Credit Opinion: Radian Guaranty Inc.

Transcription

1 Credit Opinion: Radian Guaranty Inc. Global Credit Research - 28 Nov 2012 Philadelphia, Pennsylvania, United States Ratings Category Rating Outlook Insurance Financial Strength Radian Group Inc. Rating Outlook Senior Unsecured Moody's Rating NEG Ba3 NEG Caa2 Contacts Analyst Phone Helen Remeza/New York City Myra Shankin/New York City Stanislas Rouyer/New York City Key Indicators [1]Radian Guaranty Inc New Insurance Written 15,510 11,558 16,969 32,513 57,132 Risk in Force 30,692 31,461 33,765 34,951 31,622 Insurance in Force 126, , , , ,006 Strategy & Franchise Value Moody's ABV/BV [2] 1.5x 1.3x 1.3x 1.3x 1.4x Client Concentration 32.2% 35.4% 34.3% 28.8% 27.9% Portfolio Characteristics % Non-Prime and Alt-A RIF 15.3% 17.4% 19.8% 22.2% 28.1% Credit Risk Ratio 1,549 1,722 1, Delinquency Ratio 15.3% 17.0% 15.8% 9.4% 5.8% Geographic Concentration 25.7% 26.5% 28.3% 27.9% 26.5% Capital Adequacy Adjusted Risk to Capital 47.6x 38.9x 30.7x 39.9x 23.5x DDLP Coverage Ratio.6x.6x.7x 1.1x 2.2x % of Claims Paying Resources Provided by Captives 2.3% 2.8% 5.8% 6.3% 4.7% Profitability Pre-Tax NI/Avg. Cap. (SAP) -58.9% -55.2% -24.0% -72.9% -18.9% Loss Ratio (SAP) 190.1% 227.5% 183.9% 291.8% 168.8% Expense Ratio (SAP) 26.1% 17.6% 11.1% 12.3% 50.0% Financial Flexibility Earnings Coverage -5.2x -23.4x -6.4x -24.9x -15.1x Cash Flow Coverage.x.x.x.x 2.1x Financial Leverage 41.1% 52.7% 25.2% 27.8% 26.5% [1] Key Indicators as of Quarterly Profitability and Financial Flexibility values annualized for calculation. [2] Calculated on a STAT basis post Radian Group no longer provides stand-alone GAAP financial statements for Radian Guaranty

2 Opinion SUMMARY RATING RATIONALE The Ba3 IFS ratings of Radian Guaranty and Radian Mortgage Assurance Inc. (RMAI) reflect: 1) their consolidated financial resources in excess of Moody's base case losses, and 2) their ability to continue to write new business for some time given the recently granted regulatory and counterparty waivers. New high quality business production has partially mitigated the legacy losses, and enhances Radian's chances of a turnaround. Radian Group's Caa2 senior debt rating reflects the holding company's constrained liquidity, ongoing stress at its mortgage insurance subsidiaries, and upcoming debt maturities. Radian may be unable to meet its senior debt obligations totaling $779 million, given that its subsidiaries are unlikely to pay dividends for the foreseeable future, and that its unrestricted cash and liquid investments amount to approximately $368 million, as of 30 September Debt holders could potentially face material losses. Credit Strengths Credit strengths of the company include: - Higher quality new business and improved production volume - Access to Radian Asset's capital resources Credit Challenges Credit challenges for the company include: - Prolonged operating losses pressure capital and liquidity position - Uncertainty about regulatory and counterparty forbearance - Uncertainty about the role of mortgage insurers in the future mortgage finance market Rating Outlook The negative rating outlook reflects the continued uncertainty in mortgage insurance losses, and the firm's dependence on regulatory and counterparty forbearance to continue to write business. What Could Change the Rating - Up The following factors could result in an upgrade: - Improving housing market outlook results in lower insured mortgage losses - Injection of capital that meaningfully improves the firm's capital adequacy - Better than expected loss developments in its financial guaranty portfolios - Evidence that private mortgage insurers will have a sustained and robust role in the mortgage finance market What Could Change the Rating - Down The following factors could result in a downgrade: - Regulatory actions or loss of eligibility status with the GSEs that prevent Radian from writing new business - Greater than anticipated adverse loss developments in the financial guaranty or mortgage insurance portfolios resulting in fewer resources available at the insurance companies - Capital deficiency relative to its Ba rating threshold that remains uncorrected Recent Events

