NEW YORK - Standard & Poor's Ratings Services said it lowered its ratings on MGIC to B from B-plus and its unsolicited issuer credit rating on MGIC Investment Corp. to CCC from CCC-plus. The outlook is negative.
According to S&P’s rating definitions an insurer rated B has weak financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. MGIC currently fits this definition.
"High losses in the mortgage insurance sector are occurring amid an economy that is struggling to recover and that continues to exhibit significant weakness in the jobs and housing markets," said Standard & Poor's credit analyst Ron Joas. The lack of significant improvement in payroll employment contributed to high levels of new notices of delinquency (NODs).
MGIC's reported full-year 2011 operating losses of approximately $560 million (excluding realized capital gains of $143 million) significantly exceeded S&P’s operating loss estimate of approximately $370 million. Also, although NODs declined by 17% year over year, cure activity declined by 18%, and MGIC's claims incidence increased, leading to increased losses incurred year over year in the fourth quarter.
MGIC is at significant risk of adverse reserve development. Macroeconomic conditions remain unsupportive of a more rapid turnaround in the underlying fundamentals of the mortgage insurance industry. While adverse deviation of a few percent would ordinarily not be considered significant, given the size of MGIC's existing reserves, even nominal deviations could have a significantly negative impact on MGIC's capital base. A lack of improvement in underlying market fundamentals could result in higher levels of claim incidence, lower cure activity, and higher costs associated with claims settlements than expected, which could ultimately threaten MGIC's reserve adequacy.
Similarly, MGIC may be subject to losses as a result of disputes with certain significant counterparties. MGIC is in litigation with Countrywide, which believes it is entitled to damages of almost $700 million from loans rescinded. Furthermore, MGIC is in a contractual dispute with Freddie Mac over an interpretation that would have otherwise resulted in incurred losses $192 million higher in the fourth quarter on a year-to-date basis. MGIC does not have reserves established against these risks, given they believe they are not reasonably estimable or probable. However, they do represent a significant risk to MGIC's capital base.
The negative outlook on MGIC reflects the current trajectory of operating performance, the impact ongoing losses are expected to have on MGIC's capital position, and the significant downside risk due to adverse development. Although new NODs continue to decline, they would likely increase again if the economy enters another recession and payroll employment once again declines. The high level of new notices and the volatility in cure activity make it difficult to foresee materially improving operating performance over the coming quarters.
S&P expects operating results to be impacted by favorable seasonality in the first half of 2012. However, S&P could lower the ratings if the trajectory of MGIC's operating results, including any reserve adjustments or other charges, indicate operating losses will exceed $400 million for full-year 2012. Also, if industry fundamentals, such as new NODs and cure activity, provide little or no indication of significant improvement over the year, which may lead to significant losses into 2013, S&P could lower the ratings. In this context, MGIC's remaining capital and the regulatory forbearance they have received through 2013 could come under more pressure. If operating losses and industry fundamentals improve, providing an indication that 2013 results would be significantly better than breakeven, S&P could affirm the ratings.
