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AIG’s Mortgage Unit Posts First Profit Since 2007

American International Group Inc.’s mortgage guarantor posted a quarterly profit for the first time in three years on an improving U.S. default rate, aiding the bailed-out insurer’s recovery.

United Guaranty Corp. had $73 million in operating profit in the three months ended March 31, compared with a $483 million loss a year earlier, AIG said May 7 in a statement. The Greensboro, North Carolina-based unit, which pays lenders when homeowners default and foreclosure doesn’t recoup costs, said quarterly claims expenses fell by $794 million.

“I am really proud of UGC,” AIG Chief Executive Officer Robert Benmosche told investors in an audio statement posted on New York-based AIG’s website. “They have made some real improvements in claims management and in other areas that are really starting to come through their financial results.”

Benmosche, who is selling assets to repay rescue loans, 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.

AIG climbed $2.28, or 5.9 percent, to $40.98 in New York Stock Exchange composite trading at 4 p.m. The insurer has advanced about 37 percent this year. AIG slipped 4.5 percent in 2009 and plunged 97 percent in 2008.

Catching Up

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. Rivals MGIC Investment Corp., Radian Group Inc. and 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.

The mortgage industry’s policies sold this year and next “will be the most profitable book of business the mortgage industry has ever seen,” Matthew Howlett, an analyst at Macquarie Group Ltd, said last month. “There is a growing sentiment the industry is going to survive this credit crisis.”

Insurers have been cutting costs by rejecting claims on the grounds that false information submitted by borrowers or lenders voids coverage.

United Guaranty denied about $58 million in claims on first-lien loans in the quarter, an activity that will continue this year because the unit found “increased occurrences of fraudulent claims, underwriting guideline violations and other deviations from contractual terms,” AIG said last week in a filing. The disagreements are mostly from contracts sold in 2006 and 2007, AIG said.

Reinsurer Arbitration

Transatlantic Holdings Inc., the reinsurer divested by AIG, started arbitration proceedings against United Guaranty in September 2009 in a dispute over coverage. Transatlantic said in a filing last week that it is seeking to nullify protection it sold to United Guaranty tied to subprime mortgages. AIG sold its remaining stake of New York-based Transatlantic this year.

United Guaranty was ranked the fourth-largest U.S. mortgage Insurer last year, behind No. 1 MGIC, Radian and PMI, according to Inside Mortgage Finance, a trade journal. All the firms were unprofitable in 2009.

United Guaranty agreed in December to sell its 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.

Profitable Policies

AIG’s first-quarter profit compares with a net loss of $4.35 billion a year earlier as investment income climbed and writedowns narrowed, the company said last week. Benmosche plans to build global property-casualty units and U.S. life operations while stanching losses at units that originated, insured and invested in home loans. The company needed a 2008 bailout that swelled to $182.3 billion after bad bets on subprime mortgages.

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 AIG in the eight years prior to the housing slump, the company has said.

AIG named Eric Martinez CEO of United Guaranty last year, replacing William Nutt. Martinez previously worked for former AIG restructuring chief Paula Reynolds at car insurer Safeco Corp. and utility AGL Resources Inc.

Until 2007, private mortgage policies had been among the most profitable types of coverage sold by insurers. From 2004 to 2006, members of the Mortgage Insurance Companies of America reported a profit margin of at least 35 cents for every dollar they collected in premiums. Auto insurers made less than 5 cents on every dollar in 2006, according to A.M. Best Co.

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