The business of insuring low-down-payment mortgage loans continues to be a gold mine.

MGIC Investment Corp., the nation's largest mortgage insurer, reported Monday that earnings for the second quarter rose 28.5%, to $80.6 million. Earnings per share increased 26.4%, to 67 cents, exceeding Wall Street analysts' estimates. According to First Call, the consensus estimate was 64 cents.

The stellar quarter came on the heels of a 24.4% first-quarter increase in earnings per share.

Second-quarter revenues increased 15.6%, and expenses and losses were up only 1.1%.

New insurance written in the quarter totaled $7.7 billion, a 13.5% drop from a year earlier. New insurance written was down 13.8% in the first half.

But William H. Lacy, MGIC's chief executive officer, said insurance written should rebound in the second half. Mortgage lenders have been reporting increased origination volume lately, he noted.

And despite lower volume, a higher percentage of older policies remain in force. Persistency-the percentage of insurance remaining in force from the prior year-was 83%, compared to 82% at the end of 1996 and 81.5% a year earlier.

"Even though volume is down year-to-year, persistency is pretty strong, and earnings should remain good for most of the mortgage insurance companies," said Edwin Ciskowski, an analyst at Equitable Securities Corp.

Mark L. Constant, an analyst at Merrill Lynch & Co., said the sluggishness in new insurance written was not a surprise, given lenders' lower production.

The highlight of the quarter, he added, was an 8-basis-point improvement in the default ratio from yearend, to 1.85%.

Mr. Constant said the ratio fell further than he had expected, and he raised his earnings estimates for this year and next by a nickel and 6 cents, respectively.

Mr. Lacy told analysts during a conference call that the California housing market, where many claims on the industry have originated, "seems to be getting better."

Mortgage insurance covers the risk of default on low-down-payment loans. Fannie Mae and Freddie Mac will not buy loans with less than a 20% down payment unless they are insured.

Two of the other four publicly traded mortgage insurance companies will report second-quarter earnings this week.

Analysts are expecting earnings of 74 cents a share at CMAC Investment Corp., a 19.3% gain, according to First Call.

But analysts are not predicting such a large gain at PMI Group, San Francisco. The consensus estimate is that PMI will post a 12.7% earnings increase, to $1.24 a share, according to First Call.

The two smallest mortgage insurers, Amerin Corp. and Triad Guaranty, are expected to earn 36 cents and 53 cents, respectively, for gains of 44% and 35.8%. Each will report earnings next week.

Mr. Ciskowksi said PMI has lost market share to MGIC and CMAC because they have been writing lower-priced policies on pools of loans sold to Fannie Mae and Freddie Mac for some larger lenders. PMI is not writing pool insurance.

He added that even though products like pool insurance and captive reinsurance are examples of discounted pricing, insurers can afford to give up some profits because they are doing so well.

With captive reinsurance, insurers cede some of the insurance premiums to lenders. In turn, the lender sets up a separate reinsurance subsidiary to assume portions of risk.

Mr. Lacy said the economies in some markets will inevitably cool off and that will lead to leaner times for the mortgage insurance industry.

"When we insured loans in Southern California in the early 1990s we weren't insuring bad loans," he said, referring to the losses that many mortgage insurers experienced there because of defaults related to the decline in housing prices.

Mr. Ciskowski said the mortgage insurers are shrewd enough to avoid getting burned again in any particular market and will likely continue to increase the loss reserves on their balance sheets.

MGIC's loss reserves at the end of the second quarter totaled $553.4 million, 29.7% higher than a year earlier.

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