July 16, 2009 / 11:41 AM / 11 years ago

UPDATE 4-MGIC's restructuring plan sends shares soaring

* Will invest up to $1 bln in new mortgage unit

* Hopes to get aid from U.S. Treasury

* Q2 loss $2.74/shr vs loss 81 cents/shr

* MGIC shares close 19 percent higher (Recasts with details about the new unit, adds analyst comment, updates share movement)

By Sweta Singh and Patrick Rucker

NEW YORK, July 16 (Reuters) - MGIC Investment Corp (MTG.N) will invest up to $1 billion in a spin-off insurance unit that it hopes will help the mortgage finance company survive a deep housing downturn, sending its shares up 19 percent.

The largest U.S. mortgage insurer said it plans to wind down its existing operations and capitalize a subsidiary at the beginning of next year in a move that could let the company build fresh investments as the housing market stabilizes.

Friedman, Billings Ramsey analyst Steve Stelmach raised the stock to “outperform” from “market perform” and said with regulatory approval for a new operating subsidiary, the company has increased flexibility to generate future revenue to offset losses on the existing book.

MGIC on Thursday reported a wider quarterly loss on rising defaults in the battered housing sector.

MGIC aims to begin funding the new unit with $500 million by the end of July and intends to have the new business, Mortgage Indemnity Corp, eventually replace MGIC.

“When MIC is fully operational, MGIC will stop writing new business, i.e., it will go into run-off,” the company said in a statement.

Analyst Mike Grondahl of Northland Securities said it was very positive that the company got regulatory approval for a new unit that will allow it to continue to write business.

The company’s main regulator in Wisconsin approved the restructuring that will see MGIC trim its capital reserves to fund the realignment. Some analysts were concerned bond holders faced greater risk in a plan that depletes the company’s cushion against policy claims.

The company has no plans to issue equity or debt in connection with the capitalization of MIC, it said.

Mortgage finance companies Fannie Mae FNM.N, Freddie Mac FRE.N partner with insurers like MGIC to help shield them from losses.

A home buyer who cannot offer a 20 percent down payment, for instance, will often turn to mortgage insurers.

Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA) are in discussions with MGIC about how the company can right itself, an FHFA spokesperson told Reuters.

MGIC said it hopes to receive a capital investment from the U.S. Treasury but “cannot predict whether we will be successful in obtaining capital from any external source.”

The specialty insurance company saw its business prosper during a five-year housing boom that ended in 2006, but lately investors have shunned MGIC as record home loan defaults have threatened the company’s stability.

QUARTERLY LOSS

Milwaukee-based MGIC reported a second-quarter net loss of $339.8, or $2.74 a share, compared with a loss of $99.9 million, or 81 cents a share, a year earlier.

MGIC wrote $5.9 billion of new insurance in the quarter, compared with $14.0 billion a year ago.

The company said it has more-than-adequate resources to pay all of its insured claim obligations on insurance in force.

In a call with analysts, Chief Executive Curt Culver said, “the underwriting results in the 2008 book of business and the credit mix on the 2009 remain positive.”

He expects business written since the first quarter of 2008 to perform at loss ratios of 50 percent or less.

Fitch Ratings, however, downgraded MGIC, because it will siphon capital from MGIC to the new unit and so reduce the resources that are available to pay claims at MGIC.

Shares of MGIC ended up 19.3 percent at $4.70 at the close of regular trading Thursday on the New York Stock Exchange. (Reporting by Sweta Singh and Patrick Rucker; Editing by John Wallace, Matt Daily, Tim Dobbyn)

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