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MGIC Warns About Business

MGIC Warns About BusinessMortgage insurer needs additional capital

April 29, 2009

By staff

MGIC Investment Corp. could be forced to stop writing new business by the end of the year.The mortgage insurer announced a $185 million first-quarter loss today — ballooning from the $35 million loss a year earlier. New policies written tumbled from $19.1 billion last year to just $6.2 billion in the most recent quarter.

Loan delinquency soared to 13.51 percent from 7.68 percent in the first-quarter 2008.

MGIC said it expects to continue seeing losses on its 2006 and 2007 book of business for “a number of years.”

Results reflected deteriorating delinquency that is being driven by a weakening economy, increased unemployment and falling home prices, MGIC Chairman and Chief Executive Officer Curt S. Culver said in the report. He noted that although the company has adequate capital to pay all of its insured claim obligations, “we are considering options to obtain capital to continue to write new business.”

Culver said options under consideration could raise capital for new business “through the use of claims-paying resources that are not needed to cover obligations on our existing insurance in force, from reinsurance and/or through the sale of equity or debt securities. While we have not pursued raising capital from private sources, we have been in discussions with both the U.S. Treasury and the Office of the Commissioner of Insurance of Wisconsin to explore capital options.”

But the company acknowledged intense competition for government assistance could present a hurdle for that option. In addition, any securities offering would substantially dilute shareholder equity.

Still, Culver added, “We believe that one of these options will develop in a manner that, combined with any benefits achieved from the national loan modification and refinance efforts, will allow MGIC to continue to write new insurance on an uninterrupted basis.”

MGIC warned that unless recent loss trends materially improve, its policyholders position could decline. As a result, its risk-to-capital ratio could wind up exceeding regulatory limits some time by the end of this year — leaving it unable to write new business.

One big question mark for the insurer is the ultimate resolution of Fannie Mae and Freddie Mac by their conservator, the Federal Housing Finance Agency. Loans owned or managed by the two companies — currently being run by the FHFA — account for the majority of MGIC’s business, and a change in their activity could have an adverse impact on the insurer’s earnings.

The earnings report went on to outline a number of conditions that could hurt the company.

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