DBRS Downgrades United Guaranty’s Canadian Subsidiary

DBRS has today downgraded the Financial Strength rating of AIG United Guaranty Mortgage Insurance Company Canada (AIGUG Canada or the Company) from AA to A (high). It has been removed from Under Review with Negative Implications, where it was placed on September 15, 2008. The trend is Stable.

Since the Company is not yet profitable and continues to rely on capital injections from its U.S. parent, United Guaranty Corporation (UGC), to support its growth, DBRS is electing to reduce the rating associated with the strict application of the capital adequacy framework by a single notch. This notch captures residual concerns as to the ability of UGC to continue to provide meaningful capital support following its recent financial deterioration as a result of weakening U.S. housing markets.

According to the DBRS mortgage insurance company methodology, assigned ratings should be closely tied to the level of capital adequacy as measured by the DBRS Canadian RMBS model under a worst-case runoff scenario, given the characteristics of the mortgage insurance company’s liability portfolio. Following a recent capital injection by UGC, the available capital resources of AIGUG Canada would have supported a AA (low) rating, based solely on capital adequacy. The incremental single-notch adjustment mentioned above results in an A (high) Financial Strength rating for AIGUG Canada.

Simultaneous with this rating action, DBRS has downgraded the rating of UGC to BBB (high) (see separate press release on UGC and affiliates), which results in DBRS placing less reliance on the existing capital and liquidity Support Agreement between the Company and UGC than it formerly did in assigning this rating. Since the assigned rating on AIGUG Canada is now higher than the corresponding rating on UGC, terms of the existing Support Agreement would appear to give UGC the right to terminate the Support Agreement so that all future ratings of AIGUG Canada will reflect the stand-alone Canadian operation.

The Stable trend being assigned to the Company’s rating is a reflection of the comparatively strong Canadian residential real estate market and the modest expected growth in the Company’s insurance portfolio in the near term. While DBRS expects the Company’s loss ratio to increase in the near term as a result of the weakening economy and rising rate of unemployment, such losses are not expected to be outside the bounds of the capital adequacy model assumptions. DBRS nevertheless expects the Company to generate positive earnings now that its initial start-up phase is behind it, which should provide an additional and more reliable source of capital with which to fund the Company’s portfolio growth.

Note:
All figures are in Canadian 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.