Research Update: Ratings Lowered On Three Mortgage Insurer Groups: Old Republic, PMI, And Radian

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1 August 26, 2008 Research Update: Ratings Lowered On Three Mortgage Insurer Groups: Old Republic, PMI, And Radian Primary Credit Analysts: James Brender, New York (1) Andrew Dral, New York (1) Secondary Credit Analyst: Rodney A Clark, FSA, New York (1) ;rodney_clark@standardandpoors.com Table Of Contents Rationale Old Republic International Corp. PMI Group Inc. Radian Group Inc. Genworth Financial Inc.'s Mortgage Insurance Subsidiaries MGIC Investment Corp. Ratings List 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page

2 Research Update: Ratings Lowered On Three Mortgage Insurer Groups: Old Republic, PMI, And Radian Rationale On Aug. 26, 2008, Standard & Poor's Ratings Services lowered its counterparty credit rating on Old Republic International Corp. (ORI) to 'A-' from 'A' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'A+' from 'AA-'. The outlook is negative. At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI Group) to 'BBB-' from 'BBB+' and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A-' from 'A+'. In addition, Standard & Poor's placed these ratings on CreditWatch with negative implications. We will likely either lower the ratings another notch or affirm them and assign a negative outlook. We expect to resolve the CreditWatch status of the ratings within 30 days. Standard & Poor's also lowered its counterparty credit rating on Radian Group Inc. (Radian Group) to 'BB+' from 'BBB' and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'BBB+' from 'A'. At the same time, we removed these ratings from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative. Standard & Poor's also affirmed its 'AA' counterparty credit and financial strength ratings on Genworth Financial Inc.'s core mortgage insurance subsidiaries. The outlook remains negative. In addition, Standard & Poor's affirmed its 'BBB' counterparty credit rating on MGIC Investment Corp. (MGIC Investment) and its 'A' counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC), including MGIC Australia Pty Ltd. The outlook is still negative. The downgrades reflect Standard & Poor's expectations for further deterioration in key variables that influence claims, our reassessment of the long-term fundamentals of the mortgage insurance industry, our concerns about the profitability of insured mortgages originated in 2008, and our comparisons of firms' actual results for the first half of 2008 with our forecasts. When we announced ratings actions on several mortgage insurers on April 8, 2008, we stated that our forecast for the peak-to-trough decline in the S&P/Case Shiller Home Price Index was 20%. Now, we believe this index will decline 29%. Furthermore, the unemployment rate was less than 5% when the housing markets first showed signs of deterioration. It has increased to 5.7% at the end of July 2008, and we believe it will rise above 6.2% in Throughout the disruption in the housing markets, Standard & Poor's has highlighted higher unemployment as a potential driver of significantly greater claims for mortgage insurance. After re-examining the U.S. mortgage insurance industry's long-term fundamentals, Standard & Poor's has concluded that the industry's competitive Standard & Poor s RatingsDirect August 26,

3 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. Nothing precludes a U.S. mortgage insurer from being rated in the 'AA' category, but for that to happen, it would have to distinguish itself materially from most of its peers. Our more pessimistic assessment of the sector reflects our opinion that U.S. mortgage insurers have limited opportunities for long-term growth and diversification. In addition, mortgage insurers' terms of trade with Fannie Mae and Freddie Mac (collectively the GSEs) and lenders seem favorable today, but these much larger counterparties have historically been able to implement initiatives that either weaken mortgage insurers' profitability or raise their risk tolerances. The mortgage insurers' difficulties in stemming their exposure to unprofitable loans long after the disruption in the housing markets indicate most firms' ERM practices are adequate, which is the second lowest of Standard & Poor's four designations for ERM. Finally, our projected claims for the 2006 and 2007 vintages indicate the volatility of mortgage insurers' operating results is significantly greater than what we assumed before the deterioration in the mortgage and housing markets. Operating losses have become so significant that they have had a material impact on some companies' capitalization and financial flexibility. Standard & Poor's expects the 2008 vintage will generate a moderate underwriting profit for most mortgage insurers. However, the significant uncertainty in the mortgage and housing markets--coupled with unfavorable data on early payment defaults--suggests an underwriting loss is a real possibility. We have increased our estimate of the claim rate for the 2008 vintage to 7.0% from 6.5%. Our current estimate assumes the unfavorable profile and initial performance of loans originated in the first quarter of 2008 reflects commitments for loans originated before mortgage insurers implemented more restrictive guidelines. If those guidelines do not improve credit quality, the claim rate will likely be greater than 7%. Even with solid credit quality, insured loans originated in 2008 face a difficult combination of falling home prices and loan-to-value (LTV) ratios that are still above 90%. The comparisons between mortgage insurers' actual results for the first half of 2008 and Standard & Poor's expectations were mixed. We also enhanced our ability to forecast mortgage insurers' operating results by incorporating an assessment of their geographic exposures by vintage. Previously, our focus was on the risk profile and development of delinquencies and claims by vintage and channel. In developing our latest forecasts, Standard & Poor's projected loss rates by state and vintage based on the state's trends in home prices and unemployment. We calibrated these projected loss rates to our forecast for a rise in unemployment and a 17% peak-to-trough decline in the OFHEO purchase-only home price index. Finally, we selected loss rates for each company by vintage and distribution channel by examining the firm's exposure by state, risk profile, current delinquencies, and claims since inception. Capital adequacy and available liquidity indicate that the mortgage insurers' near-term ability to satisfy claims from existing resources remains strong. Whether or not companies need to raise additional capital depends on the severity of their operating losses and the amount of new business they 3

