DBRS Downgrades United Guaranty and Affiliates

DBRS has today downgraded the Financial Strength rating of United Guaranty Residential Insurance Company (UGRIC) to BBB (high) from AA. As the primary U.S. mortgage insurance (MI) operating subsidiary of United Guaranty Corporation (UGC or the Company), UGRIC’s ratings are the key determinant of the Issuer Rating of UGC, which has also been downgraded to BBB (high) from AA. At these rating levels, the assigned trend is Stable. The ratings have been removed from Under Review with Negative Implications, where they were placed on September 15, 2008, pending the release of year-end financial results.

DBRS notes that its ratings for the Company are independent of the American International Group holding company, its financial products business segment and the securities-lending business that gave rise to the need for a series of government rescue packages starting in September 2008.

The downgrade of UGRIC reflects the application of the DBRS mortgage insurance company methodology, which provides that in the absence of any explicit support from a stronger upstream parent, the capital adequacy calculation establishes a ceiling for the Financial Strength rating. Qualitative considerations such as longer-term earnings potential, business strategy and operational risk factors will generally only adversely affect the assigned rating, if at all. In this case, DBRS believes that the ambient business and financial risks being faced by the Company and UGRIC do not represent a concern relative to the BBB (high) rating and no additional downward notches are applicable. DBRS believes that the conservative assumptions that are incorporated into the capital adequacy calculation sufficiently take into account the current softness in the U.S. residential housing market as well as an expectation of further deterioration.

On the basis of capital adequacy alone (as calculated with reference to available capital resources, including reinsurance protection provided by lender captive reinsurance companies under the current severe loss scenario, existing insurance-in-force and the MI portfolio risk as measured by the application of the DBRS U.S. RMBS valuation model), the Financial Strength of UGRIC is rated at the BBB (high) level. Developments, including an estimated 30% decline in average U.S. house prices since late 2006, have caused DBRS to incorporate more conservative assumptions into its U.S. RMBS models, increasing the attachment point for each corresponding rating category. These more conservative assumptions are an attempt to capture the increased severity and frequency of underwriting losses in the U.S. mortgage market.

With the Company’s decision in late 2008 to put the loss-making second-lien business into runoff, the rating for UGC is now primarily derived from that of UGRIC and the related first-lien mortgage insurance business. While DBRS acknowledges that the MI operations come under the umbrella of AIG Property and Casualty Group Inc. (P&C Group), which has been providing capital support to the Company through the recent difficulties, there is no explicit upstream support factored into these ratings.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mortgage Insurance Companies in Canada, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.