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Environment Remains Difficult for MI Firms

Based on what preliminary indications show, the fourth quarter of 2007 was another financial disaster for the mortgage insurance industry.

First, MGIC Investment Corp., Milwaukee, is projecting incurred losses for the fourth quarter of 2007 in the area of $1.3 billion. This is more than double what Friedman Billings Ramsey analysts Steve Stelmach and Paul Miller Jr., had previously estimated, the pair said in a report.

Then Old Republic International Corp., Chicago, said its mortgage guaranty business, and to a lesser extent, its title insurance business, contributed to a fourth-quarter net operating income loss for the company. Old Republic was profitable for the quarter only because of realized investment gains recorded for the period.

In what it called an investor update, MGIC blamed a continued deterioration in cure rates, leading to a higher percentage of loans becoming claims. In addition, average claim size continues to increase. For 2008, MGIC is projecting paid losses in the area of $1.8 billion to $2 billion.

MGIC also decided to stop writing bulk business insuring loans included in Wall Street securitizations during the fourth quarter. The company said it is analyzing the accounting implications, which this move will have for its fourth-quarter results.

In their report, the FBR analysts said they forecast MGIC to have a tangible book value of $2.6 billion by year-end 2008, down from $4.5 billion at the end of the first quarter 2007.

"This will bring MGIC uncomfortably close to breaching its minimum net worth requirement of $2 billion. As a result, we view rating agency risk as growing as well as the need for a potential capital raise. Also we do not view other MIs as immune from the troubles seen at MGIC and would expect the group to trade lower in sympathy," the analysts said.

At Old Republic, it reported net income of $20.2 million ($0.09 per share) for the period. But the company also provides net operating income or loss, which is a non-generally accepted accounting principles measure, because it believes its use enhances the understanding of the company's business results.

The company said it had a net operating loss of $12.2 million, or $0.05 per share, for the fourth quarter 2007, compared with net operating income of $103.9 million, or $0.45 per share, for the same period one year prior.

In the quarter, the mortgage guaranty subsidiary, Republic Mortgage Insurance Co., had a pretax operating loss of $112.6 million, while the title insurance business had a smaller loss of $15.7 million.

It was not all bad news for RMIC. The mortgage guaranty business saw a 23.6% improvement in net premiums earned compared with the fourth quarter 2006, while traditional new insurance written increased by 85.3% year-over-year and persistency was up to 77.6% at the end of 2007.

But incurred claims rose to almost 179% of RMIC's fourth-quarter earned premiums and to nearly 119% of such premiums for all of 2007.

"These costs outpaced a substantial increase in premium revenues and pressured operating results to unprofitable levels for the first time in 19 years," a statement from Old Republic said.

The title business had been operating at a near breakeven level for the first three quarters of the year, but the fourth-quarter loss pushed to a loss of $14.7 million for all of 2007.

Its direct title production facilities in the Western U.S. sustained the biggest impact of the troubles in the housing market. In the fourth quarter, Old Republic took aggressive steps to address the imbalance between costs and revenues in that region.

But severance, lease terminations and other expenses penalized fourth quarter pretax operating results by $6.2 million. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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