The five publicly traded mortgage insurance companies have all outperformed the market in the last three months, but it's the smallest of the group that has attracted the most attention.
Triad Guaranty, with less than 3% of the mortgage insurance market, has soared recently. In the last two weeks alone, the stock is up 28%.
Steven Schwartz, an analyst with ABN Amro/Chicago Corp. said investors have caught on to the fact that Triad is expected to outpace the rest of the industry in earnings growth.
In the first quarter Triad's earnings per share grew 28%. Most of the publicly traded mortgage insurers have reported earnings growth of at least 20%. Winston-Salem, N.C.-based Triad and the other four mortgage insurance companies will report second-quarter earnings later this month.
According to First Call, analysts expect Triad to report earnings per share of 53 cents for the second quarter. Triad earned 40 cents a share in the second quarter of 1996.
Even though Triad is the smallest public company in the industry, it has prospered by limiting its claim losses.
"We're very careful about the kind of the risk we put on our books. Our risk is properly priced and properly underwritten," said Darryl W. Thompson, chief executive officer.
Mr. Thompson said Triad is not writing any of the controversial GSE pool insurance, a product that some insurers are writing in the hopes of getting lenders to purchase more profitable primary insurance as well.
Critics of GSE pool say the product is underpriced relative to the risk that the insurer must assume.
"We've been more conservative than some of the other mortgage insurance companies," Mr. Thompson said.
Triad does business with some of the smaller regional mortgage lenders that other insurers eschew in favor of the industry giants.
"We deal with larger lenders, someone like Norwest, but we don't just concentrate on the top 25 or 30 lenders the way some other companies do," Mr. Thompson said.
He said he expects the company's share to expand eventually to 4% and 5% of the market.
As for Triad's high-flying stock, Mr. Thompson credited the coattails of Milwaukee-based MGIC Investment Corp., the market share leader.
MGIC has performed well enough recently to boost many mortgage insurance stocks. MGIC announced a stock split and share repurchase program in May.
Mark L. Constant, an analyst for Merrill Lynch, said another reason for the run-up in the mortgage insurance stocks is that investors believe the California housing market is on the upswing.
A recovery in California would bode well for mortgage insurers, because claim expenses would dramatically decrease. California loans now account for more than 60% of the claims that CMAC Investment and PMI Group are paying, Mr. Constant said.
Sanford C. Bernstein analyst Jonathan Gray said a more favorable housing market in California would help CMAC, PMI, and MGIC even more than the California-based thrifts that are major lenders in the state.
"The mortgage insurance industry's profitability could surge if the California housing market turns," Mr. Gray said.
Mr. Constant said it appears that delinquency rates may have peaked in Southern California. This could foreshadow in appreciation in the value of homes there. The housing market in Northern California has already shown signs of strength, he added.
Triad does not have huge exposure to California, Mr. Thompson said, but the company's market share has been rising there and in other western states.
