(Updates throughout with comments from MGIC CEO during earnings conference call, closing share price.)
By Lavonne Kuykendall
Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- Despite paying out more in losses than it collected in premiums for the first quarter, MGIC Investment Corp. (NYSE:MTG) (MTG) sees some cause for optimism in its mortgage insurance business.
During the company's earnings conference call Thursday, Curt S. Culver, MGIC's chairman and chief executive, refused to say whether he thought the company might return to profitability in 2009, but he suggested that the picture for the U.S. housing market was not so dire as many believe.
MGIC reported a net loss of $34.4 million for the first quarter, versus year- earlier net income of $92.4 million. Despite the sharp swing, the bottom line came in well above Wall Street expectations, sending MGIC shares 19% higher to close at $12.49.
Revenue climbed 15% to $423.9 million, which helped keep the loss down. More customers purchased mortgage insurance despite increased prices, and generally kept policies longer.
Culver called rating agency Standard & Poor's prediction of an average 20% drop in housing values from the peak to the trough of the current down-cycle overstated. S&P also said last week that it doesn't expect most of the mortgage insurers to return to profitability until 2010. Culver pointed to the Office of Federal Housing Enterprise Oversight's home price index, which he said suggests around a 9% drop in housing values for those purchased with loans that conform to Fannie Mae (NYSE:FNM) (FNM) and Freddie Mac (NYSE:FRE) (FRE) guidelines, which make up the majority of MGIC's business.
"We think that is more in line," Culver said during the call. He said that he thought the media overplayed stories of people walking away from loans. "That does not happen on our space as much as the media portrays it," he said.
When S&P cut MGIC's rating to A from AA- last week, the company's capital adequacy to pay claims was not as big an issue as the continued housing market decline, a stance Culver said he disagreed with.
S&P noted that MGIC had an AAA capital level as measured by a capital adequacy ratio of 110%, which measures claims-paying resources divided by potential claims generated by S&P so-called stress-test scenarios.
Rather, "the downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance," explained Standard & Poor's credit analyst James Brender. The slumping house market played a big role.
MGIC, and four other mortgage insurers that saw their ratings cut must now submit plans to regain their AA ratings to Fannie and Freddie, or risk coming under more restrictive requirements.
But in his conversations with Freddie Mac (NYSE:FRE) , Culver said that the GSE shares his view that capital is more important than the general economic outlook.
"It seems to be a departure from how S&P is looking at the business, where operating margin is more important than capital," Culver said. "We had a fundamental difference. We disagreed strongly with what (S&P) did."
MGIC's lower-than-expected losses helped lift shares of the entire mortgage insurance segment Thursday, with PMI Group (NYSE:PMI) (PMI), Radian Group (NYSE:RDN) (RDN), Old Republic International (ORI) and Triad Guaranty Inc. (NASDAQ-NMS:TGIC) (TGIC), all closing up Thursday.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@ dowjones.com
(END) Dow Jones Newswires 04-17-08 1754 Copyright (c) 2008 Dow Jones & Company, Inc.
