We called a bottom to the MI stock rout on 8/25/11 here. Since that time the worst performer, Genworth, beat the S&P by 4% returning 41%. Radian returned 200% after answering The Dragon's Capital Question by implementing precisely the commutation solution that we had suggested. We reasserted our view of Radian in response to Barron's November 6th article asserting Radian was "A House of Cards."
Now we will justify why market prices of Radian and MGIC diverged in 2012 and what that means for investments now. While we have hardly mentioned MGIC on these pages before, we did and do consider the company solvent in the sense that there exists value in equity if liquidity does not get in the way. But liquidity does look likely to get in the way.
MGIC will have a holding company cash position of $187M in Q4 after accounting for $200M in contribution commitments to its operating subsidiary and $13M in non-deferable interest payments on Sr. Notes. The company has $100M of Sr. Notes maturing on 11/1/15 and will need to make $26M in interests payments for each of the next three years. This means that without any other sources or uses of cash, MGIC will have approximately $9M at the holding company at year end 2015. Without a large downward revision to its expected claim rate on its legacy book, MGIC will likely still exceed a 25:1 risk-to-capital ratio at that time.
The future of the company then, is dependent on access to capital markets. The Dragon guesses that they will have it, but price is wildly uncertain. For that reason, the best place in the capital structure looks to be the subordinated debenture 9% of 2063 recently trading around 46 with substantial deferred interest. (The securities are 144a meaning only qualified institutional buyers may purchase them, thanks for looking out for the little guy big brother). We see this trade returning 40% annualized through 2016 if a liquidity solution is realized. The odds are good, but we think we can do better. Playing the market access game has never been our favorite bet.
We claim no exceptional forecasting power in forcasting market access, a clear hurdle to committing capital here. There is an attractiveness to this trade in so far as it is robust to long term perceived uncertainty of the role of PMI. However, the Dragon believes that role is more certain than the market suspects. Old Republic, a market insider, and newcomer Arch Capital are betting that way. Old Republic acquired a minority stake in MGIC common stock and Arch announced the acquisition of PMI Group, Inc assets.
For the PMI industry's future, the big question on everybody's mind is QRM and housing finance reform. Whether the initial QRM proposal is revised or not, PMI on qualified mortgages is going to be the main show for low down payment mortgages. Retaining a 5% interest might increase cost, but hardly makes the product unworkable. QRM implementation would also likely come after a QM-like exemption while the GSEs remain in conservatorship. Meanwhile FHFA Acting Director Edward DeMarco has voiced support for an expanded role of PMI. DeMarco faces hostility from Senate Democrats over his resistance to principal reduction, but such an idea would fit with any FHFA director's duty to fulfill a mandate to "foster liquid, efficient, competitive, and resilient national housing finance markets (including activities relating to mortgages on housing for low- and moderate-income families involving a resonable economic return that may be less than the return earned on other activities)."
With that in mind, we would rather continue to focus capital on the greatest franchise in the industry. Radian's handling of the housing collapse was nothing short of a masterstroke. The firm aggressively expanded sales efforts just as pricing firmed and competitors retreated from attractive business. Peripheral businesses were sold (or commuted) when capital was needed but after valuable income had been earned and saleability improved. The maturity of the financial guarantee book coincides with debt maturities at the holding company. The company has shifted to more monthly (versus upfront) premium business in anticipation of higher interest rates and longer persistency. Interest cost reimbursement agreements with subsidiaries and the opportunistic repurchase and extension of debts has ensures holding company liquidity until 2017. By that time, dividend capacity and operating earnings will likely be at a record.
Even with S.A. Ibrahim at the helm, Radian will probably lose share within the PMI industry as new entrants and re-entrants fight for a piece of the pie. Meanwhile, refinancing activity will decrease. But the overall PMI market will grow with household formation and home purchases (even in the current low interest rate environment refinancing accounted for only 38% of Radian's NIW in the first 9 months of 2012). All in, Radian's levels of NIW are sustainable. Almost as important, slow moving prices and rising interest rates will keep persistency high on a book of business that is focused on monthly premiums.
Radian publicly says that it expects every $10B of NIW to generate $75M net present value. This appears to be consistent with 70% persistency and a 50% combined ratio. A persistency of 80% would be the lowest in since 2007. The expense ratio has been under 25% four of the last five years (2008 was 29%). Finally, the 2010 book of business is performing at a loss ratio under 10% YTD in it's second full year, a time period normally associated with close to peak losses. From this seat, a persistency at 80% and a combined ratio of 35%, the NPV of $10B looks more like $125M. If so, Radian added value of half a billion dollars, or 2/3 of it's market capitalization, in 2012 alone. But NIW in 2013 has the momentum to be even higher.
