Standard & Poor's Rating Services said it lowered its insurer financial strength ratings and long-term issuer credit ratings on Radian Guaranty Inc., Radian Mortgage Insurance Inc., Radian Mortgage Assurance Inc. (collectively Radian MI), and Mortgage Guaranty Insurance Corp. and MGIC Indemnity Co. (collectively MGIC). At the same time, it lowered its long-term issuer credit rating on Radian Group Inc. (Radian) to CCC-minus from CCC.
Standard & Poor's affirmed the ratings on Radian Asset Assurance Inc. (Radian Group's bond insurance subsidiary), Genworth Mortgage Insurance Corp. (GMICO), Genworth Residential Mortgage Insurance Corp. of North Carolina, and the unsolicited ratings on MGIC's parent company MGIC Investment Corp. (MTG). The outlook on all of the companies is negative.
Radian MI had approximately $924 million in statutory capital as of the end of second-quarter 2012. Because this capital is entirely attributable to the investment in its wholly owned subsidiary, Radian Asset Assurance, S&P continues to view Radian's capital quality as low. The holding company had $350 million in cash and investment at the end of second-quarter 2012. However, this should decline by the end of 2013 due to the upcoming 2013 debt maturity of $92 million and potential capital contributions to the operating subsidiaries.
MTG had cash and short-term investments totaling approximately $400 million as of June 30, 2012. Under terms provided to MTG by Freddie Mac, MTG will be required to contribute $200 million of capital to MGIC by Sept. 30, 2012, to continue writing new business in states where waivers have not been received. The company repurchased debt of approximately $70 million par outstanding of the 5.375% senior notes due in November 2015 during the quarter, leaving approximately $100 million outstanding. The affirmation of the unsolicited ratings on MTG reflect the belief that MTG will continue to have the wherewithal to meet holding company obligations in the near term.
GMICO reported a loss of $25 million in second-quarter 2012, in line with expectations. Although the company is still at risk for adverse reserve development, the risk for GMICO is more muted than peers'. At approximately $30,600 in reserves per delinquency, GMICO has the highest reserve per delinquency in the mortgage insurance sector, and GMICO's reserves do not incorporate reserve benefits attributable to future rescissions. Furthermore, GMICO has minimal claim denial activity, keeping the risk of adverse development related to overturned claims low. The company is very focused on claims curtailment, but maintains reserves sufficient to cover curtailed amounts.
The outlooks for MGIC, Radian MI, and GMICO are negative. This reflects the continuing risk of significant adverse reserve development; the current trajectory of operating performance; and the impact ongoing losses are expected to have on the companies' capital positions. Although new NODs have decreased in the past three months, trend should reverse in the second half of the year, due to the lack of significant improvement in the jobs markets and normal adverse seasonality. As a result, operating performance should deteriorate in the remainder of the year for all of the companies.
As a general rule, companies that face a 50-50 chance of eventual default should be rated in the CCC category. CCC is also appropriate--even at a lower probability threshold--if the risk of default is near term (within the next 12 months). At this time, S&P does not believe the operating company ratings on MGIC, Radian MI, or GMICO meet these thresholds.
However, lack of more-significant improvement in the jobs markets leading to high levels of new NODs and further declines in cure rates may lead to further adverse development due to higher assumptions of claims incidence. To the extent these adjustments are significant and operating results during a rolling 12-month period show lack of significant improvement, we may lower the ratings for MGIC and Radian MI to the CCC category, as this may be a sign of an eventual or near-term default. GMICO, because its average reserve per delinquency is higher than its peers', may be downgraded one notch.
The agency said it may also lower the ratings for the respective MIs if it believes state insurance regulators will retract regulatory capital waivers to write new business, which might be a precursor to further regulatory intervention.
It may also lower the ratings if MTG or Radian downstream capital to the extent that they have less-than-adequate resources to service debt and related expenses for their respective 2013 and 2015 maturities.
