Oct. 16, 2009 (PR Newswire) -- MILWAUKEE, Oct. 16 /PRNewswire-FirstCall/ -- MGIC Investment Corporation (NYSE: MTG) today reported a net loss for the quarter ended September 30, 2009 of $517.8 million, compared with a net loss of $115.4 million for the same quarter a year ago. Diluted loss per share was $4.17 for the quarter ending September 30, 2009, compared to diluted loss per share of $0.93 for the same quarter a year ago.
The net loss for the first nine months of 2009 was $1.042 billion, compared with a net loss of $249.8 million for the same period last year. For the first nine months of 2009, diluted loss per share was $8.39 compared with a diluted loss per share of $2.26 for the same period last year.
Curt S. Culver, chairman and chief executive officer of MGIC Investment Corporation and Mortgage Guaranty Insurance Corporation ("MGIC"), said that he was pleased to report that Fannie Mae has approved MGIC Indemnity Corporation ("MIC"), a wholly owned MGIC subsidiary, as an approved mortgage insurer in selected jurisdictions and that we are working closely with Freddie Mac and hope to have their approval soon. He added that once Freddie Mac's approval is finalized that he is optimistic that the Office of the Commissioner of Insurance for the State of Wisconsin will issue a decision allowing the reactivation of MIC in the very near future. Relative to operating results he stated that the weak economy, higher unemployment and lower home prices continue to keep cure rates low which resulted in an increase in the delinquent inventory and consequently higher losses incurred for the quarter. He further added that while there has been minimal financial benefit to date, for the first time we are seeing signs that the various loan modification programs of the US Treasury Department and the private sector, that are designed to help responsible homeowners avoid foreclosure, are being implemented.
Total revenues for the third quarter were $413.3 million, compared with $461.6 million in the third quarter last year. Net premiums written for the quarter were $278.3 million, compared with $365.0 million for the same period last year. Net premiums written for the first nine months of 2009 were $956.2 million, compared with $1.105 billion for the same period last year. Included in other revenue, for the third quarter of 2009, was a gain of $6.4 million that resulted from the repurchase of $42.3 million of long term debt due in September 2011.
New insurance written in the third quarter was $4.6 billion, compared to $9.7 billion in the third quarter of 2008. In addition, the Home Affordable Refinance Program accounted for $450.0 million of insurance that is not included in the new insurance written total due to these transactions being treated as a modification of the coverage on existing insurance in force. New insurance written for the first nine months of 2009 was $17.0 billion compared to $42.8 billion in the first nine months of 2008. Persistency, or the percentage of insurance remaining in force from one year prior, was 85.2 percent at September 30, 2009, compared with 84.4 percent at December 31, 2008, and 82.1 percent at September 30, 2008.
As of September 30, 2009, MGIC's primary insurance in force was $216.8 billion, compared with $227.0 billion at December 31, 2008, and $228.2 billion at September 30, 2008. The fair value of MGIC Investment Corporation's investment portfolio, cash and cash equivalents was $8.7 billion at September 30, 2009, compared with $8.1 billion at December 31, 2008, and $7.7 billion at September 30, 2008. In the third quarter of 2009, we recorded a tax benefit of $100.3 million, which is primarily to offset a tax liability on $279.5 million of unrealized gains that were recorded to equity.
At September 30, 2009, the percentage of loans that were delinquent, excluding bulk loans, was 13.97 percent, compared with 9.51 percent at December 31, 2008, and 7.54 percent at September 30, 2008. Including bulk loans, the percentage of loans that were delinquent at September 30, 2009 was 16.92 percent, compared to 12.37 percent at December 31, 2008, and 10.20 percent at September 30, 2008.
Losses incurred in the third quarter were $971.0 million, up from $788.3 million reported for the same period last year primarily due to an increase in delinquencies. Net underwriting and other expenses were $59.1 million in the third quarter as compared to $62.4 million reported for the same period last year.
