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AIG's Garland Says Mortgage Unit Headed in `Right Direction' After Profit
American International Group Inc.’s mortgage guarantor, which recorded a quarterly profit for the first time since 2007, may continue to post improving results as it seeks to take market share from rivals, an executive said.
AIG’s United Guaranty Corp. started a new risk-adjusted pricing model this year that allows it to sell more coverage, Kim Garland, chief operating officer of the Greensboro, North Carolina-based unit said today in a telephone interview. The business had $73 million in operating profit in the first three months of this year, compared with a $483 million loss a year earlier, as claims expenses fell by $794 million.
“A lot of things are pointing in the right direction for us,” Garland said. “We’ve seen newly reported delinquencies go down, which has been beneficial. We’d done good reserving in 2009 so we’d recognized our loss liabilities there.” Shares of rivals jumped more than 9 percent in New York trading.
AIG Chief Executive Officer Robert Benmosche, who is selling assets to repay a $182.3 billion bailout, decided to keep United Guaranty partly because it was “well positioned” to take advantage of market opportunities, Moody’s Investors Service said in February. Results from the unit, which had more than $4 billion in losses in the three years ended Dec. 31, helped AIG post first-quarter net income of $1.45 billion.
Mortgage insurers pay lenders when homeowners default and foreclosure doesn’t recoup costs. The industry typically limited selling coverage in geographic markets where home price declines were expected, rather than charging more for the greater perceived risk, Garland said.
“Because we’ve implemented a pricing model that varies our premium more with the risk quality, we can open up our underwriting eligibility guidelines so that we’re comfortable with the premium we’re getting for the risk,” said Garland, who previously worked at auto insurer Safeco. “Now our appetite is a little broader.”
United Guaranty added 59 geographic areas to its “moderately declining” category for underwriting policies from the insurer’s “stable” designation, the firm said this week. The moves were made as United Guaranty refined its modeling and not because U.S. real estate markets worsened, Garland said. It removed 20 areas from its riskiest underwriting category.
Borrowers caught up on overdue mortgages faster than new delinquencies were reported on insured home loans in February for the first time in almost four years as the U.S. economy improved, a trend that continued in March and April. Rivals MGIC Investment Corp., Radian Group Inc. and Walnut Creek, California-based PMI Group Inc. have raised capital this year through equity offerings as investors bet that higher insurance rates and improved underwriting will lead to a profit rebound.
Radian surged 84 cents, or 10 percent, to $8.98 at 4:01 p.m. in New York Stock Exchange composite trading. Milwaukee- based MGIC jumped 9.3 percent and PMI gained 10 percent.
United Guaranty was ranked the fourth-largest U.S. mortgage Insurer last year, behind No. 1 MGIC, Philadelphia-based Radian and PMI, according to Inside Mortgage Finance, a trade journal. All the firms were unprofitable in 2009.
United Guaranty was founded in 1963 and sold to AIG in 1981. The business generated $2.8 billion in operating income and $600 million in dividends for New York-based AIG in the eight years prior to the housing slump, the company has said.
AIG agreed in December to sell United Guaranty’s Israeli operations to Harel Insurance Investments & Financial Services Ltd. for $35.5 million and its Canadian mortgage insurer to a group led by the Ontario Teachers’ Pension Plan for an undisclosed amount.