MGIC Investment Corp.: What to Expect Thursday on Earnings

MGIC Investment (MTG 1.28%) will release its quarterly report on Thursday, and investors have bid up the company's stock to levels not seen since early 2011, as the housing market continues to move forward. Higher home prices mean fewer losses for mortgage insurance companies, but can MGIC stay profitable amid increasing competition from established players Radian Group (RDN 1.26%) and Genworth Financial (GNW 1.87%), as well as newly public Essent Group (ESNT 1.50%) and NMI Holdings (Nasdaq: NMIH)?

MGIC suffered greatly during the financial crisis, as its relatively small size left it unprepared for the full magnitude of the plunge in home prices and subsequent rise in delinquency rates. Yet, over the years, the company has done well to shore up its capital position, taking advantage of recovering home prices to reduce its potential loss exposure. Now that the housing market has healed itself, the big question is whether MGIC can deal with new competitors that didn't have to go through the crisis. 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 report.

Image Source: StockMonkeys.com.

Stats on MGIC Investment

Source: Yahoo! Finance.

Can MGIC earnings go positive soon?
Analysts have gotten more optimistic about MGIC earnings in recent months, narrowing their loss estimates for the fourth quarter by $0.01 per share, and boosting their full-year 2014 earnings projections by 20%. The stock has continued climbing, rising 8% since mid-October.

MGIC's third-quarter earnings helped create much of the enthusiasm about the stock lately. The company reported a huge drop in delinquency rates, with non-bulk loan delinquencies falling from more than 12% in the previous quarter to below 10%. That helped MGIC post a surprise profit, defying expectations of a substantial loss, and leading CEO Curt Culver to express optimism about improving economic conditions and their impact on the housing industry.

But better conditions in mortgage insurance inevitably lead to new entrants, and MGIC will now have to deal with Essent Group and NMI Holdings. Hedge-fund investor Kyle Bass helped back NMI Holdings, which was founded in 2011, and Essent just started doing business in 2010. With hopes that government-sponsored enterprises Fannie Mae and Freddie Mac, as well as the Federal Housing Administration, will play a smaller role in the mortgage market, the opportunity for the private market to grow is huge. Moreover, unlike MGIC and Radian, neither NMI nor Essent have the problem loans on their books that established mortgage insurers still have to deal with.

Still, MGIC has worked hard to bring in new business that will offset unfavorable legacy assets and get the company back to consistent profitability. Radian and Genworth have taken similar action, with Radian writing billions in new policies, and Genworth having recently boosted its maximum insurable mortgage amount from $625,000 to $850,000 late last year.

The key question for MGIC will come as the housing market starts reaching lofty levels again. If loan quality starts to decrease, MGIC has to be prepared to rein in its underwriting standards in order to avoid a repeat of the financial crisis.

In the MGIC earnings report, watch to see whether the mortgage insurer is able to give another positive surprise on the earnings front. With more competition, MGIC needs to work hard to capitalize on the favorable conditions in the industry while they last.

Click here to add MGIC Investment to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.