MGIC Lags Est on High Claims Cost

Mortgage insurer MGIC Investment Corp. (MTG - Analyst Report) reported second quarter 2011 operating loss of 86 cents per share, significantly lagging the Zacks Consensus Estimate of a profit of 5 cents per share. It is highly reflective of the repercussions that the company is still facing in relation to the U.S housing market fiasco. 

Total revenues for the quarter were $367.0 million, down 9.7% year over year. Net premiums written dropped 8.4% year over year to $270.4 million due to adherence to stricter loan payout requirements that caused an overall decline in business for mortgage insurers insuring these loans.  

New insurance written was $3.1 billion, up 14.8% year over year. Persistency, which measures the percentage of insurance remaining in force since previous year, was 83.3% at June 30, 2011 as against 84.4% at December 31, 2010, and 86.4% at June 30, 2010.

As of June 30, 2011, MGIC's primary insurance in force was $182.4 billion compared with $191.3 billion at December 31, 2010, and $202.4 billion at June 30, 2010.

MGIC reported incurred losses or claim cost of $459.6 million, up 43.5% year over year due to new notices exceeding cures. Net underwriting and other expenses stood at $54.0 million, almost in line the prior-year quarter figure, which was $54.1 million.

MGIC’s risk to capital ratio of 20.4:1at second quarter end was in compliance with the risk to capital ratio requirements of 25:1. 

Book value per share, measuring the net worth of a company, decreased to $7.52 as of June 30, 2011compared with $8.00 as of March 31, 2011.

Suffering Peers

Results of MGIC fuelled investor’s pessimism over the private mortgage insurance industry, driving down the shares of other players. While the share price of MGIC fell 23% to close at $4.62, Radian Group(RDN - Snapshot Report) deteriorated 13.79% to close at $3.50, and PMI Group, Inc.(PMI) went down 12.60% to $1.11. All of these companies, which protect lenders from losses if a homeowner defaults and lenders fail to recoup costs through foreclosure, have been suffering since the subprime mortgage crisis in 2007. This, in turn, set delinquencies and foreclosures soaring.

Our Take

Long term- In the long term, the housing market recession, coupled with the rise in subprime mortgage defaults, could lead to positive results for mortgage insurers. As a consequence, such conditions could facilitate more conservative lending practices, leading to more rational borrower and lender behavior, and cause mortgage originators to recognize the value of mortgage insurance.

Short to medium term - The operating environment of the U.S. mortgage insurance industry remains highly uncertain, particularly in light of the recent regulatory proposals dealing with the housing reform. Most players are expected to continue reporting losses for the foreseeable future, and the implications from broader housing reforms are not yet clear.  

Rating agency Standard and Poor’s does not expect mortgage insurers to become profitable until at least 2012. The rating agency has maintained a negative outlook on the sector. It stated that the performance of the mortgage insurer is contingent on the overall U.S. economy and unemployment figures. While Moody’s has assigned a financial strength rating of Ba3 to MGIC, with a positive outlook, Standard & Poor’s has rated it B+ with a negative outlook.

MGIC has been reporting in red for the past four years.The company reported net losses of $0.4 billion, $1.3 billion, $0.5 billion and $1.7 billion in 2010, 2009, 2008 and 2007 respectively.  For the first two quarters of 2011, MGIC reported a net loss of $185.4 million. Management currently expects the company to continue reporting annual net losses, the size of which will depend primarily on the amount of incurred and paid losses from its existing business and, to a lesser extent, on the amount and profitability of its new business. We therefore continue to remain cautious on the stock until signs of greater stability become more evident and its operating results, along with the industry’s legal and regulatory environment, become clearer.

Milwaukee-based MGIC carries a Zacks Rank # 4, which translates into a short term (1-3 months) Sell rating.

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