Credit Suisse Research Analyst - Douglas Harter, CFA has published a report titled "2012 Outlook: Optimistic on Liquidity, but Uncertainty Remains High" on Dec 19, 2011. The analyst has a cautious outlook on the mortgage insurers. Currently, both the debt and the equity markets are putting a significant level of doubt on the ability of the mortgage insurers to survive. On the other hand the liquidity outlook for mortgage insurers is on the optimistic side, materialization of which can eventually turn them profitable. Moreover waivers in writing new business at levels above 25x and improvement in employment in 2012 can serve as additional key triggers.
MGIC Investment Corp. (MTG) is currently being watched with caution by Credit Suisse, with a target price of $4/share. The company does present residual value but the parent company's liquidity would remain the key determinant for this value to be recognized. Earnings and capital remain low for all the mortgage insurers, however improved liquidity and employment, and additional waivers in writing new businesses above 25x can eventually bring turnaround in mortgage insurers' profitability. CS analyst expects that MGIC will be granted waivers and will be allowed to operate with 30x risk to capital ratio. Primary variable in 2012 for the mortgage insurers would remain credit quality. Analyst expects credit quality to improve in 2012, where 1H 2012 is likely to benefit from favorable seasonal trend, while the later half could benefit from improving economic fundamentals.
Radian Group Inc. (RDN) has been given an Outperform rating with target price of $5/share. Given the acute liquidity position of the mortgage insurers and pressures exerted by the debt and equity markets, it became difficult for the investors to recognize value of these companies. Risk to capital ratios for the mortgage insurers has now touched 25x levels, which will require capital injections by the parent companies and continuation of waivers in order to write new business. Analyst expects that Radian will be granted waivers and will be allowed to operate with 30x risk to capital ratio. Improvement in credit quality and economic fundamentals along with continuation of waivers in writing new businesses should eventually bring turn around in company's profitability. During 3Q Radian was the second largest market share gainer, where its share grew by 4.3% to 22.2%. For the 4Q there is still 13% market share to be divided amongst 5 remaining players; Radian can again benefit from this opportunity depending on its capital and liquidity levels and the ability to write new business with waivers.
American International Group Inc. (AIG) has been given Neutral rating by the Credit Suisse, and has been given a target price of $29/share. Company has been the biggest market share gainer amongst the mortgage insurers, recently. Exiting of PMI and Old Republican from new business market had raised opportunity for rest of the mortgage insurers to gain market share. During 3Q AIG's share grew by 6.8% to 25.4%. For the 4Q there is still 13% market share to be divided among 5 remaining players; AIG can again benefit from this opportunity depending on its capital and liquidity levels and the ability to write new business with waivers.
Genworth Financial Inc. (GNW) has also been given Neutral rating by the Credit Suisse, with a target price of $8/share. Risk to capital ratios for the mortgage insurers continues to rise near 25x levels. As a result mortgage insurance subsidiaries would require capital contributions from their parent companies along with waivers to continue to write new business. Genworth in 3Q operated at 30x risk-to-capital ratio. This ratio is likely to increase in coming quarters as the company does not plan to contribute any additional capital to the mortgage insurance subsidiary. Though pricing should have net positive impact on the private mortgage insurers' market share in 2012 but the weak capital/liquidity positions would continue to hamper the industry's ability to take full advantage of the opportunity. Analyst expects Genworth to continue to originate new policies. At the same time it does highlight the weak position of the industry to absorb further economic weakness.
PMI Group Inc. (PMI) has exited from writing new business; as a result its market share has declined by 5.9% q/q and currently stands at 8.6%. Liquidity, capital ratios and credit quality remains big challenges for PMI. Pressure exerted from the debt and equity markets have made it difficult for mortgage insurers to survive; PMI being one of them.
Old Republican International Corp. (ORI) has also exited from writing new business market and as a result its market share has declined by 2.6% q/q and currently stands at 4.3%. Liquidity, capital ratios and credit quality remains to be the biggest challenges for the ORI too. Market is pricing in a doubtful scenario for ORI's survival.