Losses are up and profits down at the nation’s largest private mortgage insurer, Mortgage Guaranty Insurance Corp.
MGIC — which insures 1.3 million mortgages valued at $176.5 billion — said today that fourth-quarter earnings were down largely because the slowdown in the housing market cut into the generation of new premiums.
But the company is also facing a rise in the percentage of delinquent A-minus and subprime loans it insures, and disclosed that regulators in New York and Minnesota have investigated its captive reinsurance practices.
Parent company MGIC Investment Corp. reported fourth-quarter earnings dropped 5 percent to $121.5 million, or $1.47 per share, compared to the same quarter last year. At $564.7 million, earnings for the year are down 9.9 percent from 2005.
Premiums written during the quarter totaled $305.6 million, down 3.5 percent from the same time last year, the company said. The $1.22 billion in premiums written for the year was 2.8 percent less than 2005’s.
At the same time, fourth-quarter losses were up 9 percent from last year, to $187.3 million. Losses for the year were $613.6 million, an 11 percent increase from 2005. While the percentage of all loans insured by MGIC that were delinquent declined from last year, the percentage of delinquent bulk, A-minus and subprime loans is on the upswing.
The percentage of all loans insured by MGIC delinquent at the end of 2006 stood at 6.13 percent, compared with 6.58 percent at the same time last year, and 6.05 percent at the end of 2004.
The percentage of bulk loans delinquent at the end of the year was 14.87 percent, up from 14.72 percent in 2005 and 14.06 percent at the end of 2004. Bulk loans are part of a negotiated transaction between the lender and the mortgage insurer.
The percentage of delinquent A-minus and subprime loans was 18.94 percent, up from 18.3 percent at the end of 2005 and 16.49 percent in 2004.
About 85.6 percent of the loans MGIC insures are prime, with 10 percent classified as A-minus and 4.2 percent as subprime. That compares with 84.3 percent prime, 10.9 percent A-minus and 4.8 percent subprime in 2005.
The company said 8 percent of loans insured on an individual, or flow, basis are adjustable-rate mortgages, while 65 percent insured bulk loans are ARMs.
MGIC “believes the volume of ‘interest-only’ loans (which may also be ARMs) and loans with negative-amortization features, such as pay-option ARMs, increased in 2005 and 2006.”
Although the company has no data on the historical performance of such loans, it “believes claim rates on certain of these loans will be substantially higher than on loans without scheduled payment increases that are made to borrowers of comparable credit quality.”
MGIC said that in addition to credit risk, lawsuits and actions by government regulators could hurt the company’s future performance.
In June 2005, MGIC says it provided information on its captive reinsurance arrangements to the New York Insurance Department. In February 2006, the department requested that MGIC review its premium rates in New York, and to file adjusted rates based on past financial performance. MGIC “advised the NYID that it believes its premium rates are reasonable and that, given the nature of mortgage insurance risk, premium rates should not be determined only by the experience of recent years,” the company said.
The Minnesota Department of Commerce also served an administrative subpoena on MGIC in February 2006, the company disclosed, requesting information about the company’s captive mortgage reinsurance “and certain other matters.”
State and federal regulators in recent years have penalized several companies created by lenders, developers and real estate brokers for the purpose of “reinsuring” title insurance policies. Regulators have said title insurers use such arrangements to generate referrals, and that reinsurance adds unnecessary costs for consumers.