Fitch Ratings has downgraded mortgage insurers MGIC Investment Corp. and The PMI Group (TPG), citing in both cases loss expectations and capital constraints facing the companies as independent mortgage insurers.
Fitch downgraded MGIC Investment Corp.'s insurer financial strength (IFS) rating to "triple-B" from "A-minus," and the IFS rating for PMI Group (TPG) to IFS to "double-B" from "triple-B-plus." Subsidiaries of the companies were also downgraded.
Regarding MGIC, which includes MGIC Investment Corp. and its subsidiaries, Fitch said, "In addition to limited capital markets access, MGIC has few remaining assets that could be monetized to increase its capital resources," as the company did in 2008 with the sale of its interest in Sherman Financial LLC, "and will largely have to rely on current capital resources to satisfy ongoing MI claims."
Fitch said the ratings also reflect concerns with "certain covenants in MGIC's credit facility, which currently has $200 million outstanding. Given the current operating environment and MGIC's operating results, there is a high likelihood that MGIC would need to repay or restructure the credit facility prior to maturity in order to avoid breaching the facility's leverage and other financial covenants," Fitch said.
On PMI, which includes TPG and its subsidiaries, Fitch said, "PMI has extremely limited access to the capital markets and, as a result, will largely have to rely on current capital resources to satisfy ongoing MI claims. PMI's rating reflects the company's limited capital resources in comparison to Fitch's expectations of continued losses and the risk profile of PMI's insured exposures relative to its peers."
Fitch said PMI also has relatively larger exposure to stressed regions, such as California and Florida, and Alt-A mortgages on the 2007 and prior vintages.
TPG currently has $200 million drawn under its credit facility, compared with approximately $236 million of cash on hand, Fitch noted.
"In the event that TPG is unable to successfully restructure the bank facility and is forced to repay the $200 million outstanding, it would be left with approximately $36 million with which to fund interest payments of approximately $29 million per annum on its outstanding senior and junior notes, as well as fund any operating expenses," Fitch explained.
In general, Fitch said the mortgage insurance industry faces continuing challenges such as rising unemployment, home price depreciation and limited access to refinancing options for homeowners, which in turn have contributed to rising delinquencies and losses within insured portfolios.
The ratings for MGIC and PMI have been removed from Rating Watch Negative as a result of the downgrade. The outlook for the ratings is negative.
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