Will Rising Rates Kill MGIC Earnings?

MGIC Investment (NYSE: MTG  ) will release its quarterly report next Tuesday, but investors haven't waited for that report to send the stock to two-year highs. As the housing market has improved, the mortgage-insurance company's prospects have followed suit, but the slow recovery in MGIC earnings are now vulnerable to a potential drop in premium revenue if rising interest rates hurt new mortgage activity.

Putting MGIC's share-price rise in perspective, though, the mortgage insurer still isn't profitable, and investors don't expect it to get back into the black until next year at the earliest. Will new headwinds push back the company's break-even date even further? Let's take an early look at what's been happening with MGIC Investment over the past quarter, and what we're likely to see in its quarterly report.

Stats on MGIC Investment

Analyst EPS Estimate

($0.15)

Year-Ago EPS

($1.49)

Revenue Estimate

$266.24 million

Change From Year-Ago Revenue

(17%)

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Are MGIC earnings really improving?
In recent months, analysts have had mixed views about the prospects for MGIC earnings, narrowing their June-quarter estimates by $0.01 per share, but widening their full-year 2013 loss consensus by $0.05 per share. That hasn't stopped the stock's gains, though, with shares having risen another 30% just since mid-April.

MGIC's financial condition still doesn't look all that pretty. In its first-quarter report from April, the company saw revenue drop almost 30% from the year-ago quarter, and posted a loss that was almost double what Wall Street had expected. Yet, a combination of $3 billion in new insurance premiums generated from the Home Affordable Refinance Program, and a full-percentage-point drop in delinquent loans, helped the stock avoid a big decline as a result.

But rising prospects for the housing market have improved so strongly that MGIC and its peers are seeing a brighter future. Rival Radian Group (NYSE: RDN  ) has also seen its shares increase as hedge-fund investors like Maverick Capital and John Paulson have bought shares of mortgage-insurance companies, recognizing the impact of rising home prices in reducing the potential liability from mortgage defaults. Both Radian and MGIC have junk bond ratings, reflecting their continued risk, but the companies seem less risky than they did before housing bounced.

The wildcard for mortgage insurers lately has been legal action between insurers and mortgage lenders. In April, MGIC settled a dispute with Bank of America that provided for reimbursements from B of A for certain claims MGIC paid, and established reduced claim responsibility on subsequent losses. Fellow insurer MBIA got a much larger $1.6 billion settlement from B of A in their mortgage-insurance litigation, and Assured Guaranty recently resolved similar disagreements with UBS over mortgage-backed securities that went bad.

For this quarter's MGIC earnings report, watch for continued signs that the company is starting to work its way back to profitability. With big banks reporting heavy mortgage activity, any slowdown from higher interest rates might have to wait until future quarters. If MGIC issues negative guidance going forward, though, then all of its recent share-price gains could be at risk.

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