The latest filing from John Paulson is in, and the man, whose firm famously made $15 billion in 2007 betting against mortgage bonds, is still holding on to millions in insurers like Radian Group (NYSE:RDN), MGIC (NYSE:MTG), and Genworth Financial (NYSE:GNW).
According to the latest SEC filing for the $20 billion portfolio, Paulson & Co. held $1.9 billion in the common stock of financial companies. Yet unlike some major investors -- like Warren Buffett -- Paulson abstained from holdings in the largest banks, apart from a nearly $185 million position in warrants of Bank of America (NYSE: BAC), and instead clung to insurers:
The three biggest insurers he holds -- Aetna, CNO Financial, and Hartford Financial Services -- all operate in the more typical health, property and casualty, life, and other industry. But the fund also has almost $400 million in Radian, MGIC, and Genworth, which are key players in mortgage insurance.
The mortgage insurers
Radian's mortgage insurance (MI) sales rose 27% over the last year, and it is now the largest private mortgage insurer in the U.S., with more than $161 billion in policies. Although the company reported a loss of $197 million for the full year in 2013, that marked a significant improvement over the $451 million loss in 2012, and many have noted it is finally on the path to turning itself around.
The company has been engaged in a turnaround effort over the last year, and CEO S.A. Ibrahim noted, "I am pleased to report that we achieved operating profitability in our mortgage insurance business, and we expect that the size and credit quality of our MI portfolio will fuel improved levels of operating profitability this year."
MGIC is another principal mortgage insurer whose operations improved remarkably in 2013, as although it reported a loss of $50 million, this was well below the $927 million in losses it incurred in 2012. As the broader mortgage and housing market improved and MGIC began to shell out less in the form of insurance losses ($2.1 billion in 2012 versus $838 million in 2013), the company, like Radian, began to see its operations improve.
Interestingly, Genworth is slightly different from the others as it has a significant presence overseas, and of its $398 million in operating income from its mortgage insurance segment in 2013, $228 million came from Australia and $170 million from Canada. Yet it too saw a major rebound in its U.S. operations as a new loss of $138 million in 2012 translated to $37 million in net income for 2013.
The bottom line
These three firms have seen their stocks rise considerably since the beginning of 2013. In fact, MGIC and Radian were also heightened by buy recommendations by Goldman Sachs in October:
As a result, MGIC and Radian have gone from trading at significant discounts to now well above their tangible book values. While the two companies are still facing difficulties, through the forward-looking trend of the markets, many understand the business will turn around and the stock prices largely reflect that growth.
However, it's important to remember Paulson hasn't added to his stake in any of these companies since the first quarter of 2013. When you consider his firm was recently named the 2013 Absolute Return Awards hedge fund of the year, one reason was that he saw the likely turnaround in these mortgage insurers before everyone else did.