For private mortgage insurers, credit is not a concern — yet

February 16, 2024 5:39 PM

While 2023 was another financially healthy year for the private mortgage insurance industry, as the business written during and immediately after the pandemic ages, delinquencies are likely to pick up.

The peak time frame for a borrower to fail to make a payment as scheduled is in the third through fifth years following origination. That period has already started for the 2020 vintage and will soon arrive for the 2021 production.

"On the fourth quarter conference call, management noted that while they are encouraged by the overall credit environment, they (along with industry peers) believe new notices will continue to tick up as the large vintage books from 2020-2022 season [age]," said Bose George, an analyst at Keefe, Bruyette & Woods, in his report on NMI Holdings.

The industry's capital ratios — at least 25 states use some form of risk-based metric, while the secondary market requires active companies to meet the Primary Mortgage Insurer Eligibility Requirments standard — are stable at this point in the housing market cycle, Eric Hagen of BTIG wrote in his weekly mortgage industry overview on Feb. 12.

"We think the higher reported loss rates in [the fourth quarter] may be contributing to more limited visibility for earnings growth. Some investors had been anticipating a tapering-off of Covid-era reserve releases, but with somewhat uncertain timing until now. We're starting to turn to more story-specific catalysts for earnings and valuation upside," Hagen said.

The six active companies logged $283.8 billion of new insurance written during 2023, down 30% from $405.1 billion in 2022 and less than half of the $600 billion produced in 2020, according to figures from KBW. The decline was in line with the change in overall volume of $1.64 trillion in 2023, versus $2.31 trillion for 2022, according to the Mortgage Bankers Association.

Fourth quarter NIW of $59.2 billion was down 24% from the third quarter at $78.2 billion and 22% from $76 billion one year ago.

MGIC keeps lead in market share

MGIC Investment Corp. continued to be the nation's most prolific underwriter of private mortgage insurance in the fourth quarter, although a decision to pull back from the market through higher pricing in the first quarter pushed it down the table for full-year volume.

The Milwaukee-based company reported $184.5 million of net income for the fourth quarter and $712.95 million for the full year. This compared with $182.8 million in the third quarter and $191.4 million for the fourth quarter of 2022; full year 2022 earnings totaled $865.35 million.

MGIC's delinquent loan inventory increased to 25,650 loans from 24,720 on Sept. 30, 2023 but that "continues to be low by historical standards," Chief Financial Officer Nathanial Colson said on the earnings call.

In the quarter, MGIC received 12,708 new delinquency notices compared to 12,240 in the prior three-month period and 11,899 one year prior. "While new notices were higher year-over-year, they were 7% below the prepandemic levels seen in the fourth quarter of 2019," Colson said. "We continue to expect that the level of new delinquency notices may increase due to the large 2020 and 2021 book years being in what are historically higher loss emergence years."

MGIC is pricing using the assumption that losses will run higher than what it's been experiencing, and "that's going to continue to be our view on it," CEO TIm Mattke said.

"And when we say get a little bit worse, we still view it as likely better than what people think sort of historical averages are," Mattke continued.

Borrower equity protects Radian from loan losses

Net income at Radian Group fell to $143 million in the fourth quarter, from $157 million in the previous quarter and $162 million for the same period in 2022.

For the full year, net income dropped to $603 million from $742 million.

NIW was $10.6 billion in the fourth quarter, compared with $13.9 billion in the third quarter and $12.9 billion in the fourth quarter of 2022. Volume was $52.7 billion for all of 2023, versus $68.0 billion for the prior year.

"Borrowers in our insured portfolio have significant equity in their homes, which helps to mitigate the risk of loss by decreasing both the frequency and severity of paid claims," CEO Rick Thornberry said on the earnings call. "In fact, we estimate that as of year-end 2023, 86% of our total insurance in force had at least 10% embedded equity and 82% of our defaulted loans had at least 20% embedded equity."

Meanwhile, Radian's Homegenius segment, which includes its title insurance underwriting subsidiary, reported an adjusted pretax operating loss of $18 million for the fourth quarter, an improvement when compared with prior period results of a loss $21 million for the third quarter, and a loss of $31 million for the fourth quarter of 2022. Adjusted pretax operating loss for the full year was $86 million, only slightly better than the $88 million loss for 2022.

Enact’s market share slips

Enact Holdings tied with Essent for the largest market share loss compared to one year prior and the second largest quarter-to-quarter drop-off.

But its fourth quarter net income was higher than for the same period in 2022. The company, still majority owned by former parent Genworth Financial, earned $157 million, versus $164 million for the third quarter and $144 million for the fourth quarter of 2022.

