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TEXT-Fitch cuts CMG Mortgage Insurance IFS rating to 'BBB-'
July 25, 2012 / 6:19 PM / 5 years ago

TEXT-Fitch cuts CMG Mortgage Insurance IFS rating to 'BBB-'

 July 25 - Fitch Ratings has downgraded CMG Mortgage Insurance Company's (CMG
MI) Insurer Financial Strength (IFS) rating to 'BBB-' from 'BBB'. The Rating
Outlook remains Negative.

Today's rating action is driven primarily by increased operational risk and
increased senior management turnover at CMG MI over the past year. In Fitch's
view, the operational risks facing the company have increased with the
receivership of PMI Mortgage Insurance Co. (PMI) by the Arizona Department of
Insurance. PMI is a 50% shareholder in CMG MI and a provider of key operational
functions. Conversely, the recent positive trends in operating performance and
CMG MI's insured portfolio help counterbalance some of the negative
developments.

Fitch views the stability of senior management as an important rating driver,
particularly in light of increased operational risks resulting from the PMI
receivership. CMG MI's board of directors and organizational structure is
represented by its two equal shareholders, PMI and CMFG Life Insurance Co.
(CMFG). CMG MI's senior management team is also co-managed by individuals from
both organizations. Over the past 12 months, a number of general managers have
resigned from CMG MI for various reasons. While CMG MI has not experienced any
notable operational issues to date, Fitch believes that the possibility of a
lapse in underwriting, risk management, technology or accounting has increased
as a result of potential future attrition and/or turnover.

Capitalization has marginally weakened over the past year, with CMG MI's
risk-to-capital (RTC) ratio increasing to 20.8x at March 31, 2012 from 19.7x in
the prior year. While the RTC remains elevated by historical standards, it is
among the lowest among mortgage insurers and is below the 25.0x level mandated
by some state regulators. CMG MI's shareholder agreement has an RTC trigger of
23.0x, which the company is managing to remain below. Approaching this trigger
could put additional pressure on CMG MI's ratings.

CMG MI's rating continues to be supported by the quality of the insured
portfolio, which has been improving since the first half of 2011. The percentage
of defaulted loans (measured by loan count) has dropped to 4.80% in 2Q12 from a
peak of 5.88% in the fourth quarter of 2010 (4Q'10). Even at its highest, CMG
MI's default rate was materially lower than the default rates reported by its
peers. Fitch would expect the quality of the insured portfolio to improve
further as CMG MI puts on new business and continues to see declines in notices
of default. CMG MI's niche credit union (CU) core market has provided the
company with better underwritten mortgages during the housing boom, which
resulted in lower rates of delinquencies and losses.

Operating performance has started to improve as a result of lower underwriting
losses and a recent uptick in new business. In 1Q'12, CMG MI's loss ratio has
dropped below 100% for the first time in several years and the company is close
to breaking even. Fitch expects these positive trends to continue and believes
CMG MI will return to profitability in the coming quarters.

Longer term, operating performance is likely to be restrained by a higher
expense base, as CMG MI hires more full time employees for functions that were
historically outsourced to PMI. Even though PMI currently allocates costs to CMG
MI, Fitch expects the company to incur incremental expenses as it in-sources
certain operational functions. Increased competition from both existing and
start-up mortgage insurers in the CU space may also put additional pressure on
CMG MI's pricing and underwriting standards.

Fitch views with caution the company's recent efforts to regain market share
among its CU customers by relaxing some of its underwriting guidelines. This
concern is mitigated to some extent by the better quality of the new business
being underwritten, particularly in comparison to CMG MI's existing book of
business. Furthermore, growth may be somewhat constrained by the aforementioned
RTC trigger of 23.0x. Fitch analyzes CMG MI on a stand-alone basis and its IFS
rating does not factor in any support from the company's owners.

RATING DRIVERS AND SENSITIVITIES

The Negative Outlook primarily reflects the increased operational risk,
longer-term uncertainty regarding CMG MI's ownership structure and a generally
difficult regulatory environment for mortgage insurers. Fitch expects there to
be limited positive momentum in the ratings and/or Outlook for the foreseeable
future given the constraints discussed above. Negative actions could result if
delinquency levels start to deteriorate, capital levels fail to remain stable or
grow over the next several years, or due to heightened uncertainty regarding CMG
MI's ownership.

Headquartered in San Francisco and domiciled in Wisconsin, CMG MI is a 50/50
joint venture between CMFG and PMI. CMG MI, the smallest of the eight private
mortgage insurers, is dedicated solely to insuring loans made by the CUs to
their members that cover a broad variety of mortgage types strictly on a flow
basis. As of March 31, 2012, the company had $4.9 billion of risk-in-force.

Fitch has downgraded the following rating:

CMG Mortgage Insurance Company
--IFS to 'BBB-' from 'BBB'.

The Rating Outlook remains Negative.

Contact:
Primary Analyst
Ilya Ivashkov, CFA
Director
+1-212-908-0769
Fitch, Inc.
One State Street Plaza
New York, NY 10004

Secondary Analyst
Joo-Yung Lee
Managing Director
+1-212-908-0560

Committee Chairperson
Meghan Neenan, CFA
Senior Director
+1-212-908-9121


Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
brian.bertsch@fitchratings.com.

Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:
Insurance Rating Methodology

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