Bloomberg News

Paulson Thrives as Radian Proves Second Chances Work: Mortgages

July 25, 2013

Paulson Thrives as Radian Proves Second Chances Work

John A. Paulson, president of Paulson & Co., in New York. Photographer: Rick Maiman/Bloomberg

When Radian Group Inc. (RDN:US) sold shares in 2010 to bolster capital, the buyers lost more than a third of their investment in just two months. The mortgage insurer’s offering in February, backed by money managers including John Paulson, is proving second chances can work.

Radian has rallied 76 percent to $14.07 since selling shares for $8 apiece as well as debt in February. Rival MGIC Investment Corp. (MTG:US) has followed a similar pattern, slumping after a 2010 offering and surging 47 percent since this year’s $1.15 billion capital raise.

Mortgage insurers that were considered on the verge of default just a year ago by debt traders are rebounding as investors bet a resurgent U.S. real estate market can cushion losses on policies sold before the housing crash. Milwaukee-based MGIC reported its first profit (MTG:US) since 2010 this week as claims and delinquent loans declined, and Radian said yesterday its mortgage insurance operations were profitable as well. That’s putting Paulson’s prediction that Radian can reach $20 by 2015 within reach.

“They believe that there is opportunity to ride the housing recovery up,” S.A. Ibrahim, chief executive officer of Philadelphia-based Radian, said in an interview. “The bigger issue this time, in terms of our capital raise, was of not being able to make many of our investors happy in terms of the size of the allocations.”

Property Crash

Radian raised $689 million selling shares and debt this year, almost three years after it sold shares for $11 each as U.S. home prices were mired in the worst real-estate crash since the Great Depression. The shares, which fell as low as $1.95 in December 2011, rose 1.4 percent today at the close of New York trading.

MGIC dropped to 84 cents in August 2012 after selling shares for $10.75 apiece in April 2010. It issued stock at $5.15 in March when it also raised $500 million in debt. It added 1.1 percent today to $7.57.

“Things didn’t improve at the pace that people thought they would improve, not just mortgage insurers, but economically in general,” Michael Zimmerman, senior vice president of investor relations at MGIC, said yesterday by phone. “Can this company return to being a very profitable organization in the mortgage insurance business? Absolutely.”

Paulson, the hedge fund manager who made $15 billion betting against real estate as the financial crisis hit, became among the largest holders of both Radian and MGIC this year.

Paulson Purchases

New York-based Paulson & Co. held 17 million shares of MGIC and about $150 million of the company’s notes at the end of the first quarter, according to a regulatory filing. Dawn Dover, a spokeswoman for Paulson at Kekst & Co., declined to comment.

The fund owned 11.55 million Radian shares (RDN:US), and notes that were then worth $101.8 million, the filing showed. Radian can reach $20 by 2015, Paulson said in a first-quarter letter to investors in his Recovery Fund. He said he purchased Radian shares at an average of $6 in late 2012 and for $8 in this year’s offering.

“We believe the housing market has bottomed so we wanted to go long real estate opportunities,” Paulson told CNBC on July 17. “There’s still a lot of upside and it’s not too late to get involved.”

The property rebound that began last year has accelerated. Sales of new homes climbed 8.3 percent in June to an annualized pace of 497,000, the highest level since May 2008, the Commerce Department said yesterday. Home prices increased 12.1 percent in April from a year earlier, the biggest year-over-year gain since March 2006, according to the S&P/Case-Shiller Index.

Improved Value

Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs. Radian and MGIC still trade for less than a third of their value at the end of 2006 (RDN:US), before losses tied to the housing collapse drained capital. Rivals PMI Group Inc. and Triad Guaranty Inc. were pushed from the market by losses.

“There’s no question, people are going to hang in there longer if they see improvement in the value of their homes,” MGIC CEO Curt Culver said on a July 23 conference call with analysts.

Coverage written beginning in 2009 accounts for 36 percent of MGIC’s “risk in force,” Culver said on the conference call. Returns on new business are expected to be about 20 percent, driven by lower delinquency levels, he said. Coverage after 2008 is more than half of primary risk in force at Radian, Ibrahim said, and the company projects new business returns in the “mid-teens.”

‘New Business’

“Early on, when we were hit by the downturn, we started focusing on writing new business,” Ibrahim said. “The downturn gave us the best opportunity to catapult to a No. 1 position in market share.”

The companies are also benefiting as the U.S. government reduces its role in the market for insuring home loans, in part by raising prices for guaranties.

Radian expects to report a marginal profit in the mortgage insurance operation this year, Ibrahim said. MGIC forecasts a loss, Zimmerman said.

Genworth Financial Inc. (GNW:US), which sells mortgage insurance in addition to life policies and long-term care coverage, is scheduled to report results next week.

Investors shouldn’t look to MGIC and Radian for a prediction of how Genworth’s mortgage guaranty business will fare, said Mark Palmer, an analyst at BTIG LLC.

“There’s not the degree of overlap that would enable a clean read-through,” he said.

Persistency Rates

The pace of home sales may decline as borrowing costs increase after the Federal Reserve said it may taper a bond-buying program. That could also mean fewer borrowers refinancing and terminating their coverage.

“While further increases in interest rates could reduce purchase activity, they are also likely to increase our persistency rates, which will help us grow our insurance in force,” Ibrahim said on a conference call with analysts yesterday.

Jack Micenko, an analyst at Susquehanna International Group LLP., yesterday boosted his price target (MTG:US) on MGIC to $12 from $5 and raised the rating to positive from neutral, citing the company’s return to profitability. He raised his 12-month price target for Radian to $20 from $15 in a note today

“The mortgage insurance sector is the preferred way to play the U.S. housing recovery,” Micenko wrote. Mortgage insurers will profit from new business on rising home sales, and an increase in house prices has a “turbo effects on earnings,” tied to improvements in older policies, he said.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Rob Urban at robprag@bloomberg.net


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Companies Mentioned

  • RDN
    (Radian Group Inc)
    • $14.53 USD
    • -0.07
    • -0.48%
  • MTG
    (MGIC Investment Corp)
    • $8.22 USD
    • -0.08
    • -0.97%
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