The move involves the mortgage insurer stopping the transfer of business from so-called captive insurance companies -- which are established to finance risk -- as part of a contract referred to as excess of loss reinsurance treaties.
Such a contract stipulates how insurance written on various risks will be shared between a reinsurer and an insurer as it pertains to excess of loss reinsurance -- which indemnifies the reinsured company against all or some of a loss in excess of its loss retention.
MGIC said loans that have been reinsured through Dec. 31 will run off under the terms of their treaty, while quota-share reinsurance deals -- those that require the insurer to transfer, and the reinsurer to accept, a given percentage of every risk within a category of business written by the insurer -- will be unaffected.
The move comes in addition to a number of other actions MGIC has been taking to protect its financial strength from further pain. It has already been hurt by higher losses amid "the continuing dislocation in residential housing and related mortgage lending." The company has raised $840 million in capital through securities sales, changed its underwriting guidelines, raised premiums and reached a reinsurance agreement with HCC Insurance Holdings Inc. HCC is providing up to $50 billion a year of coverage on newly written insurance policies to help cover catastrophic losses.
Mortgage insurers such as MGIC cover potential lender losses on loans to borrowers who can't come up with a 20% downpayment. Firms have seen claims skyrocket over the last year, as the lack of liquidity in the housing market makes it difficult for borrowers to refinance or for lenders to resell foreclosed properties at profitable prices, forcing mortgage insurers to pay up.