4 write in the next couple of years. All the mortgage insurers that we downgraded today have capital adequacy ratios above Standard & Poor's minimum ratio for a 'AA' rating. However, we expect the capital adequacy ratios to decline for the next few quarters because of operating losses. The insurers have very liquid investment portfolios, but the financial flexibility of most of their holding companies has weakened. Despite the challenging environment for mortgage insurers, there are some long-term positive factors for the industry. Greater demand for mortgage insurance, tighter underwriting guidelines, higher premium rates, less utilization of lender captives, greater persistency, and lower expense ratios will eventually coalesce to produce a long period of extremely strong underwriting profits. In the long term, mortgage insurers have a strong competitive position because of their critical role in the GSEs' mission to provide liquidity, stability, and affordability to the housing markets. 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. Old Republic International Corp. Standard & Poor's lowered its ratings on ORI and its core subsidiaries by one notch because of the challenges confronting the group's mortgage insurance subsidiary, Republic Mortgage Insurance Co. (RMIC). Standard & Poor's recognizes that RMIC's operating results and insured loan portfolio compare favorably with those of most of its peers. However, we believe the group's financial strength is consistent with an 'A+' rating following our re-assessment of the fundamentals of the mortgage insurance sector. We expect that RMIC will report a significant underwriting loss in 2008 and possibly in 2009 as well. (Standard & Poor's defines underwriting profitability as premiums earned plus other income less losses incurred and operating expenses; it does not include investment income or realized capital gains and losses.) Standard & Poor's does not believe that the challenges confronting the mortgage and housing sector threaten RMIC's solvency. As of June 30, 2008, RMIC's capital adequacy ratio was well above Standard & Poor's minimum for a 'AAA' rating. RMIC has the intrinsic resources to survive scenarios worse than today's environment. RMIC is different from the other mortgage insurers that Standard & Poor's downgraded because RMIC benefits from ORI's resources and conservative culture. The group has strong diversification. Despite the challenges confronting RMIC and the Old Republic title insurers (ORTIG), ORI reported consolidated net income of $272 million in 2007, primarily because of the profitability of ORI's property/casualty business, which reported a combined ratio of 95%. The diversification--coupled with the extremely strong holding-company metrics, including debt to total capital of less than 2%--are the justification for narrower notching between the ratings on the holding company and those on its RMIC insurance subsidiaries. Although Standard & Poor's believes RMIC's operating performance will ultimately contribute to us revising the outlook to stable, further Standard & Poor s RatingsDirect August 26,

