Analysts predict more economic challenges for private mortgage insurers

The ability of private mortgage insurer Radian ($12.90 -0.02%) to write new business is starting to pique investor interest, analysts say. Fellow insurer MGIC, by way of comparison, remains in a tougher position. At any rate, the remainder of the year will present further macroeconomic challenges to the sector.

Radian wrote $8.3 billion in new insurance in the second quarter, up from $6.5 billion in 1Q and $2.3 billion in the second quarter of 2011, according to Bose George with Keefe, Bruyette & Woods.  In July alone, the firm wrote $3.4 billion in new insurance.

Radian is currently a type of shining star in a depressed sector with its stock price rising 40% from January levels. At the onset of 2012, Radian was trading at $2.29 a share, and is now priced at approximately $3.21 a share.

"There is definitely interest in the new business that is now being written," George with KBW said. "The mortgage credit quality is very strong, and there is an expectation that the new business will be profitable."

But challenges remain, and the risks are well known.

Bose says the older vintage mortgage insurance portfolios at Radian and MGIC remain potential investor risks since "very few people are comfortable with legacy exposure" that could eventually spark new delinquencies and claims as the economy slugs along.

On the credit side, significant risks remain.

Ron Joas, a credit analyst with Standard & Poor's who covers Radian and MGIC, says "it becomes important that they raise capital, which they need at this point." He added, "their ability to raise capital is weak."

In a recent S&P report, Joas concluded Radian, MGIC and Genworth all have a negative outlook. "Although new notices of default have decreased in the past three months, we expect this trend to reverse in the second half of the year, due to the lack of significant improvement in the jobs markets and normal adverse seasonality," the S&P report asserted. "As a result, we expect operating performance to deteriorate in the remainder of the year for all of the companies."

"MGIC took a reserve charge and issued second-quarter earnings that surprised the market," he added. "The market may have been expecting better results, and they came out with reserve charges for their existing portfolio – suggesting that more delinquencies might turn into claims. It's not good news for the insurance sector."

Furthermore, MGIC remains in a dispute with Freddie Mac over pool policies and could lose waivers from Freddie that allow it to write new business in certain jurisdictions if a new settlement is not reached by late October.

The outlook could improve if "they go through multiple quarters where they don't show any negative results" and if home prices increase and employment improves, George noted.

Joas noted that S&P lowered the Counterparty Credit Rating and Financial Strength Ratings of Radian and MGIC to 'B-' in early August, which is just one notch above a CCC rating — a level that suggests a company faces a 50-50 chance of eventual default, Joas said.

"Radian MI reported an underwriting loss of $75.7 million in second-quarter 2012, an improvement from same period in 2011," he wrote in an analyst report. "However, we believe the risk of a significant adverse reserve adjustment has increased, which could hurt Radian MI's capital adequacy and future earnings."

kpanchuk@housingwire.com