Two Value Managers Sweat Out the Mortgage Insurance Sector

Includes: MBI, MTG, PMIR, RDN
by: Gary Smith

Two value managers, Marty Whitman and Al Zucaro, have invested heavily in the troubled mortgage insurance sector, Erik Holm reported in Bloomberg, and they are prepared to sweat it out.

MGIC Investment Corp. (NYSE:MTG), PMI Group Inc. (PMI) and Radian Group Inc., (NYSE:RDN) the industry's three largest firms, had their worst year in 2007, declining as much as 78 percent. Whitman bought into the slump to become the largest stakeholder in Philadelphia- based Radian. Zucaro became the No. 1 investor in PMI of Walnut Creek, California, and the second-biggest for Milwaukee-based MGIC.

``We're just going to have to sweat it out for the next 18 or 24 months,'' said Zucaro, who runs Old Republic International Corp., parent of the industry's sixth-largest company.

Holm reported that the two took the plunge as the sector's shares took a plunge of their own: Radian shares slumped 78 percent in 2007, with the company reporting 3Q losses of $704 million; PMI dropped 72 percent on a quarterly loss of $86.6 million; and MGIC, the largest U.S. mortgage insurer, saw its stock fall 64 percent on losses of $372.5 million, with no 2008 profits in sight.

The value managers refused to disclose the price they paid for the shares, but using a simple calculation based on average prices during the period of the purchases, Holm concluded that, to date, Whitman may have made 60 percent losses on his PMI holding, and 80 percent on his Radian investment, while Zucaro may have lost a third on his MGIC stake.

``While the near-term situation may seem dire, we are patient, long-term investors willing to ride out short-term volatility,'' Whitman's company said in a December 28 filing.

Furthermore, holdings in financial insurance companies, including Radian, MGIC and bond insurer MBIA Inc. (NYSE:MBI), were less than 4 percent of Third Avenue Value Fund's $11 billion in assets.

The tide may already be turning for the sector, Holm suggested. This was based on reported higher premiums from new policies, tougher standards on mortgage borrowers which may cut default rates, and Treasury Secretary Henry Paulson's plan to freeze rates on some adjustable loans for five years.

``Value investors are looking ahead and have figured that, by hook or by crook, these companies will get through 2008,'' said David Havens, a credit analyst at UBS AG in Stamford, Connecticut. ``The insurance they are selling now is probably quite a bit better than it has been for a number of years in terms of quality.''

As Third Avenue International Fund's portfolio manager Amit Wadhwaney wrote in the fourth quarter letter to shareholders:

The whiff of panic currently blowing through the financial markets has the potential to present tremendous buying opportunities.