If MGIC Investment Corp. were to downstream $200 million in capital to its Mortgage Guaranty Insurance Corp. subsidiary, the parent company's ability to meet $589 million in senior debt obligations might be stressed and the holders of its $390 million in junior subordinated debt could face substantially losses, according to the analysts at Moody's Investors Service.
The analysts note the $200 million contribution would come from $760 million in standalone assets at the parent company.
But the analysts at FBR Capital Markets figure things a little differently, saying their calculations leave MGIC Investment Corp. with $311 million to work with, after the $200 million contribution. It based its calculations (starting with that same $760 million figure) on 2015 debt maturities and debt service totaling $249 million.
The reason why MGIC Investment Corp. is looking to make that capital contribution is because the mortgage insurance subsidiary's risk-to-capital ratio is at 24-to-1, dangerously close to breaching the 25-to-1 requirement 17 states have (and which could affect its ability to write business in all 50 states).
Those divergent views may explain why those analysts take different tracks in their respective reports. Moody's downgraded the mortgage insurance unit's insurance financial strength rating to B1 from Ba3, not only because of the capital issue, but because of large current and future claims payments combined with a modest amount of new business. It also cut the rating on the parent's debt, plus it has both the parent and subsidiary on watch for further downgrades.
FBR, however, is still maintaining its outperform rating for MGIC Investment Corp. Analysts Steve Stelmach and Patrick Kealey Jr. write, "Highly levered to credit trends, capital concerns could moderate should the mortgage market witness better credit metrics over the next year, and if economic growth and employment rebound."
The analysts added among the things making the environment favorable for the entire private mortgage insurance industry is the reduction in competition as PMI and Republic Mortgage Insurance Co. have both stopped writing new business. The parent companies of those two companies, they noted, were either unable or unwilling to put more capital into those units.
"We continue to view the future value of premiums, current reserves and capital as sufficient to offset future losses on its insured book of business," Stelmach and Kealey said.
Moody's Ranjini Venkatesan and Stanislas Rouyer said they are keeping the ratings for MGIC on review because of uncertainty the company would be able to get continued risk-to-capital waivers from its primary regulator (which is Wisconsin) and its counterparties.
But after saying that, the analysts state MGIC is likely to get a waiver from its regulator plus an extension of its agreement with Fannie Mae to write business through another subsidiary in states where it cannot get a waiver; that agreement is set to expire at the end of the year. Any decisions on waivers or extensions and under what terms may not be known until the end of the year, Moody's said. But if MGIC does get a waiver for at least another year, Moody's said it was likely to affirm its ratings at the current levels.