Wall Street Bulk transactions, as of September 30, 2009, included approximately 104,000 loans with insurance in force of approximately $17.2 billion and risk in force of approximately $5.1 billion. During the quarter the premium deficiency reserve declined by $19.3 million from $227.1 million, as of June 30, 2009, to $207.8 million as of September 30, 2009. The $207.8 million premium deficiency reserve as of September 30, 2009 reflects the present value of expected future losses and expenses that exceeded the present value of expected future premium and already established loss reserves. Within the premium deficiency calculation, our present value of expected future paid losses and expenses was $2,341 million, offset by the present value of expected future premium of $489 million and already established loss reserves of $ 1,644 million. The premium deficiency reserve as of June 30, 2009 reflected the present value of expected future paid losses and expenses of $2,491 million, offset by the present value of expected future premium of $595 million and already established loss reserves of $1,669 million. The premium deficiency reserve of $1,210.8 million was initially established in the fourth quarter of 2007, and has declined by $1,003.0 billion to $207.8 million as of September 30, 2009.
About MGIC
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the nation's leading provider of private mortgage insurance coverage with $216.8 billion primary insurance in force covering 1.4 million mortgages as of September 30, 2009. MGIC serves over 3,300 lenders with locations across the country, Puerto Rico, and other locations helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality.
Webcast Details
As previously announced, MGIC Investment Corporation will hold a webcast today at 10 a.m. ET to allow securities analysts and shareholders the opportunity to hear management discuss the company's quarterly results. The call is being webcast and can be accessed at the company's website at http://mtg.mgic.com. The webcast is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Investors can listen to the call through CCBN's individual investor center at www.companyboardroom.com or by visiting any of the investor sites in CCBN's Individual Investor Network. The webcast will be available for replay on the company's website through November 16, 2009 under Investor Information.
This press release, which includes certain additional statistical and other information, including non-GAAP financial information and a supplement that contains various portfolio statistics are both available on the Company's website at http://mtg.mgic.com under Investor Information.
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below. These risk factors should be reviewed in connection with this press release and our periodic reports to the Securities and Exchange Commission. These risk factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact, including matters that inherently refer to future events. Among others, statements that include words such as "believe", "anticipate", "will" or "expect", or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. No investor should rely on the fact that such statements are current at any time other than the time at which this press release was issued.
While our plan to write new insurance in an MGIC subsidiary is moving forward, we cannot guarantee that even if it is implemented it will allow us to continue to write new insurance in the future.
For some time, we have been working to implement a plan to write new mortgage insurance in MGIC Indemnity Corporation ("MIC"), a wholly owned subsidiary of MGIC. This plan is driven by our belief that in the future MGIC will not meet regulatory capital requirements in Wisconsin (which would prevent MGIC from writing new business anywhere) or in certain jurisdictions (which would prevent MGIC from writing business in the particular jurisdiction) and may not be able to obtain appropriate waivers of these requirements. In addition to Wisconsin, these capital requirements are present in 16 jurisdictions while the remaining jurisdictions in which MGIC does business do not have specific capital requirements applicable to mortgage insurers. Before MIC can begin writing new business, the Office of the Commissioner of Insurance for the State of Wisconsin ("OCI") must specifically authorize MIC to do so and MIC must obtain licenses in the jurisdictions where it will transact business. In addition, as a practical matter, MIC's ability to write mortgage insurance depends on being approved as an eligible mortgage insurer by Fannie Mae and/or Freddie Mac (together, the "GSEs").
On October 14, 2009, we, MGIC and MIC entered into an agreement (the "Agreement") with Fannie Mae under which MGIC will contribute $200 million to MIC and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Agreement. MIC will be eligible to write mortgage insurance only if the OCI grants MGIC a waiver from Wisconsin's capital requirements and only in those 16 jurisdictions in which MGIC cannot write new insurance due to MGIC's failure to meet regulatory capital requirements applicable to mortgage insurers and if MGIC fails to obtain relief from those requirements or a specified waiver of them. We expect MGIC will be able to obtain waivers in a number of these jurisdictions such that MGIC, rather than MIC, will write new business there. The Agreement, including certain restrictions imposed on us, MGIC and MIC, is summarized more fully in, and included as an exhibit to, our Form 8-K filed with the Securities and Exchange Commission on October 16, 2009.