3 In the first quarter of 2012, the company announced that it received waivers from regulators and counterparties (mainly Fannie Mae and Freddie Mac, the GSEs), and has been approved for using RMAI to write business, if needed, in states where it has not obtained such waivers. In the second quarter of 2012, Radian Guaranty entered into a quota share reinsurance agreement with a third party reinsurer. Under the terms of the agreement, Radian could cede a 20% quota share of new production for up to $1.25 billion to $1.60 billion of risk-in-force. At a 25-to-1 risk-to-capital ratio, the typical regulatory threshold, Radian expects a capital benefit of between $50 million and $62.5 million. Radian Guaranty also has the option to commute two-thirds of the reinsurance ceded as part of a transaction on 31 December , which would result in Radian Guaranty reassuming the related risk-in-force in exchange for a predefined commutation amount. In November 2012, Radian Group Inc. announced that RAA entered into an agreement with Financial Guaranty Insurance Company (FGIC) which, if consummated, would commute the remaining $827 million of outstanding par reinsured by RAA from FGIC. This portfolio represents 13% of RAA's total reinsurance exposure as of 30 September 2012, and includes $196 million of Radian Asset's $225 million in net par outstanding as of 30 September 2012, related to Jefferson County, Alabama sewer warrants. In exchange, if the commutation is approved by the Supreme Court of the State of New York, RAA would pay approximately $52.4 million to terminate the exposure. Prior to this in April 2012, Radian commuted its largest single ABS exposure, an ABS CDO ($450.2 million net par as of March 31, 2012), and six insured TruPs CDOs ($699.0 million net par as of March 31, 2012). DETAILED RATING CONSIDERATIONS Moody's currently rates Radian Ba3 for insurance financial strength, which is based on an analysis of the key rating factors described below: I. Franchise Value and strategy - Ba Historically, mortgage insurers benefited considerably from the GSEs' requirement, under their federal charter, to use credit enhancement on mortgages with loan-to-value in excess of 80%. Currently, mortgage insurers while still benefiting from the GSE requirement are exposed to the uncertain dynamics of the mortgage finance industry because housing finance reform may impact the role of Fannie Mae and Freddie Mac and mortgage insurance demand. Since 2009 the penetration rate for private mortgage insurance declined substantially while the FHA's share grew, but more recently private mortgage insurers have steadily regained some shares from FHA, and Radian has increased its market share among its peers. In addition, significant operating losses from the legacy book have severely weakened the firm's capital and liquidity position. Some states require mortgage insurers to operate below a 25 to 1 risk-to-capital ratio and while Radian has not exceeded the threshold so far, should it breach in the future it would have difficulty writing business absent regulatory waivers and counterparty support. Radian received some regulatory waivers in the first quarter of this year, and it was given approval by the GSEs for using RMAI to write business, if needed, in states where it has not obtained such waivers. II. Portfolio Characteristics - Ba Losses and new delinquencies remain elevated, but there are some clear signs of moderation, albeit at a relatively slow pace. While Radian's insured book comprises of increasingly more recent vintage and higher quality, Radian's Ba score on its portfolio characteristics reflects continued uncertainty related to the performance of its legacy insured portfolio. However, portfolio run-off and commutations of Radian's second lien and pool portfolios in conjunction with the fully reserved NIMS exposure have reduced loss volatility. III. Capital Adequacy - Ba New high quality business production has partially mitigated losses. Furthermore, to alleviate some near-term regulatory capital pressures at a time when capital markets access is constrained and the firm may have to rely on regulatory forbearance to write new business, Radian has used reinsurance, restructurings and commutations to manage its capital. Despite these actions, Radian's capital ratio is likely to decline further before stabilizing given continued operating losses. Moody's estimates Radian's future losses using a loss curve approach derived from the mortgage insurance industry's experience in prior severe regional stresses and adjusted for current experience. We believe that Radian's claims paying resources (including support from Radian Assets) are in excess of base case claims at a level consistent with a below investment grade rating. The recently announced commutation with FGIC, if approved by the Court, would reduce Radian Asset's exposure

