Higher claim costs along with lower premiums written led mortgage insurer MGIC Investment Corp. (MTG) report a third quarter operating loss of 88 cents per share, 8 cents worse than the Zacks Consensus Estimate of a loss of 80 cents per share. It is highly reflective of the repercussions that the company continues to face in relation to the U.S housing market fiasco.
Total revenues for the quarter were $337.2 million, down 12% year over year. Net premiums written dropped 8.4% year over year to $255.7 million due to stricter loan payout requirements that caused an overall decline in business for mortgage insurers underwriting these loans.
New insurance writings were $3.9 billion up 11.4% year over year. Persistency, which measures the percentage of insurance remaining in force since the previous year, was 83.7% at September 30, 2011 down from 84.4% as on December 31, 2010, and 85.7% as on September 30, 2011.
Combined ratio, a measure of an insurer’s profitability was 184.6% as of the end of the third quarter compared with 146% in the prior year quarter. A combined ratio of under 100% signifies profitability. This means that MGIC has been paying $1.85 on claims and expenses for every dollar of premium earned.
MGIC reported incurred losses or claim cost of $462.7 million, up 20% 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 24.0:1 at third quarter end and was very close to the regulatory limit of 25:1. This extremely high capital to risk ratio raises apprehensions that the company may come under regulatory seizure if it breaches the 25:1 mark, the same fate faced by its close rival PMI Group Inc. (PMI). The main insurance subsidiary of PMI Group named PMI Mortgage Insurance Co. was seized by regulators over the weekend as it breached its risk to capital ratio.
Book value per share, which measures the net worth of a company, decreased to $6.90 in the quarter compared with $9.89 in the prior year quarter.
MGIC results this quarter have carried on the losing trend of the past four years, when the housing market trouble led borrowers to default on loan repayments by the borrowers and consequently increase in the company’s claims cost. We expect continuing elevated defaults in a weak housing market, which will keep homeowners struggling to meet their mortgage payments.
MGIC rivals include Genworth Financial Inc. (GNW) and Radian Group Inc. (RDN), PMI Group Inc. (PMI) and all of them have been suffering since the housing downturn.
