GE Mortgage Ins. Moves To Lower Capital Level
NU Online News Service, Sept. 26, 4:05 p.m. EDT?General Electric Mortgage Insurance Corp., based in Raleigh, N.C., announced its decision today to manage its U.S. business at "Double-A" capital levels, down from previous "Triple-A" levels.
The announcement was followed by downgrades by some rating agencies. Fitch Ratings, based in New York, said it cut GEMICO's "Triple-A" insurer financial strength rating to "Double-A", with a "Stable" outlook.
GEMICO said it made the decision after analyzing its business and capital structure with regards to customer and investor requirements, as well as the industry's competitive landscape. According to its review, operating at "Double-A" levels would offer "improved capital efficiency and return on equity, while maintaining a conservative risk-capital ratio," GEMICO stated. The company also said it made the decision after consulting with major rating agencies.
Tom Mann, chief executive officer at GEMICO, said that "in today's competitive market, it simply makes sense for us to use our capital as efficiently as possible."
Mr. Mann added that by operating at "Double-A" capital levels that prevail in the industry, GEMICO can free up some of its capital to improve its return-on-equity and meet the needs of its lenders, investors and the low-down-payment market.
Mr. Mann also assured that his company's ability to pay claims will "remain strong, as will our commitment to the industry and homebuyers it serves."
Brett Lawless, analyst at Fitch Ratings, told National Underwriter that GEMICO management had earlier informed his firm that it was going to manage its capital position at "Double-A."
"In their point of view, they were not receiving much benefit from the ?Triple-A' rating. I think it's an effort to remove capital from the company because less capital would be required at the ?Double-A' level, thereby boosting returns," Mr. Lawless said.
Mr. Lawless added that at this point, his firm is looking at the company as a standalone, "but we are considering that they are still part of a large diversified group of companies. So there is less need for them to grow in other areas," he said.
Standard & Poor's in New York also lowered today its counterparty credit and financial strength ratings for GEMICO and its Australian affiliate to "Double-A" from "Triple-A" with a "Stable" outlook, removing the company from S&P's CreditWatch status.
Robert Partridge, analyst at S&P, told National Underwriter his firm actually would have lowered GEMICO ratings even if the company didn't alter its capital levels, partly because of changes in S&P's own rating criteria regarding support from parent corporations.
Last June, S&P placed GEMICO's "Triple-A" ratings on CreditWatch with negative implications, prompted by changes within S&P's own rating criteria, which now limit the rating support for main subsidiaries to one notch below the parent rating.
"So this represents a combination of different factors: our criteria change, plus how we are viewing the parental support from GE, and what GEMICO's intentions are going forward in terms of its capital management process," Mr. Partridge said.
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