Mortgage Insurers: On the Road to Recovery, but Not There Yet

Private mortgage insurers Radian Group , MGIC Investment Corp , and Genworth Financial have been some of the market's best performers year to date. Outperforming the S&P 500 by 108%, 150%, and 51%, respectively.

However, they still have some serious financial issues left hanging over them from the financial crisis.

An uncertain recovery
At the end of the company's fiscal first quarter, MGIC reported a net loss of $72.9 million, compared with a net loss of $19.6 million for the same quarter a year ago. Then again, for the end of this year's fiscal second quarter, MCIG reported a net income of $12.4 million, compared with a net loss of $273.9 million for the same quarter a year ago.

However, MGIC's management states in both the second- and first-quarter earnings reports that:

We have reported net losses for the last six years, expect to continue to report annual net losses, and cannot assure you when we will return to profitability... We have reported a net loss in each of the last six fiscal years, with an aggregate net loss for 2007-2012 of $5.3 billion... We currently expect to continue to report annual net losses...

So overall, MGIC's recovery looks to be under way, but nothing is certain, and these loose forecasts and erratic incomes, which are a result of an almost continual stream of mortgage defaults, add a large amount of uncertainty to MGIC's outlook. 

Still, MGIC's outlook is improving. At the end of the second quarter, the number of delinquent loans on the company's books fell 24% year over year and now stand at their lowest point in five years. The company also reported a 45% rise in new business year over year, so it's not all bad.

Better positioned
Radian meanwhile continues to lose money, but like MGIC, the company is now in a better position than before to stage a recovery. At the end of the second quarter, 53% of the company's mortgage risk was written after 2008, which means the company's "risk in force" is now largely of high quality, outweighing the legacy mortgage book (pre-2008).

In addition, Radian, like MGIC, also noted a year-over-year decline in primary delinquent loans by 21%, new business also increased to $13.4 billion for the quarter, up from $10.9 billion during the first quarter of this year. Furthermore, Radian decreased its risk-to-capital ratio from 21:1 during the fiscal second quarter of 2012, to 18.6:1 during the first quarter of this year -- a lower level of leverage usually signifies less earnings volatility .

Storm clouds ahead
While Genworth Financial has performed better than MGIC and Radian during the past five years, remaining profitable for the most part thanks to the company's international operations and non-mortgage financial services arm, the company could be sailing into stormy waters.

International mortgage insurance accounted for 60% of Genworth's net operating income during the first half of this year. Individually, Canadian mortgage insurance accounted for 24% of overall revenue for the second quarter, and Australian insurance accounted for 31% of revenue for the same period.

There is much speculation over the state of the Canadian housing market. Some believe the market is in bubble stage, others think there is nothing to worry about. The Organization for Economic Co-operation and Development has ranked Canada's housing market as among the world's most expensive. However, Canadian economists and the Bank of Canada don't see a problem at this point.

The Australian market is much the same: both sides of the argument have been put forward by prominent financial figures, but the factor linking these two economies -- each on separate sides of the world -- is the commodity markets, and the recent decline in capital spending could be the catalyst that starts a collapse in property prices.  

Foolish bottom line
MGIC and Radian look like they're in the process of recovery, but there's still a significant amount of uncertainty hanging over the companies. Peer Genworth financial looks strong, having avoided a lot of fallout from the financial crisis, but storm clouds could be brewing over the company as uncertainty starts to build in some of the company's key markets. 

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