SAN FRANCISCO – Fitch Ratings on Wednesday said it downgraded CMG Mortgage Insurance Company’s Insurer Financial Strength rating to “BBB-” from “BBB” based on financial troubles at PMI Mortgage Insurance, CUNA Mutual Group’s partner in the joint venture.

The rating action is driven primarily by increased operational risk and increased senior management turnover at CMG MI over the past year, the ratings company said. In Fitch’s view, the operational risks facing the company have increased with the receivership of PMI Mortgage by the Arizona Department of Insurance.

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 said it believes the possibility of a lapse in underwriting, risk management, technology or accounting has increased as a result of potential future attrition and/or turnover.

PMI is a 50% shareholder in CMG MI and a provider of key operational functions for the leading provider of private mortgage insurance for credit unions. Conversely, Fitch said the recent positive trends in operating performance and CMG MI’s insured portfolio help counterbalance some of the negative developments.

Fitch said it 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. CMG MI’s senior management team is co-managed by individuals from both organizations.

Capitalization has marginally weakened over the past year, with CMG MI’s risk-to-capital ratio increasing to 20.8x at March 31, 2012, from 19.7x in the prior year. While the ratio remains elevated by historical standards, Fitch said 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. Fitch warned approaching this trigger could put “additional pressure” on CMG MI’s ratings.

Fitch said 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. CMG MI’s niche credit union core market has provided the company with better underwritten mortgages during the housing boom, which resulted in lower rates of delinquencies and losses.

The percentage of defaulted loans (measured by loan count) has dropped to 4.8% in the second quarter of 2012 from a peak of 5.88% in the fourth quarter of 2010. Even at its highest, CMG MI’s default rate was materially lower than the default rates reported by its peers. Fitch said it 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.

Operating performance has started to improve as a result of lower underwriting losses and a recent uptick in new business. In the first quarter of 2012, 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.


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