Interest Rate Roundup

Monday, June 30, 2008

Late day ratings downgrades at XL, Genworth

A couple of noteworthy ratings downgrades hit the tape this afternoon. First, Fitch Ratings lowered its ratings outlook on XL Capital to "negative." XL is currently rated A+ by Fitch, but Fitch is concerned about losses the insurer may suffer due to its business ties to the bond guarantee firm Security Capital Assurance. From the Fitch note:

"Fitch Ratings has placed the ratings of XL Capital Ltd (XL) and its property/casualty (re)insurance subsidiaries, including the Issuer Default Rating (IDR) and the Insurer Financial Strength (IFS) rating of lead (re)insurance companies XL Insurance (Bermuda) Ltd and XL Re Ltd. on Rating Watch Negative.

"The rating action reflects Fitch's concerns regarding XL's exposure to Security Capital Assurance (SCA). XL has an ongoing exposure to SCA via a facultative reinsurance contract, an excess of loss reinsurance contract, and an unlimited guaranty in support of any losses payable on the pre-August 2006 initial public offering (IPO) financial guaranty portfolio. This guaranty is triggered upon the occurrence of both of the following events: default on payments of interest and principal by the underlying guaranteed obligation and failure of XL Financial Assurance (XLFA) to meet its obligations to XL Capital Assurance (XLCA) under its facultative quota share reinsurance agreement with XLCA.

"XL is actively working to resolve its exposure to SCA and while Fitch views successful resolution of this exposure as a positive, the size of any charges, and the manner in which XL funds any charges, could have an impact on the ratings. Fitch envisions if a large charge is ultimately taken that is not offset by an equity-like capital raise, ratings would likely be downgraded by one notch. If there are no additional charges or they are modest, or if a capital raise is executed in the event of a larger charge, Fitch would likely affirm the ratings and return to a Stable Outlook."

Next up in the ratings agency firing line: Genworth Financial, the mortgage, life, and long-term health care insurance firm spun off by General Electric in May 2004. Moody's Investors Service downgraded the insurance financial strength ratings of Genworth's mortgage insurance unit to Aa3 from Aa2 (wondering how the Moody's credit ratings scale works? Check out this page). Genworth is the fourth-largest mortgage insurer. Here's a brief excerpt from the Moody's note:

"Moody's Investors Service has downgrade to Aa3, from Aa2, the insurance financial strength ratings of Genworth Mortgage Insurance Corporation (GMICO) and supported affiliates, reflecting its weakened credit profile as a result of historically high mortgage defaults and uncertainty about ultimate losses, mitigated in part by the group's limited exposure to the highest risk mortgage products, robust capital adequacy, and ownership by a strong and diversified parent. The rating agency added that the firm is well positioned to take advantage of current new business opportunities given its strong credit profile relative to peers. The rating outlook is negative. "


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