MGIC Investment Corp (MTG.N) will be able to continue selling mortgage insurance throughout the United States after the company agreed to pay $267.5 million to Freddie Mac FMCC.OB 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 capital requirements.
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," Ryan said.
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 September 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 quarter.
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 September 30, more than double the amount of business it wrote last year.
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 competitors' territory.
MGIC's rival Radian Inc (RDN.N) 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 $1.46 earlier.
(Reporting by Ashutosh Pandey and Sharanya Hrishikesh in Bangalore; Editing by Roshni Menon, Maju Samuel)