S&P Downgrades Three Mortgage Insurers

Standard & Poor's Ratings Services has downgraded three mortgage insurance groups because of concerns about profitability and the mortgage insurance industry in general.

The counterparty credit ratings for Old Republic International Corp. (ORI), PMI Group and Radian Group Inc. were lowered respectively to "A-minus" from "A"; to "triple-B-minus" from "triple-B-plus"; and to "double-B-plus" from "triple-B."

Speaking to factors adversely affecting the mortgage insurance industry, S&P said that in April it forecasted the peak-to-trough decline in the S&P/Case Shiller Home Price Index at 20 percent. The rating agency now feels that the decline will be 29 percent.

Additionally, S&P said that higher unemployment is a potential driver of significantly greater claims for mortgage insurance.

The unemployment rate when the housing crisis began was 5 percent, S&P noted, but that number has climbed to 5.7 percent as of the end of July. S&P predicted that the number will rise above 6.2 percent in 2009.

S&P said that it believes U.S. mortgage insurers will have "limited opportunities for long-term growth and diversification." The rating agency also said mortgage insurers' terms of trade with Fannie Mae and Freddie Mac, while currently favorable, may be subject to initiatives that could weaken mortgage insurers' profitability or raise their risk tolerances.

S&P also said projected claims for the 2006 and 2007 vintages show a volatility in mortgage insurers' operating results that is "significantly greater than what we assumed before the deterioration in the mortgage housing markets."

The rating agency stated, "After re-examining the U.S. mortgage insurance industry's long-term fundamentals, Standard & Poor's has concluded that the industry's competitive position, operating performance and enterprise risk management (ERM) practices are more consistent with the lower end of the 'A' category. As in any industry, we view some companies as having greater financial strength than others, so a distribution of ratings is appropriate."

It is possible for a U.S. mortgage insurer to reach the "double-A" category, S&P said, "but for that to happen, it would have to distinguish itself materially from most of its peers."

S&P's predictions for struggles in the mortgage insurance sector follow a report released in July by Fitch Ratings, which stated that mortgage insurers' troubles may get worse before they improve, despite steps taken to improve business prospects. The report concluded that the mortgage insurance industry "will continue to post significant losses well into 2009."

S&P did cite some long-term positives for U.S. mortgage insurers, including greater demand, higher premiums, tighter underwriting guidelines, less utilization of lender captives and lower expense ratios.

"Although Standard & Poor's believes the mortgage insurance industry's operating results will remain volatile because of the cyclicality of the mortgage and housing markets, the sector's expected loss ratio is much lower than those of most segments of the property/casualty industry," the rating agency said.