Finance & Business World

Marty Whitman and Al Zucaro, stock pickers with a knack for buying low, may be dripping in sweat after they snapped up U.S. mortgage insurers that shed more than 40 percent of their value in the past three months.

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

Investors abandoned the group on concern record mortgage defaults may wipe out profit in 2008 and beyond. MGIC plummeted 64 percent during 2007, PMI dropped 72 percent and Radian fell 78 percent. That made them bargains to Zucaro and Whitman’s Third Avenue Management LLC, whose flagship mutual fund outperformed the Standard & Poor’s 500 Index in seven of the past eight years.

Zucaro has increased his stake in MGIC to 11 percent and owned 15 percent of PMI, according to data compiled by Bloomberg. Whitman held 19 percent of Radian and 1.2 percent of MGIC.

Lower Value

Neither Whitman, 83, nor Zucaro, 68, disclosed what they paid for the shares. If Zucaro purchased PMI at the average price of $28.29 during the 11-week period when he obtained the stake, according to a regulatory filing, his investment may have lost about 60 percent through yesterday. PMI closed at $11.45 in New York Stock Exchange composite trading yesterday, down from a 52-week high of $51.46 on Feb. 6. Using the same methodology, Zucaro’s MGIC holding may have lost about a third of its value.

The Radian stake acquired by Whitman in July may have dropped about 80 percent based on the average share price. Stock acquired during the next three months may have dropped more than 40 percent. Radian closed at $10.11 yesterday, down from $54 at the end of June.

“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 Dec. 28 filing. Financial insurance companies, including Radian, MGIC and bond insurer MBIA Inc., were less than 4 percent of holdings in the Third Avenue Value Fund as of Oct. 31. The fund had assets of more than $11 billion on Dec. 31. Whitman didn’t respond to requests for comment.

Premiums Increase

The recovery Whitman and Zucaro anticipate may have already begun bad credit payday loans. The Mortgage Insurance Companies of America in Washington said premiums from new policies rose 79 percent in November from a year earlier as banks, weary of record foreclosures, forced more borrowers to buy policies. Mortgage insurers repay lenders when customers don’t.

Pressure from regulators and mortgage investors has also forced lenders to tighten standards and screen out people who can’t really afford loans. That may cut future default rates and reduce claims costs for mortgage insurance.

Another boost may come from Treasury Secretary Henry Paulson’s plan to curb foreclosures by freezing 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.”

Quarterly Losses

MGIC is the largest U.S. mortgage insurer, covering $173 billion of home loans, followed by PMI with $152 billion and Radian with $114 billion, according to 2006 data from trade publication Inside Mortgage Finance.

Zucaro and Whitman accumulated their stakes as the industry struggled through its worst year on record. MGIC’s third-quarter loss was $372.5 million and the company said it didn’t expect to be profitable in 2008. PMI had an $86.8 million loss as claims costs increased fivefold. Radian lost $704 million.

Zucaro has run Chicago-based Old Republic since 1990. Born in France, he joined the insurer in 1976 as chief financial officer. The company also covers property and sells title insurance. The value of Old Republic’s bond holdings more than doubled to $6.8 billion in the four years ended 2006 and its stock investments increased 25 percent since they were purchased, according to the company’s most recent annual report.

`The Mess We’re In’

“You shouldn’t be in the insurance business unless you have a 5-to-10 year horizon,” Zucaro said in a Nov. 30 interview. “Lower interest rates do encourage business activity, and it all feeds on itself and might enable us to get out of the mess we’re in.”

Whitman’s third-quarter letter to shareholders said he won’t buy “unless the issuing company enjoys a super-strong financial position.” He did just that with Radian amid what he saw as a “panic” surrounding financial stocks. Whitman called Radian “well-financed” and said it can “survive and prosper” without going to capital markets for new funds in 2008.
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