| Sept 19
Sept 19 As more Americans buy homes, the handful
of private insurers that cover their mortgages are attracting
heavyweight investors keen to profit from the nascent housing
With billionaire John Paulson snapping up their shares,
Radian Group Inc and MGIC Investment Corp are at
the forefront of a recovery that is wiping out losses sustained
when the housing bubble burst five years ago.
"These companies are writing highly profitable new
business," said Charles Murphy, partner at hedge fund Paulson &
Though the housing recovery might have slowed, with mortgage
rates rising on the expectation that the U.S. Federal Reserve
will soon reduce its bond-buying economic stimulus program, most
economists think the upward trend will continue.
Once again, there are seven private mortgage insurers in the
United States - the same number as before the housing crash,
their depleted ranks bolstered by new entrants that have
acquired defunct operating platforms.
Private mortgage insurers accounted for 36 percent of U.S.
mortgage insurance written in the second quarter, their biggest
quarterly share of the market since 2008, according to a Royal
Bank of Scotland report published in August.
The proportion will keep rising as home prices appreciate
and their main competitor, the Federal Housing Administration
(FHA), charges higher premiums, analysts and executives said.
Mortgage insurers cover losses when homeowners default and
foreclosures fail to recoup costs. Typically, coverage is
required when homeowners make a downpayment of less than 20
percent on a property.
Companies such as Genworth Financial Inc and Old
Republic International Corp, as well as Radian and MGIC,
were left nursing losses after selling billions of dollars of
low-priced policies before the market crashed in 2008.
As a result, the FHA's share of mortgage insurance ballooned
to a high of around 70 percent in 2009, according to specialist
publication Inside Mortgage Finance.
But the agency's share has been falling as it has reduced
its market exposure and raised premiums to replenish dwindling
"Our lender-customers consistently tell us they are moving
back toward private MI (mortgage insurance) usage from FHA, and
the numbers bear that out," said Rohit Gupta, president and
chief executive of Genworth U.S. Mortgage Insurance.
Echoing data quoted by others, MGIC Chief Executive Curt
Culver said private companies now accounted for about one-third
of the U.S. mortgage insurance market and the FHA two-thirds.
"I would expect that to flip totally over the next few
years, back to the traditional two-thirds, one-third in our
favor," Culver said at a conference this month.
Macquarie Equities analyst Sean Dargan identified the higher
FHA premiums - and thus the agency's reduced ability to compete
- as one of two main drivers of the revival in private
Higher home prices are the other major driver, he said.
"As we see more home price appreciation, it will improve the
outlook for claims severity and perhaps will cause a change in
borrower behavior - where borrowers are less likely to default."
Investors are betting on the recovery. MGIC's stock has
risen sixfold in the last year and Radian's has quadrupled.
Yet both still trade at a fraction of their pre-crisis
values, suggesting plenty of room for growth. MGIC's stock price
of $7.77 compares with a lifetime high of $75.62 in 2004; Radian
peaked in 2007 at nearly five times its current price of $14.06.
"We think there's a good run left in terms of regaining
share," Radian Chief Financial Officer Bob Quint said at the
same conference this month.
Fund heavyweight John Paulson bought 17 million MGIC shares
in the first quarter to become the insurer's No. 3 shareholder,
with a 5 percent stake. He also owns about 7 percent of Radian,
making him that company's second-largest shareholder.
Paulson & Co's Murphy said losses from the insurers' legacy
portfolios had become less severe as home prices have risen and
the number and severity of foreclosures has declined.
Other hedge funds, including Maverick Capital and the family
office of George Soros, have also built stakes in Radian and
MGIC in the first half of the year. Maverick, helmed by veteran
stock-picker Lee Ainslie, owns about 4.4 percent of MGIC.
Genworth's Gupta said private mortgage insurers raised about
$2 billion in capital in the last year. As more money flows in,
they will be better equipped to assume risk and reduce the
government's role in the housing market, he said.
The mean price target of eight analysts covering MGIC's
stock has risen nearly 28 percent in the last two months to
$7.50, according to Thomson Reuters I/B/E/S. On Radian, the mean
price target has risen 20 percent to $15.21.
None of the eight analysts covering Radian has a "sell"
rating on the stock. Of those covering MGIC, only Credit Suisse
analyst Douglas Harter rates the stock a "sell", having said in
June that the favorable trends were priced in.
SPACE IS LIMITED
Three of today's seven private mortgage insurers - NMI
Holdings, Arch Capital Group Ltd and Essent Guaranty
Inc - entered the business by acquiring the operating platform
of a company that had stopped writing new insurance.
Essent Group Ltd and NMI, which raised about $510 million in
a private placement of its shares in April 2012, have both filed
for an initial public offering of their shares. They declined to
comment ahead of their respective listings.
With no more such platforms available, any company seeking
entry to the market now would have to start from scratch. High
entry barriers and tighter regulatory oversight make this a
To be competitive, any new entrant would need to raise $200
million to $400 million of new capital and maintain such a level
for seven to 10 years, Susquehanna analyst Jack Micenko said.
A new insurer would also need approval from individual
states to write new business, as well as the endorsement of
government-sponsored entities such as Fannie Mae and Freddie Mac
- a process that can take more than a year.
All of which bodes well for those already in business. MGIC
and Radian, which together account for nearly half of the U.S.
private mortgage insurance market, each wrote record business in
"You are more likely to see an expansion of market-share
opportunities for the existing players," FBR Capital Markets
analyst Edward Mills said.