S&P Warns of 'Multi-Notch Downgrades' on 5 Mortgage Insurers

Standard & Poors
December 8, 2008


S&P also placed its ratings on Radian Asset Assurance Inc. on CreditWatch, but said it is "still evaluating the impact of this CreditWatch on obligations Radian Asset guarantees. The ratings on some securities could be placed on CreditWatch negative, but we will not lower any of them."

"The CreditWatch placements reflect greater deterioration in the employment and housing markets than we had anticipated when we last conducted an extensive review of the mortgage insurance sector in late August," explained credit analyst James Brender. "We also have concerns that mortgage insurers' poor operating results--coupled with the disruptions in the capital markets--will prevent them from obtaining additional capital needed to refinance debt maturities, remain compliant with covenants, and maintain appropriate capitalization to remain going concerns."

For more detail, please see "Worsening Economy Is Making Life Even More Difficult For U.S. Mortgage Insurers," which S&P has published today on its RatingsDirect web site.

S&P said it would "resolve the CreditWatch status of the ratings in two stages. First, we will re-evaluate our estimate of mortgage insurers' net loss costs for their insured loan portfolios based on deterioration in macroeconomic conditions, partially offset by greater anticipated benefits of reinsurance. We expect to complete this assessment within the next couple of weeks.

"The second stage will be a thorough sector-wide review that incorporates operating results for the fourth quarter and developments in macroeconomic conditions. We anticipate completing this review in mid March, but we might accelerate the resolution of a CreditWatch placement if a company reports operating results that compare very unfavorably with our expectations."

S&P added that as "a result of today's CreditWatches," it "expects most mortgage insurers will ultimately be downgraded, and some of the downgrades will be more than one notch."

In addition the rating agency said that the "resolution of the CreditWatch for ORI and its subsidiaries will likely involve a revision to Standard & Poor's group methodology for ORI's subsidiaries. Currently, we view ORI's mortgage insurance operations (RMIC), ORI's title insurance subsidiaries (ORTI), and ORI's property/casualty operations (Old Republic General) as core subsidiaries."

S&P noted that its policy is to "align the ratings on all subsidiaries that we consider to be core to the group. It is very likely that ORI's main business units will be reclassified as strategically important. We still think ORI would devote resources to help its key subsidiaries survive difficult times, but we do not believe its level of commitment is above our high threshold for core designation.

"The change in group methodology has several implications. Because the rating on Old Republic General will no longer move in tandem with the RMIC rating, we did not place Old Republic General on CreditWatch. ORTIG is on CreditWatch because its stand-alone financial strength is not consistent with the current 'A+' rating."

S&P said it "typically raises a strategically important entity's stand-alone rating by up to three notches for implicit support, but we cap the rating at one notch below the core subsidiary or strongest member of the group. Therefore, ORTIG's supported rating would be capped at one notch below Old Republic General's 'A+' financial strength rating. Finally, it is very unlikely that the resolution of the CreditWatch on RMIC will result in a downgrade of more than one notch because the company's rating will benefit from its strategic importance to the group."

Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for S&P's credit ratings, research, and risk analysis, at: www.ratingsdirect.com.

All ratings affected by this rating action can be found on Standard & Poor's public Web site at: www.standardandpoors.com.

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