tag:blogger.com,1999:blog-4815867514277794362.post7030290926947407109..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Do you believe in Magic? [Fannie Mae part IA.]John Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-4815867514277794362.post-53300558476852738382008-08-29T10:54:00.000+10:002008-08-29T10:54:00.000+10:00MTG, PMI, RDN and even ORI and GNW are all buys.th...MTG, PMI, RDN and even ORI and GNW are all buys.<BR/><BR/>the best way to think about MI conceptually is as a bridge loan. if home prices collapse or the borrower loses a job in the first 3 yrs, the loan goes bad. otherwise, it's a solid investment.<BR/><BR/>the critical question to getting these stocks right is the level of cumulative defaults on 06/07 flow business. 05 is bad, but not catastrophic. the bulk business has already been written off. therefore, the only lingering uncertainty is what the level of defaults on 06/07 will be.<BR/><BR/>here is how to answer the question. MGIC's total claims paying resources (investments + collateralized reinsurance recoverable + the present value of installment premiums) is roughly $13B. that is 24% of the total risk in force. the subprime debacle (for which you were right to short the stock) will end up costing them about 8% of risk in force on a cash basis. that leaves 16% of risk in force (roughly $9B) available to satisfy claims on 06/07 business.<BR/><BR/>that leaves roughly 2/3rds of the claims paying ability ($9B) available to satisfy losses on flow business. the problems are concentrated in 06/07. the total risk in force on 06/07 is roughly $20B (may be high). so in order for MGIC to go bust, roughly 4/10 06/07 vintage loans must go belly up.<BR/><BR/>so how likely is that? well, if you obtain copies of MI annual statements, you can recreate loss triangles by accident year. they will show you that, over time, the cumulative default rate on a flow book is around 2%. it also demonstrates that by year 3, somewhere between 30 and 50% of lifetime defaults have been recognized.<BR/><BR/>you can use the loss triangles and historical seasoning curves to develop a rough model of what lifetime defaults will be on the 06/07 books, given the experience to date. they suggest cum defaults in the range of 10-15%. now, 06/07 only accounts for 40% of the flow book, so the total contribution to loss frequencies will probably by somewhere in the 4-6% range.<BR/><BR/>this analysis suggests that, far from being insolvent, there is actually tremendous value here that has been unrecognized by the market. the stocks are 10-20 baggers over a 5 year time frame.<BR/><BR/>that being said, i think all parts of the capital structure of these companies are interesting. for those who are intrigued by the analysis, but scared to own the equities, i'd point to RDN and PMI holding company debt. you are getting 13-25% YTM (face value 55-80% of par) for a senior interest in the holding company that owns the regulated MI subsidiary.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-41126301147052859962008-08-09T03:04:00.000+10:002008-08-09T03:04:00.000+10:00is it possible to be CF positive and still go bust...is it possible to be CF positive and still go bust? I don't know, but Jimmy Cayne might be able to tell you.John Haskellhttps://www.blogger.com/profile/08341430524377582352noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-72282264742811033952008-08-09T02:16:00.000+10:002008-08-09T02:16:00.000+10:00John...Thanks for your thoughts on Magic. We too ...John...Thanks for your thoughts on Magic. We too were short the stock for some of its fall but have now gone long in significant size. Yes they underwrote a lot of crap, but the premium deficiency reserve which assumed a51% loss rate compensated for that. Now the remaining bulk RIF is only $3.5 billion per page 13 of the recent supplement. Total reserves are $4 billion or $34,000 per delinquent loan at June 30. If the cure rate is 50% (which is way below the historic number) then the reserve per real delinquent loan is more like $68,000. You are right to mention how Magic is cash flow neutral and thats important. We see Magic as generating $1.5 billion in pre provision pre tax earnings per year. Just take revenues minus operating expenses. That is alot of cash at $1.5 billion a year plus $4 billion of reserves to pay future claims. Recent book value was just below $23 per share and based on expected losses over next 6 quarters this should not get below $18 per share at year end 2009. At this point the real earnings power of Magic will shine through remember $1.5 billion pre provision pre tax earnings divided by 150 million shares = $10.00 per share. I guess you could say that makes us believe in Magic.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-60805358300597705002008-08-09T00:10:00.000+10:002008-08-09T00:10:00.000+10:00Their definition of subprime was so weak that it w...Their definition of subprime was so weak that it was possible to not be considered subprime.<BR/><A HREF="http://tweakerz.com/" REL="nofollow"> More Cleavage </A>Unknownhttps://www.blogger.com/profile/17594485199944397566noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-6778451619666785912008-08-08T16:06:00.000+10:002008-08-08T16:06:00.000+10:00Stock is down from about 60 to about 7. It has do...Stock is down from about 60 to about 7. <BR/><BR/>It has done a dilutive capital raise (like many others).<BR/><BR/>It pays a token dividend of 2.5c per quarter. <BR/><BR/>The company used to buy back huge quantities of stock. Obviously that has stopped.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30203295952548031182008-08-08T15:45:00.000+10:002008-08-08T15:45:00.000+10:00I'm curious that given how much the value of the c...I'm curious that given how much the value of the company has fallen they are still paying out dividends?Anonymousnoreply@blogger.com