Private Mortgage Insurance Companies Running Out of Options

Implications: The mortgage  insurance industry has suffered horrific losses and is quickly losing ground in a struggle for survival. Triad announced that it will cease insuring new loans.  The three major mortgage insurers (MTG, PMI, RDN) have been downgraded below AA, the minimum rating required by the GSEs (Fannie Mae and Freddie Mac).  The GSEs are allowing the MI's to continue insuring their loans, based on plans submitted by each company detailing how they will restore a AA rating.  These plans are becoming harder to execute. Despite holding over $18 billion in cash and investments(including reserves), market capitalization for the three companies has fallen from $15 billion one year ago to $1.2 billion today.  It is next to impossible for  the MI companies to raise significant new equity at these prices.  Long term debt has also become very expensive. Credit default swaps on Radian debt are now priced at junk bond levels.

Analysis: While the options available to the MI companies are severely limited, there may be more value in these companies than is reflected in their current stock prices. 

The biggest unknown is of course credit losses. While there is no bottom in sight, the MI's actually appear to have plenty of capital to weather the next few years.  Radian for example has over $6 billion in cash and investments and expects to pay out $1 billion in claims this year.  Even assuming this estimate is off by a factor of 150%, there is adequate capital to pay claims for several years.

The business now being written is also much less risky and industry economics have improved.  Premiums and persistency have increased. 

Despite this, the MI's are under severe pressure to raise capital or lower their risks, and further downgrades could put them into runoff.   Selling off risk may be more realistic than raising equity at todays prices and MTG recently announced that they are offloading some catastrophic risk to a re insurer.

Another solution would be an acquisition by an entity with the capital and patience to get through the current credit cycle.  It remains to be seen if someone steps forward.