DBRS Rates AIG United Guaranty Mortgage Insurance Company Canada Financial Strength at AA

DBRS has today assigned AA ratings to the Financial Strength of AIG United Guaranty Mortgage Insurance Company Canada (AIGUG Canada) and United Guaranty Residential Insurance Company (UGRIC). These ratings are based on a capital and liquidity Support Agreement from United Guaranty Corporation (UGC or the Company), which has been assigned an AA Issuer Rating. All trends are Stable.

While UGC is a financially strong company with a good history of profitability, the credit assessment of a monoline insurance company such as a mortgage insurance (MI) company must primarily measure capital adequacy under extreme market or economic conditions. DBRS has analyzed the capital and MI policy liabilities of the Company’s primary domestic MI subsidiary, United Guaranty Residential Insurance Company. DBRS has found that UGRIC has sufficient capital and financial resources, under a worst-case run-off scenario, to support a Financial Strength rating of AA for UGRIC. This rating, in turn, supports an AA rating at both the Company and AIGUG Canada.

Strong capitalization and profitability are the direct result of the conservative application of comprehensive risk management policies and procedures, including underwriting and pricing models that draw on the Company’s extensive database. However, UGC has a portfolio that closely mirrors the U.S. mortgage market, with an increasing proportion of higher-risk mortgages such as adjustable rate mortgages (ARMs), greater-than-97% loan-to-value (LTV) mortgages and low document loans. While MI pricing is expected to compensate insurers in normal times for incremental risk associated with these products, the credit cycle in mortgage lending has started to turn down after a number of years of excellent performance. DBRS expects that the Company’s financial performance as well as the total U.S. mortgage insurance market will be negatively impacted as existing loans season and claims and losses increase. It should be noted that sub-prime mortgages, as measured by FICO scores below 575, remain below 3% of risk exposure and below the industry average.

UGC has also recently been seeking new opportunities for growth beyond the traditional U.S. MI market, including U.S. second mortgages, private education loans as well as the emerging international MI market. While the Company’s prudent risk management techniques are employed in these emerging areas, 2006 saw negative loss experience related to second-mortgage coverage originated by third-party brokers, which has now been addressed. International operations are growing at a double-digit rate and have made a positive contribution to earnings for several years.