Lehman: MIs Need Reserves.

NEW YORK -- A trio of reports from Lehman Brothers on the three largest publicly traded mortgage insurers all had a common theme: an expectation that those firms will need to build reserves.

In his report on MGIC Investment Corp., analyst Bruce W. Harting cites recent data from the Mortgage Insurance Cos. of America showing the cure/default ratio remaining in the 60% range. In addition, he cites comments from MGIC management at a recent meeting as well as data from other segments of the mortgage business.

"The most notable takeaway from all of these data points is a comment from MGIC management that they believe the near-term mortgage credit for the entire industry will be worse than most expect, which suggests to us that MGIC and its peers will have to continue to make significant additions to reserves," he said.

For MGIC, Lehman is modeling in that it would face higher paid claims than previously expected and thus need to a more substantial reserve build. As a result, it has cut its earnings-per-share estimates on the company from a loss of $0.94 per share in 2007 to a loss of $3.03 per share and a loss of $3.54 per share in 2008 to a loss of $4.50 per share.

For The PMI Group, Lehman cut its fourth-quarter estimate from a loss of $0.88 per share to a loss of $1.58 per share. PMI's problems include its investment in financial guaranty firm FGIC, in which it holds a 42% stake.

The rating agencies have informed FGIC that it needs to raise capital to maintain its AAA rating.

Mr. Harting comments, "We don't believe PMI will be in a position to ...