Fitch Ratings' said new Federal Reserve Bank support for American International Group and action by the insurer led it to affirm ratings of AIG subsidiaries United Guaranty Corp (UGC), United Guaranty Residential Insurance Company (UGRIC), and Ezer Mortgage Insurance Company (EMI).

Fitch said the Nov 10 ratings actions affirming the “A” long-term Issuer Default Rating (IDR) of UGC, the “AA-minus” insurer financial strength (IFS) rating of UGRIC, and the “A” IFS rating of EMI were part of Fitch's broader rating actions taken on AIG, which is UGC's ultimate parent company.

Now, Fitch said it has withdrawn the issuer default rating of UGC and the insurer financial strength rating of EMI at the request of AIG.

Fitch explained, “Previously, UGC and EMI's ratings were linked to a company guaranty provided by AIG which is no longer in place.”

UGRIC's “AA-minus” financial strength rating “reflects the explicit support it derives from AIG in the form of a net worth maintenance agreement, a stop-loss treaty provided by National Union Fire Insurance Company, and UGRIC's standalone claims paying resources,” according to Fitch.

Fitch said the outlook on the rating is negative, which is consistent with the rating agency's view of the overall mortgage insurance sector.

UGRIC is expected to face continued challenges in its financial results over the near-to-intermediate term, Fitch said, as a result of continued deterioration in its insured portfolio, “particularly related to the company's 2007 and 2006 vintage insured exposure.”

Fitch also said business underwritten in the first half of 2008 may exhibit similar performance characteristics as the 2007 vintage given that UGRIC's more meaningful underwriting changes were not fully incorporated until the second quarter of 2008. The slowing U.S. economy and rising unemployment may also cause further pressure, Fitch said.

“While UGRIC has, like other mortgage insurers, taken significant steps to improve the quality of future business, Fitch believes that the negative economic pressures on its legacy insured portfolio will outweigh positive developments in pricing and underwriting over the near-to-intermediate term,” said the rating agency.

Fitch also said it will continue to monitor the overall impact that government initiatives and lender-initiated loan modification programs may have on the mortgage insurance sector as a whole and UGRIC in particular.

Its earlier rating actions on AIG, Fitch said, “reflect the agency's belief that collectively, various actions announced November 10 by AIG and the Federal Reserve Bank of New York provide a high level of explicit and implicit U.S. government support for AIG as the company implements its previously announced restructuring plan.”

On November 10, Fitch affirmed AIG's IDR at “A” and removed it from Rating Watch Evolving. Fitch said, “This followed the announcement by the U.S. Treasury and the Federal Reserve of a series of actions to provide a high level of explicit and implicit government support to AIG.

Furthermore, Fitch believes the U.S. government has significant incentives to ensure AIG is successful in implementing its restructuring plan. Fitch expects the assumed 'government support floor' for AIG to remain in place until AIG fully executes its restructuring plan, thereby limiting immediate AIG counterparty risk in existing structured finance transactions.”

Special Reports /

Fitch Explains Actions On AIG Subsidiaries

Related Stories

Recommended For You