That is why we won't settle for an expected 40% per year for 4 years on jr. subordinated MGIC paper.
In the short term for Radian, CFO Bob Quint's expectation as of the Q3 call for "a larger MI operating loss as the negative impact of seasonality on both new defaults and cures is expected to result in significantly higher incurred losses for the {4th} quarter." However both defaults and cures were slightly better while claims paid were about 1% higher.
We never invest based on market witchcraft: technical analysis and chartism. Stoicism has served us better than fast-money market timing. However, watching the telltale signs of this sorcery fascinates us. Two things speak to us from the charts: the fast money is in, but for the real money looking to enter, the pain trade is higher.
Showing posts with label MGIC. Show all posts
Showing posts with label MGIC. Show all posts
Saturday, February 9, 2013
Thursday, August 25, 2011
HAMP: Data that Doesn't Foretell Doomed
Technicians, chartists and that lot are wizards. Whether you believe in them is up to you. But we just have that feeling that the bottom may have been put in for the solvent MI group: especially Radian, MGIC while Genworth offers less volatility and potential return.
Call it a double bottom, capitulation, or just a long awaited piece of good news. The recent market movements have made for an attractive opportunity amongst the three basic asset classes: redeploying capital into mortgage insurance assets and out of bond insurance assets and especially other assets. Not so much as changed in the bond insurance world, and that's why those assets are an attractive relative source of funds. Other assets - for those who believe in holding such things - remain the most attractive source of funds.
That's why this had to be written now.
What needs to be written is that the one (or the one) source of cure data outside of mortgage insurers supports the case for current reserve levels - or lower. Don't get us wrong: the next few quarters will in all likelihood continue to be ugly, with high loss provisions for the group as the delinquent inventory ages and new defaults remain stubborn. But that doesn't lend credit to suggestions that reserves should be 75% of risk in default for loans over 3 month delinquent (a la Barron's.)
The source is HAMP, see the program's press releases here or visit The Dragon's compilation of the latest two monthly reports here.
The data is broken out with more granularity than the MI's reports and cover two categories: loans from canceled HAMP trials and loans from loans not qualifying for HAMP. In all, 2.1M million loans are covered in the canceled loan and non-qualifying loans. The WSJ estimated their are about 6.3M delinquent loans.
For non-qualifying loans, roughly 0.9M of 1.55M or 58% of disposed loans were either current, paid off, modified or on a payment plan. 57% of 0.6M canceled loans fell into the same categories. Roughly 15% of canceled and non-qualifying loans were categorized as action pending or action not allowed. The remainder were in categories that would likely result in a claim - foreclosure pending, foreclosure completed, and short sale/deed-in-lieu.
If this data were extrapolated to the delinquent inventory at MI companies, they would look comically over-reserved. But this is a biased sample. Those loans not counted might tend to be those with the most hopeless borrowers or worthless properties, not to mention foreclosure process difficulties. On the other side of the scale, these numbers don't account for the 90% higher rate of still-current loans out of 657k permanent non-canceled HAMP modifications.
There's more: this data has no accounting for rescission and denials which might benefit claim payment rates to the tune of 15% or more. All of a sudden 50% of delinquent inventory covered by loss reserves doesn't sound so bad. Volatility be damned: we've used this opportunity to load up for the long haul.
Call it a double bottom, capitulation, or just a long awaited piece of good news. The recent market movements have made for an attractive opportunity amongst the three basic asset classes: redeploying capital into mortgage insurance assets and out of bond insurance assets and especially other assets. Not so much as changed in the bond insurance world, and that's why those assets are an attractive relative source of funds. Other assets - for those who believe in holding such things - remain the most attractive source of funds.
That's why this had to be written now.
What needs to be written is that the one (or the one) source of cure data outside of mortgage insurers supports the case for current reserve levels - or lower. Don't get us wrong: the next few quarters will in all likelihood continue to be ugly, with high loss provisions for the group as the delinquent inventory ages and new defaults remain stubborn. But that doesn't lend credit to suggestions that reserves should be 75% of risk in default for loans over 3 month delinquent (a la Barron's.)
The source is HAMP, see the program's press releases here or visit The Dragon's compilation of the latest two monthly reports here.
The data is broken out with more granularity than the MI's reports and cover two categories: loans from canceled HAMP trials and loans from loans not qualifying for HAMP. In all, 2.1M million loans are covered in the canceled loan and non-qualifying loans. The WSJ estimated their are about 6.3M delinquent loans.
For non-qualifying loans, roughly 0.9M of 1.55M or 58% of disposed loans were either current, paid off, modified or on a payment plan. 57% of 0.6M canceled loans fell into the same categories. Roughly 15% of canceled and non-qualifying loans were categorized as action pending or action not allowed. The remainder were in categories that would likely result in a claim - foreclosure pending, foreclosure completed, and short sale/deed-in-lieu.