We have been working closely with Freddie Mac to approve MIC as an eligible mortgage insurer and hope to have their approval soon. While in July 2009 the OCI approved a transaction under which we would have contributed more than $200 million to MIC and MIC would have written mortgage insurance in all jurisdictions in place of MGIC, the OCI has not approved the plan to write mortgage insurance through MIC contemplated by the Agreement nor has it yet granted MGIC a waiver from the regulatory capital requirements in Wisconsin. There can be no assurance that we will be able to obtain, in a timely fashion or at all, the approvals necessary to allow MIC to write new insurance in jurisdictions in which MGIC would be prohibited from doing so due to MGIC's failure to meet applicable regulatory capital requirements.
Under the Agreement, MIC has been approved as an eligible mortgage insurer by Fannie Mae only though December 31, 2011. Whether MIC will continue as an eligible mortgage insurer after that date will be determined by Fannie Mae's mortgage insurer eligibility requirements then in effect. Further, under the Agreement we cannot capitalize MIC with more than $200 million, which limits the amount of business MIC can write. While we believe this amount of capital will be more than sufficient to write business for the foreseeable future in the jurisdictions in which MIC is eligible to do so under the Agreement, depending on the level of losses that MGIC experiences in the future, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific regulatory capital requirements applicable to mortgage insurers, may prevent MGIC from continuing to be able to write new insurance in some or all of the jurisdictions in which MIC will not write business.
Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.
The majority of our insurance written is for loans sold to Fannie Mae and Freddie Mac. As a result, the business practices of the GSEs affect the entire relationship between them and mortgage insurers and include:
-- the level of private mortgage insurance coverage, subject to the
limitations of the GSEs' charters (which may be changed by federal
legislation) when private mortgage insurance is used as the required
credit enhancement on low down payment mortgages,
-- the amount of loan level delivery fees (which result in higher costs to
borrowers) that the GSEs assess on loans that require mortgage
insurance,
-- whether the GSEs influence the mortgage lender's selection of the
mortgage insurer providing coverage and, if so, any transactions that
are related to that selection,
-- the underwriting standards that determine what loans are eligible for
purchase by the GSEs, which can affect the quality of the risk insured
by the mortgage insurer and the availability of mortgage loans,
-- the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
-- the programs established by the GSEs intended to avoid or mitigate loss
on insured mortgages and the circumstances in which mortgage servicers
must implement such programs.
In September 2008, the Federal Housing Finance Agency ("FHFA") was appointed as the conservator of the GSEs. As their conservator, FHFA controls and directs the operations of the GSEs. The appointment of FHFA as conservator, the increasing role that the federal government has assumed in the residential mortgage market, our industry's inability, due to capital constraints, to write sufficient business to meet the needs of the GSEs or other factors may increase the likelihood that the business practices of the GSEs change in ways that may have a material adverse effect on us. In addition, these factors may increase the likelihood that the charters of the GSEs are changed by new federal legislation. Such changes may allow the GSEs to reduce or eliminate the level of private mortgage insurance coverage that they use as credit enhancement. The Obama administration has announced that it will announce its plans regarding the future of the GSEs in early 2010.
For a number of years, the GSEs have had programs under which on certain loans lenders could choose a mortgage insurance coverage percentage that was only the minimum required by their charters, with the GSEs paying a lower price for these loans ("charter coverage"). The GSEs have also had programs under which on certain loans they would accept a level of mortgage insurance above the requirements of their charters but below their standard coverage without any decrease in the purchase price they would pay for these loans ("reduced coverage"). In September 2009, Fannie Mae announced that, effective January 1, 2010, it would expand broadly the types of loans eligible for charter coverage. Fannie Mae's announcement also said it would eliminate its reduced coverage program in the second quarter of 2010. During the third quarter of 2009, a majority of our volume has been on loans with GSE standard coverage, a substantial portion of our volume has been on loans with reduced coverage, and a minor portion of our volume has been on loans with charter coverage. We charge higher premium rates for higher coverages. To the extent lenders selling loans to Fannie Mae chose charter coverage for loans that we insure, our revenues would be reduced and we could experience other adverse effects.
