Yahoo Finance Why MGIC Investment Corp, Radian Group, Essent Group, and NMI Holdings Stock Plunged on Monday
A boon from lower corporate taxes is turning into a bust for the mortgage insurance industry. The industry's largest companies including MGIC Investment Corp (NYSE: MTG), Radian Group (NYSE: RDN), Essent Group (NYSE: ESNT), and NMI Holdings (NASDAQ: NMIH) are all down by more than 14% as of 1 p.m. EDT Monday.
In a bid to gain market share, MGIC Investment Corp. announced it would slash the premiums it charges to insure certain borrowers. It will be most aggressive with price cuts for borrowers with lower credit scores, where premiums will be cut by as much as 24%. Prices for higher-quality borrowers will be reduced by a smaller degree, by about 11% on average.
Competition bites
Private mortgage insurance is considered to be almost perfectly competitive as companies compete for business primarily on price alone. With MGIC Investment Corp slashing the premiums it charges on borrower-paid policies, other mortgage insurers including Radian Group, Essent Group, and NMI Holdings will have to follow or risk losing business to their lower-priced peers.
In a presentation, MGIC Investment Corp explained that it can afford to underwrite policies at lower premiums thanks to a drop in the U.S. corporate tax rate from 35% to 21%. In an illustrative example, it detailed how after-tax returns on a certain cohort of prime borrowers would increase marginally despite a 10% decrease in the premiums it charges to its customers.
Image source: Getty Images.
Tax savings flow to customers
While investors may have expected prices to ultimately drift downward over time, it seems they were blindsided by just how quickly prices were dropped as a result of the Tax Cut and Jobs Act. On the company's most recent earnings conference call in January, an analyst asked how or when lower tax rates might be reflected in premiums.
MGIC Investment Corp's CEO, Pat Sinks, said, "I think that's to be determined, and I don't mean to be vague in my answer, but it's still early in the year, as to how it will play out," referring to pricing decisions based on tax rate changes.
Sinks also discussed the potential for higher returns due to a lower tax rate, adding that "whether or not that will be competed away, that's a possibility. But we haven't seen any indication of that yet." Interestingly, it was MGIC Investment Corp that decided to fire the first big salvo by slashing premiums.
Fewer mortgages to insure
Mortgage origination volumes are closely tied to interest rates, and with rates rising, fewer homeowners are refinancing, leaving the mortgage insurers to compete for a smaller number of mortgages to insure.
Notably, total U.S. mortgage origination volume declined by 19% in the fourth quarter of 2017 compared to the prior-year period, according to data compiled by ATTOM Data Solutions. As origination volume declines, mortgage insurers have to grow by taking market share, and that means pricing policies more aggressively.
MGIC Investment Corp's pricing actions are likely to be followed by similar price cuts by Radian Group, Essent Group, and NMI Holdings.
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Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
