MGIC Downgrade Based On Restructuring Announcement

Posted by Orb Staff on July 17, 2009 No Comments
Categories : Residential Mortgage

Ratings has downgraded the insurer financial strength (IFS) rating of Mortgage Guaranty Insurance Corp. (MGIC) to BBB- from BBB and placed it and the long-term debt and senior debt ratings of MGIC Investment Corp. on Rating Watch Negative. Fitch's actions were in response to a [link=http://www.mortgageorb.com/e107_plugins/content/content_lt.php?content.3901][u]restructuring plan[/u][/link] announced by MGIC. The plan, which has received approval from its main regulator, the Wisconsin Office of the Commissioner of Insurance, allows for the downstreaming of capital from MGIC, the company's main operating subsidiary, to an existing, wholly owned subsidiary of MGIC, MGIC Indemnity Corp. (MG Indemnity). The downgrade is driven by the proposed removal of capital from one regulated entity for placement in a separate regulated entity. Notwithstanding MGIC's ownership of MG Indemnity, there still exists some subordination of claim on capital for payment of losses, the agency notes. The restructuring has both negative and positive implications with respect to MGIC's policyholders, Fitch adds. The downstreaming of capital from MGIC to MG Indemnity reduces the resources that are immediately available to pay claims at MGIC over the short term. Moreover, while capital is being downstreamed to a wholly owned subsidiary of MGIC, it will be utilized to underwrite new business and thus increase the risk profile of this capital through releveraging and subordination of MGIC policyholders to MG Indemnity policyholders for payment of losses from these resources, Fitch says. Positively, the restructuring allows the MGIC group to avoid a risk-to-capital-driven cessation of operations and to underwrite potentially high-quality business at attractive rates. The new business will be housed in a legal entity that is unencumbered by legacy portfolio issues. Given the ownership structure within the organization, this could ultimately benefit MGIC policyholders over the long term, as any dividends paid out of MG Indemnity would pass to MGIC and would then be subject to MGIC's regulatory capital restrictions. Further, the franchise position of the consolidated entity is strengthened by this action. SOURCE

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