Top mortgage insurer buys industry's No. 3
NEW YORK -- MGIC Investment Corp., the largest U S mortgage insurer, will buy number three Radian Group Inc. for $4.9 billion in stock to reduce computer and salary expenses in a stagnating market.
Milwaukee-based MGIC will exchange 0.9658 share of its stock for each share of Philadelphia-based Radian, paying no premium to Radian's $61.28 closing share price on Feb. 2, the companies said in a statement. Shares of MGIC surged 11 percent yesterday, the biggest one-day gain in more than three years. Radian climbed 9.3 percent.
The new company, in control of about a third of the country's mortgage insurance market, plans to cut almost a quarter of its combined costs to boost profit as demand for protection against home-loan defaults wanes. MGIC also will get a foothold in bond insurance -- a market PMI Group Inc., the number two mortgage insurer, entered in 2003.
"If I'm MGIC, it gets me out of a competitive box and into new businesses at a relatively cheap price," said Matthew Roswell, an analyst at Stifel Nicolaus & Co. in Baltimore. He has a "buy" rating on MGIC and a "hold" rating on Radian.
In the United States, mortgage insurers have been hurt by second, or "piggy-back," loans, which eliminate the need for insurance on mortgages with low down payments. MGIC and Radian are expecting to cut about $128 million in expenses by 2009 and are targeting opportunities to grow overseas, where some markets are nascent.
"The shape of the market has changed dramatically and it's unclear as to how it's going to continue to change," Radian chief executive Sanford Ibrahim told reporters during a conference call.
The new company, to be called MGIC Radian Financial Group Inc., will have about $290 billion of primary mortgage insurance in force, the companies said.
Through the first nine months of 2006, MGIC insured $42.5 billion of mortgages, accounting for 22 percent of a total $195 billion insured, according to Inside Mortgage Insurance. PMI had 19 percent, followed by Radian's 17 percent, the trade publication said. In the same period in 2005, $197 billion in mortgages were insured.
MGIC is paying about nine times Radian's estimated earnings this year and 1.2 times its book value, compared with sector averages of 10 times earnings and 1.25 times book value, said Roswell.
MGIC's stock climbed $7.16 to $70.09 in New York Stock Exchange composite trading of 6.96 million shares, more than seven times the three-month daily average. Radian rose $5.67 to $66.51 in trading of 4.73 million shares, almost five times the average. It was Radian's biggest gain since October 2002.
Shares of PMI, based in Walnut Creek, Calif. , and Triad Guaranty Inc., a smaller rival in Winston - Salem, N.C., also gained after MGIC and Radian said they may lose about $12 billion in insured mortgages by 2008. PMI rose $2.41, or 5 percent, to $50.09; Triad gained $2.79, or 5.5 percent, to $53.50.
"Market share is going to be naturally repositioned" because lenders won't want to do too much business with one insurer, said Geoffrey Dunn, an analyst at Keefe, Bruyette & Woods Inc. in Hartford .
The perceived risk of owning Radian debt fell to its lowest level since October, according to traders betting on creditworthiness in the credit-default swap market. Credit-default swaps fell 28 percent to $27,100 from $37,500 Monday, according to CMA Datavision in London. A decrease in price indicates an improvement in the perception of credit quality.
The companies expect to complete the deal in the fourth quarter of 2007. For MGIC shareholders, it should add 2.8 percent to 2008 earnings and 6.3 percent to 2009 profit, the companies said. For Radian, the estimated increase is 4.7 percent next year and 8.2 percent in 2009.
Curt Culver, MGIC's chairman and chief executive , will hold both posts at the new Milwaukee-based insurer until 2009, when Ibraham will succeed him as CEO. In 2010, Ibraham will become chairman.
