2008-06-05 23:34:28 -
- Fitch Ratings has announced a number of rating actions on the U.S. private mortgage insurance (MI) sector (see full list below). Several of these actions have led to downgrades of multiple notches to the insurer financial strength (IFS) and debt ratings of the affected companies.
Today's announcement follows previous rating actions taken by Fitch within the MI industry
on Feb. 25, 2008. Based on further review of the U.S. mortgage market and its impact on the financial and insured portfolio performance of the MI industry, Fitch has grown considerably more pessimistic on the outlook for the sector. This relates greatly to Fitch's view that 2007 will likely prove to be one of the worst underwriting years in the modern history of the U.S. mortgage industry, and recognition that 2007 was a year of rapid growth for a number of key mortgage insurers. Fitch notes that 2007 vintage mortgages are turning delinquent at a significantly faster pace than the 2006 or 2005 vintage years; an early indication in support of Fitch's growing concerns with exposures underwritten in that year.
The current trouble being experienced in the U.S. mortgage markets has spilled over from subprime into other mortgage products, such as adjustable-rate, negative amortizing, reduced documentation, and second-lien mortgages. The major factors driving the deterioration in mortgage performance indicators has been the poor underwriting process demonstrated by many mortgage lenders the past few years, combined with the continued and accelerating national home price decline which has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Adding to the strain seems to be an increasing willingness for borrowers to 'walk away' from mortgage debt when estimated home values are below their current mortgage balances. This is appearing quite apparent for 2007 mortgages as these borrowers have born the full brunt of home price declines. Fraud has also played a key role.
It appears the MIs' underwriting processes were ineffective in identifying and protecting against these risks, as the industry aggressively courted new business throughout 2007. As a result, these companies' insured portfolios are now heavily concentrated with 2007 vintage mortgage loans, many of which are very high loan-to-value (greater than 95%) and/or were underwritten to borrowers who provided limited or no documentation.
The deterioration in the U.S. mortgage market has led to continued sharp increases in delinquencies for all the MI companies, particularly for loans originated in the 2005-2007 vintage years. With reduced options to refinance or cure troubled credits, Fitch believes a greater percentage of these delinquent borrowers will end up in foreclosure in the years ahead which will translate into higher claims and losses over this time period.
The capital adequacy of the MI industry has weakened by a combination of recent losses and noted growth in 2007. To address the further weakness of the 2007 vintage, Fitch has applied additional stresses against that book of business on our capital modeling process.
Current rating actions have been tempered by recent capital raising initiatives or the prospect of successful initiatives. In addition, Fitch believes that potential claims on the 2007, and to an extent 2006 vintages, could be moderated because Fitch believes many potential claims on mortgage insurance policies may be determined to be ineligible to be paid, reducing the amount of losses that will occur in the future. Some degree of reduced losses due to assumed ineligible claims has been captured in Fitch's updated capital modeling. Finally, Fitch believes the MIs will receive material capital benefit from lender captive mortgage reinsurance company arrangements that have been entered into over the years.
Except for the most conservative players in the U.S. MI sector, Fitch does not anticipate existing players returning to healthy levels of profitability until late-2009 but more likely 2010. This estimate incorporates Fitch's view that meaningful changes to underwriting standards, from both a risk and pricing perspective, have only recently been instituted by the MI companies. These changes are intended to create better profitability on business written going forward. While all of the mortgage insurers rated by Fitch have been affected by the deterioration in today's mortgage environment, the extent of the trouble varies by company, as each insurer has differing levels of exposure to product sectors of concern (i.e., subprime, reduced documentation, or exotic loan products). Furthermore, the companies have different organizational structures, with some benefiting from diversified parent companies or from MI operations based in international markets.
While the majority of the U.S. private mortgage insurance industry's risk in force relates to mortgages that conform to government sponsored entities (GSE) underwriting guidelines, the industry as a whole does have material exposure to non-conforming loans, both in the subprime and Alt-A sectors, and in many cases with the additional risk of untested loan products layered on top (i.e., negative amortization or interest-only loans). A large portion of this exposure is insured through the MIs' bulk and modified pool business lines. Additionally, significant portions of these non-conforming loans are geographically concentrated in soft markets such as California and Florida, where home price depreciation has been especially pronounced. The national home price decline has had a negative impact on mortgage performance across all sectors of insured loans within the 2006 and 2007 vintages, not just higher-risk segments, and this phenomenon has already led to significant increases in reserves for all of the mortgage insurers.
