Paul Muolo is out of the office. We're running this story in place of his usual column.Can MGIC Pull a Rabbit Out of an MI Subsidiary?
First the bad news: the mortgage insurance industry submitted a plan to the Treasury Department for "capital relief" (as in please give us some TARP money) several months ago but has yet to hear from Uncle Sam. In the interim a dialogue has been established between the MIs and Treasury but secretary Timothy Geithner isn't ready to open the cash register quite yet.
And the new good news? Last week Mortgage Guaranty Insurance Corp. - the nation's largest MI company in terms of policies-in-force - posted a $340 million loss in the second quarter, warning that it may not meet minimum capital standards that would allow it to continue writing new policies.
Yep, that's the new good news. But bear with me. Even though MGIC continues to bleed red ink, on the day its "earnings" came out its shares shot up almost 20% to $4.70. The loss by the MI is indeed ugly news. Over the next few quarters it likely will continue to lose money but what's titillating the market (I think) is MGIC's newly unveiled plan to capitalize - with $1 billion in cash - a dormant subsidiary called MGIC Indemnity Corp or MIC.
The idea is that MIC will begin writing new policies early next year, isolating all its new business into this "clean entity." Why would MGIC do this? Answer: so it can raise capital from investors by highlighting this new "clean" unit. With MIC operative it would allow MGIC's current book-of-business ($223 billion worth of policies) to run-off.
To me it sounds like MGIC is trying to pull off a "good bank/bad bank" type of re-creation to isolate its past and pave the way for the future. I asked the company where the money would come from to both beef up this new unit and pay future claims on its old book of business. Its investor relations chief, Michael J. Zimmerman, said MGIC has $8 billion in cash and investments at its disposal to pull it off. The company is waiting on the appropriate state and regulatory approvals.
One MI executive from a competing firm called the plan "interesting," adding that if it works it "could serve as a model for us all." (As long as they "all" have enough capital.) With the Treasury Department placing the MI industry at the bottom of its "to do" list MGIC had to do something. As the old saying goes: Necessity is the mother of invention.
There is a wild card here. If home prices don't start stabilizing soon and if the employment picture doesn't brighten all the creative innovations in the world will not help. The company stressed to me that despite its huge loss and its new "plan" it will continue to insure new loans. "We have no capital restraints on the volume of new business we can write," said Mr. Zimmerman. For now, the market believes him.
