United Guaranty, the mortgage insurance unit of AIG, plans to go public later this year.
According to Bloomberg, this IPO is not being done for solely financial reasons. Activist investors Carl Icahn and John Paulson are aiming to break up AIG's businesses, and this move would help that purpose by placing more outside control in United Guaranty. AIG CEO Paul Hancock already stated that he plans to exit United Guaranty and that it would eventually be separated from AIG.
This is a shrewd move in AIG's attempt to shake the "systemically important financial institution," or SIFI, tag which it gained after its $182 billion bailout by the US government in 2008. And it might just work. Aside from selling United Guaranty, it claims to have shrunk its balance sheet and also plans to sell its broker-dealer network.
But from a purely financial perspective, is United Guaranty a stock worth investing in? It is too soon to tell. United Guaranty has yet to announce how large its IPO will be (it filed a placeholder value of $100 million), and the IPO will not launch for at least a couple months. And if the weak IPO market picks up soon, that would change things a great deal.
But for now, here are some facts about United Guaranty which any prospective investor should pay attention to.
A growing market
In its SEC filing, United Guaranty states that it is the "leading private mortgage insurance company in the United States." And while the stain of the 2008 financial crisis may still linger over it and AIG to some degree, United Guaranty has reason to feel optimistic about its future prospects.
One of the key factors is that the housing market is booming again, and is forecast to have one of the strongest years in a decade. Low mortgage rates and unemployment are positive news for the housing market. Freddie Mac (OTCQB:FMCC) has stated that they expect housing fundamentals such as prices to reach levels not seen since 2006. It can also feel confident in the housing market because millennials are getting older, reaching their 30s, and are now interested in buying homes.
If United Guaranty can take advantage of the stronger housing market to grow its insurance portfolio, then it could be a nice stock over the long term. The rising housing market is just one sign among others portending towards economic recovery, and United Guaranty would be in a strong position to take advantage of it thanks to its size and reputation.
Are the finances secure?
But while United Guaranty has reasons to feel secure about the housing market, investors have reasons to feel less secure about the company's finances.
The good news is that last year, United Guaranty recorded a net income of $359.8 million. The bad news is that this is down from United Guaranty's net income of $393.7 million the year before, with the decline coming due to a near 10 percent drop in revenue.
And while United Guaranty is splitting off from AIG, it will not be able to count on reliable support from its former company. Last January, Moody's (NYSE:MCO) downgraded United Guaranty's Baa1 IFS rating. While Moody's did state that it expects United Guaranty to "remain a leading mortgage insurer", it cited concerns about its funding prospects and higher compliance expenses as a public company. Whether United Guaranty will be able to split off and survive is the biggest question which the company must answer before its IPO is released.
Time to wait and see
Ultimately, there is no reason for investors to rush to a conclusion on whether to purchase United Guaranty stock or not. Given the slow IPO market, it'll be easier to figure out how to find a rental in Accra. The key thing which any investor should do is to wait and see if United Guaranty waits until the IPO market picks up before announcing its date.
If United Guaranty chooses to plunge ahead even if the IPO market remains weak, that would actually be a good sign. It would indicate that the company is confident enough in its long-term fortunes that it does not need to wait for the stock market to improve before going public. But if United Guaranty waits, or worse, sets a date and then delays the IPO, that should be a reason for concern.
Still, there are certainly worse prospects out there than United Guaranty, and investors should have some reason to feel confident about this stock's potential prospects.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.