NEW YORK - Moody's Investors Service said it has confirmed the insurance financial strength rating of Mortgage Guaranty Insurance Corporation (MGIC) at B1.
The senior unsecured debt rating of MGIC Investment Corporation (MTG, MGIC's parent company) has been downgraded from Caa1 to Caa2 to reflect a deteriorating liquidity position.
The rating action follows the extension of the regulatory capital waiver by its main regulator, the Wisconsin Office of the Commissioner of Insurance (WI-OCI), through year-end 2013, and continued approval by Fannie Mae and Freddie Mac allowing MGIC to continue to write new business. Moody's has also affirmed the Ba3 rating of MGIC Indemnity Corporation (MIC), a wholly owned subsidiary of MGIC.
The outlook for all ratings is negative. The rating actions conclude the reviews for downgrade initiated on November 1, 2011.
Moody's commented that the confirmation of MGIC's B1 insurance Financial Strength Rating reflects the improved visibility about the firm's ability to write new business following the WI-OCI extension of the regulatory capital waiver through December 31, 2013; the previous waiver expired on December 31, 2011.
Wisconsin is one of the 16 jurisdictions in the US where mortgage insurers have to meet state specific minimum statutory capitalization requirements to be eligible to write new business in the state. At the end of the third quarter of 2011, MGIC's statutory capital position was only $50 million above the minimum required by the WI-OCI; therefore extension of the waiver was crucial to MGIC's access to new business flows.
According to the agreement with WI-OCI, MGIC has to maintain “liquid assets” of at least $1.0 billion for the waiver to remain effective. Moody's estimates that MGIC's $6.4 billion liquid assets portfolio at the end of 2011 should remain materially in excess of the $1 billion threshold over the next two years despite some meaningful erosion due to substantial claims payment.
The rating agency added that the renewal of Fannie Mae's support through December 31, 2013, allowing the group to write business in states that will not or cannot waive regulatory requirements through its MIC subsidiary is also a positive development.
Freddie Mac has a similar agreement with the group that expires on December 31, 2012. At the end of the third quarter of 2011, MIC had $234 million of capital against a small net risk in force of $4 million. In connection with the strategy to use MIC as the lead insurer in certain key markets, MGIC down streamed $200 million to MIC in January 2012. The affirmation of MIC's rating reflects its strong relative credit profile and continued credit linkage to MGIC.
Moody's indicated that the downgrade of MTG's senior debt rating reflects its deteriorating liquidity profile following the recent downstream of $200 million to its main insurance subsidiaries. The holding company had stand-alone assets of about $486 million at the end of 2011 and outstanding debt obligations comprised of $516 million in senior unsecured debt and $345 million junior convertible debt. Given the low likelihood of dividend payments from MGIC for the foreseeable future, Moody's believes that the company's ability to repay its debt may be compromised.
The negative outlook for all outstanding ratings reflects the continued weakness in the housing markets and consequent potential for higher losses in its insured portfolio, said the rating agency. It also reflects continued uncertainty about the long term prospects for the firm and the mortgage insurance industry given the likely changes to the housing finance market and dependence on continued regulatory and counterparty waivers.
The following ratings have been confirmed and the outlook has been changed to negative: Mortgage Guaranty Insurance Corp insurance financial strength rating at B1; MGIC Investment Corporation junior subordinated debt at Ca (hyb).
The following rating was affirmed: MGIC Indemnity Corporation insurance financial strength rating at Ba3, negative outlook.
The following rating was downgraded and the outlook has been changed to negative: MGIC Investment Corporation senior unsecured rating to Caa2 from Caa1.
The last rating action related to MGIC was on November 1, 2011, when Moody's downgraded Mortgage Guaranty Insurance Corp from Ba3 to B1, the senior debt rating MGIC Investment Corp's from B3 to Caa1 and the junior subordinated debt rating from Caa3 to Ca. The IFSR rating of MGIC and the senior and subordinated ratings of MGIC Investment Corp. were placed on review for downgrade at that time.