Standard & Poor's lowered the financial strength rating of MGIC Investment Corp. and three other mortgage insurers yesterday, citing weaker than expected fourth-quarter results.
MGIC was dropped from "double-A-minus" to "A." In addition, Old Republic International Corp. was lowered from "double-A" to "double-A-minus; PMI Group Inc. was cut from "double-A" to "A-minus"; and Radian Group Inc. went from "double-A-minus" to "A."
The outlook is negative on MGIC, Old Republic and PMI. Radian remains on Credit Watch with negative implications, the New York-based rating agency said.
James Brender, a credit analyst for S&P, said in a statement that the action reflects weaker than expected results for the fourth quarter of 2007 and "continued deterioration in key variables that influence claims for mortgage insurance.
Also affecting the ratings are rising unemployment and decline in median home prices that are expected to fall 20 percent from their peak in 2006, said S&P.
Mortgage insurers are not expected to make a turnaround and produce an underwriting profit until 2010, but "individual results will vary," the ratings service said. However, the insurers whose ratings were adjusted are expected to be able to pay claims, though some companies may need to raise additional capital.
Mr. Brender said there are "some long-term positive factors for the industry" as insurers work to reduce their exposure to higher risk products.
S&P said it estimates that 58 percent of the mortgage insurers are rated below "double-A-minus," and Fannie Mae and Freddie Mac, the government-sponsored mortgage lenders, will have to review those companies to determine if they are still eligible to insure mortgages they sponsor.
Of the remaining mortgage insurers at "double-A-minus" or above, S&P said there is not enough capacity to absorb the necessary volume.
Today, S&P downgraded PMI Mortgage Insurance Ltd. Australia from "double-A-minus" to "double-A" following the downgrading of the U.S. parent company.
Reacting to the news, MGIC Chairman and Chief Executive Officer Curt S. Culver said in a statement that while disappointed by S&P's action, the company's capital adequacy ratio exceeds S&P's "triple-A" rating, and the company does not expect the rating change to affect doing business with the government.
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