4 to toxic credits such as Jefferson County. That would be credit positive for Radian Asset, in turn benefiting its owner Radian Guaranty, because the commutation would remove the uncertainty of losses attributable to these credits. IV. Profitability - B Radian's profitability metrics remain depressed as operating losses remain high. Despite signs of fewer new delinquencies, the timing of a return to profitability remains uncertain. V. Financial Flexibility - B Moody's scores Radian single-b for financial flexibility to reflect its challenging liquidity position and constrained access to the debt and equity market. The recent reinsurance agreement helped alleviate some near-term regulatory capital pressure but came at a cost to earnings. After adjusting its 30 September 2012 unrestricted cash and liquid investments for the recent tender auction related to its 2013 debt obligations, Radian has remaining unrestricted cash and liquid investments of approximately $368 million. Since dividends from the group's subsidiaries are unlikely for the foreseeable future given its weak regulatory capital position, the holding company may not be able to meet its senior debt obligations, totaling $779 million, including $79 million 2013 senior debt, $250 million 2015 senior debt, and $450 million 2017 convertible senior debt, and that debt holders could potentially face material losses. Moody's also notes that Radian Group has expense-sharing agreements in place with its principal operating subsidiaries that require that these subsidiaries pay their share of holding company expenses, including interest expense on debt. However, these arrangements could be terminated at the discretion of the insurance regulator, and such termination would increase expenses for the holding company. Rating Factors Radian Guaranty Inc. Financial Strength Rating Scorecard [1] Aaa Aa A Baa Score [2]Adjusted Score FACTOR 1: Strategy & Franchise Value (30%) Aaa Ba % IIF (flow + 50% bulk + 25% pool) 18.1% % Industry Net Premiums Earned 23.3% Moody's ABV/BV [3] 1.53x Client Concentration 32.2% FACTOR 2: Portfolio Characteristics (25%) Baa Ba % Non-Prime and Alt-A RIF 15.3% Credit Risk Ratio 1549 Delinquency Ratio 15.3% Geographic Concentration 25.7% FACTOR 3: Capital Adequacy (15%) < Baa Ba Adjusted Risk to Capital 47.6x DDLP Coverage Ratio.6x % of Claims Paying Resources from Captives 2.3% FACTOR 4: Profitability (20%) Baa B Pre-Tax NI/Avg. Cap. (SAP) - 3yr avg -46.0% Loss Ratio (SAP) - 3yr avg 200.5% Expense Ratio (SAP) - 3yr avg 18.3% FACTOR 5: Financial Flexibility (10%) < Baa B Earnings Coverage - 5yr avg -15.x

5 Cash Flow Coverage - 5yr avg.43x Financial Leverage - 1yr 41.1% AGGREGATE PROFILE A Ba3 [1] Scorecard as of %IIF as of Q If applicable, Quarterly Profitability and Financial Flexibility values annualized for calculation. [2] The Adjusted Total Scorecard Rating above represents one component of the published insurance financial strength rating and is the stand-alone financial strength rating of the organization before other considerations such as accounting policy & disclosure, regulatory environment, non-financial guaranty activities & liquidity risks, and implicit & explicit support. If the Adjusted Total Scorecard Rating differs from the published rating, please see a discussion of the other considerations above. [3] Calculated on a STAT basis. Radian Group no longer provides stand-alone GAAP financial statements for Radian Guaranty 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such

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