Mortgage insurance companies beat analysts' second-quarter earnings projections, and industry experts are saying the second half will be even better, with refinancing volume expected to cool down.

But mortgage insurers' stocks have by and large trailed the rest of the market because of concerns about competitive pressures and legislation that could affect the industry. Amerin Guaranty Corp. is to release its earnings today; the other three major mortgage insurance companies' results came out last week.

CMAC Investment Corp.'s earnings were "solid, top to bottom," said Mark Constant, an analyst at Merrill Lynch & Co. Net income per share rose to 91 cents in the second quarter, beating the Wall Street consensus estimate of 90 cents. New insurance written increased 80%, to $5.7 billion, and the share of loans in default fell 1 basis point, to 2.31%.

The PMI Group Inc.'s results were more mixed. Operating earnings per share increased to $1.41, from $1.24, beating the Street's consensus of $1.39. The company picked up market share, and the credit quality of its portfolio improved as its default rate fell to 2.16%, from 2.20% the year before.

But analysts were disappointed by the increase in PMI's expenses. "Contract underwriting expenses were much higher than I expected," said Kenneth Posner, an analyst at Morgan Stanley Dean Witter.

In contract underwriting, insurers process loans for originators in exchange for fees and the opportunity to supply private insurance to any loan that requires it. "It's an enticement to get other business, but it's an expensive product," said Edwin Ciskowski, an analyst at SunTrust Equitable Securities Corp. During an analyst conference call last week, officials at MGIC Investment Corp. said their company tried to raise prices for contract underwriting, only to be rebuffed by customers.

"Contract underwriting has become a major competitive tool, and costs have gone up." said William Lacy, MGIC's chief executive officer, in an interview Monday with American Banker.

However, Mr. Lacy said, as refinancing volumes come down, so will contract underwriting expenses. But Mr. Posner pointed to the increase in contract expenses at PMI and MGIC's failure to raise prices as evidence that "competitive intensity is mounting."

Mortgage insurance stocks generally have not kept pace with this year's bull market. "We may have gotten ahead of the market," said Mr. Lacy. "We had an almost unbelievable appreciation for a while, and we're probably catching our breath."

The House of Representatives approved legislation last week that would automatically cancel private mortgage insurance when a borrower's equity reaches 22%.

Other pending legislation would raise the limit on the size of loan that the FHA program can insure. If enacted, the measure may "take away a small amount of business for the mortgage insurance companies," Mr. Ciskowski said. "It's a modest negative."

Also, the refinancing boom has inhibited some companies from expanding their portfolios.

"There's been some concern about long-term, in-force book growth," said Mr. Lacy, explaining the underperformance of mortgage insurance stocks. "And there's been some uncertainty, some negative publicity about the cancellation" legislation. "What does it mean to us? That kind of uncertainty doesn't help."

With two major pieces of legislation likely to be out of the way and refinancing activity expected to taper off, "the second half of the year could be a lot better," Mr. Ciskowski said.

The Wall Street consensus is that Amerin's second-quarter earnings grew to 47 cents a share, from 37 cents a year earlier, according to Nelson Information, an investment research firm.

Amerin is expected to have benefited from its being the youngest of the major mortgage insurers, making its portfolio less susceptible to prepayments.

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