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Rating Action:

Moody's places the ratings of Radian Guaranty and Radian Group under review for possible downgrade

05 Sep 2007
Moody's places the ratings of Radian Guaranty and Radian Group under review for possible downgrade

New York, September 05, 2007 -- Moody's Investors Service placed the Aa3 insurance financial strength (IFS) ratings of Radian Guaranty Inc., Amerin Guaranty Corporation and Radian Insurance Inc. and the A2 senior debt rating of Radian Group Inc. (Radian) under review for possible downgrade. Moody's also affirmed the Aa3 IFS ratings of Radian Asset Assurance, Inc. and Radian Asset Assurance Limited with a stable outlook. These rating actions follow the recent announcements by Radian and MGIC Investment Corp to terminate their merger agreement.

According to Moody's, the termination of the merger agreement places negative pressure on the IFS ratings of Radian's mortgage insurance companies in light of the expectation that the company, as a standalone entity, will experience meaningful increases in incurred losses and reduced earnings through 2008. Deterioration in the residential mortgage market is a growing concern for the mortgage insurance industry at large, but Radian has been disproportionately impacted largely because of its exposure to $796 million in net interest margin securitizations (NIMS) and $1.1 billion in second lien transactions as of 6/30/07. Had the merger been completed as planned, these troubled exposures would have been more easily absorbed within a much larger combined entity.

Moody's said that, with the termination of the merger, Radian will need to regroup its senior management team and other professionals, some of whom were not expected to remain with the merged company. Radian has said that it intends to revise its business strategy to focus on relationships with large lenders and traditional mortgage insurance products, and will no longer write credit protection on NIMS and second lien transactions. While the revised strategy appears to be more conservative, Radian will likely experience a contraction in market share and reductions in new business volumes.

Radian's traditional mortgage insurance book more closely mirrors the rest of the industry, although emerging indications that deterioration in the residential mortgage market may extend beyond the sub-prime sector represent an additional risk for Radian's traditional mortgage insurance platform, according to Moody's.

Radian also announced that it expects to retain the proceeds from the partial sale of The Sherman Financial Group, LLC (Sherman) within Radian Guaranty Inc., which will strengthen the company's capital adequacy. Moody's commented that Radian's retained interest in Sherman continues to expose the group to an entity with a materially higher risk profile and more volatile earnings.

The affirmation of the Aa3 ratings of the consolidated financial guaranty businesses, Radian Asset Assurance, Inc. and Radian Asset Assurance Limited (Radian Asset), reflects its stable earnings, limited exposure to residential mortgage risk, and the diversity of its direct financial guaranty and reinsurance portfolio. Moody's believes that Radian Asset is adequately capitalized for the risk of its insured portfolio but that the announced $100 million capital infusion will further bolster the company's capital position, enhancing its flexibility to continue to write new business.

Moody's review of Radian's ratings will focus on the capital adequacy of the mortgage insurance franchise as it incurs higher losses on its insured portfolio, the viability of its revised business strategy, the extent of continued support from lenders and the GSEs, and the cohesiveness and capability of the senior management team in navigating the company through this stress period. Moody's will also be evaluating the ability of Radian to improve the volume and credit quality of its insured portfolio with new business writings, which could serve to offset some of the earnings deterioration of the existing book.

The review of Radian's A2 senior unsecured debt ratings will focus on the ability of the operating companies to continue to generate earnings and cash flows to support Radian's debt service and stabilize the company's market access. Moody's notes that the deterioration in the credit profile of the mortgage insurance franchise, which has been the dominant contributor of earnings and cash flows to the holding company, could result in wider notching between the IFS and debt ratings than has historically been the case.

Moody's placed the following ratings under review for possible downgrade:

Radian Group, Inc. -- A2 senior unsecured debt; (P)A2 senior unsecured debt; (P)A3 subordinate debt; and (P)Baa1 preferred stock issuable under the shelf registration

Radian Capital Trust I and II -- (P)A3 subordinate debt

Radian Guaranty Inc. -- Aa3 insurance financial strength

Radian Insurance Inc. -- Aa3 insurance financial strength

Amerin Guaranty Corporation -- Aa3 insurance financial strength

The following ratings were affirmed with a stable outlook:

Radian Asset Assurance Inc. -- Aa3 insurance financial strength

Radian Asset Assurance Limited -- Aa3 insurance financial strength

Radian Group, Inc., headquartered in Philadelphia, PA, is the holding company for several credit enhancement providers including Radian Guaranty Inc., a mortgage insurer, and Radian Asset Assurance, Inc. a provider of direct financial guaranty insurance and reinsurance.

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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