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Rating Action:

MOODY'S CONFIRMS Aaa RATINGS UNITED GUARANTY RESIDENTIAL INSURANCE COMPANY AND CERTAIN AFFILIATES; OUTLOOK IS NEGATIVE

05 Sep 2003
MOODY'S CONFIRMS Aaa RATINGS UNITED GUARANTY RESIDENTIAL INSURANCE COMPANY AND CERTAIN AFFILIATES; OUTLOOK IS NEGATIVE

New York, September 05, 2003 -- Moody's Investors Service has confirmed the Aaa insurance financial strength ratings of United Guaranty Residential Insurance Company (UGRIC), United Guaranty Mortgage Indemnity Company (UGMIC) and United Guaranty Residential Insurance Company of North Carolina (UGRIC of NC). The rating outlook for these mortgage insurers is negative. These rating actions conclude Moody's review of the ratings for possible downgrade which began in February 2003, in conjunction with Moody's review of the ratings of American International Group, Inc.'s domestic brokerage group.

According to Moody's, the Aaa ratings for these firms in the United Guaranty group are based on a recently executed explicit support agreement from American International Group (AIG ) (rated Aaa for senior debt, negative outlook). In addition, UGRIC and UGRIC of NC enjoy support from National Union Fire Insurance Company of Pittsburgh (National Union, rated Aaa for insurance financial strength, under review for downgrade), an AIG subsidiary that provides reinsurance. The reinsurance further demonstrates support by an AIG member company. The negative rating outlook is based on AIG's negative rating outlook, which reflects several factors, including what Moody's considers to be a heightened risk profile at AIG's domestic brokerage operations, whose Aaa insurance financial strength ratings continue to be under review for possible downgrade, and increased operational leverage in recent years in AIG's retirement and other financial services operations.

The new support agreements executed by AIG guarantee that UGRIC and UGRIC of NC will each have a minimum threshold of policyholder surplus, and a guarantee of liquidity to make timely payments of policy or other obligations. UGMIC is fully guaranteed by its parent, UGRIC. It is Moody's opinion that these support agreements from AIG are crucial to these mortgage insurers' Aaa ratings. While these entities have consistently demonstrated prudent risk management, low losses, favorable earnings and strong capitalization, on a stand alone basis these ratings would not be Aaa.

UGRIC, the lead firm in the United Guaranty group, is a monoline private mortgage insurer for single-family residential mortgages serving several thousand lenders. Demonstrative of the company's prudent risk management is a loss ratio that has consistently ranked as one of the lowest in the industry, and which was approximately 19% at March 31, 2003. UGRIC has a relatively modest market share, ranking fifth in the mortgage insurance industry, as reflected in its 13% market share of industry insurance in force as of March 31, 2003. Moody's believes that despite a challenging operating environment, UGRIC is well capitalized. According to the rating agency, UGRIC's t leverage at March 31, 2003 (at 10.4X risk-in-force) is modest on a risk-adjusted basis, reflecting the strength of its core primary business, and avoidance of some of the riskier sectors of mortgage insurance. Like all other mortgage insurers, UGRIC has been faced with a difficult marketplace where profitability is being crimped by captive insurance agreements with mortgage originators, pressure to write insurance on higher risk product such as less-than-prime mortgages, and growth of 80-10-10 mortgages.

According to Moody's, UGRIC of NC's business of providing mortgage insurance for second liens is strategically important to the United Guaranty group's mortgage insurance business, and serves to diversify premiums derived from the core first mortgage insurance business and the threat of 80-10-10 purchase money mortgages, which compete with first mortgage insurance. Moody's expectation is that such strategic importance will continue. Moody's notes that, unlike the first mortgage insurance business, UGRIC of NC does not benefit from the regulatory demand imposed by the government-sponsored enterprises, Fannie Mae and Freddie Mac, whose charters require primary mortgage insurance for certain mortgages. Additional important positive rating factors include UGRIC of NC's prudent underwriting standards, favorable earnings history, sound capitalization, and successful and long track record in its second mortgage insurance business.

A change in the rating of AIG would likely have a prompt, direct effect on the ratings of the United Guaranty firms. In addition, a shift in the strategic importance of the residential mortgage insurance business to AIG, material operating problems, or a diminution of the reinsurance agreement provided by National Union, could have rating implications for UGRIC, UGMIC and UGRIC of NC.

United Guaranty Residential Insurance Company writes mortgage insurance on residential mortgages in all 50 states. United Guaranty Mortgage Indemnity Company writes specialty mortgage insurance, such as insurance for low down-payment residential mortgages, and is a wholly owned subsidiary of UGRIC. United Guaranty Residential Insurance Company of North Carolina writes insurance for second mortgages. American International Group, Inc. is the ultimate parent and is a Aaa-rated, diversified insurance holding company headquartered in New York City.

New York
Arlene Isaacs-Lowe
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John J. Kriz
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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