Fitch Downgrades MGIC on Continued Losses in Insured Portfolio

The downgrades are driven primarily by Fitch's concern regarding capital adequacy, business continuity and holding company liquidity. MGIC's third quarter 2009 (3Q'09) results included a significant increase in the delinquency of full documentation prime mortgages which resulted in higher losses incurred at the operating company level. The ability of the operating company to continue to write new business remains uncertain, although recent developments indicate progress on that front. The holding company continues to face near to medium term liquidity demands with the maturity of its September 2011 senior notes and longer term liquidity demands with respect to its November 2015 senior notes.

Capital adequacy is a particular area of concern with higher loss ratios negatively impacting earnings and capital. The 3Q'09 loss ratio rose to 331% from 222% in 2Q'09, partly driven by a premium adjustment for rescissions. After a period of flat to declining new default notices related to prime loans, new prime full documentation loan default notices increased in 3Q'09, mirroring the difficult macro economic and employment climate. This implies that losses (and resultant capital erosion) are unlikely to abate in the near term, as unemployment is anticipated by many analysts, including Fitch's economic team, to increase through mid 2010.

Business continuity exhibits a more mixed outlook. MGIC's restructuring initiative still needs regulatory approval from state regulators and consent from one of the GSEs, with the consent of one GSE already received. Fitch believes these approvals and consents will likely be forthcoming. Fitch views the reduction in proposed downstreaming of capital to MGIC Indemnity Corp. (MIC), from an initial $500 million (announced in July) to the $200 million, with no additional planned amounts, as less detrimental to existing policyholders, given the subordination of their claim on downstreamed capital for payment of losses. Earnings from new business are expected to be at high profit margins but due to lower volumes, not expected to generate a sufficient offset against rising reserve requirements.

The Outlook will remain Negative until the rate of mortgage delinquencies mortgages exhibits sustained stabilization or decline, and an appropriate level of reserves can be determined. Losses will also be impacted by the ultimate level of rescissions and any benefit from the Home Affordability Modification Program (HAMP). Fitch notes that rescission activity is likely to be lower with respect to full documentation prime mortgage delinquencies, but that HAMP may provide some ultimate loss mitigation for this product.

Holding company liquidity remains challenged due to ongoing losses and limited ability to upstream dividends. As of Oct. 14, 2009, MGIC IC had approximately $97 million in short-term investments, the majority of which was in cash. The remaining par of senior notes due September 2011 was approximately $86 million, with approximate interest cost on all of the remaining senior notes (both 2011 and 2015 maturities) of approximately $21 million per annum, or $41 million through September 2011, implying a cash shortfall at maturity of ($30) million before any dividends to the holding company. As part of MGIC's restructuring initiative, Fannie Mae has consented to a $100 million dividend from MGIC to MGIC IC to be used for debt servicing needs, which, if approved by MGIC's regulator, should help to alleviate near term liquidity constraints. Longer term, Fitch expects continued holding company liquidity pressure with respect to servicing the November 2015 senior notes. While any dividend places policyholders at a disadvantage relative to holding company bondholders, Fitch would view a holding company bankruptcy as a negative to policyholders, in that run off of the operating companies would be more likely to occur. The continued ability of MGIC and its wholly owned subsidiaries to write new business under tighter guidelines could be capital accretive and beneficial to policyholders in the longer term.

Fitch has downgraded the following ratings, removed them from Rating Watch Negative, and assigned a Negative Outlook:

Mortgage Guaranty Insurance Corp.

--IFS to 'BB-' from 'BBB-', removed from Rating Watch Negative and assigned a Negative Outlook.

MGIC Investment Corp.

--Long-term Issuer rating to 'B-' from 'B', removed from Rating Watch Negative and assigned a Negative Outlook.

Fitch has downgraded the following debt ratings and removed them from Rating Watch Negative:

--$200 million 5.625% senior notes due Sept. 15, 2011 to 'B-' from 'B', removed from Rating Watch Negative;

--$300 million 5.375% senior notes due Nov. 1, 2015 to 'B-' from 'B', removed from Rating Watch Negative.

The following rating remains unaffected:

MGIC Investment Corp.

--$390 million 9% convertible junior subordinated debentures due 2063 'C'.

Additional information is available at www.fitchratings.com.

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SOURCE: Fitch Ratings

Fitch Ratings 
Davie Rodriguez, +1-212-908-0386 
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