Fitch provides the following rating actions on the MI companies as listed below:
Genworth Mortgage Insurance Corp.:
Fitch has placed the 'AA' insurer financial strength rating of Genworth Mortgage Insurance Corp. (GMICO) and its operational affiliates on Rating Watch Negative (See list below). Additionally, in a separate commentary, Fitch has also placed Issuer Default Rating (IDR) and long-term debt ratings of Genworth Financial, Inc. on Rating Watch Negative as a result of the actions taken on the U.S. mortgage insurance companies.
Fitch has placed the following ratings on Rating Watch Negative:
--Genworth Mortgage Insurance Corporation
--Genworth Residential Mortgage Insurance Corporation of North Carolina
--Genworth Financial Assurance Corporation
--Genworth Financial Mortgage Insurance Pty Ltd (Genworth Australia)
--Genworth Financial Mortgage Insurance Limited (Genworth UK)
--IFS at 'AA'.
--Genworth Seguros de Credito a la Vivienda, S.A. De C.V.
--IFS at 'A';
Fitch has affirmed the following rating and the Rating Outlook remains Stable:
Genworth Seguros de Credito a la Vivienda, S.A. De C.V.
--National IFS at 'AAA(mex)'.
These rating actions incorporate Fitch's updated view on ultimate loss expectations on the 2005 through 2007 vintage insured exposure as well as the observed delinquency trends within GMICO's insured portfolio which indicate progressively declining performance for each vintage with the 2007 vintage performing lower than 2006. Notably, while GMICO's insured portfolio has historically outperformed the insured portfolio of it peers in terms of delinquency and loss development, largely attributable to the company's more conservative underwriting practices, the delinquency performance of Genworth's 2007 vintage has trended closer to that of its peers.
Positively, GMICO's 2006 and prior vintage exposure continues to perform better than that of its peers and the company continues to benefit from its ownership by a diversified holding company with earnings derived from an established international mortgage insurance presence. Given these considerations, Fitch continues to view GMICO as being better positioned than most of its peers to weather the current market environment, but given the developments related to the sizable 2007 vintage, Fitch believes that GMICO's capital levels may be pressured. Fitch will continue to monitor GMICO's delinquency and loss development trends over the next several quarters as continued deterioration related to the company's sizable exposure to the 2007 vintage may require that the company strengthen its capital position.
Resolution of the Rating Watch will ultimately factor in any enhancements to the company's capital position. In addition, Fitch will continue to monitor the company's delinquency and loss development curves to determine the extent of the challenges facing GMICO. If the company does not improve its capital or its expected loss situation does not stabilize, it is possible GMICO's IFS ratings could be lowered to 'AA-'.
The ratings of Genworth Australia and Genworth Europe have both been placed on Rating Watch Negative based on the similar rating action on U.S. mortgage insurance affiliates principally because these entities receive tangible support from GMICO in the form of capital support agreements.
As of March 31, 2008, GMICO and its consolidated U.S. mortgage insurance affiliates maintained consolidated U.S. risk in force of $34.3 billion and consolidated U.S. statutory capital of $2.6 billion for a risk to capital ratio of 13.2:1.
Mortgage Guaranty Insurance Corp.:
Fitch has downgraded the following ratings on MGIC Investment Corp. and its mortgage insurance subsidiaries Mortgage Guaranty Insurance Corp. and MGIC Australia Pty Ltd to the following:
Mortgage Guaranty Insurance Corp.
MGIC Australia Pty Ltd
--Insurer financial strength (IFS) to 'A+' from 'AA'
MGIC Investment Corp.
