Life as a mortgage insurer looks increasingly grim this earnings season. Yet another dismal earnings report Thursday hit stocks in the sector, as MGIC Investment ( MTG) slashed its dividend. Each piece of bad news generates outsized declines among these stocks, which have fallen between 67% and 89% this year. As the housing market continues to deteriorate, investors are concerned that the mortgage crisis is pushing these companies to their limits. Mortgage insurance policies are paid out to lenders when borrowers default on their debt. Thursday, Triad Guaranty ( TGIC) plunged 29%, a day after reporting a hefty quarterly loss of $31.8 million, or $2.13 a share, compared to a profit of $19.4 million, or $1.30 a share, in the year-ago quarter. Analysts had anticipated Triad would earn 72 cents a share in the quarter. MGIC, which reported a massive $4.60 per-share third-quarter loss a week ago, Thursday slashed its quarterly dividend by 90% to 2.5 cents a share, sending shares down 12%. Radian Group ( RDN) and PMI Group ( PMI), which report earnings next week, sank 23% and 8% respectively. Winston-Salem, N.C.-based Triad, which analysts had seen as insuring better-quality loans, said net losses and loss adjustment expenses totaled $106.8 million in the quarter, compared to $19.3 million in the year-ago period. The losses included an increase of reserves of $78.3 million compared to just $5.7 million a year earlier. Paid claims were $28.5 million for the quarter compared to $13.6 million.
"Our portfolio experienced significant pressures on the heels of the liquidity issues that affected the availability of mortgage lending and the rapid deterioration of the housing markets in certain areas of the U.S.," said Triad's CEO Mark Tonnesen. Triad's poor results sparked Bear Stearns analyst Michael Nannizzi to downgrade the company to the equivalent of a sell rating. "This potentially raises some concern about capital adequacy," he writes in a note, adding that it will be difficult for Triad to replace the volume it lost from American Home Mortgage, one of its largest customers and a large producer of so-called Alt-A loans. American Home went belly-up in August after a liquidity squeeze. Nannizzi is also concerned about the company's current risk-to-capital ratio, which he estimates at 17.8, compared to an industry average, which is below 10. Remedying the problem includes only unattractive options for Triad, he says, adding that its ratio will climb above 20 or the firm will not write new business. He notes that over 70% of the firm's risk is relative to policies written from 2005 and later. "We believe delinquency and claim trends will only deteriorate further as these problematic vintages enter their peak claim-paying years in 2008-2009," Nannizzi writes. MGIC's earnings issues stem from an after-tax writedown of $303 million tied to its equity investment in C-Bass, a joint venture with Radian that invested in subprime mortgages. MGIC warned last week that it did not expect to return to profitability in the fourth quarter or in 2008.
The company also recorded $11.3 million in pretax expenses tied to its failed merger with Radian, which was terminated in September. Kathleen Shanley, a senior investment grade analyst at Gimme Credit, an independent research service on corporate bonds, says MGIC's dividend cut was a "necessary move." She adds that the firm's dividend at up cash is to the tune of about $83 million per year. Shanley's has a credit rating of "deteriorating" on MGIC. Adding fuel to the fire on Thursday was bond insurer MBIA ( MBI). Shares dropped 18% after it posted a loss of $36.6 million, or 29 cents a share, compared to $217.9 million, or $1.59 a share. The Armonk, N.Y.-based company recorded $352.4 million, or $1.80 a share, in writedowns on certain financial instruments and foreign exchange. MBIA says that the mark-to-market loss "does not reflect material credit impairment." "The loss was a consequence of wider spreads affecting the valuation of the company's structured credit derivatives portfolio," the company said. That portfolio included commercial mortgage-backed securities collateral and on other asset-backed securities whose values have plunged in the summer's credit crunch." Credit ratings agencies have already put PMI Group and MGIC Investment on CreditWatch with negative implications in the past week, and some expect ratings downgrades are not far behind. "We believe it is probable -- though not certain -- that all seven major mortgage insurers will report underwriting losses in 2008,'' S&P said in a separate statement last week.