MGIC Losses Widen, Reorganization Planned
MGIC Investment Corporation announced on Thursday that it plans to reorganize its operations in response to widening losses from its core business.
MGIC and its subsidiary Mortgage Guaranty Insurance Corporation reported a net loss for the quarter ended June 30 of $339.8 million or $2.74 per diluted share. Losses during the same quarter of 2008 were $99.9 million or $0.81 a share.
The company's losses thus far in 2009 total $524.4 million compared to $134.4 million last year. On a diluted share basis the loss rose from $1.29 to $4.22.
MGIC is a leading issuer of Private Mortgage Insurance (PMI). These are policies written on individual residential mortgages when borrowers do not provide a 20 percent down payment. The policies are purchased by the home owner but insure the lender bank against loss.
Curt S. Culver, chairman and chief executive officer blamed MGIC's growing financial difficulties on mounting delinquencies and foreclosures of residential mortgages insured by the company due to the weakening economy, job losses, and falling home values but said that the company has adequate resources to cover its obligations on its current book of business.
Delinquent loans, including bulk loans increased to 14.97 percent of the companies' portfolio from 8.6 percent the year before.
Under the announced reorganization, MGIC plans to shift writing of new policies to another subsidiary, MGIC Indemnity Corporation and cease writing any new business within the parent company. To this end, MGIC has reached an agreement with the Wisconsin Commissioner of Insurance that will allow it to contribute up to $1 billion to MGIC Indemnity in two installments starting this month.
If MGIC must continue to write policies through the parent company it will need either additional capital or relief from capital requirements in 16 of the states in which it does business. To that end, the company has also had talks with the U.S. Department of the Treasury about a capital investment.
Even with the funds transfer agreement from the home state insurance commissioner, MGIC has a long way to go to effect the planned reorganization. Wisconsin authorities have not yet given permission for the subsidiary to actually write policies and similar permission must be obtained from each of the states. The indemnity company must also be approved as an eligible insurer by Freddie Mac and/or Fannie Mae.
The company stated, “We cannot predict whether these approvals will be obtained and if so on what conditions. If we cannot execute that plan we will need to re-evaluate these other options.”
After the companies' financials were announced, Fitch Ratings downgraded its ratings for MGIC from “BBB” to “BBB-” and placed it on Ratings Watch Negative. The BBB- rating is the lowest investment ratings grade.
After an initial drop early in the day, the company's stock was trading near the close at $4.88, up $0.94 from Wednesday's close.
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