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* Says considering reinsurance, raising cash from markets
* 4th-qtr loss/share $1.91 vs loss/share $0.67 year earlier
* Dec-end prelim combined ops risk-to-capital ratio at 47.8 to 1
* Expects risk ratio to rise further
* Shares reverse course, up 11 percent in midday trading (Adds details from conference call)
By Jochelle Mendonca
Feb 28 (Reuters) - Mortgage insurer MGIC Investment Corp said it was considering reinsuring some of its businesses and raising capital after it reported a sharp deterioration in its ability to pay claims at the end of the fourth quarter.
The company's shares fell as much as 15 percent on Thursday morning but reversed course, rising 11 percent to $3.10 in midday trading. The stock, sold for as much as $70 before the housing bubble burst in 2007, was the top percentage gainer on the New York Stock Exchange at 1226 ET.
MGIC and rivals Radian Group Inc and life insurer Genworth Financial Inc's mortgage unit protect lenders in cases where homebuyers make down payments below a certain threshold.
They have been struggling to recoup their losses after the housing bubble burst and foreclosures soared, saddling them with large claims on unpaid home loans and thin capital cushions.
The preliminary risk-to-capital ratio at MGIC's combined insurance operations was 47.8 to 1 as of Dec. 31. Mortgage insurance regulators commonly allow for a maximum risk-to-capital ratio of 25 to 1.
The mortgage insurer said it expects its risk to rise above the Dec. 31 level in 2013.
"We are evaluating a number of options to address the elevated risk-to-capital ratio with the objective of materially reducing it," MGIC Chief Executive Curt Culver said on a post-earnings conference call.
These options include utilizing existing insurance subsidiaries for reinsurance, contributing additional capital to its underwriting units from the holding company, and raising capital, Culver said.
MGIC is in discussions with regulators and its main counterparties Freddie Mac and Fannie Mae regarding the capital options.
Philadelphia-based Radian is also looking to raise about $700 million through the sale of shares and debt, leading bond rating agency Moody's to upgrade its senior debt rating.
"Based on what our friends in Philadelphia did, the market is pretty acceptable to the (mortgage insurance) space. We know that because we have got a number of inquiries," Culver said.
MGIC's primary regulator uses the minimum policyholder position to gauge an insurer's strength. MGIC came up short on that measure as well.
Its minimum policyholder position (MPP) was $640 million below the required amount of $1.2 billion at the end of the year.
The MPP is the minimum amount of money an insurer would need to meet claims.
MGIC has received waivers to allow it to continue to write insurance despite its high risk levels.
The mortgage insurer has fallen behind its rivals in new insurance written and its rising risk places it in a much weaker competitive position.
Radian's risk-to-capital ratio was 20.8 to 1 as of the end of 2012 and the company expects its risk-to-capital ratio to stay within regulatory limits this year.
Radian, whose profits on new insurance are increasingly offsetting legacy losses, expects to return to operating profitability in 2013.
MGIC, on the other hand, has said it is unable to project a return to profitability in the near term.
Analysts do not expect the company to post a profit until the third quarter of 2014, according Thomson Reuters I/B/E/S.
MGIC wrote $7 billion in new insurance in the fourth quarter, while Radian wrote $11.7 billion in the same period.
MGIC's fourth-quarter loss almost tripled to $386.7 million, or $1.91 per share, from $135.3 million, or 67 cents per share, a year earlier.
The loss included a $267.5 million settlement with Freddie Mac.
MGIC agreed in November to make the payout to its primary counterparty to settle a dispute that threatened its future.
The company also said that it had made substantial progress in resolving its dispute with Bank of America's Countrywide unit.
MGIC had refused to pay claims on Countrywide's loans, saying they were improperly written, a fact the mortgage lender disputed.
Mortgage bond insurer MBIA Inc, which flagged 'going concern' doubts and liquidation fears over its unit that insured mortgage-backed derivatives, is also suing Bank of America on similar grounds. (Additional reporting by Ashutosh Pandey in Bangalore; Editing by Maju Samuel)