Why MGIC Investment Shares Plunged Then Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of MGIC Investment (NYSE: MTG  ) , a mortgage service provider to lenders and government entities, went for a wild ride today, falling as much as 16%, only to reverse course and shoot up as much as 11%, following the release of its fourth-quarter earnings results.

So what: For the quarter, MGIC reported a staggeringly large loss of $386.7 million, up from $135.3 million loss reported in the year-ago period. Included in this loss is a $267.5 million settlement with Freddie Mac. This was the tenth straight quarterly loss for MGIC, which continues to be hampered by toxic loans left over from the housing bubble. Furthermore, management reported that its preliminary December-end risk-to-capital-ratio was 44.7:1! The typical allowance that mortgage insurance regulators will allow is no more than 25:1, and many of its peers were either shutdown, or forced to stop selling insurance with ratios in the 42:1 to 58:1 range over the past few years.

Now what: The worst part is that MGIC CEO Curt Culver notes that the risk-to-capital ratio is actually expected to rise further! As if MGIC wasn't in a poor enough capital position to begin with, it may get even worse, which could ultimately affect its ability to underwrite insurance and compete with its peers. I honestly can't figure out why MGIC even rebounded off its lows following this ghastly report, and I'd suggest staying as far away as possible from the stock.

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