Third-quarter earnings for the mortgage insurers and title insurers will show two industries heading in different directions, analysts from Keefe, Bruyette & Woods declared. They raised their operating earnings estimates for title insurers, who should have better-than-expected results for the third quarter as a result of refinancings.
A pair of those title insurers, First American Corp. and Fidelity National Financial, could use some of their excess capital to acquire CoreLogic's mortgage origination and default-related assets, the analysts said.
On the other hand, they cut the estimates for the mortgage insurers that they follow due to increased expectations for reserves due to higher-than-expected new delinquency notices during the period.
The PMI Group was moved to “covered not rated” from its previous rating of “market perform” as the company stopped writing new business and its third-quarter loss-per-share estimate was increased to a loss of $1.21 from $1.14.
Analysts Nathaniel Otis and William Clark kept Old Republic International Corp. in their universe of mortgage insurers even though that company's subsidiary stopped writing new business at the start of September.
They did lower their estimate for ORI by $0.07 per share to a loss of $0.20 per share, but they added that for the mortgage insurance segment they are expecting "a smaller-than-expected decrease in delinquency levels. We are now looking for a sequential decline in total delinquencies of 2.9% compared to our previous expectation of a 4.8% decline." On the title insurance side, they increased their pretax net income estimate to $7.6 million from $6.9 million.
Given PMI and ORI no longer writing any new mortgage insurance business, KBW expects the market share to increase at MGIC and Radian. Radian in particular has become active in pursuit of new business, hiring additional sales people.
The analysts predict MGIC will have new insurance written of $3.1 billion, flat with the second quarter and down from $3.5 billion in the third quarter last year. But Radian will see an increase between the second and third quarters, with new insurance written of $3.2 billion, up from $2.3 billion, but this is flat year over year.
The analysts commented, "Even with the increased levels of new business written in the quarter, the bottom-line impact on those who are gaining penetration will be minimal given reduced overall levels of total business."
The two "positive sector catalysts" for the private mortgage insurers, the government coming out with a definition of what is a qualified residential mortgage, and a state attorneys general/servicer foreclosure settlement are being "pushed out later into 2011 and possibly into 2012," KBW said.
As for title insurers, Otis and Clark noted that First American was reporting its open orders were up 44% in August when compared with July.
They believe title insurers will "benefit in some way from a prolonged, low-rate environment, whether the order volume pick-up is substantial or merely modest."
But given the large number of underwater borrowers, "we remain cautious in how much benefit the low rate environment will drive a true refinancing wave," they said.
The bad news about refi-driven business is that the premiums for title policies from these originations are roughly one-half of the premium for a home purchase transaction.
But the title insurers should benefit from strong levels of commercial transaction title business.
