No Magic for MGIC in Q3

MGIC Investment Corp.’s (MTG) third-quarter loss of $4.44 per share was wider than the Zacks Consensus Estimate of a loss of $1.64 per share. Last year, the company had reported a loss of $1.06 per share. Increasing delinquent inventory and consequently higher incurred losses drained the results.

The company’s loss stood at $971 million from $788.3 million reported for the same period last year, primarily due to an increase in delinquencies. Net underwriting and other expenses were $59.1 million as compared to $62.4 million reported for the same period last year.

Total revenues were $413.3 million, compared with $461.6 million in the third quarter last year. Net premiums written were $278.3 million, compared with $365.0 million for the same period last year. New insurance written was $4.6 billion, compared to $9.7 billion in the third quarter of 2008. Investment income was $75.5 million, down 3.9% year over year.

Persistency − the percentage of insurance remaining in force from a year earlier − was 85.2% at Sep 30, 2009, compared with 82.1% at Sep 30, 2008.

MGIC's primary insurance in-force increased to $216.8 billion, compared to $228.2 billion last year.

Net paid claims totaled $417 million, up $37 million on a linked quarter and $87 million year over year.

The percentage of delinquent loans (excluding bulk loans) was 13.97%. The level was up from 7.54% recorded last year.

Book value decreased 38.9% year over year to $13.18 per share.

We continue to remain concerned over the prospects for MTG. Increased delinquencies due to increased unemployment, lower home prices and the ongoing recession caused losses. The deteriorating position of the company was aggravated by yet another rating cut by Fitch as well as Standard and Poor’s. We believe that MTG will be unable to write new insurance until the new subsidiary starts operating, which is awaiting approval from Fannie Freddie as well as from various state insurance commissioners. We are unsure as to new business prospects. Pending further positive developments we will continue to rate the shares as a Hold.

Comments

[jerkassdorko:]

Will "Mortgage The Gathering" run out of cards, or has the government secretly already decided to stack the deck in its favor? Place your wagers now!

Nov 02 07:27 PM

[The Mortgag...:]

The mortgage insurance industry is in a difficult position. It bases loan losses on mortgage defaults. The government's Home Affordable Mortgage program encourages home owners to default (pay their mortgage late) in order to get better terms on their loans. Consequently, mortgage defaults have been consistently increasing, MTG has consistently increased loan loss reserves and the balance sheet appears to be getting worse because loan loss reserves have been increasing.

The ironic part is that actual paid claims have been less than the company's operating cash flow. If you were to look at MTG's operating cash flow for the last seven quarters, it would show $1.3 billion in positive cash flow at a time when it reported $1.2 billion in losses. The positive cash flow has resulted in a decrease of $300 million in interest bearing liabilities and and increase of $800 million in investment grade securities.


The most important question for the mortgage insurance industry is how long it will take for unemployment to improve and for the HAMP program bring about significant numbers of modified loans. Once the unemployment rate begins to decline and the HAMP loan modification program begins to result in increases in cures of defaulted loans, the mortgage insurance companies will start reporting smaller losses and eventually profits due to declining numbers of loans which are in default.

Ironcically, this will probably result in a period of time when the Mortgage insurance companies report profits, but have negative cash flow for the same reasons they currently have positive cash flow while they are reporting losses.

Any stock under $5 has inherit risks. However, the peculiarities of the accounting for MTG create an opportunity for big turn around as the economy improves.

Nov 12 05:50 PM