5 deterioration in ORI's property/casualty business could increase the probability of a downgrade. ORI's property/casualty business reported a combined ratio above 100% for the second quarter of 2008 because of a softening rate environment and continuing underwriting losses for the segment's credit indemnity products. We believe a full-year adjusted combined ratio of more than 102% would not be consistent with a casualty lines carrier rated at the upper end of the 'A' category. The adjustment subtracts premiums, claims, and expenses related to ORI's credit indemnity product. ORI's title insurance subsidiary (Old Republic General Title Insurance Corp.) reported a pretax operating loss of $17 million for the first half of 2008 because of difficult conditions in the title insurance industry. Although this result was not a key driver of the downgrade, it does demonstrate that the disruptions in the mortgage and housing markets are affecting ORI's consolidated results, not just those of RMIC. PMI Group Inc. Standard & Poor's lowered its ratings on PMI Group, PMI, and PMI Europe by two notches because of our re-assessment of the mortgage insurance industry's fundamentals as well as some company-specific concerns. PMI's operating results for the first half of 2008 compare unfavorably with Standard & Poor's expectations. The variance primarily reflects a reserve increase related to the revaluation of existing delinquent loans and a sharp increase in the primary delinquency rate to 10.4% as of June 30, 2008, from 7.9% as of Dec. 31, Standard & Poor's recognizes there are some differences in reporting that make PMI's delinquency rate appear artificially unfavorable on a relative basis, but we also think the above-average delinquency rate reflects some unfavorable concentrations. Compared with its peers, PMI has above-average concentrations of risk-in-force (RIF) from loans with reduced documentation, and the group's RIF from its structured channel and modified pool policies grew significantly in 2005 and Standard & Poor's believes mortgage insurers' results for these segments will compare unfavorably to the flow channel, which features a much greater portion of prime, fully documented mortgages for an amount less than the GSEs' conforming loan limit. The U.S. company's loss ratio was 265% in the first half of When we lowered the ratings on PMI in April 2008, we forecasted loss ratios of 195% and 111% for 2008 and 2009, respectively. Now, we believe the loss ratios will be 240% and 165% in 2008 and 2009, respectively. Our current forecast shows PMI still reporting an underwriting loss in 2010, albeit considerably less than the losses in 2008 and The 'A-' ratings on PMI reflect its good competitive position and strong but volatile long-term profitability. After adjusting for the pending sale of PMI Mortgage Insurance Ltd. (PMI Australia), PMI's capital adequacy ratio of 122% is very strong. We expect PMI's capital adequacy ratio to decline in the next few quarters, but it will remain a rating strength. Standard & Poor's also lowered its counterparty credit and financial strength ratings on PMI Guaranty Co. to 'A-' from 'A+' and placed the ratings on CreditWatch with negative implications. These are largely dependent ratings of PMI Mortgage Insurance Co. There is a support agreement from PMI Mortgage 5

6 Insurance Co., which is for a maximum of $650 million and which PMI Group guarantees. Radian Group Inc. Standard & Poor's lowered its ratings on Radian Group and Radian MI by two notches because of the significant operating losses Radian MI has already incurred as well as our re-assessment of the mortgage insurance industry's long-term fundamentals. We also believe Radian Group has limited financial flexibility. Radian MI has reported a net loss of more than $1.3 billion for the 12 months ended June 30, Standard & Poor's views the magnitude of this loss, which was 60% of the division's shareholders' equity as of June 30, 2007, as inconsistent with a financial strength rating in the 'A' category. It is possible that Radian MI's relative operating performance will not be materially different when measured from peak-to-trough of the current cycle because of Radian MI's exposure to nontraditional products that result in earlier recognition of losses. However, improvement in Radian MI's relative operating performance within its sector would not change Standard & Poor's view that the firm's historical risk tolerance and earnings volatility were inappropriate for the previous rating. Radian MI has taken actions to improve the credit quality of its core product: traditional first-lien mortgage insurance. The company has the least exposure to mortgages with LTVs above 95%. Its RIF from ARMs, loans with reduced documentation, and mortgages to borrowers with low credit scores has declined steadily since Consequently, Radian MI's exposure to the most troublesome vintages will be partially mitigated by better credit quality. The improvement in credit quality of Radian MI's first-lien portfolio is the reason we believe Radian MI will report a loss below the industry's median in Radian MI's operating results for the remainder of 2008 and 2009 will be weaker than what Standard & Poor's typically expects from an investment-grade insurer, but we do not expect significant net operating losses. Radian MI established a premium deficiency reserve of $422 million for its first-lien business. Including the premium deficiency reserve for the second-lien business, the company has a premium deficiency reserve of $584 million as of June 30, This amount will offset most of Standard & Poor's expectations for losses for the second half of Radian MI's results for the first half of 2008 compared favorably with our expectations, but its combined ratio was still very high. Radian MI has good capitalization. Radian MI's capital adequacy ratio as of June 30, 2008, was 97%, which is slightly less than Standard & Poor's minimum for a mortgage insurer to be eligible for a 'AAA' financial strength rating. We expect Radian MI's capital adequacy ratio to decline in the next few quarters, but it should remain well above our requirements for the rating. Standard & Poor's believes Radian Group has adequate liquidity but limited financial flexibility. The holding company's resources as of June 30, 2008, consisted of liquid assets of approximately $50 million, access to more than $100 million in cash related to a tax refund held by an intermediate holding company, and its 22% ownership stake in Sherman Financial Group LLC. Standard & Poor s RatingsDirect August 26,

