The mortgage meltdown and ensuing financial crisis took down many financial entities, plowing some completely under and leaving others barely surviving. Mortgage insurance companies took an especially heavy hit, as many of the loans they secured began to crumble, squeezing these insurers nearly out of existence.
The past year has seen an astounding rebound in the sector, however, and the recent settlement between Bank of America and MBIA (NYSE:MBI) has given them another big boost. Add in Ambac Financial's emergence from bankruptcy earlier this month, and it begins to look like the sky's the limit for this formerly anemic corner of the insurance market.
Mortgage insurers' popularity has skyrocketed
Over the past year, an improving housing market combined with a retreat from the mortgage insurance business by Fannie and Freddie has provided a lift to the entire industry. Heavy-hitter Radian Group (NYSE:RDN) saw its share price levitate by nearly 600% since this time last year, and even MBIA, which was tottering on the edge of a New York state takeover of its mortgage insurance unit when the B of A pact took place, has seen shares rise by almost 90%.
All this attention hasn't gone unnoticed by institutional investors. Bloomberg offers a list of big funds like Paulson & Co., Blue Ridge Capital, and Maverick Capital that are sopping up shares of Radian and MGIC Investment (NYSE:MTG). MGIC has experienced some considerable upside, too, reporting new policies written in the first quarter of $6.5 billion, a year-over-year improvement of 35%.
Even AIG (NYSE:AIG), a comeback story all by itself, owes some of its newfound glory to its mortgage insurance arm, United Guaranty -- which pulled in $41 million in the first quarter, compared with a measly $8 million in the year-ago period. Assured Guaranty (NYSE:AGO) also announced some good news earlier this month as it reached settlement with UBS over soured mortgage-backed securities on which it was forced to pay.
Still, there are risks
Many of these insurers still have problems to resolve, not the least of which is credit risk -- both Radian and MGIC still have credit ratings sitting at Caa1 and Caa3, consecutively. Also, any negative change in the recovering housing market could very well hit these insurers hard.
But things are definitely looking up, particularly for MBIA, which recently saw a nice upgrade applied to itself and its National Public Finance unit in the wake of its Bank of America pact. For a sector that just about faded away five years ago, this transformation is remarkable -- and it looks like it isn't over yet.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.