This mortgage insurance market ain't big enough for all seven of us.
So says Patrick Sinks, CEO of MGIC Investment Corp., which has seen its market share chipped away by smaller, newer underwriters created after the housing crisis.
MGIC was the market leader in the heady days before the mortgage crisis, when origination volume was high enough to sustain as many as eight PMI underwriters. Now there are seven providers competing for a share of a much smaller originations market.
Assuming a mortgage originations market of $1.5 trillion per year, the share that would use private mortgage insurance is approximately $200 billion in originations, Sinks said.
At that level, "I don't know that there is enough business to go around for seven MI companies," he said at an investor conference on Wednesday, adding the need to develop new revenue sources is why the MIs are looking at front-end risk sharing arrangements with the government-sponsored enterprises.
The possibility for merger-and-acquisition activity exists, but nothing is imminent, he said, explaining that any consolidation will likely be prompted by shareholder angst over low revenue in an oversaturated market.
Of the seven companies, private MI is the primary business for four publicly traded companies: MGIC, Radian Group, Essent Group and NMI Holdings. The other three are subsidiaries of publicly traded insurers that write multiple lines of business.
There has been some speculation about possible mergers in the MI space. This includes a published report that said Radian's board could elect to sell the company in the wake of the planned retirement of CEO S.A. Ibrahim and that Essent was the most likely suitor.
Meanwhile, American International Group plans to sell a 19.9% stake in United Guaranty Corp. in an initial public offering. But dissident AIG shareholders had been pushing for a total divestiture or sale of UG.
Radian's Chief Financial Officer Frank Hall when asked about consolidation during that company's presentation said, "The industry has operated with more competitors and fewer competitors, and what the right number is, I don't know."
And National MI's Chairman and CEO Bradley Shuster noted there is "a lot of talk about consolidation, but very little real consolidation."
National MI entered the business after the housing crisis and does not have to deal with a legacy book of business from that era. "We try to keep our head down and focus on the opportunity right in front of us," Shuster said.
But even if there is merger activity among the MIs, investors should not count on the surviving entity retaining the combined market share, MGIC's Sinks said.
"If you have a lender who does business with four MIs and two of them consolidate, that doesn't mean you're going to hold that position. You're going to lose that. So the seller obviously wants to maximize their value for their shareholders, while the buyer has to factor in a potential loss of market share," he explained.
But what would make a merger successful is taking enough expenses out of the combination to justify the transaction, he continued.
All of the MIs have gone to more granular pricing and that has compression in the market share spread between the largest and smallest MIs, Sinks said. The smallest two companies, Arch and National MI, each had a 4% share in that quarter, while UG had a 24% share.
For the most recent quarter, Arch had a 7% share, while UG's share fell to almost 20%. MGIC's share declined to 18% from 21% during that time frame.
Discounted pricing on borrower-paid MI for the most part has gone away, with the exception being for loans originated by credit unions, Sinks said. Aggressive pricing also remains for lender-paid MI, he added.
The hubbub over policy pricing methodology, black box versus rate card, came up in all three sessions. Each company said they had the ability to replicate the black box method used by UG and Arch MI, but their customers didn't want it.
Shuster questioned the relevance of using a black box algorithm to generate the price.
"In today's post-TRID world, rate cards [with a matrix based on credit scores and loan-to-value ratios] are more appealing than a black box," he said.
Most of MGIC's customers "prefer not to have a black box. They would rather have the rate cards because there is a transparent price. They know what they're going to get each and every day," Sinks said.
And as companies have increased the granularity of their rate cards, there is less of a difference between them and black box pricing than has historically been the case, said Derek Brummer, Radian's chief risk officer. "Historically, the black box pricing had an advantage on the kind of the higher credit quality [loan]. That is less the case today," he noted.