MGIC Earnings: Losses Prevail With Premium to Book Value (MTG, PMI, RDN, GNW)

The world of mortgage insurers is not looking too hot after MGIC Investment Corp. (NYSE: MTG) gave its earnings report this morning.  The largest insurer for conventional mortgages reported a loss of -$0.93 EPS versus Thomson Reuters estimates of -$0.58 EPS.  When you consider that MGIC shares had risen from under $8.50 in November up to almost $12.00 in recent days, it is no shock that we are seeing adverse moves in rivals such as  PMI Group Inc. (NYSE: PMI),  Radian Group Inc. (NYSE: RDN) and  Genworth Financial Inc. (NYSE: GNW).

The good news is that the loss was narrower, but it still came to a whopping $186.7 million for the quarter, versus a loss of $280.1 million, or  -$2.25 EPS, a year earlier.  Total revenues for the fourth quarter were down almost 10% to $361.1 million, compared to $405.5 million versus a year earlier. Net quarterly premiums written were $271.4 million versus $286.9 million a year earlier.  Net premiums written for the full year 2010 were $1.102 billion, down from $1.243 billion for all of 2009.

The company did note something interesting here considering the state of the black holes that exist in mortgage insurers for the years ahead. The fair value of its investment portfolio, cash and cash equivalents was $8.8 billion at December 31, 2010, higher than the $8.4 billion at December 31, 2009 and higher than the $8.1 billion at December 31, 2008.

The percentage of loans that were delinquent outside of bulk loans was 14.94% versus 15.46% at the end of 2009 and versus 9.51% at the end of 2008 before the floodgates of foreclosures opened wide.  Including bulk loans, those figures were 17.48% versus 18.41% in 2009 and 12.37% in 2008.

PMI Group Inc. (NYSE: PMI) shares are now down 10% at $3.60 against a 52-week range of $2.11 to $7.75; Radian Group Inc. (NYSE: RDN) shares are down 10% at $8.55 against a 52-week range of $4.99 to $18.68.

Genworth Financial Inc. (NYSE: GNW) is more diversified, but it offers mortgage insurance as well.  Genworth shares are  down 3.5% at $13.66 against a 52-week range of $10.26 to $19.36.

MGIC Investment Corp. (NYSE: MTG) shares are really hit hard today as the stock is down almost 15% at $9.89 against a 52-week range of $5.78 to $13.80.

Investing in mortgage insurers and other financial companies in sectors where losses are certain based on book value alone is not generally a smart move.  For what it is worth, MGIC’s book value was listed as $8.33 per share at December 31, 2010, down from $10.41 at the end of 2009 and down from $19.46 at the end of 2008.

Does it seem right that investors would still want to pay a premium to book value to own a mortgage insurer which is almost assured to have losses ahead?  Unless there is a V-shaped recovery for insuring mortgages ahead, we think not.

JON C. OGG