MGIC Investment ( MTG) plunged 11% after the mortgage insurer reported a big third-quarter loss and said it doesn't expect to return to profitability in the fourth quarter or 2008. The comments spurred a ratings downgrade and sent shares across the mortgage insurance sector tumbling. Shares in Radian ( RDN), MGIC's partner in a merger that failed to close earlier this year, fell 11%, while MGIC and Triad Guaranty ( TGIC) each fell 10% and PMI ( PMI) slid 8%. For the three months ended Sept. 30, Milwaukee-based MGIC reported a loss of $372.5 million, or $4.60 a share, compared to a profit of $130 million, or $1.55 a share, in the year-ago quarter. Analysts had expected MGIC to earn 61 cents a share in the quarter. MGIC attributed the loss to an after-tax writedown of $303 million from an impairment on its equity investment in Credit-Based Asset Servicing and Securitization, or C-Bass. C-Bass is a joint venture with Radian that invested in subprime mortgages. But the business swooned as the housing downturn worsened this summer and investors shunned mortgage-backed securities. The company also recorded $11.3 million in pretax expenses over its failed merger with Radian, which was terminated in September, due to a decline in business and the C-Bass writedown. Offsetting the charges was a $106 million gain from MGIC's sale of a portion of its stake in a debt-recovery firm during the quarter.
MGIC and Radian have been hurt by the subprime mess because the policies they write pay out when loans go bad. Approximately 6.63% of its portfolio was delinquent in the third quarter, compared to 5.98% in the year-ago quarter. Losses incurred in the quarter jumped to $602 million, up from $165 million a year earlier due "primarily to the increase in both the number and size of loans that are delinquent, increase loss severity, decreased cure rates in certain markets, particularly California and Florida, continued weakness in the Midwest, and increased paid losses," MGIC said. MGIC said in a statement that the dislocation of the mortgage finance and housing downturn had a "material" impact on third-quarter results and will do the same next year. MGIC said paid losses will be in the range of $270 million to $290 million for the fourth quarter and $1.2 billion to $1.5 billion in 2008. "Given the company's expectations for paid losses, unless the cure rate and loss severity improves, the company does not foresee net income for the fourth quarter of 2007 and full year 2008," it said. MGIC said it was well positioned from a capital perspective. Fitch Ratings placed MGIC on a negative outlook from stable following the dour results.
"MGIC's ratings are likely to remain under pressure from Fitch until the point in time where a peak in the company's delinquency and loss curves can be reasonably estimated," it added. The ratings agency reaffirmed MGIC's insurer financial strength of AA as well as its senior debt rating of A. Fitch's move comes a week after S&P said it would likely downgrade the mortgage insurers' bonds, due to their declining financial position. On Wednesday, Standard & Poor's said it may cut its ratings on MGIC, given probable underwriting losses this year and next. MGIC shares dropped $3.18 to $27.69.