Mortgage Insurers Make Headlines, Title Insurers Make Money
Uncertainty surrounds specialty insurance, but there's one overlooked opportunity.
While there has been a great deal of publicity on issues affecting stocks in the specialty insurance industry--mortgage, bond, and title insurance--not much of substance has changed our view over the past year. Foreclosures continue to build, as we expected, but currently at a slower pace due to the "robo-signing" controversy and other processing issues. The economy is improving, albeit slowly, and new job formation, a factor that could limit foreclosures, is still meager. A growing inventory of distressed homes continues to pressure home prices, leading to more and deeper underwater mortgages. All in all, the outlook remains generally depressed for most of the stocks we cover in these industries. However, we adhere to our view that there is opportunity in one sector of this group.
Our take on the mortgage insurers has been and still is that they have yet to see the worst levels of actual paid claims hit their reserves. The average time from initial delinquency to foreclosure has lengthened dramatically, first from attempts to modify nonperforming loans and more recently from the delay arising from faulty foreclosure proceedings. Mortgage insurers that have already reported fourth-quarter earnings have stated that paid claims in 2011 will rise, in some cases substantially. Assuming the market doesn't weaken further, we think the mortgage insurers will survive but will likely have to raise more capital in order to be adequately reserved. On the other hand, a stagnating economy with no job growth could bring these firms to the brink if foreclosures accelerate beyond our expectations. Because of the extreme range of outcomes in this line of business we think investors are best advised to avoid the monoline mortgage insurers we cover, MGIC (MTG), Radian Group (RDN), and PMI Group (PMI). Old Republic International (ORI), a multiline insurer with other lines of business that are performing adequately, is less uncertain and could be considered for investment with a wide margin of safety.
Jim Ryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.