trending Market Intelligence /marketintelligence/en/news-insights/trending/hxhb-wwxgnvio9l0szbllg2 content esgSubNav
In This List

Shares of mortgage insurers drop after unveiling of Freddie Mac program

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


Shares of mortgage insurers drop after unveiling of Freddie Mac program

Share prices of mortgage insurance companies took a hit with the announcement of a pilot program that would create an alternative to private mortgage insurance for certain Freddie Mac loans.

Although the program targets a relatively small and less profitable portion of the insurance business for new mortgages, investors sent shares of mortgage underwriters down about 10% on average after the announcement. The largest public companies in the sector finished down between March 8 and March 15.

The S&P 500 gained 0.31% to 2,747.33 for the five-day period ending March 15, and the SNL Insurance Index climbed 0.53% to 1,041.82.

Shares of Radian Group Inc., Essent Group Ltd., MGIC Investment Corp. and NMI Holdings Inc. traded down the day the pilot was made public and did the same two days later, virtually in sync.

RBC Capital Markets analyst Mark Dwelle thought investors overplayed the potential negative from the pilot program, which would negotiate reinsurance for lender-paid mortgage insurance with a panel that would include Arch Capital Group Ltd. Freddie Mac indicated that it did not intend for the program, called Integrated Mortgage Insurance, to replace private mortgage insurers for its loans altogether.

Mortgage insurance paid by lenders represents about 15% of new policies written in a given year and if the pilot does grow into a larger threat to insurers, it would be for a low-margin slice of the market anyway, Dwelle said in an interview.

"If they like that business, and they want to keep it, they could cut their price," he said.

If they do not like the business and the profit margins do not justify competing for it, they could let some of it go, which would improve their capital positions, Dwelle added.

"Every one of these guys has capital issues — they're either over-levered, or they're growing so fast that they need more capital," he said. MGIC Investment and Radian reinsure their business, so the net economic impact of losing a portion of it would be fairly modest, he said.

Wells Fargo analyst Sean Dargan noted soon after the announcement that Essent Group's reinsurance structure would make it adaptable to the change.

Chris Gamaitoni, an analyst with Compass Point, said the pilot program is immaterial to his near-term estimates in the sector and would need to expand significantly to pose a major risk.

"In our view, the ultimate impact to mortgage insurers will be dependent on how large this program becomes, whether lenders have demand for the new execution, and if reinsurance becomes a consistent alternative to primary mortgage insurance," Gamaitoni wrote in a March 13 research note.

His return on equity analysis of the potential impact of the program on mortgage insurers showed it would barely hurt the upside he sees in the companies' share prices, he said.

Shares of the companies posted some of the largest declines for the week among publicly traded insurers. Radian declined 14.42% to $18.46. MGIC Investment fell 11.95% to $12.50. Arch Capital fared slightly better than its peers, posting a 5.24% drop to $84.07.

Elsewhere in the insurance industry, Hallmark Financial Services Inc. saw its share price fall after it reported a year-over-year fourth-quarter 2017 earnings slide. The company's shares gave up 6.48% of their value for the week, falling to $9.24. Kingstone Cos. Inc.'s stock price dropped after the company reported lower fourth-quarter 2017 net operating income compared with the 2016 fourth quarter. Kingstone saw a drop of 8.07%, to close at $18.80.