High Losses Dampen MGIC Results - Analyst Blog

MGIC Investment Corp. (MTG) fourth-quarter loss of 98 cents per share was abysmally lower than the Zacks Consensus Estimate of a loss of 58 cents. The company reported a loss of $2.42 in the year-ago quarter. The earnings missed due to higher paid losses, lower recessions and increased claims.           

Total revenue for the quarter came in at $361.1 million, down 11% year over year. The Zacks Consensus Estimate for revenue was $365 million.  Net premiums written increased modestly by 5.4% to $271.4 million.

Net loss for the quarter came in at $186.7 million, which improved substantially over a net loss of $280.1 million in the prior-year quarter.

Full year operating loss (excluding realized gains and impairment losses) was $2.56 per share versus $11.07 in 2009.  The Zacks Consensus Estimate for the full year was a loss of $1.98 per share.

For the year ended December 31, 2010, MGIC reported lower net loss of $0.4 billion versus net loss of $1.3 billion in 2009. Revenues were $1.5 billion up 12% year over year.

Net underwriting and other expenses were $53.5 million, down 4.8% year over year. The decrease reflected lower contract underwriting volume as well as a focus on expense control in difficult market conditions.

New insurance written of $4.2 billion grew for the third straight quarter. On a year-year-year basis, new insurance written grew a whopping 40.0% for the first time since 2007. Absolute levels of new insurance written volume remained muted led by lower home sales and strong, but diminishing presence of Federal Housing Administration as well as add-on fees Government-sponsored enterprise imposed on borrowers.

Investment income was $57.1 million, down 23.0% year over year due to a decrease in pre-tax yield, offset by an increase in the average amortized cost of invested assets.

Persistency (the percentage of insurance remaining in force from the year-earlier period) was 84.4% as of December 31, 2010, compared with 84.7% in the prior-year period. MGIC's primary insurance in force fell 9.8% year over year to $191.3 billion due to a decline in persistency, partially offset by higher volumes of new insurance written.

In the fourth quarter, net paid claims totaled $631 million, sharply up 23.0% year over year. For 2011, management expects the amount of claim payment to be higher than the fourth quarter levels given large number of loans past due for 12 months or more and approximately 20,000 claims received but not paid.

Claims rescissions have also helped MGIC to reduce losses. For the quarter, the company had $262 million in rescissions down from $288 million in the prior quarter. However, the company believes that percentage of claims resolved through rescissions has peaked and will continue to decline over the next several quarters though the rate of decline is not known.

As of December 31, 2010, MGIC's risk-to-capital ratio was 19.8:1 compared with 19.4:1 as of December 31, 2009. Book value decreased 20.0% year over year to $8.33 per share.

Results reflected continued weak credit and economic environment. The lackadaisical outlook given by management for 2011 stated that MGIC will continue to witness net loss on the back of higher paid claims.

MGIC had also posted net losses for the fiscal years ended December 31, 2009, 2008 and 2007, at $1.3 billion, $0.5 billion and $1.7 billion, respectively, stung by high claims from increased mortgage delinquency caused by the housing crisis. The company currently expects to continue to report 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 new business.

Investors' pessimism toward the sector led to a decline in share prices of peers – Radian Group Inc. (RDN), and PMI Group Inc. (PMI).

Going forward, we expect the company to benefit from improving credit trends. Also, a normalized operating environment expected in 2011, will fuel an increase in new insurance written. We also expect lower levels of loan modifications under Home Affordable Mortgage Program as the company has realized significant benefits from it.

The shares of MGIC carry a Zacks Rank # 3, which translates into a Hold recommendation. However, over the long term (6+ months), we rate the shares as Outperform.

 
MGIC INVSTMT CP (MTG): Free Stock Analysis Report
 
PMI GROUP (PMI): Free Stock Analysis Report
 
RADIAN GRP INC (RDN): Free Stock Analysis Report
 
Zacks Investment Research