The main players
Of the main mortgage insurance companies around are MGIC Investment Corp. (NYSE:MTG) and Radian Group Inc (NYSE:RDN), which offer the maximum exposure to the mortgage market. However, both companies still have a significant amount of delinquent mortgages left over from the financial crisis and these could come back to haunt them.
MGIC Investment Corp. (NYSE:MTG) is the largest private mortgage insurer in the U.S., insuring around 1 million mortgages and Radian Group Inc (NYSE:RDN) is slightly smaller. In their pre-financial crisis heydays, MGIC Investment Corp. (NYSE:MTG) was trading at around $60 a share while Radian Group Inc (NYSE:RDN) was trading at or around the same price. Both collapsed to just penny shares during 2008, but have now recovered some losses to trade at around $6 and $13.50, respectively.
However, while the housing market is getting back on its feet, these insurers are still suffering from write-downs from loans, stemming from the credit-crunch/financial crisis period. Indeed, since 2008, Radian Group Inc (NYSE:RDN) has only turned a profit in one year, 2011, and during the last two quarters, the company has incurred a loss of nearly $200 million — per quarter.
Moreover, MGIC Investment Corp. (NYSE:MTG) has not made a profit at all since the financial crisis and the company’s losses seem to be rising. MGIC Investment Corp. (NYSE:MTG) lost $360 million during 2010, $500 million during 2011, and $930 million during 2012. However, the company only lost $70 million during the first quarter of this year, up from an average loss of $250 million per quarter last year.
The underdog
On the other hand, we have Genworth Financial Inc (NYSE:GNW), where mortgage insurance only accounts for about 22% of the company’s overall business. The rest of the company’s revenue comes from other wealth management services. Genworth Financial Inc (NYSE:GNW)’s limited exposure to the mortgage insurance business makes it my preferred stock, as it will benefit from resurgence in writing new mortgage business, but will also be able to maintain an income stream from other financial services — a diversified company with some upside linked to the market.
The companies are starting to see a slow return to profitability
The housing market is getting back on its feet but as I have written above, these companies still have an overhang from the previous years. MGIC for example, as of April had 122,055 of its 1 million loans in Primary Delinquency (failure to pay), which is 12.2% — a considerable proportion. However, this figure was slightly down from the previous month’s number of 126,610 delinquent loans, and significantly below the figure for the period in the year before where the number of delinquent loans stood at 160,473. That said, even at this rate, it will still take several years for the company to reduce its number of delinquent loans to a suitable level.
Radian, on the other hand, had 81,577 delinquent loans at the beginning of April this year, down from 85,109 at the end of the previous month. In addition, this figure was down around 20% from the figure during the same period a year ago when the company had 101,566 delinquent loans on its books.
In comparison, during the first quarter of this year, Genworth Financial Inc (NYSE:GNW) reported its first quarterly profit from U.S. mortgage insurance since 2007. In addition to U.S. mortgage insurance, Genworth provides insurance for overseas mortgages, a part of the business which has remained relatively profitable during the past few years. That said, the company still has a number of delinquent U.S. mortgages on its books. During April this year, Genworth had 62,804 delinquent loans on its books, down from 79,474 in the same period last year, a fall of 21%.
Moreover, Genworth Financial Inc (NYSE:GNW) has reported a profit during the last three years, thanks to the company’s profitable life, health, and international mortgage insurance businesses. Moreover, after reporting a loss in 2009, the company reported profits of around $50 million in both 2010 plus 2011, and profits of $330 million during 2012. Over the same period, EPS grew by 390% and current estimates predict the company’s EPS are set to grow 100% this year. In addition, Genworth Financial Inc (NYSE:GNW)’s Q1 profit for this year was double that of 2012.
Conclusion
So overall, the housing market is recovering and all three mortgage insurance providers above are reaping the benefits as numbers of delinquent mortgages start to fall. That said, while the country’s biggest private mortgage insurer, MGIC Investment Corp. (NYSE:MTG), is starting to see a marginal improvement in its profitability, Genworth Financial Inc (NYSE:GNW) could be the company of choice due to its diversification and profitable life and health insurance operations.
The article Check out These Mortgage Insurers for a Good Play on the Housing Market Rebound originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves owns shares of Genworth Financial. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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