"What doesn't kill you makes you stronger" is an old saying revived by American pop singer Kelly Clarkson, who had a No. I hit by that name last year. It could well be the anthem for United Guaranty Corporation, a Greensboro, North Carolina--based mortgage insurance subsidiary of the insurance giant American International Group (AIG), New York. Like others in the mortgage insurance industry, United Guaranty has faced considerable headwinds since 2008. In spite of strong new books of business since 2009, the private mortgage insurance (MI) industry continues to be ravaged by claims from loans insured during the subprime lending era, with the agony being prolonged by a slow and uninspiring economic recovery. Private MIs mostly insure mortgages purchased by Fannie Mae and Freddie Mac that have less than a 20 percent down payment. Yet, since 2009, United Guaranty has surged in market share in a shrinking overall market for private MI with a new risk-pricing model for its insurance premiums and an emphasis on full-file or front-end underwriting of insured loans. The company, which ranked fifth three years ago, has moved up to become the second-largest underwriter of new private MI business after No. 1-ranked Radian Guaranty Inc., Philadelphia. The other top writers of new business during the second quarter of 2012 are third-ranked Mortgage Guaranty Insurance Corporation (MGIC), Milwaukee; and fourth-place Genworth Mortgage Insurance Co., Raleigh, North Carolina. These four companies combined wrote $34.75 billion or 87 percent of the $40.14 billion in new business written in the second quarter, according to Standard & Poor's (S&P), New York.
One reason for United Guaranty's success is its financial strength. United Guaranty Residential Insurance Co., a subsidiary of United Guaranty, is one of only two private MIs with an investment-grade rating. It has a BBB rating with a stable outlook from S&P and a Baal rating with a stable outlook from Moody's Investors Service, New York. (The only other MI rated investment-grade is San Francisco-based CMG Mortgage Insurance Co., which Moody's rated BBB-minus with a negative outlook. CMG provides private mortgage insurance to credit unions.)
Origins of the rebound
United Guaranty traces its rebound to a period of soul-searching following the financial crisis that broke out in September 2008.
In March 2009, United Guaranty parent company AIG brought in a new chief executive officer for United Guaranty, Eric Martinez, and a new chief operating officer, Kim Garland, who is now president and chief executive officer.
(In February 2012, Martinez transferred to Chartis, AIG's property and casualty group, where he serves as executive vice president ot global claims, operations and systems. In May 2012, United Guaranty hired Donna DeMaio, formerly the head of MetLife Bank NA, as chief operating officer.)
Martinez, Garland and other senior executives began an internal review at United Guaranty aimed a deciding whether or not to stay in the business. The review stretched from March through December 2009.
During the review, Garland asked his senior managers if they could design from a blank sheet of paper a new mortgage insurance company "based on the crisis and everything we had experienced and everything we have learned," what kind of company would it be?
To answer that question, senior management tried to analyze what led to failures in underwriting and the pricing of risk.
"When we went back and tried to understand what happened, we looked in the mirror and said, 'We didn't necessarily act like an insurance company. We probably acted more like a mortgage finance company than an insurance company," says Garland.
As the review proceeded, Garland explains, senior managers came to the conclusion that to be a successful mortgage insurance company that could survive all parts of the business cycle, including severe downturns, United Guaranty should be governed by a set of four principles. The four tenets are:
* First, United Guaranty has to be able to adjust the pricing of premiums based on the risk of each loan.
* Second, the company should underwrite loans on the front end to limit the amount of risk the company is taking on and, thus, be able to reduce rescissions, denials and buybacks on the back end. Rescissions occur when an insurer rescinds coverage because the loans that were covered by insurance did not turn out to be what was claimed originally by the lender.
* Third, "We had to get a...