Oct. 29, 2009 (Business Wire) -- Fitch Ratings has downgraded Mortgage Guaranty Insurance Corp.'s (MGIC) Insurer Financial Strength (IFS) rating to 'BB-' from 'BBB-'. Fitch has simultaneously downgraded MGIC Investment Corp.'s (MGIC IC) long-term issuer rating to 'B-' from 'B', and its senior notes to 'B-' from 'B'. All of the affected ratings have been removed from Rating Watch Negative. The IFS and long-term issuer ratings have been assigned Negative Rating Outlooks.
The downgrades are driven primarily by Fitch's concern regarding capital adequacy, business continuity and holding company liquidity. MGIC's third quarter 2009 (3Q'09) results included a significant increase in the delinquency of full documentation prime mortgages which resulted in higher losses incurred at the operating company level. The ability of the operating company to continue to write new business remains uncertain, although recent developments indicate progress on that front. The holding company continues to face near to medium term liquidity demands with the maturity of its September 2011 senior notes and longer term liquidity demands with respect to its November 2015 senior notes.
Capital adequacy is a particular area of concern with higher loss ratios negatively impacting earnings and capital. The 3Q'09 loss ratio rose to 331% from 222% in 2Q'09, partly driven by a premium adjustment for rescissions. After a period of flat to declining new default notices related to prime loans, new prime full documentation loan default notices increased in 3Q'09, mirroring the difficult macro economic and employment climate. This implies that losses (and resultant capital erosion) are unlikely to abate in the near term, as unemployment is anticipated by many analysts, including Fitch's economic team, to increase through mid 2010.
Business continuity exhibits a more mixed outlook. MGIC's restructuring initiative still needs regulatory approval from state regulators and consent from one of the GSEs, with the consent of one GSE already received. Fitch believes these approvals and consents will likely be forthcoming. Fitch views the reduction in proposed downstreaming of capital to MGIC Indemnity Corp. (MIC), from an initial $500 million (announced in July) to the $200 million, with no additional planned amounts, as less detrimental to existing policyholders, given the subordination of their claim on downstreamed capital for payment of losses. Earnings from new business are expected to be at high profit margins but due to lower volumes, not expected to generate a sufficient offset against rising reserve requirements.
The Outlook will remain Negative until the rate of mortgage delinquencies mortgages exhibits sustained stabilization or decline, and an appropriate level of reserves can be determined.
