Mortgage Insurance Industry Improving

In a nutshell, our investment thesis on Genworth Financial (GNW) is as U.S housing continues to recover GNW is in a good position to recover with it. Under performance in other areas of the insurer are being addressed and the improving macroeconomic climate will help. Activist shareholders and improvement in the mortgage insurance unit will be the catalyst for eliminating the huge discount between the share price and intrinsic value. Share repurchases could add significantly to the intrinsic value we are estimating.

It was the mortgage insurance unit’s poor performance during the housing crises that crushed the share price. Mortgage insurance will continue to bring the needed focus on the company and provide a good way for us to monitor progress. Two recent reports indicate the U.S. mortgage insurance market is improving in support of the GNW thesis.

First; Lender Processing Services, Inc. (LPS) provides excellent analytics on the mortgage and real estate industries in its Mortgage Monitor report with a loan-level database representing approximately 70 percent of the overall market. Who better to provide a leading indicator and gauge the health of the mortgage business than those collecting the payments? The “first look” for the October 2012 month end mortgage performance statistics shows continual improvement in month over month and year over year delinquency rates and foreclosure presales. Both positive indicators for mortgage insurers:

Source: Lender Processing Services, Inc.

The chart below from the September 2012 Mortgage Monitor report showed a seasonal upward blip in delinquencies but a clear downward trend is there. A good example on why the trends and not month to month economic statistics are important. The October 2012 full report and graph is to be published by December 10, 2012.

Source: Lender Processing Services, Inc. Mortgage Monitor Report

The second report from Fitch Ratings also reported improved revenue and a sustained housing market recovery. The outlook for the U.S. title insurance industry is “stable” and should bode well for mortgage insurers. As reported in part by DSNews:

  1. Operating profit margins for Fitch’s title universe rose to 10.3 percent in the first nine months of 2012…a dramatic jump from 6.1 percent during the same period in 2011.
  2. Title revenues increased by more than 15 percent from January to September as refinancing activity outpaced expectations and housing markets found solid ground.
  3. The period’s underwriting combined ratio reached 90.7 percent, a level not seen since 2006.
  4. Open order counts for title underwriters were 20 percent higher at third-quarter 2012 compared with the same period in 2011.
  5. ….order flow should provide a “strong pipeline of activity for the first half of 2013 and a cushion against a potentially weaker second half in an uncertain economic environment.”
  6. Fitch says it continues to view the industry as “adequately capitalized.”
  7. The biggest threat…the fiscal cliff. If that were to occur, economic growth would fall off drastically… and a “return to sizeable title insurer operating losses and capital deterioration.”
  8. …if the cliff can be avoided and the housing market is allowed to grow further, Fitch anticipates an improvement in industry capitalization to historical levels.

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