PMI Pmi Grp. (The) Common Stock

We are reiterating our Neutal recommendation on the shares of mortgage insurer MGIC Investment Corp. (MTG) following second quarter results. The company reported a second quarter 2011 operating loss of 86 cents per share, significantly lagging the Zacks Consensus Estimate of a profit of 5 cents per share. It is highly reflective of the repercussions the company continues to face in relation to the U.S housing market fiasco.

For the past three years, MGIC has been hit hard by the deteriorating mortgage and housing markets. However, the gradually improving residential mortgage markets are expected to lead the company to profitability.

Though MGIC’s market share has been declining because of competition from the Federal Housing Authority (FHA), the latter has received legislative authority to increase its monthly premium from the beginning of October 2010. This rate hike of its competitor combined with MGIC’s new credit tiered pricing has made its products more competitive.

Management expects that these changes will bring about an increase in the company’s market share versus FHA’s. This was also evident from the second quarter results where new insurance written improved 15% quarter over quarter to $3.1 billion. 

Delinquency rates declined 55 basis points sequentially and 179 basis points year over year to 15.8% in the second quarter. We expect the delinquencies to improve further and reserve per delinquency to trend down.

MGIC has been incurring losses since 2007. For the first two quarters of 2011, it reported a net loss of $185.4 million. Management currently expects to continue recording annual net losses on the back of reduced loan modification programs and slowly improving cure rates. 

MGIC attempted to trim mortgage-related losses by reviewing more claims for rescissions. Historically, these have not comprised a material portion of the company’s resolved claims, but because of significant frauds in 2006 and 2007, the rescission activity in 2008 substantially mitigated the company’s paid and incurred losses.

In 2009 and 2010, rescissions offset paid losses by approximately $1.2 billion each year, and in the first two quarters of 2011, rescissions mitigated paid losses by approximately $0.4 billion. Although the company has a substantial pipeline of claims investigations that, it believes, will eventually result in future rescissions, rescissions will not continue at the same rates (as a percentage of claims received) as experienced previously.

MGIC’s net investment income has been under pressure. Investment income has been decreasing for the past couple of years due to a fall in the average investment yield, offset by an increase in the average amortized cost of invested assets. The decrease in the average investment yield was caused both by lower prevailing interest rates and a fall in the average maturity of investments. We expect the same trend to prevail in 2011.

Milwaukee-based MGIC competes closely with Radian Inc. (RDN), which carries a Neutral recommendation, and PMI Group Inc. (PMI), which carries an Underperform rating.   

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