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Special Reports
Mortgage Insurance
Both New Insurance Written and Delinquencies Up
By Brad Finkelstein
Last year was possibly the worst year financially for the four publicly traded
companies whose primary business is mortgage insurance. Of these, three have already released their results showing
substantial losses as the industry struggles to cope with a growing number of delinquent loans.
The fourth, The PMI Group Inc., Walnut Creek, Calif., is not expected to break
the pattern. However, the company said it is unable to release its results at this time because of delays obtaining
fourth-quarter 2007 financial results from FGIC Corp.
The company added it has completed the financial results for its U.S. mortgage
insurance and international operations, but it did not provide details. PMI is the largest shareholder in FGIC,
with a 42% interest.
The largest player in the industry, MGIC Investment Corp., Milwaukee, lost $1.67
billion, or -$20.54 per share, in 2007, compared with net income of $564.7 million, or $6.65 per share, in 2006.
For the fourth quarter, MGIC reported a loss of $1.47 billion, or -$18.17 per
share, compared with net income of $121.5 million, or $1.47 per share, for the same period one year ago.
Affecting MGIC's results was the establishment of a $1.2 billion (pretax) premium
deficiency reserve relating to Wall Street bulk transactions. Also included is an after-tax charge of $33 million
related to equity losses incurred by C-BASS in the quarter. The charge reduces carrying value of a $50 million
note from C-BASS to zero.
Curt S. Culver, chairman and chief executive, in a statement said unless the cure
rate and loss severity improves, 2008 will not be a profitable year for the company.
He added there have been significant improvements to the company's business fundamentals,
including higher persistency, increased use of mortgage insurance, higher premiums for certain segments of business
and improved credit standards, which should benefit the company financially over the long term.
MGIC said it has retained an advisor to assist it in exploring alternatives for
increasing its capital. But Mr. Culver said MGIC has adequate capital to meet its claim obligations.
The percentage of loans that are delinquent is at 7.45%, compared with 6.13% one
year earlier. Take-out loans insured through the bulk channel and MGIC have a 4.99% delinquency rate, compared
with 4.08% one year prior.
A comment by Friedman Billings Ramsey said MGIC "recognized its need for
additional capital to maintain its ability to grow. Without additional capital, MGIC would likely have to freeze
future products to maintain an adequate risk-to-capital ratio, which currently stands at 10-to-1. Before any capital
raise occurs, we are forecasting a risk-to-capital of 12.4-to-1 by year-end, a level at which we believe the rating
agencies would get increasingly more cautious."
Radian Group Inc., Philadelphia, had a net loss of $618 million, or -$7.74 per
share, for the fourth quarter, compared with net income of $158.4 million, or $1.96 per share, for the same period
one year prior. For the full year, Radian lost $1.2 billion, or -$14.92 per share, compared with net income of
$582.2 million, or $7.08 per share, for all of 2006.
S.A. Ibrahim, chief executive of Radian, noted that among the challenges the company
faced during the year was the collapse of its proposed merger with MGIC. "We have come through a difficult
year and the environment continues to be very challenging. These challenges will remain with us for the near term
and may intensify, so we are looking at various scenarios and responses. In considering the book value of our company,
we think it is important to take into consideration the significant embedded value within our financial guaranty
business, as well as our ownership stake in Sherman.
"Our claims paying resources in both business segments are strong and we
stand to benefit from a stable and well-capitalized financial guaranty business," concluded Mr. Ibrahim.
In its report on Radian, FBR said it is maintaining its market perform rating
on the company, "as we expect there will be limited secondary market support in front of what is likely to
be some form of capital raising efforts. We would likely revisit our rating and price target should future capital
initiatives placate rating agencies and provide the company with the flexibility to take advantage of what we expect
will be an improving production environment for mortgage insurance through 2008 and 2009 and capital markets appear
to have shut down competing products.
"Also, with banks and mortgage investor still feeling the credit sting of
piggyback loans, the mortgage insurance product could see a more sustained resurgence beyond 2009, as we do not
believe the capital markets will quickly return to the higher-risk second-lien products that have caused so much
of the mortgage industry's credit problems. Offsetting our longer-term positive outlook is the obvious credit headwinds
facing the entire mortgage insurance industry."
The smallest MI, Triad Guaranty Inc., Winston-Salem, N.C., had a net loss of $75
million, or -$5.05 per share, for the quarter ended Dec. 31, 2007, compared with net income of $8.1 million, or
$0.54 per share, for the same quarter in 2006. For the year, Triad lost $77.5 million, or -$5.22 per share, compared
with profits of $65.6 million, or $4.40 per share, the year before.
Capital is an issue at Triad. Mark K. Tonnesen, president and chief executive,
said, "The trends we encountered in the third quarter accelerated in the fourth, especially the rise in defaults
in locations where home prices are under pressure. While the total portfolio default counts increased 38% during
the quarter, in California and Florida, default counts rose a combined 85%." In response, the company tightened
its underwriting guidelines in the fourth quarter, which reduced fourth-quarter production and is expected to limit
its 2008 production. As a result, Triad, said Mr. Tonnesen, "has developed and is actively pursuing a plan
to manage and enhance its capital resources.
"Although, at this time, we can give no assurance that we will be able to
successfully implement our plan, we realize these efforts are critically important to the future of Triad Guaranty.
Thus, enhancing capital resources is a top priority. Capital management dictated our decision during the quarter
to withdraw from Canada and contribute this capital to our U.S. insurance subsidiary."
In its report, FBR commented, "While Triad may avoid the fate of run-off,
we believe it is increasingly likely that Triad will have to stop growing its business at least for a transitional
period until it can restore its capital. Until then, we'll continue to incorporate some prospect for run-off into
our valuation assumptions."
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