insurer financial strength (IFS) 'AA+'. United Guaranty Corporation --Long-term Issuer Rating at 'AA'. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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