MGIC's 1Q income beats estimates on favorable loss development

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MGIC Investment Corp.'s first-quarter net income beat analysts' estimates due to favorable loss development and that should be seen with the other private mortgage insurers.

The company had net income of $143.6 million for the quarter, up from $89.8 million one year prior. Its earnings per share of 38 cents beat B. Riley FBR's estimate of 31 cents and the consensus 35 cents, analyst Randy Binner said in a report.

"The beat, versus our model, came primarily from the loss ratio: 10.3% versus our 25%," Binner said. "There was nearly 11% of reserve release supporting the loss ratio, so losses still beat on a core basis."

These results are a bellwether for the other mortgage insurers.

"Our call on MIs is thematic; we believe that Radian and NMI Holdings should have similar reported results this quarter," Binner said. Binner does not follow the other MIs: Essent Group, the only other company whose primary business line is MI, and Genworth and Arch Capital, both of which write other lines.

For the quarter, MGIC had new insurance written of $10.8 billion, up from $9.3 billion from the first quarter one year ago and ahead of Binner's expectations for $9.6 billion.

Insurance-in-force at the end of the quarter totaled $197.5 billion, up from $194.9 billion at the end of the fourth quarter and $183.5 billion at the end of the first quarter of 2017.

Its delinquent loan inventory fell to 41,243 from 45,556 as of Dec. 31, 2017. This included 10,198 loans from areas affected by the hurricanes last fall, down from 12,446 at the end of the fourth quarter but up from 6,531 on March 31, 2017.

"We continue to benefit from the current conditions of the employment and housing markets, favorable demographics that are helping fuel the purchase mortgage market, and a higher interest rate environment," Patrick Sinks, MGIC's chief executive, said in a press release.

"While the operating environment continues to be very dynamic, we saw our insurance-in-force and investment income increase, and the primary delinquent inventory continue to decline. Finally, in the quarter the holding company received a $50 million dividend from MGIC."

The selloff in MI industry stocks is "overdone," Binner said, pointing out that before the market opened on April 18, year-to-date MGIC was down 24%, Radian down 22% and NMI Holdings down 14%. The selloff started after the Freddie Mac/Arch IMAGIN lender-paid MI alternative pilot was announced, and was exacerbated by MGIC's own announcement of an across the board 11% price cut for its borrower-paid policies.

For the current year, the expectations around MGIC and the MIs is for "continued favorable loss development ... given favorable market data around employment, mortgage affordability, and housing supply/demand," Binner said. "We view MIs as a less expensive way to gain exposure, compared to regional banks to increased mortgage loan growth and favorable domestic residential credit trends."

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