Mortgage insurer's strong 3Q not likely to last, BTIG says

November 8, 2023 5:39 PM

It was a good quarter for the private mortgage insurers as most beat estimates, helped by slow loan prepayment speeds, stable margins and low loss rates from fewer defaults, a BTIG report noted.

But the good times are not likely to last, wrote Eric Hagen, in the report issued on Nov. 2 after the last four of the six companies reported results. (MGIC reported on Oct. 31 and Arch — which BTIG doesn't cover — reported earlier in the cycle).

"The growth opportunity may be somewhat limited by the fact that mortgage rates are high and affordability remains tight, although conditions in the purchase market haven't suffered significantly," Hagen said. But the industry could have "modest amounts of portfolio growth if we ballpark $270 to $290 billion (annualized) of new insurance…written at these mortgage rates."

Insurance-in-force totaled $1.55 trillion as of Sept. 30, up from $1.539 trillion three months prior. The six companies did $78.2 billion of new insurance written, versus $81.7 billion in the second quarter and $104.1 trillion for the third quarter of 2022.

It was also another quarter with shifting market share. Only MGIC reported an increase in NIW on a quarter-to-quarter basis.

MGIC continues to add business

The Milwaukee-based company had a significant increase in NIW, a gain of 18% from the second quarter, $14.6 billion compared with $12.4 billion. This was the second quarter in a row where after pulling back, MGIC ramped up production.

But reflecting the smaller originations market, its NIW was below the $19.6 billion produced in the third quarter of 2022.

"What you see in our third quarter NIW is primarily a reflection of our views of risk return from late second quarter of this year," said CEO Tim Mattke on its earnings call. "As I mentioned on the last call, we believe there's additional improvement in our market position and believe that is reflected in our third quarter NIW."

The Milwaukee-based company earned $182.8 million in the third quarter. This compares with $191.1 million in the second quarter and $249.6 million one year prior.

Radian reports largest quarter-to-quarter decline

On the other hand, the largest quarter-to-quarter decline in NIW was reported by Radian, down by over $3 billion to $13.9 billion from $16.9 billion; for the third quarter of last year, Radian wrote $17.6 billion.

But price competition, a past issue for the industry when volume was hard to come by, was not behind the drop-off, Derek Brummer, president of mortgage, indicated during the Q&A on the earnings call.

"In terms of the pricing environment, it continues to be rational and disciplined. And we saw fairly normal pricing fluctuations really throughout the quarter," Brummer said, adding that it remains "substantially above" 2022's levels.

Net income increased to $157 million for the third quarter versus $146 million three months prior. But Radian earned $198 million for the third quarter of 2022.

Its Homegenius real estate services business reported improved results, even though it is still operating at a loss.

Adjusted pretax operating loss, the non-standard account metric Radian uses to measure Homegenius' performance, was $21 million for the third quarter, compared to $24 million for the second quarter and $26 million for the third quarter of 2022.

Enact's earnings flat versus prior periods

At Enact, net income was flat compared with the second quarter, at $164 million versus $168 million. But this was well off the previous year's $191 million.

Its NIW slipped to approximately $14 billion from $15 billion, both on a quarter-to-quarter and year-over-year basis.

"Pricing on new insurance written remained constructive in the quarter," Rohit Gupta, president and CEO, said on the earnings call. "In response to continued macroeconomic uncertainty, we increased our price on NIW, ensuring we continue to underwrite risk at the appropriate level while remaining competitive."

But new delinquencies rose during the quarter, which Gupta attributed to seasonality. The delinquency rate was 2%, up 11 basis points from the previous quarter but flat versus the prior year and consistent with pre-pandemic levels, he noted.

Essent's newly acquired title line reports pretax loss

Essent's NIW of $12.5 billion was down from $13.5 billion in the second quarter and $17.1 billion one year prior.

But on a year-over-year basis, net income was flat at $178 million for the most recent period versus $178.1 million one year prior. In the second quarter, it reported net income of $172.2 million.

However, this was the first period that Essent had the title insurance underwriter and agency it purchased from Finance of America on its books.

"Our title and settlement services operation incurred a pretax loss of approximately $4 million in the third quarter," said Mark Casale, chairman, CEO and president, on its earnings call. "As we continue to work through the title integration, we will be taking a long-term approach to building out the business with a focus on risk controls and operational efficiency."

As it comes to pricing, the shift to the black box changed the dynamic. Instead of the lenders controlling pricing, it is now the mortgage insurers, Casale said.

"Now we all file a range of rates, we can change rates much more frequently," he continued. "It's really become what we said it was going to be, which is a risk management tool. It allows all the MIs to pick their spots."

National MI's volume down just 1% from 2Q

Net income at NMI Holdings increased not just on a quarter-to-quarter basis, but bucked industry trends by being higher compared with the same period in 2022.

Its net income of $84 million for the third quarter compared to $80.3 million, in the second quarter ended June 30, 2023 and $76.8 million in the quarter ended Sept. 30, 2022.

National MI had the smallest sequential quarter decline in NIW among the five companies that did less business, a mere 1% drop-off to $11.3 billion from $11.5 billion in the second quarter. The company did $16.7 billion in the third quarter of 2022.

"More broadly, we've been encouraged by the continued discipline that we've seen across the private MI market," Adam Pollitzer, president and CEO said on the earnings call. "Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive."

Regarding its book of business, management is watching the macro risk environment, Pollitzer said during the Q&A.

"The items that we're most focused on, that we're most concerned about, naturally are those that will touch borrower performance and consumer performance," he said "It's the macro, it's house price paths, it's where unemployment might go in response to all of these environmental factors that surround us."

Brad Shuster, the executive chairman, spoke on conversations held with the Federal Housing Finance Agency and the government-sponsored enterprises.

"Our most recent conversations surround access, affordability and fairness and those remain points of focus among a broad range of other issues, but nothing really critical pending right at the moment," Shuster said.

Arch's mortgage underwriting income up again

The mortgage segment at Arch Capital Group reported underwriting income of $282 million, versus $253 million in the previous quarter and $299 million one year prior. It is the second quarter in a row where underwriting income increased.

These results include not just U.S. primary business but mortgage reinsurance and policies written covering Australian mortgages.

Arch Capital took those underwriting earnings and redeployed them into its property and casualty segments "where opportunities abound," CEO Marc Grandisson said on its earnings call.

"Although we tend to focus our comments on the U.S. primary MI market, it is worth noting that nearly 40% of our mortgage segment underwriting profit this quarter came from non-U.S. operations compared to just over 10% in 2017," he added.

Its U.S. MI unit did $11.5 billion of new insurance written in the third quarter. This was down from $12.3 billion in the second quarter and $17.4 billion for the third quarter of 2022.