Mortgage Insurers Taking Different Paths to Profitability
Executives at Radian Group and MGIC Investment Corp. have slightly different ways of seeing things when it comes to building a sustainable future.
Radian is focusing on growing its new insurance written and its insurance-in-force, while MGIC is looking at underwriting profitable, quality business and reducing claims.
Radian Guaranty has moved ahead of Mortgage Guaranty Insurance Corp. in insurance-in-force as of the end of the fourth quarter. MGIC, founded in 1957, was the nation's first modern mortgage insurer and had been the market share leader in both IIF and new insurance written for much of that time.
But since the peak of the downturn, MGIC has been trailing Radian and United Guaranty Corp. in NIW. Radian has been closing the gap in IIF since the end of 2012.
MGIC and Radian agreed to a merger in February 2007. Soon after, the mortgage crisis ramped up. By August of that year, MGIC began giving indications it did not want to complete the transaction and one month later the deal was dead.
Radian since then has added to its sales force and began to emphasize single-premium products. This includes the lender-paid mortgage insurance product that was created by Amerin, a forerunner of Radian.
Radian has $161 billion in IIF as of Dec. 31, while MGIC has $159 billion. That is a change from the end of 2012, when MGIC had $162 billion and Radian had $140 billion. At the end of 2011, MGIC had IIF of $173 billion.
As of the end of November, the three members of the Mortgage Insurance Cos. of America (of which Radian and MGIC were two) had a total of $419 billion in force, up some $19 billion since the end of 2012. The group is disbanding and did not issue statistics for December.
Insurance in force is the driver of Radian Group's earnings. "When you multiply IIF by premiums, you get revenues," CEO S.A. Ibrahim says. But to grow this number, mortgage insurers need to maintain or grow new insurance in force. And Radian's competition is not just other private mortgage insurers, but the Federal Housing Administration as well.
Every percentage gain in private mortgage insurance penetration that is taken from FHA is a huge opportunity for his industry, Ibrahim says. In the longer term, if there is government-sponsored enterprise reform, that too is an opportunity for private mortgage insurers to gain penetration. The industry in the past has said if the government wants private capital in the system, this business is an example of it.
"We've taken that risk alongside the GSEs; we've shown that our business model could survive through a downturn. Yes there have been a couple of casualties but on the whole, without the help of any government assistance, except for one player [United Guaranty, a subsidiary of the bailed-out American International Group], we've survived. We continue to offer liquidity to the market in a very difficult environment," he declares, adding this factor resonates well with politicians of both parties.
MGIC's management is not concentrating on regaining the label of nation's largest private mortgage insurer.
"Our goal is to become the most profitable company in the MI sector," says MGIC Investment Corp. senior vice president of investor relations Mike Zimmerman.
"We are focused on us writing the highest quality [new insurance] we can get. If it so happens that makes us the No. 1 player by IIF or risk-in-force or whatever other metric, so be it."
Philadelphia-based Radian Group reported an operating profit from the mortgage insurance business in 4Q13. For the first time, revenue from the higher-quality new policies written in the last couple of years is larger than the losses associated with the legacy portfolio, says Ibrahim.
Going forward, the spread between the profits of the new book of business and losses associated with the legacy book will widen because the 2013 results only show a partial effect of the new business written. In 2014, the full effect will contribute to Radian's bottom line, Ibrahim continues.
The other half of the equation is that new defaults are decreasing. Plus, the inventory of delinquent loans continues to shrink, and that is less of a burden on Radian's finances.
MGIC, headquartered in Milwaukee, lost over $1 million in the fourth quarter, but that was a big improvement over the $387 million loss a year earlier.
Radian and United Guaranty both have passed MGIC in terms of new insurance written.
After the merger deal's collapse, Radian made an effort to add new customers, MGIC's Zimmerman points out, adding that at his company, "It is tough for us to expand our customer base because we have over 3,000 master policy holders. We can't grow the number of customers we have."
But MGIC's successful capital raise in 2013 significantly improved its financial position. Customers who dialed back the amount of their low down payment originations insured through MGIC during the turbulence have started to come back.
"Financial strength is no longer an item our sales force has to talk about" to clients. Instead, MGIC is free again to speak of its history in the business and the loans it is willing to insure to get more borrowers into homes, Zimmerman says.
The housing crisis took out three of the industry's players and the four remaining companies had to operate with a waiver of the risk-to-capital requirements of 17 states.
Today, Radian and MGIC (along with Genworth and United Guaranty) are competing with two de novo insurers, Essent and National MI. PMI's CMG joint venture has been acquired by Arch and is moving from specializing in providing coverage to credit unions to the broader market. And Old Republic wants to recapitalize and spin off Republic Mortgage Insurance Co.
In the face of so many competitors, it will be difficult for everybody to grow share. Not only are there are new players on the scene, the old legacy players are far stronger than they were just two years ago, Ibrahim says.
The time to have made large gains in market share was when PMI and RMIC had to stop writing new business. Even Essent got its traction during this period, Ibrahim notes.
Companies always gain customers each year and lose customers. But, "net-net, we've been able to add more customers than we lost. We have continued to do that and we believe we will be able to continue to that because there is an opportunity with about one-third of the market with whom we don't do business," Ibrahim continues.
Because of the nature of the business, it is difficult to target specific market share in terms of NIW. But at the same time Radian wants to keep adding new customers while writing a good book of business.
It will be difficult to gain market share in the newly competitive environment, but keeping it at the current level will allow Radian to grow its insurance in force, write a respectable amount of new policies and keep the company as an industry leader, Ibrahim says.
But keeping market share will be just as difficult for the other mortgage insurers as well, he adds.
The new entrants' original selling point was they had no legacy risk. But now capital is not a discussion point anymore for any of the legacy MIs, Zimmerman says.
So competition is now based on product, services and execution. Being the lowest cost provider (the company has an expense ratio about 25% lower than the other MIs) is MGIC's competitive advantage from now on, he says.