7 There is also a tax and debt-service agreement that allows Radian MI to reimburse Radian Group for those expenses. These resources should enable Radian Group to weather this very difficult period, but the holding company does not have the financial flexibility Standard & Poor's typically expects of an investment-grade holding company. Once Radian completes the pending amendments to its bank facility, Radian Group's $250 million credit facility will be reduced to $150 million credit facility and will be fully drawn, and we do not believe Radian Group could access the capital markets in the near term given current market conditions. Standard & Poor's lowered its financial strength rating on New York City-based Radian Asset Assurance Inc. (Radian Asset) to 'BBB+' from 'A' and removed it from CreditWatch negative. The outlook is negative. The rating on Radian Asset is directly linked to the rating of Radian Guaranty following the move of Radian Asset from a direct subsidiary of Radian Holding to a direct subsidiary of Radian Guaranty. Following the change in the corporate structure, $107 million of dividends were upstreamed to Radian Guaranty from Radian Asset, and there are no assurances that future dividends might not also be upstreamed. In addition, in our view, business prospects of Radian Asset have declined in light of its decision to exit its collateralized debt obligation business line and the impact of the disrupted mortgage market has had on the company's reinsurance business. The risk of Radian Asset being looked to provide addition capital to Radian Guaranty, combined with diminished business prospects, causes Standard & Poor's to no longer view Radian Asset as a stand-alone entity. We also lowered the rating on U.K. affiliate Radian Asset Assurance Ltd. to 'BBB+' from 'A'. Genworth Financial Inc.'s Mortgage Insurance Subsidiaries Standard & Poor's affirmed its 'AA' financial strength ratings on Genworth Mortgage Insurance Corp. and Genworth Residential Mortgage Insurance Corp. of North Carolina (collectively GMICO), the U.S. domestic mortgage insurance operations of Genworth Financial Inc. (Genworth Financial). The outlook, which was revised on Feb. 13, 2008, remains negative. The overall reason behind the negative outlook was a weak industry environment. GMICO's operating results compare favorably with those of its peer group. GMICO's operating margin has held up better than its peers; it had the only positive industry margin in 2007 at 35.8%. Its operating margin went negative in the first half of 2008, but it still outperformed most peers. Management has exerted excellent discipline, avoiding large exposures to Alt-A, low documentation loans, and ARMs. On the other hand, forecasting visibility is limited, and losses have mounted above expectations. Results compared with last year have deteriorated. The macroeconomic housing and mortgage loan environment--especially home price depreciation and rising unemployment rates--does not appear to be improving, and industry profitability probably will not return until 2010 or beyond. Despite tightening of underwriting guidelines, Standard & Poor's remains concerned about the ultimate performance of the 2008 book of business. The global mortgage insurance entity of Genworth Financial operates under Genworth Mortgage Insurance (Genworth MI). Genworth MI has differentiated itself through international expansion. Its international diversity has set an 7

8 industry standard in performance for others to match. There are international offices in Australia, Canada, New Zealand, Mexico, Japan, and several European countries, allowing borrowers to purchase homes with low down payments. Genworth Financial Mortgage Insurance Co. Canada and Genworth Financial Mortgage Insurance Pty Ltd. (Australia) have operated at a much higher level of performance. A change in rating could occur if consolidated operating performance falls outside of our expectations. For instance, an indicator of underperformance could be if the first half 2008's 84% consolidated mortgage insurance loss ratio rises to the mid 90% range. The outlook could be revised to stable if operating performance improves on the U.S. book of business or captive reinsurance benefits rise above expectations. Strong performance in the Canadian and Australian core markets could also positively affect the outlook. MGIC Investment Corp. The affirmation of the ratings of MGIC Investment and MGIC reflect the group's strong capitalization and long-term profitability of its core product of insuring prime mortgages delivered to the GSEs. MGIC's capital adequacy ratio was 110% as of June 30, We expect the capital adequacy ratios of all mortgage insurers to decline in the next few quarters because of operating losses, but MGIC's capitalization should remain a rating strength. MGIC's delinquency rate in the flow channel is below the industry median, and its profitability in this channel is superior because of less utilization of lender captive reinsurance. The holding company continues to maintain adequate liquidity. MGIC Investment's operating results for the first half of 2008 were in line with Standard & Poor's expectations. When we lowered the ratings in April 2008, we forecasted a loss ratio of 191% for The company's loss ratio for the first half of 2008 was 198%. Standard & Poor's moderately increased our forecast for MGIC's loss ratio in 2008 because of our view of macroeconomic trends, but we still expect MGIC Investment to return to profitability by Ratings List Downgraded To From Old Republic International Corp. Local Currency A-/Negative/A-2 A/Negative/A-1 Commercial Paper Local Currency A-2 A-1 American Guaranty Title Insurance Co. Republic Mortgage Insurance Co. of NC Republic Mortgage Insurance Co. Old Republic Union Insurance Co. Old Republic Surety Co. Standard & Poor s RatingsDirect August 26,

