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MGIC evaluates government funds

The Business Journal of Milwaukee - by Rich Kirchen

Add America’s largest private mortgage insurer to the list of companies seeking a government bailout.

Milwaukee-based Mortgage Guaranty Insurance Corp. says that unless losses abate or the company receives additional capital — which could include federal government funds — it may not be able to write new insurance policies later this year.

The challenge for MGIC in tapping the Troubled Assets Relief Program is that, thus far, TARP has targeted only financial institutions. MGIC executives have held ongoing discussions with federal officials since October 2008 on the company’s eligibility for the program.

“We think we have a good case,” Michael Zimmerman, MGIC’s vice president of investor relations, said in an interview.

Given President Barack Obama’s focus on preventing foreclosures and the importance of supporting real estate values through new lending activity on mortgages that require insurance, MGIC’s quest for TARP could be “looked at favorably,” Curt Culver, the company’s chairman and chief executive officer, told stock analysts Jan. 20.

MGIC executives won’t say publicly the amount of capital they would need.

“It’s not prudent to put a number out there,” Zimmerman said.

MGIC reported this week that a significant increase in mortgage delinquencies contributed to a $273.3 million net loss for the quarter ended Dec. 31, compared with net loss of $1.47 billion a year earlier. The net loss for the full year of 2008 was $518.9 million, compared with a net loss of $1.67 billion in 2007.

The company’s executives expect mortgage delinquencies to continue increasing, which means MGIC will pay more insurance claims and drain its capital during 2009.

Claim obligations

The most pressing unresolved issue for MGIC is that, if delinquencies worsen, the company could violate regulatory requirements for adequate capital to cover its claim obligations. Culver told analysts that could happen in the second half of 2009, but Zimmerman said it wouldn’t be an issue until very late in the year.

In more normal capital market conditions, MGIC could sell stock or debt to raise the capital it needs. However, the company’s stock has been trading around $2 per share, making it less attractive to investors, and debt is difficult to obtain even for well-positioned companies.

The Wisconsin Office of the Commissioner of Insurance is MGIC’s regulator. If the company doesn’t meet the state’s capital requirements, it would not be able to issue new policies, but would continue paying claims on existing policies, Zimmerman said.

“We’re not sure if our capital level in the second half of 2009 will be sufficient to meet new insurance-written demands, especially if the economy continues to weaken,” Culver told analysts.

Zimmerman termed it “a serious situation. You want to be able to write new business.”

Sean Dilweg, Wisconsin insurance commissioner, said he and his consultants have been meeting regularly with MGIC representatives to monitor the situation. Dilweg has retained Milwaukee law firm Quarles & Brady and DEPFA First Albany Securities of New York City to provide “a good third-party independent viewpoint” in reviewing MGIC.

Dilweg said his goal is to ensure that MGIC policyholders are protected. He said MGIC so far has weathered the storms of the housing market and remains in compliance with the risk-to-capital ratio of 25-to-1. The company reported its ratio is currently 16-to-1, which is up from 8-to-1 in 2007.

As for whether MGIC will be able to get some TARP funds, Dilweg said “a lot of people are looking at” TARP for capital, but he wouldn’t rate MGIC’s chances.

James Brender, an analyst with Standard & Poor’s, said he expects MGIC to get through 2009 without violating the risk ratios, but if its losses and delinquencies rise, the problem could hit in 2010.

“It could be an issue in 2010,” Brender said. “Things would have to go really bad to have deficiency this year.”

Capital from TARP “would provide some relief” for MGIC, Brender said, but he’s not assuming in his financial projections that the company will obtain such funds.


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Reader Comments

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tired and tattered

Yes, the delinquencies will continue as long as there are companies like Litton, EMC, Wells Fargo, HomEq, Homecomings and all the many others out there that will gladly manufacture the delinquencies. Yet no one is willing to put an end to the charade.

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