The US housing markets have shown considerable improvement with the help of the government’s stimulus programs. As a result, I believe mortgage insurance giants like Radian Group Inc (NYSE:RDN) and MGIC Investment Corp. (NYSE:MTG) will post strong results in the coming quarters. Bloomberg recently reported that Standard & Poor’s expects these companies to report the return of profits after a long wait.
Fears of insolvency
Analysts at S&P believe that fears about the companies becoming insolvent are long gone. The rebounding housing markets have led to a surge of capital into the mortgage insurance sector. At the same time, private guarantors wrote more than double ($175 billion) as many new policies in 2012 as compared to the prior year.
Since 2006, when MGIC Investment Corp. (NYSE:MTG) last reported an annual profit, the sector was largely written off by many. In this time span, Radian Group Inc (NYSE:RDN) was able to report only one annual profit. However, things are beginning to change amid the housing rebound.
Higher NIW through 2013
The new insurance written (NIW) by both Radian Group Inc (NYSE:RDN) and MGIC Investment Corp. (NYSE:MTG) was higher than expected, leading me to believe that the full year 2013 new insurance written would be higher than previously expected. The sector is now expected to write $219 billion worth of new policies for the year, up 25% over the prior year. These higher volumes are driven by an 8% market share gain from the Federal Housing Authority.
Therefore, higher expected NIW, capital inflows, and the rebounding US housing market will lead the mortgage insurance sector to become profitable once again.
Limitations of reinsurance
Looking at the earnings power expectations of Radian and MGIC Investment Corp. (NYSE:MTG), Credit Suisse Group AG (ADR) (NYSE:CS) has increased its price targets for both companies. After a capital raise in the first quarter, both MGIC Investment and Radian Group Inc (NYSE:RDN) have been using reinsurance to help manage risk to capital ratios. Radian has drastically reduced its reinsurance to 5% (from 20%) of the new insurance written (NIW), while MGIC Investment Corp. (NYSE:MTG) is reinsuring 30% of its NIW.
Higher levels of reinsurance has its limitations. More of the premiums earned are used up for reinsurance purposes. Here, since MGIC Investment Corp. (NYSE:MTG) is using a higher proportion of reinsurance, you should expect the company to report lower earnings by 2014. To become more profitable, it has to scale back on its reinsurance activities.
A look into the future
During the remainder of the current year, Radian Group Inc (NYSE:RDN) is expected to write new insurance worth $51 billion, 37% over the prior year, while its market share will remain stable. However, 2014 will see declines in both its market share and NIW as competition increases from new entrants. MGIC Investments is expected to write $29 billion of new insurance, 22% higher than the prior year. NIW will fall 3% next year, while its market share will shrink 50 bps due to increased competition.
