NEW YORK - Standard & Poor's Rating Services said it lowered its insurer financial strength ratings on Radian Guaranty Inc., Radian Mortgage Insurance Inc., and Amerin Guaranty Corp. (collectively Radian MI) by one notch to B from B-plus. (Amerin Guaranty is now known as Radian Mortgage Assurance Inc.) At the same time, S&P lowered its issuer credit rating on Radian Group Inc. to CCC from CCC-plus. The ratings on Radian Asset Assurance Inc.--Radian Group's bond insurance subsidiary--are unaffected by this rating action. The outlook on all Radian-related entities is negative.
According to S&P’s rating definitions, an insurer rated B has weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. S&P believes that Radian currently fits this definition.
The high level of losses in the mortgage insurance sector are occurring in an economy that is struggling to recover and that continues to exhibit significant weakness in the job and housing markets. The lack of significant improvement in payroll employment levels contributed to high levels of new notices of delinquency (NODs).
Ther rating action reflects the company's operating performance failing to meet S&P’sxpectations through third-quarter 2011. The company's loan delinquency inventory, while improving throughout 2011, remained high, and NODs have not declined rapidly enough to support a recovery of earnings.
The current ratings contemplate continued losses through 2012 with a trajectory toward break-even operating results by the end of 2013 due to improving NOD trends.
The negative outlook on Radian reflects the current trajectory of operating performance; the impact ongoing losses are expected to have on Radian's capital position, and the significant downside risk due to potential adverse development. Although new notices of delinquency continue to decline, they would likely increase again if the economy enters another recession and payroll employment once again declines. The elevated level of new notices and the volatility in cure activity make it difficult to foresee materially improving operating performance in the coming quarters.
S&P expects favorable seasonality in first-half 2012 to affect Radian's operating results. However, S&P could lower the ratings if Radian's future operating results reflect further significant reserve adjustments, which would call into question its reserve adequacy. As well, S&P could downgrade Radian if operating results fail to reflect material improvement from the operating results reported in 2011. To wit, if the trajectory of 2012 statutory earnings does not improve, Radian's claims-paying ability and capitalization will further deteriorate and call into question whether it can repay the debt due in 2015 and 2017.
S&P could also lower the ratings if the company deploys its capital at the holding company beyond $350 million within the next 12 months and has less-than-adequate resources to service the debt and related expenses due in 2013 and 2015. To the extent operating losses and industry fundamentals reflect significant improvement, providing an indication that 2013 results would be significantly better than break-even, S&P could affirm the ratings.
