What mortgage insurers' 3Q results reveal about their future path

November 6, 2020 4:17 PM

Even as private mortgage insurers had their best quarter ever, with four of the six active underwriters recording over $30 billion in new insurance written, they are facing a couple of roadblocks ahead.

Since these businesses are heavily dependent on providing credit enhancement for conforming mortgages, they are struggling with the lack of clarity on the election results, which would determine future of government-sponsored enterprise reform.

Overall though, the housing market will be a priority no matter which candidate ends up in the White House, B. Riley Securities analyst Randy Binner wrote in his reports on MGIC, Radian and National MI.

"A Biden victory would likely imply status quo on GSE reform," Binner said. "Fannie and Freddie are the users of MI for risk management and capital relief. Another Trump term would likely lead to a smaller GSE footprint, but the GSEs would likely still need the private capital that MIs provide. We view support of the housing market and low interest (mortgage) rates as a priority for either administration."

The other overhang on private mortgage insurers are the borrowers that were affected by the coronavirus who missed payments. Even if a mortgage is in forbearance, loans with missed payments are still reported by servicers to the mortgage insurers for inclusion in their delinquent loan inventory.

While those inventories remain elevated compared with post-housing crisis levels, there have been more loans curing than new notices of default being received.

The main concern for the sector as a result remains capital adequacy under the Private Mortgage Insurer Eligibility Requirements, Binner said. All three companies he follows screened well in B. Riley Securities' analysis on capital adequacy. "Also, flattening forbearance and delinquency trends and increased clarity with respect to the FEMA forbearance haircut combine to leave the MIs in a strong capital position," he added.

Below, NMN reviews the third quarter earnings of mortgage insurers in the field.

Arch's MI business reports lower net premiums written

At Arch, underwriting income fell by half in the third quarter to $130.5 million from $262.5 million one year before, although it was up from $7.4 million in the second quarter.

Unlike its competitors, Arch Capital Group has a presence in the mortgage reinsurance business, which predates its entry into mortgage insurance. The holding company operates in several other lines.

Net premiums written were down 6% given that primary insurance-in-force declined as loans were refinanced and that a lower level of premiums were ceded to the mortgage reinsurance business.

Still, new insurance written, totaling $32.8 billion, topped $24.6 billion in the second quarter and $25.3 billion in the third quarter of 2019.

There was also good news regarding delinquencies. Arch's percentage of loans in default was 4.69% at Sept. 30, compared with 5.14% at June 30.

Essent rises to the top

Essent Group reported net income for the third quarter of $124.5 million compared with $15.4 million in the second quarter and $144.6 million in the quarter ended Sept. 30, 2019.

For the first time in the company's relatively brief history, it has the largest market share with NIW for the third quarter, with $36.7 billion. This is compared with $28.2 billion in the second quarter and $18.7 billion in the third quarter of 2019.

"We are encouraged by the increase in our third quarter earnings as compared to the second quarter due to a lower loss provision driven by a decrease in the number of new COVID-19 default notices received on our insured portfolio," Mark Casale, chairman and CEO said in a press release.

Essent's percentage of loans it insures in default as of Sept. 30 was 4.54%, compared with 5.19% as of June 30 and 0.75% as of Sept. 30, 2019. The company added that on Oct. 31, its percentage of loans in default was 4.25%.

Genworth's market share slips

Unlike its competitors, Genworth's U.S. mortgage insurance business saw its NIW decline from the second quarter. The $26.6 billion written in the third quarter was down 6% from $28.4 billion on a quarter-to-quarter basis but up 41% from $18.9 billion one year ago.

Adjusted operating income for this business was $141 million in the third quarter, versus a $3 million loss in the second quarter. One year ago, it had adjusted operating income of $137 million.

That higher operating income helped drive profitability for Genworth Financial, which also has life and long-term care insurance lines, in addition to a stake in an Australian MI company.