9 Old Republic National Title Insurance Co. Old Republic Lloyds of Texas Old Republic Insurance Co. Old Republic General Title Insurance Corp. Old Republic General Insurance Corp. Mississippi Valley Title Insurance Co. Great West Casualty Co. Employers General Insurance Co. Bituminous Fire & Marine Insurance Co. Bituminous Casualty Corp. Local Currency A+/Negative/-- AA-/Negative/-- Local Currency A+/Negative/-- AA-/Negative/-- Old Republic Capital Corp. Commercial Paper (1 issue) A-2 A-1 Downgraded; CreditWatch/Outlook Action To From PMI Group Inc. Local Currency BBB-/Watch Neg/-- BBB+/Negative/-- PMI Guaranty Co. Issuer Credit Rating A-/Watch Neg/-- A+/Negative/-- Financial Enhancement Rating Local Currency A-/Watch Neg/-- A+/--/-- PMI Guaranty Co. PMI Mortgage Insurance Co. Ltd. PMI Mortgage Insurance Co. PMI Insurance Co. Local Currency A-/Watch Neg/-- A+/Negative/-- PMI Mortgage Insurance Co. PMI Mortgage Insurance Co. Ltd. Local Currency A-/Watch Neg/-- A+/Negative/-- PMI Group Inc. Senior Unsecured (5 issues) BBB-/Watch Neg BBB+ PMI Capital I Preferred Stock (1 issue) BB/Watch Neg BBB- Radian Mortgage Insurance Inc. Local Currency BBB+/Negative/-- A-/Watch Neg/-- 9

10 Local Currency BBB+/Negative/-- A-/Watch Neg/-- Amerin Guaranty Corp. Radian Guaranty Inc. Local Currency BBB+/Negative/-- A/Watch Neg/-- Amerin Guaranty Corp. Radian Guaranty Inc. Radian Asset Assurance Ltd. Radian Asset Assurance Inc. Local Currency BBB+/Negative/-- A/Watch Neg/-- Radian Asset Assurance Inc. Radian Asset Assurance Ltd. Issuer Credit Rating Local Currency BBB+/Negative/-- A/Watch Neg/-- Radian Asset Assurance Inc. Financial Enhancement Rating Local Currency BBB+/-- A/Watch Neg/-- Radian Group Inc. Local Currency BB+/Negative/-- BBB/Watch Neg/-- Radian Insurance Inc. Local Currency BB+/Negative/-- BBB/Watch Neg/-- Market Street Custodial Trusts Series I Preferred Stock (1 issue) BB+ BBB/Watch Neg Market Street Custodial Trusts Series II Preferred Stock (1 issue) BB+ BBB/Watch Neg Market Street Custodial Trusts Series III Preferred Stock (1 issue) BB+ BBB/Watch Neg Radian Group Inc. Senior Unsecured (4 issues) BB+ BBB/Watch Neg Affirmed Ratings Affirmed Genworth Mortgage Insurance Corp. Genworth Financial Mortgage Insurance Pty Ltd. Standard & Poor s RatingsDirect August 26,

11 Genworth Financial Mortgage Insurance Ltd. Genworth Financial Mortgage Insurance Co. Canada Local Currency AA/Negative/-- Genworth Mortgage Insurance Corp. Genworth Residential Mortgage Insurance Corp. of North Carolina Genworth Financial Mortgage Insurance Pty Ltd. (NZ Branch) Genworth Financial Mortgage Insurance Pty Ltd. Genworth Financial Mortgage Insurance Ltd. Genworth Financial Mortgage Insurance Co. Canada Local Currency AA/Negative/-- Ratings Affirmed MGIC Investment Corp. Local Currency MGIC Australia Pty Ltd. Mortgage Guaranty Insurance Corp. MGIC Indemnity Co. Local Currency Local Currency MGIC Investment Corp. Senior Unsecured (2 issues) Preferred Stock (1 issue) BBB/Negative/NR A/Negative/-- A/Negative/-- BBB BB+ Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at All ratings affected by this rating action can be found on Standard & Poor's public Web site at select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. 11

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