Both of the GSEs have policies which provide guidelines on terms under which they can conduct business with mortgage insurers with financial strength ratings below Aa3/AA-. For information about how these policies could affect us, see the risk factor titled "MGIC may not continue to meet the GSEs' mortgage insurer eligibility requirements."
A downturn in the domestic economy or a decline in the value of borrowers' homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing.
Losses result from events that reduce a borrower's ability to continue to make mortgage payments, such as unemployment, and whether the home of a borrower who defaults on his mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. In general, favorable economic conditions reduce the likelihood that borrowers will lack sufficient income to pay their mortgages and also favorably affect the value of homes, thereby reducing and in some cases even eliminating a loss from a mortgage default. A deterioration in economic conditions generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect housing values, which in turn can influence the willingness of borrowers with sufficient resources to make mortgage payments to do so when the mortgage balance exceeds the value of the home. Housing values may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers' perceptions of the potential for future appreciation, restrictions on mortgage credit due to more stringent underwriting standards, liquidity issues affecting lenders or other factors. The residential mortgage market in the United States has for some time experienced a variety of worsening economic conditions and housing values continue to decline. The recession that began in December 2007, which has been exacerbated by the credit crisis that began in September 2008, may result in further deterioration in home values and employment. In addition, even after the end of this recession, home values may continue to deteriorate and unemployment levels may continue to increase or remain elevated.
The mix of business we write also affects the likelihood of losses occurring.
Even when housing values are stable or rising, certain types of mortgages have higher probabilities of claims. These segments include loans with loan-to-value ratios over 95% (including loans with 100% loan-to-value ratios or in certain markets that have experienced declining housing values, over 90%), FICO credit scores below 620, limited underwriting, including limited borrower documentation, or total debt-to-income ratios of 38% or higher, as well as loans having combinations of higher risk factors. As of September 30, 2009, approximately 60% of our primary risk in force consisted of loans with loan-to-value ratios equal to or greater than 95%, 8.7% had FICO credit scores below 620, and 12.7% had limited underwriting, including limited borrower documentation. A material portion of these loans were written in 2005 -- 2007 and through the first quarter of 2008. (In accordance with industry practice, loans approved by GSEs and other automated underwriting systems under "doc waiver" programs that do not require verification of borrower income are classified by us as "full documentation." For additional information about such loans, see footnote (1) to the Additional Information at the end of this press release.)
Beginning in the fourth quarter of 2007 we made a series of changes to our underwriting guidelines in an effort to improve the risk profile of our new business. Requirements imposed by new guidelines, however, only affect business written under commitments to insure loans that are issued after those guidelines become effective. Business for which commitments are issued after new guidelines are announced and before they become effective is insured by us in accordance with the guidelines in effect at time of the commitment even if that business would not meet the new guidelines. For commitments we issue for loans that close and are insured by us, a period longer than a calendar quarter can elapse between the time we issue a commitment to insure a loan and the time we receive the payment of the first premium and report the loan in our risk in force, although this period is generally shorter.
As of September 30, 2009, approximately 3.7% of our primary risk in force written through the flow channel, and 43.1% of our primary risk in force written through the bulk channel, consisted of adjustable rate mortgages in which the initial interest rate may be adjusted during the five years after the mortgage closing ("ARMs"). We classify as fixed rate loans adjustable rate mortgages in which the initial interest rate is fixed during the five years after the mortgage closing. We believe that when the reset interest rate significantly exceeds the interest rate at loan origination, claims on ARMs would be substantially higher than for fixed rate loans. Moreover, even if interest rates remain unchanged, claims on ARMs with a "teaser rate" (an initial interest rate that does not fully reflect the index which determines subsequent rates) may also be substantially higher because of the increase in the mortgage payment that will occur when the fully indexed rate becomes effective. In addition, we have insured "interest-only" loans, which may also be ARMs, and loans with negative amortization features, such as pay option ARMs. We believe claim rates on these loans will be substantially higher than on loans without scheduled payment increases that are made to borrowers of comparable credit quality.