Genworth Financial's net incomewas $418 million in the third quarter compared with a net loss of $441 million in the second quarter and net income of $18 million in the third quarter of 2019.

"Genworth delivered strong operating performance in the third quarter, driven by outstanding top line and bottom line results in our U.S. mortgage insurance business," said Tom McInerney, president and CEO, in a press release.

"While the economic environment remains unpredictable because of the COVID-19 pandemic, we are confident that we are taking the right steps to enhance liquidity, position our businesses to navigate continued uncertainty and maximize shareholder value," he said.

Most importantly, Hony Capital delivered documentation that indicated it should be able to finalize the $1.8 billion in financing being provided to China Oceanwide to complete their merger, Genworth said. The parties remain hopeful that the deal will close at the end of this month.

MGIC benefits from fewer incurred losses

MGIC Investment reported net income of $130.8 million for the third quarter, compared with $14 million in the second quarter and with $176.9 million for the third quarter of 2019.

"Our third quarter financial performance improved compared to the second quarter primarily as a result of a decrease in incurred losses," CEO Tim Mattke said in a press release. "Fewer new notices of delinquency reported to us were the primary driver of the lower incurred losses in the third quarter. These results reflect the improved conditions of the economy and strength of the housing market, despite the ongoing challenges presented by the COVID-19 pandemic."

MGIC did $32.8 billion of NIW, an increase over the $28.2 billion written in the second quarter and the $19.1 billion in the third quarter of 2019.

The delinquent inventory consisted of 64,418 loans at Sept. 30, down from 69,326 loans at June 30, but up from 29,940 loans at Sept. 30, 2019. Currently 67% of MGIC's inventory was reported to the company as being subject to a forbearance plan.

When it comes to the PMIERs, whose formula is based on the noncurrent mortgages, MGIC has a $1.4 billion cushion.

National MI's new business opportunity

NMI Holdings reported net income of $38.2 million, for the third quarter. This compares with $26.8 million in the second quarter and $49.8 million one year prior.

"Our new business opportunity has grown significantly and we have delivered record new insurance written as more borrowers and lenders have turned to us for support than ever before," CEO Claudia Merkle said in a press release. "While still early, we have also begun to see encouraging credit trends in our in-force portfolio, with default activity stabilizing and an increasing number of borrowers exiting forbearance and resuming payment of their mortgages."

National MI's NIW in the third quarter was $18.5 billion, up 31% from $14.1 billion in the third quarter of 2019. In the second quarter of this year it did $13.1 billion.

It ended the third quarter with total PMIERs available assets of $1.7 billion and net risk-based required assets of $991 million.

However, National MI's delinquent inventory did grow during the quarter by 2,949 loans. But unlike all of its competitors except Essent, its entire insured book of business was written to standards put in place after the housing crisis.

Radian returns to profitability

Radian Group's net income of $135.1 million was lower than the $173.4 million earned one year prior, although it did turn around a $30 million second quarter loss.

However, the company set an internal record for NIW, doing $33.3 billion, compared with $25.5 billion in the second quarter and $22 billion one year prior.

On the other hand, Radian made a provision for losses of $87.8 million in the third quarter, compared with $304 million in the second quarter — the major contributor to the loss for that period — and $29.1 million in the third quarter of 2019.

While new defaults remained elevated during the third quarter versus Radian's levels before the pandemic, they decreased 67.5% from the second quarter.

Radian's delinquent loan inventory ended the quarter at 62,737 mortgages, compared with 69,742 as of June 30 and 20,184 as of Sept. 30, 2019.

Including liquidity at its parent company, Radian Guaranty has an excess of $2.3 billion above its minimum required assets of $3.5 billion.

Radian's real estate segment offers title, valuation, asset management and other real estate services. Its revenues for the third quarter were $33.3 million, compared with $26.1 million for the second quarter, and $30.1 million for the third quarter of 2019.

But prior to the earnings being released, Radian announced it was getting out of the traditional appraisal business and will only offer automated valuation products.