NU Online News Service, Aug. 23, 3:00 p.m. EDT

Rating agencies downgraded PMI Mortgage Insurance Co. (MIC), part of the PMI Group, after the company announced that the Arizona insurance department placed it under regulatory supervision.

Moody's Investors Service lowered MIC's insurance financial-strength rating to Caa1 from B3, and Standard & Poor's lowered the company's financial-strength rating from CCC-minus to R, its lowest rating, showing that regulatory action has been taken.

PMI Group recently disclosed that the Arizona department placed MIC and PMI Insurance Co. (PIC) under supervision and ordered the companies to cease issuing new mortgage-insurance commitments.

PMI Group had earlier reported a 2011 second-quarter net loss of $134.8 million and said MIC's policyholders' position was $320.3 million below the minimum required by Arizona law.

Moody's says MIC's statutory capital position has deteriorated significantly in the last few quarters as a result of high loss-reserve charges. “The risk to capital metric for [MIC] on a standalone basis reached 58:1, significantly in excess of the 25:1 regulatory requirement to write new business in some states,” Moody's adds.

Moody's says by its current base case estimate, MIC's capital resources, including future premium revenues, are “marginally lower than estimated portfolio losses,” and adds that the company's “new effective runoff status” cuts off the flow of high-quality new business.

S&P notes that if MIC does not provide a satisfactory plan to cure its financial deficiencies within 60 days, the Arizona department may commence conservatorship proceedings or take other appropriate action.

For PMI Group, Moody's says its near-term scheduled debt service and repayments appear manageable through 2015, but beyond that, the company may be “severely constrained given limited remaining resources” and the lack of dividend flows and surplus notes interest from operating companies. Moody's also suggests that troubles at MIC could trigger a default of PMI Group.

S&P credit analyst Miles Kaschalk in a statement says: “We placed our ratings on [MIC's] holding company, the PMI Group, on CreditWatch with negative implications because the occurrence of a court-appointed receivership could at the bondholder's option result in approximately $735 million of the outstanding indebtedness becoming due or payable.” He adds that the holding company would not have sufficient resources to meet its obligations in that event.