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2014: A Promising Year for Mortgage Insurers

Zacks Equity Research

Strong fourth-quarter earnings among sector participants in the private mortgage insurance industry signal a solid entry into 2014. The industry is poised to directly benefit from home price appreciation as well as improvements in the employment scenario.

In the fourth-quarter earnings conference call, Curt Culver, CEO and Chairman of MGIC Investment Corp. (MTG) said, “I also remain optimistic that the demand for home purchases will continue to recover as household formations return to their historic levels. And as the economy continues to improve, consumers will have more confidence in their future employment and their desire to purchase a home will continue to increase. And since the majority of purchasers that needs a mortgage do not have a 20% down payment, we have a wonderful opportunity in front of us.”

Another player, Genworth Financial Inc. (GNW),  produced stellar results at its U.S. Mortgage Insurance (:MI) business, which returned to full-year profitability for the first time since 2007. Management at Genworth expects significantly higher earnings at the U.S. MI segment in 2014 over the previous year, as the 2005 to 2008 blocks continue to burn out and high-quality earned premiums from the 2009 to 2013 blocks account for a higher percentage of the overall U.S. mortgage insurance portfolio.

The mortgage players earn premiums by insuring new mortgage originations and refinanced loans. The recent rise in 30-year mortgage rates has induced a significant decline in refinance volume – a trend which is expected to continue in 2014. This year, the industry will see a growing share among new home purchases as housing still remains affordable and national home prices are halfway back to their peak from 2007.

Moreover, the pent-up demand for housing will drive top-line growth in the industry. According to housing experts, much of this growth will be driven by minority groups seeking to fulfill their dream of becoming homeowners. The Harvard Joint Center for Housing Studies reports that minorities will constitute 70% of the 17 million new households projected to be formed from 2010 to 2025.

The players in the mortgage insurance will also benefit from the government’s retreat from the market that in turn will transfer a considerable share to the hands of private mortgage insurers.

With regulators working at crafting mortgage insurance eligibility standards, including new capital requirements, the industry is set to gain solidarity going forward.

Improving industry fundamentals are attracting new and potential players such as Arch Capital Group Ltd. (ACGL), which, of late, completed the acquisition of CMG Mortgage Insurance Company (CMG MI) from CUNA Mutual Group and PMI Mortgage Insurance Co. (PMI).

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