Standard & Poor's last week downgraded bond insurer Radian Asset Assurance Inc. to BBB-minus from BBB-plus in a move related to downgrades of parent Radian Guaranty Inc. and all other major U.S. mortgage insurers. The rating remains on negative watch.
Standard & Poor's attributed the downgrades of the mortgage insurers to an increase in its loss cost assumptions due to an increase in its assumptions for peak unemployment and the sharp rise in delinquent loans.
"The downgrades reflect a significant increase in our estimate of mortgage insurers' loss costs for loans insured through the flow channel and the impact this revision will have on the companies' operating results, capitalization, and competitive positions," analyst James Brender said in a statement.
Bond insurer Radian Asset's rating is linked to Radian Guaranty's rating because parent Radian Group Inc. last year contributed the bond insurance subsidiary to the mortgage insurer to help the mortgage insurers' capital position. Standard & Poor's downgraded Radian Guaranty to BB-minus from BBB-plus.
Standard & Poor's noted that Radian Asset is in run-off and essentially serves to contribute dividends to Radian Guaranty. As of Dec. 31, Radian Asset had $965 million in statutory capital and $2.8 billion in claims-paying resources. It will no longer write new business, Radian has said.
Compared to industry averages, Radian has a relatively small amount of residential mortgage-backed securities and collateralized debt obligations of asset-backed securities exposure, but its pooled corporate exposure is "sizable," Standard & Poor's said.
Radian has focused on reducing its financial guaranty exposure, with its net par outstanding falling to $100.7 billion at the end of 2008 from $116 billion at the end of 2007. Its exposure includes net reinsurance par of $36.9 billion, direct public finance par of $17.8 billion and direct structured finance exposure of $46 billion.
Standard & Poor's said the resolution of Radian Asset's CreditWatch status will hinge upon the rating agency's view of Radian Asset's capital adequacy.
"We could resolve the CreditWatch status of the ratings favorably if our review of capital adequacy - including current dividend plans and regulatory dividend constraints - indicates that it is still appropriate for the rating level," Standard & Poor's said. "If Radian Asset's capital adequacy position has weakened, we could lower the rating again, but it is unlikely that the rating would fall below the rating on the parent."
