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Why MGIC Investment Corp. Stock Dropped Today

By Jordan Wathen – Jan 21, 2016 at 3:31PM

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The mortgage insurer announced pricing changes with its fourth-quarter earnings today.

What: MGIC Investment Corp. (MTG 0.37%) stock is dropping today, down 12.6% at 2:45 p.m. ET, after the company's fourth-quarter earnings release.

So what: It reported adjusted net income of $113.9 million, or $0.26 per share for the fourth quarter vs. $75.1 million and $0.19 per share a year ago.

Earnings may have taken a backseat to an announced pricing change on its conference call. MGIC Investment intends to change its premiums for mortgage insurance, which it believes will result in comparable returns on its capital vs. its previous pricing, but at the cost of lost business going into 2016.

It pointed out that higher capital charges for insurers were the driving force behind the rate increase. In its supplement, it showed two scenarios where low-FICO homebuyers would pay roughly $85 more each month for MGIC insurance compared to alternatives from the FHA. High-FICO borrowers -- those with a credit score above 760 -- would save roughly $45 per month buying insurance from MGIC vs. FHA.

Now what: Executives noted that they expected to see a modest reduction in policies written in 2016, as its new pricing pushes away lower-FICO homebuyers and incentivizes high-FICO homebuyers with lower rates.

Insiders described the "modest" drop as an expected "single-digit" percentage decline. Wall Street, however, seems to have a mixed opinion of the pricing and strategy change, and the competitiveness of private mortgage insurance against government-sponsored alternatives. 

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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