Triad Guaranty said Wednesday in a 10-K filing with the Securities and Exchange Commission that it had not yet succeeded in securing the additional capital needed to maintain its core credit rating, and as a result Fitch Ratings wasted no time in chopping down the ratings of the now-troubled mortgage insurer. The ratings drop is the first ratings downgrade for a major private mortgage insurance company as a result of the ongoing mortgage crisis. Triad said in the filing that its own projections led it to recognize the need to "significantly augment our capital resources in the second quarter of 2008 in order to preserve our ability to continue to write new insurance," but that it has been unable to find an investor willing to commit to the company. The company said it's considering a move that would involve putting its existing portfolio into "run-off" and then forming a separate mortgage insurer to underwrite new business going forward -- a strong signal that investors thus far are extremely wary of the risk in Triad's existing book of business. Fitch is not amused Fitch downgraded Triad's insurer financial strength rating from 'AA-' to 'BBB-,' and said the plan to create new insurer was fraught with "significant execution risk." The rating agency had other concerns as well, beyond the $77.5 million net loss reported for the fourth quarter in the 10-K filing:
With Triad's risk to capital ratio increasing to 20.5:1, Triad faces an increasing possibility of surpassing the regulatory maximum risk to capital ratio of about 25:1, especially if Triad's losses continue to increase due to adverse reserve development and cause further reductions in capital. Also of concern is that Triad only maintained 101% of the minimum statutory capital requirement at Dec. 31, 2007. Breaching the risk to capital ratio or minimum statutory capital requirement could ultimately cause The Department of Insurance for the State of Illinois, Triad's primary regulator, to prevent Triad from underwriting future business. Fitch is also concerned that, as of Dec. 31, 2007, Triad was close to being in violation of one or more covenants in its $80 million bank line which greatly increases the probability that the facility would need to be repaid. Repayment of that facility could have negative consequences for the both Triad's policyholders and Triad Guaranty's debt holders.
With that sort of future to worry about, it's no wonder willing investors have been hard to come by. Freddie status in doubt Freddie Mac also took notice of the ratings downgrade, and said it will require a remediation plan from the insurer -- although it said it would not immediately strip Triad of its status as a so-called Type I insurer. Compared to Type I insurers, Type II insurers must comply with additional capital requirements and operational restrictions to retain their Freddie Mac eligibility, the GSE said in a press statement. The firm now has 90 days to submit its plan or face the prospect of likely being ineligible to underwrite future insurance on Freddie Mac loans. In anticipation of a potential downgrade, the GSE said it had already held meetings with Triad Guaranty officials to discuss their plans to manage through current market conditions. Freddie Mac and Triad officials weren't immediately available to comment on the direction of those plans, and if the GSE would support the insurer essentially "cloning" itself. Triad had not commented publicly on the downgrade at the time this story was published. The company's stock fell nearly 36 percent in trading on the Nasdaq exchange Wednesday, but was up 7.6 percent in after-hours trading to $3.65. Disclosure: The author held no positions in TGIC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.