--$200 million 5.625% senior notes due Sept. 15, 2011 to 'BBB+' from 'A';
--$300 million 5.375% senior notes due Nov. 01, 2015 to 'BBB+' from 'A';
--$325 million of convertible junior subordinated debentures to 'BBB' from 'A-';
--Long-Term Issuer Rating to 'BBB+' from 'A'.
The ratings will remain on Rating Watch Negative, where they were originally placed on Feb. 25, 2008.
These rating actions incorporate an updated review of MGIC's exposure to the 2007 vintage, Fitch's depressed views on ultimate loss expectations for the 2005-2007 vintage years, and the impact of this information on the company's capital position and financial results. MGIC's $77 billion of new insurance written in 2007 was a sizable increase from previous years, and is heavily exposed to risky loan segments which Fitch believes will perform poorly in the future. Fitch believes the level of new insurance written in 2007, as well as its weak performance characteristics, has increased the pressure on the company's capitalization. At the present time, Fitch believes MGIC's capital position is commensurate with its reduced rating level, even with full credit given to $826 million of capital raised in 2008, through the sale of common equity and hybrid capital in March 2008.
In addition to its recently demonstrated ability to access the capital markets MGIC maintains a strong position in the U.S. mortgage insurance market. Further, the company has tightened its underwriting guidelines in 2008 and has discontinued its poorly performing Wall Street bulk line of business. However, these changes do not impact the performance of the 2007 vintages. As a result, although improved MI performance in 2008 and subsequent vintage years should enable MGIC to ultimately return to profitability over time, the present stressful mortgage environment has resulted in pressure to the company's existing financial position.
The Rating Watch reflects Fitch's concerns over financial performance for the near-to-intermediate term, given the deterioration in the mortgage markets. If MGIC's insured portfolio performs below current expectations, the company's ratings will be under further pressure in the future.
As of March 31, 2008, MGIC maintained U.S. risk in force net of reinsurance of $59.7 billion and consolidated U.S. statutory capital of $5.1 billion for a risk to capital ratio of 11.7.
PMI Mortgage Insurance Co.
Fitch has downgraded the IFS ratings of PMI Mortgage Insurance Co. (PMI) and its U.S. based operational affiliates to 'A+' from 'AA'. Fitch has also downgraded the IFS ratings of PMI's international mortgage insurance operations and the long-term issuer ratings of The PMI Group, Inc. (TPG) and PMI Capital I (see list below).
Fitch has downgraded the following ratings:
PMI Mortgage Insurance Co.
PMI Guaranty Co.
PMI Insurance Co.
PMI Mortgage Insurance Company Limited (PMI Europe)
--IFS to 'A+' from 'AA'
The PMI Group, Inc.
--Long-term Issuer Rating to 'BBB+' from 'A';
--$250 million 6% senior notes due 2016 to 'BBB+' from 'A';
--$150 million 6.625% senior notes 2036 to 'BBB+' from 'A';
--$45 million 5.568% senior notes due 2008 to 'BBB+' from 'A'.
PMI Capital I
--$52 million 8.309% trust preferred securities 2027 to 'BBB' from 'A'.
The ratings will remain on Rating Watch Negative, where they were originally placed on Feb. 25, 2008.
Fitch has also downgraded the following rating:
PMI Mortgage Insurance Ltd. (PMI Australia)
--IFS to 'AA-' from 'AA.
Fitch has removed this rating from Rating Watch Negative and revised the Outlook to Negative.
These rating actions incorporate Fitch's updated view on ultimate loss expectations on the 2005 through 2007 vintage insured exposure as well as the observed delinquency trends within PMI's insured portfolio which indicate progressively declining performance for each vintage with the 2007 vintage being the weakest of the three. Given the observed performance of the 2007 vintage, the relatively high proportion of loans with LTV's greater than 95 within this vintage, and the size of the 2007 vintage exposure relative to PMI's statutory capital, it is likely that loss development from the 2007 vintage will create noticeable strain on PMI's capitalization levels over the intermediate term. Consequently, in consideration of the options available to TPG to bolster the capital levels of its U.S. mortgage insurance operations such as unutilized capital at certain subsidiaries and the ability to monetize the value of certain subisidiaries as well as other capital initiatives, Fitch believes that the capital available for the U.S. mortgage insurance is consistent with a company in the 'A' rating category. With that said, it is Fitch's expectation that PMI will move forward with a capital enhancement plan to solidify the U.S. mortgage insurance entities' financial position over the next several months.
