Why MGIC Investment Corp. Stock Was Decimated Today

Is this meaningful? Or just another movement?

Jul 11, 2014 at 3:27PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of MGIC Investment (NYSE:MTG) have dropped more than 10% today after the mortgage-insurance company announced that it would not  be able to meet the Federal Housing Finance Agency's (FHFA's) new industry standards.

So what: The FHFA has proposed regulations that will force private insurers backing mortgages owned or guaranteed by Fannie Mae (NASDAQOTCBB:FNMA) or Freddie Mac (NASDAQOTCBB:FMCC) to hold available assets of at least 5.6% of their risk exposure. MGIC's premarket response noted that it holds "materially less" assets than would be necessary to meet these requirements, but also pointed out that it believes the FHFA is requiring holdings "far in excess" of what's necessary to avoid catastrophe. Another insurer that also dropped after responding to the FHFA's proposal pointed out that the capital requirements are "more onerous" than its operating history indicates would be necessary.

Goldman Sachs (NYSE: GS) analysts dropped  MGIC from their "Conviction Buy" list as a result of its statement, reducing their recommendation to a simple (but unenthusiastic) "Buy."

Now what: While MGIC itself reported  a risk-to-capital ratio of 15.3 to 1 (or assets sufficient to cover 6.5% of its risk) in its latest quarterly filing, the company notes that it would fall short of the FHFA's requirements due to the language of the proposal -- "available assets" in this case would not include future premiums from in-force policies, and the proposal seems to not only anticipate and mandate assets to cover delinquency rates as policies are underwritten, but also mandates the insurer hold additional assets for policies that become delinquent later. In effect, the proposed policy is double-counting the impact of delinquencies on an insurer's available assets.

As this policy is still in the proposal stage, it may not wind up impacting MGIC's business at all. However, investors shouldn't ignore the impact of new regulations on MGIC's ability to do business over the coming quarters. I'd do a bit more digging before deciding that this is either a buying opportunity or a big warning sign.

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Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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