MGIC Plunges as Insurer Breaches Capital Limit After Loss
MGIC Investment Corp. (MTG) plunged by more than half after the Milwaukee-based mortgage insurer reported its largest loss since 2009 and the company’s risk-to-capital ratio breached regulatory standards.
MGIC fell 64 percent to close at 88 cents in New York, its biggest one-day drop since going public in 1991, after posting a net loss of $273.9 million compared with $151.7 million a year earlier. The cost to protect the debt of MGIC from default soared.
The firm is counting on sales of new policies to help rebuild capital after the deepest housing crash in seven decades drained liquidity at mortgage insurers including MGIC, which cover losses when homeowners default and foreclosures fail to recoup costs. MGIC’s preliminary ratio of risk to capital for combined operations rose to 30-to-1 as of June 30 from 22.2-to-1 at March 31, exceeding the 25-to-1 level required by some regulators to write new policies, the firm said today in a statement. The company said it has received waivers from some overseers to continue sales,
“This is an extremely troubled company and its ongoing viability, obviously the markets are putting a big question mark about that,” said Rob Haines, an analyst at CreditSights Inc. “It seems like it’s inevitable that the company will ultimately end up in some kind of regulatory receivership.”
Chief Executive Officer Curt Culver said the company’s results were hurt by a “lackluster economic recovery” in the U.S. The insurer has enough cash to meet obligations to clients, he said.
“There is no liquidity issue at the insurance operation,” Culver, 60, said on a conference call with analysts. “We have sufficient claims-paying resources to meet all obligations to policyholders.”
Mortgage-guarantor PMI Group Inc. (PPMIQ) filed for bankruptcy protection in November and Triad Guaranty Inc. (TGIC) stopped selling new policies in 2008 as capital ran short. Losses also prompted Old Republic International Corp. (ORI) to retreat from the business.
Falling capital levels may restrict the company’s ability to sell new policies, Mark Devries, an analyst at Barclays Plc, wrote in a research note today.
MGIC said that capital levels at its insurer fell short of regulatory requirements in Wisconsin, its main overseer, by $211 million. The state’s insurance regulator has waived the capital requirement until Dec. 31, 2013 as long as MGIC has capital “reasonably in excess of a level that would constitute a financially hazardous condition,” according to the statement.
J.P. Wieske, a spokesman for the Wisconsin insurance regulator, said MGIC’s reported loss doesn’t change its view on the company.
“The earnings that they reported are within the expectations that we had, so there are no surprises for us,” Wieske said in a telephone interview. “It does not raise any red flags for us, so at this point, we don’t have any concerns.”
Radian Group Inc. (RDN) slid 14 percent to $2.69 in New York trading, the most since November, erasing yesterday’s rally that came as delinquencies declined at the Philadelphia-based mortgage insurer. Genworth Financial Inc. (GNW), which yesterday said it faces obstacles in separating its money-losing mortgage- guaranty business, lost 8 percent to $4.12, the lowest since May 6, 2009.
Credit-default swaps tied to MGIC increased 9.6 percentage points to 40.8 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $4.08 million initially and $500,000 annually to protect $10 million of the company’s debt for five years.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.