After being hit hard by the subprime crisis, the U.S private mortgage insurance (PMI) industry is gradually recovering with improving economy, stabilizing housing market conditions in the U.S. and the material settling down of the Euro-zone crisis.
The combination of these factors create a favorable operating environment for private mortgage insurers who offer credit protection to lenders and mortgage investors, thereby providing the much needed cushion to the mortgage market.
We expect further movement in overall macroeconomic conditions in 2014. During the third quarter, GDP growth rate was 3.6% annualized, up from the initial estimate of 2.8%. This when combined with 2.5% growth from the second quarter of 2013 indicates that the economy has been growing at a better-than-expected rate between 2% to 2.5%.
The recent employment reports have displayed a positive pattern and we expect unemployment to remain at low levels in 2014. Consequently, we remain upbeat regarding trends in mortgage delinquency and default rates and expect further improvement through 2014.
Despite concerns that the Fed taper will soon come to an end, which will eventually increase mortgage rates, the demand for private mortgage insurance is expected to grow due to improving housing market trends.
The gradual improvement in the housing sector through 2013 is likely to boost economic growth. We expect home values to be relatively up with some potential for further improvement.
The PMI industry is also witnessing an indirect support from the government with reduction in market share of its agency, The Federal Housing Administration (FHA). While the third quarter numbers are not yet available, private mortgage insurers have accounted for approximately 36% of U.S. mortgage insurance written in the second quarter, their biggest quarterly share of the market since 2008.
This is significantly lower than 77% of market share held by private insurers in 2007, which leaves ample scope for expansion. We, therefore, expect private mortgage insurers to regain lost market share over the next two to three years.
Following the financial crisis, the PMI industry has emerged in a better shape. The implementation of improved underwriting guidelines and keeping a tight scrutiny on loans originated (rather than earlier practice of relying on loan originators), will enable the players to write high-performing, profitable new business thus providing a valuable contribution to the broader housing market.
The current market structure thus presents a good opportunity for stronger players, who have sturdy capital position and can enjoy regulatory forbearance. Moreover, due to the exit of some firms during the housing market crisis, supply is limited. Mortgage insurers with a differentiated financial profile can therefore benefit from current market conditions.
Some of the companies under the Zacks coverage are well poised to gain from the changing trends in the mortgage industry and Old Republic International Corp. (ORI) with Zacks Rank #1 (Strong Buy) is one of them. This company is planning to raise fresh funds from capital markets to restart its mortgage insurance unit early next year, after mounting losses from the collapse of the housing market pushed the firm out from mortgage insurance business.
Another player MGIC Investment Corp. (MTG) with a Zacks Rank #2 (Buy) is also set to benefit from the improving industry fundamentals. Decline in default led the company to report profit in the third quarter, its second straight quarterly profit. The company reported its first quarterly profit in about three years in the prior quarter, after posting annual losses for the last six years. The company has also reported an increase in its market share in the industry.
Another new entrant, Arch Capital Group Ltd. (ACGL), also with a Zacks Rank #2, announced plans to enter the U.S. mortgage insurance market earlier this year through the assets acquired from bankrupt insurer PMI Group Inc. in a $300 million deal.
In conclusion, the role of these private mortgage players, among others, will be a critical component of the current housing finance system.
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