Increasing competition
Over the past two years, the competitive environment within private mortgage insurers has become more favorable, as smaller players like The PMI Group, Inc. (OTCMKTS:PPMIQ) and Old Republic International Corporation (NYSE:ORI) have left the business. This left Radian Group and American International Group Inc (NYSE:AIG) to gain market share. Radian Group Inc (NYSE:RDN) reached the highest share of 28.4%, followed by AIG at 27.5%. MGIC Investments has the third largest share of 17% at the end of the first quarter.
However, the situation will begin to reverse over the remaining half of 2013 given Arch Capital Group Ltd. (NASDAQ:ACGL)’sacquisition of CMG Mortgage Insurance Company and the recent approval of NMI Holdings to begin writing business. By the end of next year, Arch Capital and NMI Holdings can gain a share of 15-20% from the existing mortgage insurers.
American International Group Inc (NYSE:AIG) has recently been named as a non-bank Systemically Important Financial Institution (SIFI) by the Fed. While the implications remain unclear, one thing is sure: They will be tested by the Fed for stress tests and would require approval to repurchase stocks or raise dividends. Although American International Group Inc (NYSE:AIG) appears to be well capitalized under the current rules, it will face major constraints on its future share buyback programs. The company had an established track record of repurchasing its stocks.
Conclusion
The situation is beginning to improve for Radian Group and MGIC Investment after they accumulated losses for years. However, the improving situation is also attracting more smaller players in the industry, which will ultimately snatch some of the old players’ share. Still, with this increased competition, Radian and MGIC are expected to produce some impressive results in the coming quarter. While both Radian and MGIC are expected to write higher insurances during the remaining of the year, MGIC’s future profitability is highly dependent on the level of reinsurance it uses. I believe Radian is better positioned compared to MGIC due to the lower reinsurance it has employed.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Profits to Return to These Mortgage Insurers originally appeared on Fool.com is written by Adnan Khan.
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