NIW of $10.5 billion was down from $14.4 billion in the third quarter and $15.1 billion one year prior. The 30% year-over-year decline was also only exceeded by Essent, whereas the other four companies were only off between 16% and 17%.

But the delinquency rate rose 13 basis points quarter-to-quarter to 2.1%. But that is consistent with pre-pandemic levels, Rohit Gupta, president and CEO, said on the earnings call.

As for the future, "our overall expectations based on current information is for 2024 MI market size to be similar to that in 2023," Gupta said.

Arch Capital ready to deploy capital to grow MI

The U.S. mortgage insurance business at Arch Capital Group did $9.5 billion of NIW, which one analyst on the earnings call commented was the lowest since it purchased United Guaranty.

Another caller noted that the company started pulling back even before the downturn in originations last year and then asked if volume picks up as industry economists expect, would Arch follow along?

"We have capacity, capital to be able to deploy," CEO Marc Grandisson said. "I think we would be very, very pleased to do more."

Arch finished the fourth quarter at No. 4 in NIW, moving up from No. 5 in the third quarter, with $11.5 billion. It did $11.4 billion during the fourth quarter of 2022.

For all of 2023, Arch $43.7 billion, fifth overall, compared with $72.4 billion in 2022, when it ranked second.

Its mortgage segment, which includes an Australian MI unit, as well as reinsurance, reported underwriting income of $286 million, up from $282 million in the third quarter, but down from $373 million in the fourth quarter of 2022.

"The credit profile of our U.S. primary MI portfolio remains excellent, and the overall MI market continues to be disciplined and return focus," Grandisson said. "These conditions should help to ensure that our mortgage segment remains a valuable source of earnings diversification for Arch."

Net income rises year-over-year at NMI Holdings

The portfolio of mortgages in default at National MI, the operating unit of NMI Holdings, grew to 5,099 from 4,594 as of Sept. 30, 2023 and 4,449 on Dec. 31, 2022. The default rate increased to 81 basis points in the fourth quarter from 74 basis points three months prior.

"The default population, we expected it to increase because, frankly, there's just natural growth and seasoning of the portfolio…the 2020, 2021 and 2022 books, which are coming into a period of normal loss occurrence," said Ravi Mallela, executive vice president and chief financial officer on its earnings call. "But really the performance has been strong, and we're really encouraged by just looking ahead at what's happening."

Earnings at NMI were down only slightly from the third quarter, to $83.4 million from $84 million and improved over the prior year's $72.9 million.

Full year net income was $332.1 million, up from $292.9 million for 2022.

NIW of $8.8 billion was down from $11.3 billion in the third quarter and $10.7 billion in the fourth quarter of 2022. National MI remained sixth overall in the industry for full year NIW (as it had in prior periods) at $40.8 billion in 2023, down from $58.7 billion.

"We expect that the private MI market will remain just as strong in 2024 with long-term secular trends continuing to drive an attractive new business opportunity," said Adam Pollitzer, president and CEO.

Essent falls to sixth in market share

Essent Group, which started the year with the second largest market share among the MIs, wrote the fewest new policies on a dollar basis in the fourth quarter.

The company did $8.8 billion of NIW in the fourth quarter, down from $12.5 billion in the third quarter and $13 billion for the fourth quarter of 2022. For the full year, Essent did enough business to rank third at $47.7 billion. In 2022, it did $63.1 billion.

On the earnings call, Mark Casale, chairman, CEO and president addressed price competition in the industry.

"All the MIs have picked their spots," Casale said And given where some of the pricing engines and data that we get in the industry, we can see a lot of,,,the movements and the percentages [and] everyone else can too. So we all have a pretty good beat on it."

As of the end of 2023, Essent's default rate was 1.8%, up 18 basis points from 1.62% at Sept. 30, 2023, but a level Casale called very low on the call.

Essent's net income for the quarter of $175.4 million was better than $147.4 million reported for the fourth quarter of 2022. It was lower than the $178 million earned in the third quarter. For the full year 2023, net income was $696.4 million or $6.50 per diluted share, compared to $831.4 million or $7.72 per diluted share for 2022.

During the year, Essent acquired the title insurance underwriting and agency businesses of Finance of America and the fourth quarter was the second period it reported results.

"Our title operations incurred a pretax loss of approximately $4 million in the fourth quarter, similar to last quarter," Casale said. "We remain focused on integrating title while implementing risk controls and improving operational efficiency."