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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
No Related Data.
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