Before the opening bell today, MGIC Investment Corporation (MTG) announced its second quarter results. Core earnings shrank to -$2.74 per share from -$0.81 in the prior year period, abysmally missing our expectations of ($0.65) per share.

Total revenue increased 7.1% year over year to $454.5 million. Net premiums written decreased 11.14% year over year to $330.4 million. New Insurance written declined considerably by 58% year over year to $5.9 billion. Persistency (% of premium remaining in force from the prior year) improved to 85.1%, compared with 79.7% in the prior-year period. The percent of delinquent loans doubled to 12.04% as compared with 6.02% in the prior-year period.

MTG’s primary insurance in-force decreased to $220.1 billion, compared to $226.4 billion in the prior-year period. Net paid claims increased 22.5% year over year to $380 million.

Risk-to-capital ratio reported during the quarter was 14.7, compared to 16.1:1 in the prior-year period. State law mandates that an insurer’s risk-to-capital ratio should not exceed 25:1 to be able to write insurance uninterruptedly. However, management insisted of having adequate resources to meet all of its insured claim obligations.

MTG has exposure to certain types of mortgages which have higher probabilities of claims even when the housing values are stable or rising. These segments includes loans with a loan-to-value ratio of over 95%, FICO credit scores below 620 and limited underwriting. As of June 30, 2009, approximately 60% of MTG’s primary risk in force loans with loan-to-value ratios equal to or greater than 95%, 8.9% had FICO credit scores below 620, and 13.0% had limited underwriting, including limited borrower documentation.

Beginning in the fourth quarter of 2007 management made a series of changes to its underwriting guidelines in an effort to improve the risk profile of the new business. We do, however, believe that given the various changes in the company’s underwriting guidelines that were effective in 2008, its 2008 and 2009 books of loans will generate underwriting profit.

A worsening economy, soaring unemployment and tumultuous housing market have caused a significant increase in delinquencies and continue to materially affect the company’s results. However, a lack of any positive developments from the mortgage market compels us to maintain a Sell rating on the shares of the company.
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