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MGIC Yet to Recover from Losses

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Mortgage insurer MGIC Investment Corp. (MTG) suffered an operating loss of 48 cents per share on account of higher claim costs and lower premiums written. The reported loss was wider than the Zacks Consensus Estimate of a loss of 47 cents. 

Operating loss was significantly wider than the loss of 20 cents per share recorded in the prior-year quarter. The results reflect the repercussions faced by the company due to the housing market crisis.

Total revenues for the quarter were $379.7 million, down 7.5% year over year, due to lower premiums earned and lower investment income, partially offset by higher realized investment gains.

Net premiums written dropped 7.1% year over year to $255.0 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 $4.2 billion, down 40% year over year. Persistency, which measures the percentage of insurance remaining in force since the previous year, was 82.2% as of March 31, 2012, down 150 basis points year over year.

Combined ratio, a measure of an insurer’s profitability (the lower, the better), was 145.2% at the end of the first quarter compared with 169.4% in the prior-year quarter. A combined ratio below 100% indicates profits. This means that MGIC has been paying $1.45 on claims and expenses for every dollar of premium earned.

MGIC incurred losses or claim costs of $337.1 million, up 8.6% year over year due to an uptick in claim rate.

Combined risk to capital ratio for the company increased to 22.2:1, at the end of the first 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 crosses the 25:1 mark. Its close rival PMI Group Inc. had suffered on the same ground. The main insurance subsidiary of PMI Group, PMI Mortgage Insurance Co., faced regulatory seizure as it breached its risk to capital ratio limit. 

Book value per share, measuring the net worth of a company, decreased 30% year over year to $5.60 as of March 31, 2012.

MGIC results this quarter continue the loss trend of the past four years, when the housing market trouble resulted in failure to repay loans and a consequent increase in the company’s claims cost. We expect continuing elevated defaults amid a weak housing market, as homeowners struggle with their mortgage payments.

MGIC rivals include Genworth Financial Inc. (GNW), Radian Group Inc. (RDN), and PMI Group Inc., all of which have suffered on account of the housing downturn.

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