MTG - MGIC Investment

[Buddy0807]

There's been an active discussion on these message boards regarding MBIA so thought I'd see if anyone's been look at the other mortgage insurers, particularly MGIC.  Their current situation is somewhat similar to MBIA from a legal game of chicken perspective but it would appear that MGIC doesn't have near the leverage as MBIA.  Anyway, here's a good post that explains the situation / yesterday's earnings announcement.

 

http://reminiscencesofastockblogger.com/2012/08/02/and-then-mgic-released-their-quarter-and-it-all-went-to-hell-but-i-bought-some/

[Olmsted]

For a time I thought that mortgage insurers would be a good way to play a housing recovery, but it’s been a mistake for me so far, and the only mortgage insurance I’m exposed to now is through AIG.

 

MGIC is a likely bankruptcy candidate.  If they cannot write new insurance quickly, they will be swamped by losses on their legacy book and go into runoff.  To be able to write new insurance, they need 1) capital 2) the blessing of the state regulators that they have enough capital and 3) the blessing of Frannie that they will accept mortgages with their policies.  MGIC tried to get around the high risk-capital ratios by 1) disputing some Frannie pooled claims and 2) creating another sub and writing insurance from that.  Frannie pushed back and told them to capitalize it better or they wouldn’t play.  And the dispute with Frannie over the claims is not looking good for MGIC.  That news yesterday worsened the company’s ratios, making it less able to write new insurance, more likely that regulators would stop it from writing new insurance, and thus more likely to go into runoff.  Also, MGIC already had the worst reserving per delinquency (though some of that was due to their pooled vs. individual policy mix).  Now, they could get waivers, get Frannie to play, and continue to write new insurance, and make current investors a killing.  Or, they could go into an equity-destroying runoff.

 

I had a small position in Radian, and like that they are taking share and aggressively writing new insurance at probably the best time in history for the risk-reward.  But I cannot get comfortable with their reserving.  Radian’s strategy, it seems, is to play hardball with the servicers by denying a large number of claims where paperwork is not in order or they perceived that the servicers were not living up to their responsibilities.  This has allowed them to 1) reserve less per delinquency and 2) push paying those proportion of denials that come back to them out into the future (they project they will eventually have to pay 50% of them).  This helps their capital ratios and improves their ability to write new insurance to replace their toxic legacy book now.  The danger to the investor is if they are being aggressive on those denials, and under-reserving in reality.  They went into it in some detail on the conference call, and Reminiscences of a Stock Blogger explains it well in the website you linked to.  My concern is that if the servicers were negligent enough that Radian can deny that many claims, why aren’t the other mortgage insurers doing it too?  Did Radian happen to write policies on mortgages serviced more poorly than the other insurers?  Or are they being aggressive in their claims denial?  The possibility of the latter is enough to keep me away.  If the latter is the case, one of these quarters there will be a surprise reserve adjustment that blows out their capital ratios a la MGIC yesterday.  The upshot is that if they kick the can down the road enough, they may be able to defer paying just long enough for the effect of very profitable NIW to overtake their toxic legacy book.  I just don’t know.  This could be a zero, or a home-run, and a lot of that depends on how much you trust management.

 

You can read about Genworth on another thread.  It has a whole host of issues besides its US mortgage insurance.  Arguably the brightest spot for them has been their Australian and Canadian mortgage insurance operations, but a lot of smart people suspect those markets will be going south soon.

 

[Buddy0807]

thanks for your take on things, olmsted.  the equity of mgic seems like it's pure option value at this point.  which sorta makes it interesting.  heads you win big and tails you don't lose much (if sized appropriately).  the 2015 bonds look somewhat interesting priced in the low 60s.  they've been repurchasing them at a discount and have only $100mm of remaining pricipal value outstanding.  but ultimate recovery obviously depends on what seems like a fairly binary outcome on the reg/lit front.