GEMICO Gives Up Triple-A Rating

GE Capital Mortgage Insurance Corp. here has decided voluntarily to move from being an "AAA" rated mortgage insurer to an "AA" rated one.

Most of its competitors have an "AA" rating. Only United Guaranty Residential Insurance Corp., Greensboro, N.C., is now "AAA" rated.

As for UGRIC, a statement from its executive vice president and chief financial officer H.G. Waddell III, says the company "plans to maintain its 'AAA' rating status at this time. Although the GSEs place no particular value on the 'AAA' rating, both we and our mortgage lending customers see great benefits in United Guaranty's 'AAA' rating including lower cost for certain mortgage-backed securities transactions."

Also downgraded to "AA" was GEMICO's Australian affiliate, GE Mortgage Insurance Pty. Ltd.

A pair of reports from the rating agencies, issued at different times during the year hinted at the possibility of a ratings cut.

The one issued by Fitch on the entire private mortgage insurance industry issued at the end of January, commented the potential existed for some companies to "re-evaluate the cost-benefit relationship of maintaining an insurer financial strength rating in excess of 'AA.'

"This largely relates to the significantly higher stress-model capital charges that rating agencies impose for the higher rating categories and the increased difficulty in meeting shareholder return expectations at these higher capital levels vs. the limited benefit in the marketplace for insurers that maintain IFS ratings above 'AA.'"

A spokesman for GEMICO said one of the reasons for the cut was that the company was seeing "no meaningful benefit" in the market for having the "AAA" rating, in light of the enormous amount of capital it had to hold to maintain that rating.

In June of this year, Standard & Poor's specifically took GEMICO to task and even threatened to cut its rating to "AA+."

In that report, S&P said the move was made because of changes in its ratings criteria that "limit the rating support for a strategically important subsidiary to one notch below the rating on the parent. In addition, S&P is uncertain as to General Electric's long-term plans for its operations within the insurance sector."

Back then, GEMICO issued a statement saying it held capital in excess of "AAA" levels and proudly pointed out that Fitch and Moody's both still rated the unit at "AAA."

Now GEMICO president and chief executive Tom Mann says, "In today's competitive market, it simply makes sense for us to use our capital as efficiently as possible." By operating at the "AA" level, "we can free excess capital to improve our return on equity while aggressively filling the needs of our lenders, investors and the low downpayment market."

Premiums are not affected by the cut and originators will not see any changes in their business, the GEMICO spokesman said. As for the secondary and securitization market, the move might impact the ratings on some pools GEMICO did pool insurance on in the early 1990s, the spokesman said.

A Freddie Mac spokesman said there is no effect on the company whether a mortgage insurer has an "AAA" or "AA" rating.

Meanwhile, a Fannie Mae spokeswoman issued the following statement: "At this time, Fannie Mae does not anticipate any material differences in terms and standards for 'AA' and 'AAA' primary mortgage insurance providers. However, we always reserve the right to differentiate among counterparties on the basis of differences between them, including ratings, if it is in our best interests."

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