If this data were extrapolated to the delinquent inventory at MI companies, they would look comically over-reserved. But this is a biased sample. Those loans not counted might tend to be those with the most hopeless borrowers or worthless properties, not to mention foreclosure process difficulties. On the other side of the scale, these numbers don't account for the 90% higher rate of still-current loans out of 657k permanent non-canceled HAMP modifications.
There's more: this data has no accounting for rescission and denials which might benefit claim payment rates to the tune of 15% or more. All of a sudden 50% of delinquent inventory covered by loss reserves doesn't sound so bad. Volatility be damned: we've used this opportunity to load up for the long haul.
Thursday, March 31, 2011
MICA Release; MGIC, Radian Data Compiled
MICA cure rate of 112% for February data landed squarely between rates reported earlier by MGIC and Radian of 115% and 109% respectively.
Compared to the same month in 2010, defaults dropped 30% from 68,675 to 48,086 reflecting credit burnout and an improving economy. Over the same time, cures dropped by 33% from 80,758 to 53,944 reflecting the expiration of federal modification programs and an aged delinquency inventory.
While this month shows near peak seasonal benefits, the last two years have not been so good for delinquency inventories. Since peaking in 2010 for most MIs, delinquency inventories have not aged like milk nor wine. Rather it has progressed more like Earl Gray tea; it certainly has not improved but at least it isn't rancid. The uncertainty surrounding this inventory remains extreme. Despite a slower start this year, we think this year will look better than last as portrayed in not only company loss developments but also cure rates.
On another note, both MGIC and Radian having reported several quarters of operating data so The Dragon has compiled that information. The links below have also been pasted on the "Links and Models" page. As always, we take no responsibility for our sloppy work.
MGIC Data: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dGdRWVBMVmIzVzJvbjMtdHdZM2NFb3c&hl=en_GB
Radian: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dFU1a0pFNXlEZmhZN2FORWU3RjM2bUE&hl=en_GB
MICA: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dGRjSGlrZ2NDNmlxU0VMNnNJYWliUXc&hl=en_GB&pli=1#gid=0
Compared to the same month in 2010, defaults dropped 30% from 68,675 to 48,086 reflecting credit burnout and an improving economy. Over the same time, cures dropped by 33% from 80,758 to 53,944 reflecting the expiration of federal modification programs and an aged delinquency inventory.
While this month shows near peak seasonal benefits, the last two years have not been so good for delinquency inventories. Since peaking in 2010 for most MIs, delinquency inventories have not aged like milk nor wine. Rather it has progressed more like Earl Gray tea; it certainly has not improved but at least it isn't rancid. The uncertainty surrounding this inventory remains extreme. Despite a slower start this year, we think this year will look better than last as portrayed in not only company loss developments but also cure rates.
On another note, both MGIC and Radian having reported several quarters of operating data so The Dragon has compiled that information. The links below have also been pasted on the "Links and Models" page. As always, we take no responsibility for our sloppy work.
MGIC Data: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dGdRWVBMVmIzVzJvbjMtdHdZM2NFb3c&hl=en_GB
Radian: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dFU1a0pFNXlEZmhZN2FORWU3RjM2bUE&hl=en_GB
MICA: https://spreadsheets.google.com/ccc?key=0AlFMaAd3v9o0dGRjSGlrZ2NDNmlxU0VMNnNJYWliUXc&hl=en_GB&pli=1#gid=0
Tuesday, March 8, 2011
A "Holy Crap" Cure Rate
MGIC released its February operating statistics that shows all the typical seasonal improvements. That translates into a 115.2% February cure rate compared to 72.7% rate in January. Cure rates do not include recissions and denials. The improvement was driven by an almost 4000 loan increase in cures and 3000 loan decrease in delinquencies.
The highest cure rate reported by MICA for 2008, 2009, and 2010 occurred in March with rates of 87%, 83.2%, and 123.4% respectively. Here are MGIC's February numbers:
The highest cure rate reported by MICA for 2008, 2009, and 2010 occurred in March with rates of 87%, 83.2%, and 123.4% respectively. Here are MGIC's February numbers:
February 2011 | |||
Primary New Insurance Written ($ Billions) | $0.9 | ||
Beginning Primary Delinquent Inventory (# of loans) | 213,860 | ||
Plus: New Notices | 14,074 | ||
Less: Cures | 16,216 | ||
Less: Paids (including those charged to a deductible or captive) | 4,331 | ||
Less: Rescissions and Denials | 941 | ||
Ending Primary Delinquent Inventory (# of loans) | 206,446 |
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