A planned merger of MGIC Investment Corp. and Radian Group Inc. would put the insurance of $290 billion in mortgages and $104 billion in other investments under a single roof and create a company with $15 billion in assets.
MGIC Radian Financial Group Inc., as the new company is to be called, would be overseen by MGIC Chief Executive Officer Curt S. Culver and headquartered in Milwaukee, Wis. Radian CEO S.A. Ibrahim would serve as president and chief operating officer, and succeed Culver as chief executive officer of the combined company in 2009.
The merger plan announced today is subject to approval by shareholders and regulators, and could close in the fourth quarter of this year. The companies expect the merger to generate cost savings of $128 million in 2008 and 2009, while restructuring costs will total $125 million to $150 million.
Fitch Ratings responded to the announcement of the merger by placing its AA+ rating of Mortgage Guaranty Insurance Corp. (MGIC) and the A+ senior debt rating of parent company MGIC Investment Corp. on “Rating Watch Negative.”
In a statement, Fitch analysts said the merger “makes economic and strategic sense,” but that “the combination of the two organizations will increase MGIC’s risk profile relative to historical norms.”
In a conference call with reporters, MGIC Chief Financial Officer J. Michael Lauer said the move by Fitch was expected because MGIC is rated “a notch above” Radian, and there are always uncertainties invovled in mergers.
Fitch affirmed its AA ratings of Radian’s mortgage insurance subsidiaries, Radian Guaranty Inc., Radian Insurance Inc., Amerin Guaranty Corp. and Radian Europe Ltd., saying the rating outlook for those companies remains stable.
“Fitch believes there will be significant synergies realized from the proposed merger, including large expense savings, increased capital efficiency, and a better focused international expansion effort,” analysts said. “Notwithstanding, Fitch recognizes significant execution risk in the proposed transaction; most notably the melding of two separate and distinct corporate cultures, as well as the reconciliation of any regulatory or customer objections.”
MGIC Corp. recently reported that fourth-quarter-2006 earnings fell 5 percent to $121.5 million, or $1.47 per share, compared to the same quarter of 2005. Earnings for the year were down 9.9 percent to $564.7 million.
MGIC said earnings were down largely because of a slowdown in generating new premiums, but the company also saw a rise in the percentage of delinquent A-minus and subprime loans it insures.
Radian’s most recent earnings report said the company made record profits of $582.2 million in 2006, up 11.3 percent from 2005. Fourth-quarter-2006 earnings of $158.4 million were up 52 percent from $104.5 million the year before.
In reporting its earnings, MGIC revealed that regulators in New York and Minnesota were looking into the company’s captive reinsurance arrangements.
In its most recent earnings report, Radian also warned investors of the “possibility of private lawsuits or investigations by state insurance departments and state attorneys general.” Although Radian did not say it was under investigation, the company’s captive reinsurance, pool insurance and contract underwriting businesses could be challenged as violations of the Real Estate Settlement Procedures Act or similar state regulations, the company said.
