In the webcast, MGIC's management indicated that Minnesota Insurance Commissioner wants to see a minimum of $1 billion of liquid funds available to pay claims. My interpreatation is that the commissioner would work with MGIC as long as that threshhold was met. One of the analysts stated that his numbers indicated that MGIC would not ever drop below that threshold.
If the GSE's agree with this, then MGIC has a clear path to get over the bad economy. Even with out an improving economy, the new delinquincies are shrinking by about 25% per year. If unemployment were to stay at current levels, the new delinquincies would shrink to about 56% of the current level in two years. This is about the level they would need to decline for MGIC to start making a profit.
In two years, they should reach this level with out an improving economy and it would be sooner with an improving economy. My analsysis would show losses of $80 to $100 million per quarter next year if the unemployment rate does not decrease. and $0 per quarter in 2014.
Assuming no additional reserves for existing delinquincies (Yes paid basher, this is a big assumption), the capital will shrink to about $200 million by the end of 2013 and then start increasing in 2014.
If the GSE's see continued improvement, they are likely continue to be patient.
In my opinoin, MGIC's management has been incredibly honest in the face of a terrible situation. This honesty will hopefully build the good will that the MGIC needs to get to the promised land that seems to be visible in the distant horizon.
Very good post thanks you, Mortgageguy. This is why Bernie, Edi and many of us have been waiting for your analysis. MTG is better than RDN fundamentally, and way oversold, will go back up to $3.00+ by the end of year.
Sentiment: Strong Buy
I just listened to the webcast again and the MI industry has requested that the risk to capital requirement be replaced with an ability to pay all claims criteria. This along with the final negotiations with Freddie could give MGIC a clear path to return to profitability in 2014.
Good to hear from you again. All the Insurers will be facing a recession next year which is not good. Job growth is not gonna be happening especially with more taxes such as Obamacare. The concern is 2012 is a blip purely on artificial low rates of interest. Your thoughts appreciated.
I do not believe we are heading into a recession next year. Most reports I have read believe the economy would improve with out respect to which candidate won the election.
My analysis is based on no improvement or worsening of unemployment or the real estate market.
New delinquincies declined by about 25% from last year to this year. Current new delinquincies are about 11,000 per month. They need to be at about 6,000 per month in order to break even.
If the economy does not improve, MGIC's new delinquincies will be 8,250 per monthin 2013 and then about 6,000 per month in 2014. This would mean a loss of $180 million in the fourth quarter and $81 million per quarter in 2013. In addition, the settlement with Freddie is $260 Million +/-.
This will all but eliminate equity by 12/2013, but at that point, the company will be breaking even or making a small profit.
Any improvement in unemployment will improve this forecast. Any additional reserving for existing delinquinicies, or settlements with other parties such as Countrywide and the IRS would hurt equity.
In the event things turn around, the tax benefits for the losses can be added to equity.
Apparently the Wisconsin regulators are comfortable with this situation because it shows improvements leading to break even and then profitability even with out economic improvements.
The question is how will the GSE's respond to a risk to capital ratio that is way too high, but clear signs that all future obligations can be paid. I would expect this will be clear as the Freddie issue is resolved in a few weeks.
MGIC's position is that the risk to capital is high, but the the operating performance is improving and all claims will be paid. With this in mind, they are asking to be able to continue to write insurance.
Assuming you are correct, a $200M capital base against $37B of risk is a risk-to-capital of 185. Do you honestly believe any lenders are going to do business with them at that level? You may not think lenders care about counterparty risk, because the GSEs are on the hook for the loss, but I can assure you that assumption is incorrect, as evidenced by the customers they lost after last quarter's losses were announced. I suspect even more customers will be leaving them, especially the larger lenders.
As for the decline in delinquencies, since 1/1/2012 delinquencies have declined by 29,357. In that same time frame paid claims have totaled 38,771. MGIC simply cannot afford to have delinquencies decline in that manner.
Sentiment: Strong Sell
as evident in conference call, they have plenty of near-cash to contribute to said capital base if it was required. but it's not. regulators are not asking it. lenders evidently aren't asking for it either because NIW is growing.
so, why again contribute capital for a ratio that none of your counter parties are asking of.
Liquid near-cash is almost 5 billion. And that's after dealing with 2x the losses as its competitors.
I feel that must be a large reason why the regulators are being very lenient.