Higher claim costs coupled with lower premium written led mortgage insurer MGIC Investment Corp. (NYSE:MTG - News) report fourth quarter operating loss of $1.19 per share, substantially worse than the Zacks Consensus Estimate of a loss of 77 cents per share. Operating loss in the quarter also widened compared with a loss of 98 cents per share incurred in the prior-year quarter. The results reflect the repercussions that the company is still facing in relation to the U.S. housing market fiasco.
Total revenues for the quarter were $447.0 million, down 24% year over year. Net premiums written dropped 2.8% year over year to $263.8 million due to adherence to stricter loan payout requirements that caused an overall decline in business for mortgage insurers insuring these loans.
New insurance writings were worth $4.2 billion, unchanged from the prior-year quarter. Persistency, which measures the percentage of insurance remaining in force since previous year, was 82.9% on December 31, 2011, down from 84.4% on December 31, 2010, and 84.7% on December 31, 2010.
Combined ratio, a measure of an insurer’s profitability (the lower, the better) was 189.7% at the end of the fourth quarter compared with 169.4% in the prior-year quarter. A combined ratio below 100% signifies profitability. This means that MGIC has been paying $1.89 on claims and expenses for every dollar of premium earned.
MGIC reported incurred losses or claim cost of $482.1 million, up 7.5% year over year, due to new notices exceeding cures along with higher claims paid on previously disclosed delinquencies.
Combined risk to capital ratio for the company increased to 22.2:1 at the end of the fourth quarter, close to the regulatory limit of 25:1. We are concerned about the steep capital to risk ratio which poses a significant regulatory seizure risk for the company once it transcends the 25:1 mark. Its close rival PMI Group Inc. (Other OTC:PPMIQ.PK - News) had suffered on the same ground. The main insurance subsidiary of PMI Group named PMI Mortgage Insurance Co. was seized by regulators as it breached its risk to capital ratio limit.
Book value per share, measuring the net worth of a company, decreased to $5.95 as of December 31, 2011, compared with $8.33 as of December 31, 2010.
MGIC results in this quarter continue the loss trend of the past four years when the housing market trouble started leading to loan payment default by the borrowers and a consequent increase in the company’s claims cost. We expect continuing elevated defaults amid a weak housing market with homeowners struggling to meet their mortgage payments.
MGIC rivals, Genworth Financial Inc. (NYSE:GNW - News), Radian Group Inc. (NYSE:RDN - News), and PMI Group Inc. (Other OTC:PPMIQ.PK - News), have all been suffering badly ever since the housing downturn.
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