Although we attempt to incorporate these higher expected claim rates into our underwriting and pricing models, there can be no assurance that the premiums earned and the associated investment income will prove adequate to compensate for actual losses even under our current underwriting guidelines. We do, however, believe that given the various changes in our underwriting guidelines that were effective beginning in the first quarter of 2008, our insurance written beginning in the second quarter of 2008 will generate underwriting profits.
Because we establish loss reserves only upon a loan default rather than based on estimates of our ultimate losses, our earnings may be adversely affected by losses disproportionately in certain periods.
In accordance with GAAP for the mortgage insurance industry, we establish loss reserves only for loans in default. Reserves are established for reported insurance losses and loss adjustment expenses based on when notices of default on insured mortgage loans are received. Reserves are also established for estimated losses incurred on notices of default that have not yet been reported to us by the servicers (this is what is referred to as "IBNR" in the mortgage insurance industry). We establish reserves using estimated claims rates and claims amounts in estimating the ultimate loss. Because our reserving method does not take account of the impact of future losses that could occur from loans that are not delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our financial statements, except in the case where a premium deficiency exists. As a result, future losses may have a material impact on future results as losses emerge.
Because loss reserve estimates are subject to uncertainties and are based on assumptions that are currently very volatile, paid claims may be substantially different than our loss reserves.
We establish reserves using estimated claim rates and claim amounts in estimating the ultimate loss on delinquent loans. The estimated claim rates and claim amounts represent what we believe best reflect the estimate of what will actually be paid on the loans in default as of the reserve date and incorporates mitigation from rescissions.
The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. Current conditions in the housing and mortgage industries make the assumptions that we use to establish loss reserves more volatile than they would otherwise be. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions leading to a reduction in borrowers' income and thus their ability to make mortgage payments, a drop in housing values that could materially reduce our ability to mitigate potential loss through property acquisition and resale or expose us to greater loss on resale of properties obtained through the claim settlement process and mitigation from rescissions being materially less than assumed. Changes to our estimates could result in material impact to our results of operations, even in a stable economic environment, and there can be no assurance that actual claims paid by us will not be substantially different than our loss reserves.
The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations.
We set premiums at the time a policy is issued based on our expectations regarding likely performance over the long-term. Our premiums are subject to approval by state regulatory agencies, which can delay or limit our ability to increase our premiums. Generally, we cannot cancel the mortgage insurance coverage or adjust renewal premiums during the life of a mortgage insurance policy. As a result, higher than anticipated claims generally cannot be offset by premium increases on policies in force or mitigated by our non-renewal or cancellation of insurance coverage. The premiums we charge, and the associated investment income, may not be adequate to compensate us for the risks and costs associated with the insurance coverage provided to customers. An increase in the number or size of claims, compared to what we anticipate, could adversely affect our results of operations or financial condition.
In January 2008, we announced that we had decided to stop writing the portion of our bulk business that insures loans which are included in Wall Street securitizations because the performance of loans included in such securitizations deteriorated materially in the fourth quarter of 2007 and this deterioration was materially worse than we experienced for loans insured through the flow channel or loans insured through the remainder of our bulk channel. As of December 31, 2007 we established a premium deficiency reserve of approximately $1.2 billion. As of September 30, 2009, the premium deficiency reserve was $208 million. At each date, the premium deficiency reserve is the present value of expected future losses and expenses that exceeded the present value of expected future premium and already established loss reserves on these bulk transactions.
The mortgage insurance industry is experiencing material losses, especially on the 2006 and 2007 books. The ultimate amount of these losses will depend in part on general economic conditions, including unemployment, and the direction of home prices, which in turn will be influenced by general economic conditions and other factors. Because we cannot predict future home prices or general economic conditions with confidence, there is significant uncertainty surrounding what our ultimate losses will be on our 2006 and 2007 books. Our current expectation, however, is that these books will continue to generate material incurred and paid losses for a number of years.
