Rating Agency Downgrades Debt Status of Two Mortgage Insurers

Fitch Ratings here has downgraded the debt ratings on two publicly traded private mortgage insurers - MGIC Investment Corp., Milwaukee, and The Radian Group, Philadelphia.

Fitch did not take any action on either company's insurer financial strength rating.

The reasoning behind each move was similar - a concern over leverage at both firms.

Fitch's statement on the MGIC decision said the downgrade "is the result of an expansion of the notching between the organization's IFS rating and debt ratings and primarily reflects Fitch's concern with the company's more aggressive management of its financial leverage."

MGIC's debt to adjusted total capital ratio was 14.9% as of June 30, 2003, up from 13.7% at the end of 2001. Fitch notes the increase is because of higher levels of debt outstanding as well as a "meaningful" stock repurchase program undertaken by MGIC.

At Radian, Fitch is concerned with "the company's higher utilization of debt leverage relative to that employed over its recent history." The debt to total capital ratio was 19.2% as of June 30, 2003, up from 16.5% at year-end 2002, 12% in 2001 and zero from 1998 through 2000.

Separately, Standard & Poor's Ratings Services here has issued an "A+" senior unsecured debt rating, an "A" senior subordinated debt rating and an "A-" preferred stock rating to The PMI Group Inc.'s $700 million universal shelf offering registration.

Donovan Fraser, S&P's credit analyst, said, "The shelf filing anticipates about $207 million in securities that are mandatorily convertible to PMI common stock and $100 million in new common equity.

"The aggregate shelf amount of $700 million takes into consideration a further $207 million on mandatory conversion of the securities, a 15% greenshoe overallotment provision, underwriting expenses related to the transaction and other general corporate purposes."

The filing follows the announcement that Walnut Creek, Calif.-based PMI will acquire 42% of Financial Guaranty Insurance Co. That deal will cost the company approximately $607 million.

S&P said the FGIC deal represents a significant source of earnings diversification for PMI and is consistent with its strategy as a global provider of credit enhancement give its 24.9% equity investment in Ram Re, a financial guaranty reinsurer.

S&P has a negative outlook on PMI because of potential exposure to litigation as a result of its investment in Fairbanks Capital Corp. In addition, although PMI's mortgage insurance operations have an "AA+" rating, recent operating results have deteriorated to be in line with that of its peer group. The negative outlook recognizes the potential direction of that rating if the underlying quantitative and qualitative metrics no longer support a differentiation from that peer group.

Zacks.com, the online unit of Zacks Investment Research Inc., Chicago, has given PMI a rank of four (sell). Stocks with this ranking, Zacks said, should be sold or avoided for the next one to three months.

In its comments about PMI, Zacks noted earnings estimates for the mortgage insurer for this year and next are down 62 cents and 34 cents, respectively, from where they were at the end of May. In its results for the second quarter, PMI did not take any impairment related to Fairbanks, but PMI did not rule out any future action. "As conditions improve, so too should PMI Group's results and earnings estimates. For right now though, it might be best to sit tight on a position in PMI Group until its earnings estimates gain more upside mobility," Zacks said.

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