Standard & Poor's Rating Services said it raised its insurer financial strength ratings on Mortgage Guaranty Insurance Corp. and its subsidiary MGIC Indemnity Co. (collectively MGIC) to B from B-minus.
At the same time, we raised our unsolicited rating on MGIC's parent company MGIC Investment Corp. (MTG) to B-minus from CCC-plus. The outlook is stable.
MTG announced a plan to issue 135 million shares of common equity and $450 million of senior convertible notes due in 2020. If the 15% share and $50 million note overallotments are fully exercised, the combined offering will provide more than $1.2 billion in additional capital to the company. The agency believe MTG will downstream a large portion of the offering to support MGIC's capital position and enable management to achieve a risk-to-capital ratio of less than 25x.
"The extent of the capital raise mitigates, if not eliminates, our concerns in the near term regarding a regulatory take-over of the company, because MGIC's consolidated risk-to-capital ratio exceeded 47x as of year-end 2012," said Standard & Poor's credit analyst Ron Joas. In addition, MTG incurred pretax losses of approximately $929 million in 2012, driven largely by second-quarter reserve charges related to a decline in cure activity in late-stage (more than 12 payments missed) delinquencies and fourth-quarter charges related to settlements with Freddie Mac and Countrywide. Excepting the charges related to the settlements, MTG would have approached break-even results in the fourth quarter. This is unusual because of the negative seasonal impact normally apparent in the fourth quarter of any given year.
The outlook is stable. The additional cash resources from the note and share issuance provide additional financial and capital flexibility. However, S&P believes the company's financial profile will remain under pressure, and significant risk remains due to potential adverse development in loss reserves and ongoing losses from new notices of delinquency.
It could downgrade MTG and MGIC if MGIC does not return to profitability within 12 to 18 months, or if MGIC experiences significant reserve charges in excess of those seen in 2012. The agency expects management to manage the risk-to-capital ratio to 25x or less in the foreseeable future, and MTG to downstream capital necessary to support business growth.