NEW YORK - Moody's Investors Service said it has downgraded the insurance financial strength rating of Mortgage Guaranty Insurance Corporation (MGIC) to B1, from Ba3, due to material deterioration in the insurer's regulatory capital position, large current and projected claims payments, and modest new business production. In the same rating action,Moody's has affirmed the Ba3 rating of MGIC Indemnity Corporation (MIC), a wholly owned subsidiary of MGIC but the outlook has been changed to negative.
Moody's has also downgraded the debt ratings of MGIC Investment Corporation (MTG, MGIC's parent company): senior debt to Caa1 from B3, and junior subordinated debt to Ca from Caa3. MGIC's and MTG's ratings are on review for possible downgrade.
MGIC recently announced that at the end of the third quarter of 2011, the risk in force to capital ratio for the combined insurance operationsreached 24:1 and its policyholder position exceeded the minimum required by its state insurance regulator, the Wisconsin Office of the Commissioner (WI-OCI) by only $50 million. With continued stress in the US mortgage market, MGIC is likely to see further deterioration in its regulatory capital position, added Moody's. The current waiver of the requirement from WI-OCI that allow MGIC to continue writing business despite a potential breach of the regulatory capital requirements is set to expire on December 31st.
Additionally MGIC has agreements with the GSEs under which MIC will be eligible to write business in jurisdictions where MGIC cannot, as long as MGIC has obtained the waiver from WI-OCI. The Fannie Mae agreement expires on December 31, and the Freddie Mac agreement expires on December 31, 2012.
MGIC is currently paying approximately $725 million of claims per quarter. The rating agency expects that paid claims are likely to decrease only modestly in 2012 and 2013 as the large volume of severely delinquent loans (loans that have been delinquent for more than 12 months that now account for over 55% of MGIC's delinquent inventory), enters foreclosure. Current new production, although of high average quality and at a higher premium level, is a fraction of the volume previously written by MGIC and is, assuming continued regulatory and counterparty forbearance, covering only a modest portion of losses from older vintages.
According to Moody's estimates at year-end 2010, MGIC's capital resources on a runoff basis, including future premium revenues related to the existing book of business, were approximately $12.0 billion, and present value of future losses were about $9.6 billion, resulting in a loss coverage ratio of 1.25x in Moody's base case. Given the uncertainty in the housing markets, and unclear ultimate success of some loss mitigation strategies of the firm, Moody's also estimated coverage outcomes in alternate loss development scenarios. MGIC's loss coverage ratio improved to 1.45x in the upside scenario and declined to 1.05x in the downside scenario. The company paid $2.2 billion of claims in the first nine months of 2011.
MTG, the holding company, had stand-alone assets of about $760 million at the end of the third quarter of 2011, of which the company might downstream $200 million to its insurance operations. Given the low likelihood of dividend payments from MGIC for the foreseeable future, Moody's believes that the company's ability to meet its $589 million of senior debt obligations might be stressed and that its $390 million of junior subordinated debt could face substantial losses.
MIC, a Wisconsin domiciled insurer, is the alternate GSE-approved insurer in the MGIC group for states where MGIC is not permitted to insure new risk and any capital allocation to MIC has to be approved by the GSEs. MIC had $233 million of capital at the end of the second quarter of 2011 against a small net risk in force of $1 million. Moody's said that the negative outlook on MIC reflects the group's weak credit profile and the limited visibility about its business prospects.
The review for downgrade for MGIC's and MTG's ratings reflects the uncertainty about MGIC's ability to get waivers from its regulators and counterparties. Moody's believes that MGIC is likely to get a waiver from its regulator and an extension of its agreement with Fannie Mae, but such decision, nor its terms, may not be known until the end of the year. Should an extension of the waivers be granted for at least another year, Moody's would likely affirm the firm's ratings at current levels.
