Mortgage Risk Stellar Again With $3.4 Billion Wager on ‘New War’

Mortgage Risk Stellar Again With $3.4 Billion Wager on ‘New War’

(Bloomberg)—Mortgage insurance, an industry that drove several companies to collapse or the brink of failure in the housing crisis, is again considered a safe bet as Arch Capital Group Ltd. Chief Executive Officer Dinos Iordanou reshapes his company by purchasing a loan guarantor from American International Group Inc.

“Hopefully the last war was fought and lost, and the new war is going to be fought and won,” Iordanou said Tuesday on a conference call, a day after agreeing to pay $3.4 billion to buy AIG’s United Guaranty Corp. “People are going to pay attention to properly price their business.”

Mortgage guarantors cover losses for lenders when homeowners default and foreclosure fails to recoup costs. When housing prices are climbing, it can be one of the highest-margin businesses in all of insurance. The thirst for quick profits, however, drove companies to compete too aggressively for business in years like 2006 and 2007, taking on risks they couldn’t handle.

‘Hands on the Stove’

“Too many people put their hands on the stove, and they got burned,” Iordanou said, acknowledging that the past was not always “stellar” for the industry. “I will assure you we’re not going to make those tragic mistakes of the past.”

Iordanou, along with hedge fund billionaires and Wall Street giants, were among the first to bet on mortgage-insurance recovery after the credit crisis. The newcomers determined that profits would be sustainable if companies charged more for coverage.

Essent Group Ltd., which was built with backing by Goldman Sachs Group Inc. and George Soros’s Valorina LLC, acquired assets from money-losing mortgage guarantor Triad Guaranty Inc. as markets recovered and had an initial public offering in 2013. That same year, Arch pushed into mortgage insurance with a deal to add assets from PMI Group Inc., which was also hobbled by higher-than-expected claims costs.

John Paulson has gained from the recovery of Radian Group Inc., which is still trading for a fraction of its 2006 closing price. And, more recently, reinsurers tied to hedge fund managers Daniel Loeb and David Einhorn have taken on mortgage-related risks after being stung by losses on property-and-casualty coverage, including policies tied to Florida homes or commercial vehicles.

‘More Stable’

“At this time in the cycle, we like the mortgage sector because we believe that the mortgage insurance earnings are more stable and predictable than P&C earnings,” said Iordanou, whose Bermuda-based company will become the industry leader with the AIG deal. He expects mortgage insurance to contribute half the company’s profits, while consuming only a third of its capital.

Even as he sold United Guaranty, AIG CEO Peter Hancock stressed in a memo that his company “will continue to be a participant in the residential real estate market,” partly through direct ownership of mortgage loans and a portfolio of structured securities. And New York-based AIG, which is divesting assets to free up cash for share buybacks, will also retain a portion of the profits from some United Guaranty policies sold in prior years. Plus, Arch is paying for the deal partly in stock.

Holding Arch Capital shares has been a winning bet for two decades. The stock advanced 3.9 percent to $80.07 at 10:18 a.m. in New York, extending its gain since Dec. 31 to 15 percent. The company has climbed 9 of the past 11 years, and never posted an annual decline of worse than 1 percent in that span.

--With assistance from Katherine Chiglinsky. To contact the reporters on this story: Sonali Basak in New York at [email protected] ;Agnel Philip in New York at [email protected] To contact the editors responsible for this story: Dan Kraut at [email protected] Steven Crabill


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