The property market is on the rebound and home prices are now on average the highest on record, according to Reuters. For the most part, the boom in property sales has been due to the availability of mortgages and one of the best ways to play this trend could be through mortgage insurance providers.
The main players
Of the main mortgage insurance companies around are MGIC Investment Corp. (NYSE:MTG) and Radian Group Inc (NYSE:RDN), which offer the maximum exposure to the mortgage market. However, both companies still have a significant amount of delinquent mortgages left over from the financial crisis and these could come back to haunt them.
MGIC Investment Corp. (NYSE:MTG) is the largest private mortgage insurer in the U.S., insuring around 1 million mortgages and Radian Group Inc (NYSE:RDN) is slightly smaller. In their pre-financial crisis heydays, MGIC Investment Corp. (NYSE:MTG) was trading at around $60 a share while Radian Group Inc (NYSE:RDN) was trading at or around the same price. Both collapsed to just penny shares during 2008, but have now recovered some losses to trade at around $6 and $13.50, respectively.
However, while the housing market is getting back on its feet, these insurers are still suffering from write-downs from loans, stemming from the credit-crunch/financial crisis period. Indeed, since 2008, Radian Group Inc (NYSE:RDN) has only turned a profit in one year, 2011, and during the last two quarters, the company has incurred a loss of nearly $200 million — per quarter.
Moreover, MGIC Investment Corp. (NYSE:MTG) has not made a profit at all since the financial crisis and the company’s losses seem to be rising. MGIC Investment Corp. (NYSE:MTG) lost $360 million during 2010, $500 million during 2011, and $930 million during 2012. However, the company only lost $70 million during the first quarter of this year, up from an average loss of $250 million per quarter last year.
On the other hand, we have Genworth Financial Inc (NYSE:GNW), where mortgage insurance only accounts for about 22% of the company’s overall business. The rest of the company’s revenue comes from other wealth management services. Genworth Financial Inc (NYSE:GNW)’s limited exposure to the mortgage insurance business makes it my preferred stock, as it will benefit from resurgence in writing new mortgage business, but will also be able to maintain an income stream from other financial services — a diversified company with some upside linked to the market.
The companies are starting to see a slow return to profitability
The housing market is getting back on its feet but as I have written above, these companies still have an overhang from the previous years. MGIC for example, as of April had 122,055 of its 1 million loans in Primary Delinquency (failure to pay), which is 12.2% — a considerable proportion. However, this figure was slightly down from the previous month’s number of 126,610 delinquent loans, and significantly below the figure for the period in the year before where the number of delinquent loans stood at 160,473. That said, even at this rate, it will still take several years for the company to reduce its number of delinquent loans to a suitable level.