By Ashutosh Pandey and Sharanya Hrishikesh
Nov 9 (Reuters) - MGIC Investment Corp will be able to
continue selling mortgage insurance throughout the United States
after the company agreed to pay $267.5 million to Freddie Mac to
settle a dispute that threatened the insurer's future.
The settlement was a condition set by Freddie Mac, the
government-backed mortgage financier, to allow a new unit of
MGIC to underwrite mortgages in seven states.
MGIC had announced the settlement last week, but had not
disclosed the monetary terms.
However, the mortgage insurer said it will not sign the
settlement agreement until the new unit, MIC, gets approval to
write business in states where the main unit does not meet
MGIC had sold Freddie Mac a pool of policies, the valuation
of which became a bone of contention. The insurer filed a
lawsuit in May seeking to pay less than what Freddie Mac
believed the policies were worth.
As part of the settlement, MGIC agreed to pay $100 million
when the deal is signed, and the remaining amount as monthly
payments over the next four years.
Morningstar analyst Jim Ryan said the settlement was a
"strong positive" for MGIC as it let the company write business
with Freddie Mac, which they could not do earlier.
"The positive is that this will allow them to write more
business, the downside is that there are going to be payouts,"
MGIC, like other mortgage insurers, was left with huge
losses and bad loans after the housing crisis. Its recovery
plan, which involves writing new insurance through a newly
capitalized unit to take advantage of an upturn in the housing
market, had been caught up in the dispute with Freddie Mac.
The insurer feared that major lenders may refuse to do
business with it if it could not operate nationally.
Mortgage insurers, which protect lenders in case home loans
turn bad, have been struggling to meet capital adequacy
benchmarks and have time and again sought waivers to continue
writing business in many states in the United States.
They have also been creating new units to find a way around
soaring risk ratios.
At Sept. 30, the preliminary risk-to-capital ratio of
MGIC's combined insurance operations was 34.1 to 1. Mortgage
insurance regulators commonly allow for a maximum
risk-to-capital ratio of 25:1.
Macquarie Research analyst Jasper Burch said the settlement
would affect results, mostly in the fourth quarter, while also
eating into statutory capital, and driving risk ratios higher.
The Wisconsin Insurance Commissioner, which is MGIC
Investment's primary regulator, uses a minimum policyholder
position (MPP) to gauge the health of an insurer. MPP is the
minimum amount of money an insurer would need to meet claims.
MGIC's preliminary policyholder position was $344 million
below the required MPP of $1.3 billion at the end of the third
The company also reported its ninth straight quarterly loss
on Friday, sending its shares down as much as 13 percent.
MGIC wrote new insurance worth $7 billion in the quarter
ended Sept. 30, more than double the amount of business it wrote
Even as mortgage insurers struggle with the bad loans left
over from the housing crisis, they have been aggressively
writing profitable new business, sometimes by moving into
MGIC's rival Radian Inc posted its first quarterly profit
this year last week as new business jumped to $10.6 billion.
Shares of MGIC were flat at $1.67 in late-afternoon trading
on the New York Stock Exchange. They touched a one-month low of
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