Fitch Pulls the Last Triple-A From Radian Reinsurance

Fitch Ratings yesterday downgraded Radian Reinsurance to AA from AAA, depriving it of its last remaining triple-A rating. Fitch also removed the credit from rating watch negative, where it was placed last October.Standard & Poor’s currently rates the reinsurer AA after having lowered it from AAA on Oct. 4. Moody’s Investors Service, which rates Radian Reinsurance Aa2, downgraded the company’s predecessor, Enhance Reinsurance, from AAA in 1999. All three rating agencies give the credit a stable outlook.“The only reaction is, we have a sound basis standing that’s been validated by our insured book to date,” said Tino Kamarck, president of both Radian Reinsurance and its sister company, bond insurer Radian Asset Assurance. “This particular rating action isn’t going to affect our standing going forward.”Kamarck said Radian Reinsurance insures investment-grade bonds and will not be changing its policy based on Fitch’s action. He declined to comment on the fairness of the downgrade.“Talking about the fairness or unfairness of a rating action is like talking about the fairness or unfairness of the tide going out,” he said. “There’s nothing you can do about it.”In its rating report, Fitch said the downgrade reflects the anticipation that Radian Reinsurance will begin receiving a larger amount of insured business from Radian Asset Assurance. The bond insurer is rated AA by Fitch and Standard & Poor’s, and is not rated by Moody’s. Both of the subsidiaries are owned by Philadelphia-based Radian Group Inc.Fitch reported that Radian Asset Assurance currently takes up 3% of Radian Reinsurance’s portfolio, but this percentage is likely to grow. “Radian Reinsurance is going to be getting a larger percentage of business from their sister company, Radian Asset Assurance,” said Fitch director Greg Stofega, author of the report.Fitch reported that “increased cessions from Radian Asset to Radian Reinsurance will result in the convergence of the credit profiles of the two companies. Radian Asset generally insures transactions that are consistent with its AA rating and have higher risk characteristics than the AAA primaries.”In its report, Fitch said that 48% of Radian Asset’s insured portfolio was rated BBB or below as of Dec. 31, 2002, while Radian Reinsurance had 27% of its portfolio rated BBB or below. In addition, Fitch noted that Radian Asset’s net premiums written jumped 170% in 2002 after that unit received a capital infusion of $125 million from the parent, Radian Group, “and is viewed by management has having the greater opportunity for growth versus Radian Reinsurance.”Kamarck said that Radian Asset Assurance received the cash infusion to feed its expansion. “We expect that business to be growing more rapidly and therefore we can allocate capital to support it,” said Kamarck. Since July of last year, Fitch has had a negative rating outlook on the monoline reinsurance sector. Fitch said that the outlook “reflects concerns over less favorable relationships and contractual terms with the companies’ major clients, as well as increased competition.” For Radian Reinsurance, Fitch said there has been increased pressure on earnings, and a greater challenge “to grow its business while writing business consistent with AAA ratings.” This prompted the agency to put Radian Reinsurance on rating watch negative on Oct. 4, 2002.“Fitch believes the primaries may choose to do less business with Radian Reinsurance in the future, using instead other AAA reinsurers or risk transfer mechanisms that provide greater ratings agency credit,” Stofega wrote in the report.