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MGIC Posts First Loss, Predicts No Profit Next Year (Update7)
By Josh P. Hamilton

Oct. 17 (Bloomberg) -- MGIC Investment Corp., the largest U.S. mortgage insurer, posted its first quarterly loss in 16 years and said it won't be profitable in 2008 as foreclosures increase from record levels.

The net loss of $372.5 million, or $4.60 a share, was the worst quarter for the Milwaukee-based company since it went public in 1991. MGIC earned $130 million, or $1.55 a share, a year earlier, the company said today in a statement. MGIC fell the most in two months in New York trading.

Costs to bail out lenders more than tripled to $602.3 million as U.S. home prices in the nation's biggest markets fell, making it harder for banks to recover when loans go sour. Chief Executive Officer Curt Culver said on a conference call today that U.S. real estate prices may drop 10 percent over the next 18 months.

``Things are going to get worse from here,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``We've got a couple of scary quarters ahead of us.''

MGIC wrote off its $466 million investment in Credit-Based Asset Servicing and Securitization LLC, jointly owned with Radian Group Inc., after demand for subprime loans collapsed. The writedown lowered third-quarter earnings by $303 million after taxes. MGIC last month abandoned its $4.9 billion plan to acquire Radian, the third-largest mortgage insurer, partly because of the C-Bass loss.

Shares Decline

MGIC declined $4.62, or 15 percent, to $26.25 in New York Stock Exchange composite trading at 2:59 p.m. The stock has lost more than half its value this year. Philadelphia-based Radian fell $3.70, or 17 percent, to $17.87. Walnut Creek, California-based PMI Group Inc., ranked second, dropped $2.24, or 11 percent, to $26.27.

Fitch Ratings said it may downgrade MGIC's claims-paying ability because mortgages insured in 2007 appear to be performing at least as badly as 2006 loans.

The insurer increased the money set aside for future claims by 31 percent since June 30, to $1.56 billion. It paid out $2.03 in claims and expenses for every premium dollar, more than double the second quarter's payout rate.

``We have modeled in, I think, very draconian loss estimates,'' Culver said during the call. ``We have got more than enough capital to pay those.''

The company will probably end the year with about $300 million in cash, enough to weather current conditions, he said. MGIC also has $200 million available on a line of credit that requires it to maintain a minimum market value of $2.25 billion, the company said. MGIC was worth about $2.15 billion as of 2:59 p.m. in New York.

California, Florida

Culver blamed much of the surging losses on larger claims from bigger mortgages and fewer delinquent mortgages being returned to good standing as housing markets deteriorated, particularly in California and Florida.

The risk of owning MGIC's bonds rose to the highest level in six weeks, according to credit-default swap traders. The contracts, used to speculate on the company's ability to repay its debt or hedge against the risk it won't, rose 40 basis points to 200 basis points, according to CMA Datavision. An increase suggests deterioration in investor confidence.

Excluding the $303 million writedown of the joint venture and a $105.9 million gain from the sale of an investment, both after tax, the insurer lost $2.16 a share. The average estimate of nine analysts surveyed by Bloomberg, excluding investment gains and losses, was a profit of 61 cents.

Asked if the company would continue its dividend of 25 cents a share, Culver said the board evaluates the payout on a ``quarter- to-quarter'' basis.

Default Protection

Mortgage insurers help reimburse home lenders when borrowers don't pay. Lenders often require homeowners to buy private mortgage insurance if they put down less than 20 percent in cash or if their credit rating is weak.

The number of borrowers more than 60 days behind on privately insured loans jumped 30 percent from year-earlier levels in August, the most recent data from Washington-based Mortgage Insurance Companies of America showed.

MGIC was founded 50 years ago as Mortgage Guaranty Insurance Corp. by a Milwaukee real estate attorney who conceived of privately insuring only a portion of the mortgage, making the coverage less costly and allowing lenders to settle for lower down payments. A portion of a foreclosed loan can usually be recovered by selling the property.

The company is forecasting declines in home values of 20 percent in the Phoenix area, 18 percent in Las Vegas, 13 percent in Orlando, Florida, and 7 percent in Los Angeles over the next two years.

C-Bass Joint Venture

The C-Bass joint venture bought delinquent subprime mortgages, made to borrowers with poor credit records, aiming to get collections back on schedule and sell the debt at a profit. MGIC and Radian each own 46 percent of C-Bass. MGIC wrote off its full $466 million equity investment in the unit and said it hopes to recover $50 million it loaned to C-Bass.

The C-Bass loss was partially offset by MGIC's $240.8 million sale last month of a 16 percent stake in another joint venture with Radian, Sherman Financial Group LLC., which invests primarily in distressed consumer debt. MGIC still owns 24.2 percent of the debt- recovery company.

Premium revenue rose 8.4 percent to $321 million, MGIC said. Mortgage insurers are selling more coverage as lenders seek to lower their risk and make loans attractive to investors. New mortgages insured by homebuyers totaled more than $23.7 billion in August, a 66 percent jump over the year-earlier period, the Mortgage Insurance Companies of America said.

MGIC is the first U.S. mortgage insurer to release third- quarter results.

``It's a huge miss,'' said Geoffrey Dunn, an analyst at KBW Inc. in Hartford, Connecticut. ``Our fears that 2008 might be even worse than we forecast are being realized.''

To contact the reporter on this story: Josh P. Hamilton in New York at .

Last Updated: October 17, 2007 15:04 EDT
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rockin' & rollin
if there is no profit , then how do they stay in business  ??

I'd close my doors .

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By overcharging the consumers with bogus fees.

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