The Rating Watch reflects Fitch's concerns over financial performance for the near-to-intermediate term, give the deterioration in the mortgage markets. In addition, future rating actions will incorporate the success the company has in executing on its capital enhancement plan. If the company is unable to enhance its capital position as planned, or if the company's insured portfolio performs below current expectations, PMI's ratings will be under further pressure in the future.
As of March 31, 2008, PMI maintained U.S. risk in force of $34.5 billion and consolidated U.S. statutory capital of $2.6 billion for a risk to capital ratio of 11.9:1.
PMI's Australian subsidiary's operations benefit from stringent capital standards required by the Australian regulatory authorities, which, combined with a high level of regulatory oversight and a strict corporate governance regime, substantially ringfence the Australian subsidiary from the capital adequacy concerns regarding its parent. PMI Australia's established market position combined with the benefits created by the regulatory environment affords the company a certain degree of ratings separation from its parent company. As a result of these considerations, Fitch believes that a one-notch downgrade of PMI Australia's IFS to 'AA-' adequately reflects the benefits of PMI Australia franchise value, stand-alone capital adequacy and regulatory environment with the concerns created by financial pressure being experienced by its parent company. That said, PMI Australia could face negative ratings pressure if the IFS ratings TPG's U.S. operations fall below the 'A' category.
Republic Mortgage Insurance Corp.
Fitch has downgraded the insurer financial strength rating of Republic Mortgage Insurance Corp. (RMIC) to 'AA-' from 'AA' and has placed the rating on Rating Watch Negative.
Additionally, in a separate commentary, Fitch has also downgraded the issuer default and long-term debt ratings of Old Republic International Corp. (ORI) as well as the insurer financial ratings of its general insurance subsidiaries and placed these ratings on Rating Watch Negative in conjunction with the rating actions taken on RMIC.
Republic Mortgage Insurance Co.
--Insurer Financial Strength to 'AA-' from 'AA'.
This rating has been placed on Rating Watch Negative.
This rating action incorporates Fitch's updated view on ultimate loss expectations on the 2005 through 2007 vintage insured exposure as well as the observed delinquency trends within RMIC's insured portfolio which indicate progressively weaker performance for each vintage year. Given the current loss expectations for RMIC's insured portfolio, particularly on its sizable 2007 vintage exposure, Fitch believes that RMIC maintains capital levels consistent with an 'A' rating when considered on a stand-alone basis, but recognizes that RMIC benefits from being owned by ORI. That said, however, Fitch believes that ORI's ability to support its mortgage insurance operations has been diminished given ORI's material exposure to second-lien residential mortgages through its consumer credit indemnity (CCI) program, which is underwritten by Old Republic Insurance Company. Fitch believes recent performance measures of this business indicate that ORI could potentially be experiencing significant losses on this portfolio over the near-to-intermediate term, further straining ORI's existing capital position.
Positively, ORI benefits from a highly conservative capital structure with nearly no debt and, therefore, maintains substantial financial flexibility. Resolution of the Rating Watch on ORI and RMIC will incorporate any enhancements to the company's capital position, along with whether credit trends at both companies can show signs of stabilizing. If these trends are not improved, it is possible that RMIC's rating will be lowered into the 'A' rating category.
As of Mar. 31, 2008, Republic Mortgage Insurance Corp. maintained consolidated U.S. risk in force of $22.5 billion and consolidated U.S. statutory capital of $1.5 billion for a risk to capital ratio of 15.0:1.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
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Thomas J. Abruzzo, +1-212-908-0793
Davie Rodriguez, +1-212-908-0386
Ralph R. Aurora, +1-212-908-0528
Australia:
John Miles, +61-7-3222-8616
Andrew Smith, +61-7-3222-8618
London:
Andrew Murray, +44 (0) 207-417-4303
Kenneth Reed, +1-212-908-0540 (Media Relations, New York)
