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Rating Action:

Moody's downgrades Radian Guaranty to A2 and Radian Asset Assurance to A3; rating outlooks are negative

25 Jun 2008
Moody's downgrades Radian Guaranty to A2 and Radian Asset Assurance to A3; rating outlooks are negative

New York, June 25, 2008 -- Moody's Investors Service has downgraded the insurance financial strength (IFS) ratings of Radian Group's mortgage insurance subsidiaries (collectively "Radian"), including Radian Guaranty and Amerin Guaranty which were downgraded to A2 from Aa3, and Radian Insurance which was downgraded to Baa1 from Aa3. In the same rating action, Moody's also downgraded to A3 from Aa3 the IFS ratings of Radian Asset Assurance and Radian Asset Assurance Limited (collectively "Radian Asset"), and the senior debt rating of the holding company, Radian Group to Ba1 from A2. The outlook for the ratings is negative.

As a result of today's rating action, the Moody's-rated securities that are guaranteed or "wrapped" by Radian Asset are also downgraded to A3, except those with higher public underlying ratings. A list of these securities will be made available under "Ratings Lists" at www.moodys.com/guarantors.

Today's rating action concludes a review for possible downgrade that was initiated on January 31, 2008, and reflects the deterioration in Radian's capital adequacy and medium term profitability prospects, as well as the firm's limited financial flexibility. The rating agency said that, while mortgage insurance demand and new business quality have both improved in recent months, performance of Radian's exposures originated prior to 2008 has eroded capitalization and those exposures remain vulnerable to further economic deterioration. The downgrade of Radian Asset reflects deterioration in the financial guaranty company's franchise value and the prospect that its capital adequacy may be negatively affected given management's announcement that the subsidiary will likely cease writing new business and will serve as a potential source of capital for Radian's mortgage insurance platform.

Moody's said that franchise strength and the ability to withstand cyclical downturns are key factors in its analysis of a mortgage insurer's business and financial profile. Mortgage insurers derive a substantial portion of their franchise strength from the value that they provide to government-sponsored enterprises involved in residential mortgage finance (the GSEs) by allowing them to participate in the high-loan-to-value portion of the mortgage market. Radian insures approximately 15% of the conforming loan market and is a significant counterparty to the GSEs. Moody's said that Radian and other mortgage insurers have benefited from the GSEs' increasing penetration of the mortgage origination market, resulting in higher new business volume, improving underwriting criteria and greater pricing power. Fannie Mae and Freddie Mac recently modified their minimum guideline requirements for mortgage insurers, including the elimination of rating triggers, and Freddie Mac confirmed Radian's designation as an approved "Type 1" insurer, allowing the firm to continue to write new GSE-eligible business. Moody's said that Radian's ability to retain its status as a Type 1 insurer will be an important rating consideration for the company going forward.

In evaluating capital adequacy, Moody's has segmented the insured portfolio by vintage, delivery channel (flow, bulk, pool) and borrower quality. Portfolio loss estimates were derived using a stochastic simulation model which applies estimates of expected and stress losses for each strata of risk. The model also incorporates the impact of projected premiums on the insured portfolio, as well as the benefit of reinsurance provided by mortgage lender captives and through other third-party reinsurance arrangements. Capital resources were then compared to the present value of projected net losses using a standard benchmark for capital adequacy at a range of rating levels. Moody's also considered the company's capital position relative to regulatory capital requirements.

Moody's said that the performance of Radian's insured portfolio has deteriorated meaningfully, not only for its traditional primary mortgage insurance portfolio, but even more so for its higher-risk pool insurance policies, net interest margin securitizations (NIMS), and second lien transactions which collectively account for over 40% of Moody's estimate of expected losses. For Radian's mortgage insurance portfolio overall, capital adequacy on a risk-adjusted basis is consistent with Moody's single-A metrics, and the company is currently well within regulatory limits.

According to Moody's, the downgrade of Radian Insurance to Baa1 (two notches below the IFS ratings of Radian's main mortgage insurance operating subsidiaries) reflects the higher-risk nature of its insurance portfolio of second lien and NIM transactions, coupled with Moody's view that the subsidiary is no longer strategically important to Radian's overall mortgage insurance platform. Moody's noted that the rating of Radian Insurance continues to derive support from a net worth maintenance agreement from Radian Guaranty, although any claims under the agreement would rank junior to the policyholders of Radian Guaranty.

Moody's said that the downgrade of Radian Asset's IFS rating to A3 reflects the likelihood that the guarantor will cease writing new business going forward, negatively impacting the company's franchise value. The rating agency added that Radian Asset's capital profile remains strong currently, but could well decline over time as capital resources are diverted from the company to support Radian's mortgage insurance platform.

The downgrade of Radian Group's senior debt to Ba1 reflects its subordination to the policyholders of the insurance operating companies, as well as the group's reduced financial flexibility. Terms of Radian's secured bank credit facility were also a consideration in the positioning of the senior debt rating. Radian Group has suffered a sharp drop in its market capitalization, making it difficult to economically raise new capital in the current environment, according to Moody's. Furthermore, ordinary dividends are unavailable from Radian Guaranty, and Radian Asset's unrestricted available capital is likely to be used to enhance the capital of the mortgage insurance platform. The holding company does, however, maintain over $100 million in liquidity, and has operating agreements currently in place which allow for holding company debt to be serviced as an expense of the operating subsidiaries.

The negative rating outlook reflects the potential for further adverse development within the group's insured risk portfolio and its ability to economically address potential capital shortfalls should markets continue to worsen.

Moody's downgraded the following ratings and changed the rating outlook to negative:

Radian Group, Inc. -- senior debt to Ba1 from A2; prospective senior debt to (P)Ba1 from (P)A2; prospective subordinate debt to (P)Ba2 from (P)A3; prospective preferred stock to (P)Ba3 from (P)Baa1

Radian Group Capital Trust I -- prospective trust preferred to (P)Ba2 from (P)A3

Radian Group Capital Trust II -- prospective trust preferred to (P)Ba2 from (P)A3

Radian Guaranty Inc. -- insurance financial strength to A2 from Aa3

Radian Insurance Inc. -- insurance financial strength to Baa1 from Aa3

Amerin Guaranty Corporation -- insurance financial strength to A2 from Aa3

Enhance Financial Services Group Inc. -- prospective senior debt to (P)Ba1 from (P)A2; prospective subordinate debt to (P)Ba2 from (P)A3

Radian Asset Assurance Inc. -- insurance financial strength to A3 from Aa3

Radian Asset Assurance Limited -- insurance financial strength to A3 from Aa3

Radian Group is a US based holding company which owns a mortgage insurance platform comprised of Radian Guaranty, Radian Insurance and Amerin Guaranty, as well as a financial guaranty insurance company, Radian Asset. The group also has investments in other financial services entities. As of March 31, 2007, Radian Group had total assets of $8.3 billion and $2.9 billion in shareholder's equity.

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
Jack Dorer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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