Following the recent run in stocks, I see mortgage insurers as being fairly valued. Capital positions have strengthened and industry fundamentals are improving. However, going forward there is not enough earnings power to provide additional upside. This report looks at the various macro level inputs and finds that the private mortgage insurance industry is poised to deliver NIW (new insurance written) growth over the coming years despite the declines in overall mortgage market volumes. A financial review of some of the main players is also part of the report.
Future Mortgage Volumes
Credit Suisse in a report to its investors said that it expects total mortgage market volumes to decline 20% to $1.4 trillion during the current year. It also expects a further decline of 24% in 2014 that will bring the total down to $1.1 trillion. The decline in refinance activity is expected to bring down these mortgage volumes. The refinancing activity is expected to be 72% lower in 2014 than 2012 levels. Compared to this, the purchase volumes are expected to increase 41% over the same time period. The mortgage market shift to purchases is a positive as market share on purchase volume is higher than for refinance. In 2012, around 62% of the purchase volume had mortgage insurance. Compared to this, the mortgage insurance market share on refinances is only 19%.
During the prior year, private mortgage insurers increased their market share by 10% to 32% largely during the first three quarters. Excluding the HARP volumes, the private mortgage insurance market share is 6% lower.
Taking into account all the inputs discussed above, Credit Suisse expects private mortgage insurance volumes to increase by 21% during the current year and 13% during the next year.
After the exit by PMI Group and Old Republic the competitive environment within the industry became favorable, particularly for the Radian Group Inc (NYSE:RDN). Radian Group gained some ground and has a current market share of 29%, followed by American International Group Inc (NYSE:AIG) at 28%, MGIC Investment Corp. (NYSE:MTG) at 17% and Genworth Financial Inc (NYSE:GNW) at 12%. However, the trend will reverse during the current year given Arch Capital Group Ltd. (NASDAQ:ACGL)’s purchase of CMG and the recent approval of NMI Holdings to write business.
Genworth Financial Inc (NYSE:GNW) reported EPS of $0.34 for the fourth quarter, well above the consensus estimate of $0.27. The earnings were positively impacted by a 16 cent benefit from the new Government Guarantee framework. Another 2 cents were contributed by favorable taxes in US mortgage insurance and 1 cent each from three different one-time items. Excluding the one-time items, I arrive at the core earnings of 17 cents for the quarter. The weakness in the latest results was driven by a miss in the Long Term Care business segment, where the company took a small reserve charge amounting to $5 million. The segment also experienced unfavorable underwriting. The company also experienced misses in the US MI and Canada, partially offset by better than expected results in International Protection and Australia MI.