MGIC: Capital requirements create uncertainty about new business
MGIC says regulatory capital requirements could prevent the mortgage insurer from writing new business as it continues to juggle negotiations with state regulators and an increase in claims and expenditures that could "exceed cash generated from operations."
The firm made those assertions in a Securities & Exchange Commission regulatory filing.
MGIC says 16 state insurance jurisdictions, including its main regulator in Wisconsin, require mortgage insurers to maintain a minimum amount of capital to write new business within their respective jurisdictions.
The capital requirements vary state-by-state, but in most jurisdictions the maximum risk-to-capital ratio level is 25-to-1. As of June 30, MGIC maintains a preliminary risk-to-capital ratio of 27.8-to-1, while its combined insurance operations have a risk level of 30-to-1.
The insurer currently has a waiver agreement with its main regulator, the Office of the Commissioner of Insurance of the State of Wisconsin.
This agreement waives the state's risk-to-capital ratio requirements until Dec. 31, 2013. But to be able to write new business within the state during that period, the regulator says MGIC Investment Corp., the parent company, must make cash infusions to MGIC and ensure its liquid assets are at the $1 billion level.
To date, the firm's liquid assets are well above that level, hovering at $5.4 billion, and MGIC said, "we do not expect that MGIC's liquid assets will fall below $1 billion during the covered period."
Still, the firm said it expects its liquid assets to continue to drop materially after June 30 and through 2013 as "claim payments and other uses of cash continue to exceed cash generated from operations."
MGIC also said in its latest earnings update that its Wisconsin regulator objects to a requirement that Freddie Mac laid out when approving the insurer for mortgage operations in states that have yet to grant the firm capital requirement waivers.
A waiver from Freddie Mac would open up certain states, allowing the insurer to pursue new business without waivers from other regulators.
"If one GSE does not approve MIC (MGIC Indemnity Corp., a subsidiary of MGIC Investment Corp.) in all jurisdictions that have not waived their capital requirements for MGIC, MIC may be able to write insurance on loans that will be sold to the other GSE or retained by private investors," MGIC said in its quarterly report.
"However, because lenders may not know which GSE will purchase their loans until loan origination is complete and mortgage insurance has been procured, lenders may be unwilling to procure mortgage insurance from MIC. Furthermore, if we are unable to write business on a nationwide basis utilizing a combination of MGIC and MIC, lenders may be unwilling to procure insurance from us anywhere."
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