Lightyear Backs New Mortgage Insurer
Deal allows PE firm to enter monoline business.
May 2, 2008
Lightyear Capital, a New York private equity firm that invests in the financial service industry, is planning to back a new monoline mortgage insurance company through a $400 million transaction with publicly traded mortgage insurer Triad Guaranty.
Lightyear and Triad jointly announced the transaction on Friday that will involve Lightyear making a $200 million investment with an investor group in a company named Triad Guaranty Insurance, a private mortgage business that will be Illinois-domiciled. Once the deal has been completed certain members of Triad Guaranty will join the new monolines insurance company, which will also acquire specific assets and the right to use Triad’s systems and technologies.
“It’s going to be a very good time for this business over the next three to five years,” said Donald Marron, chief executive and founder of Lightyear Capital, in an interview on Friday. “You’re going to have much better underwriting standards and much improved credit,” he added.
When coupled with a pent up demand for housing mortgage insurance is going to be a desirable product in the coming years, said Marron, formerly chairman and chief executive of PaineWebber Group.
David Glenn, a managing director at Lightyear Capital who spearheaded the firm’s deal, agreed, noting there is a need for mortgage insurance and that Triad provides an entrée for the firm into the monolines business. Lightyear’s expertise in the area, he said, was bolstered through its retention of 25-year insurance executive John Shettle as a senior advisor in November 2007. “His addition has helped us greatly with the monolines,” Glenn said.
Marron and Glenn declined to comment on additional details of the transaction.
Triad offers mortgage insurance through two products called primary and modified pool. Its primary coverage offers mortgage default protection to lenders on individual loans including a percentage of unpaid loan principal and delinquent interest, whereas the modified pool insurance covers structured bulk transactions.
The company responded to last year’s housing crisis by tightening its underwriting guidelines and imposing more restrictive guidelines for troubled markets in Arizona, California, Florida and Nevada, according to its latest annual report.
Triad Guaranty Insurance will continue providing mortgage default insurance and work on a remediation plan that will be presented to Fannie Mae and Freddie Mac.
At the moment, though, the company’s transaction with Lightyear is still under negotiation.
"We believe the transactions that we are now actively negotiating with Lightyear offer the best outcome for our customers, policyholders, stockholders and employees given the current industry conditions and capital-raising environment,” said Mark Tonnesen, president and chief executive of Triad Guaranty, who entered into a new employment agreement with the company on April 23.
Triad Guaranty, a Winston Salem, N.C.-based mortgage insurer, has a market capitalization of $36.5 million and trades on the Nasdaq exchange under the ticker TGIC. Its shares have traded at a range of $2.01 a share to $47.35 per share over the past year.
Triad Guaranty, which has $1 billion worth of claims paying resources available, will run-off its mortgage operations business because of the deal with Lightyear.
Fitch responded to the news by downgrading the company to junk status.
Triad Guaranty’s shares increased 2.1% to $2.43 a share, compared with a previous close of $2.38 a share.
Lightyear, which is funding the deal with equity from its more than $850 million second fund, isn’t unfamiliar with the insurance business. It has executed several investments in specialty insurers including NAU Country Insurance Group, Delos Insurance Group and Antares Holdings.
The transaction, under review by the Illinois Department of Insurance and other regulators, is expected to close in the third quarter of 2008.
Lightyear wouldn’t be the first private equity firm to invest in a monoline business this year.
WL Ross & Co., the New York private equity firm run by financier Wilbur Ross, made a $250 million investment in Hamilton, Bermuda-based Assured Guaranty Ltd. in early April, buying 10.6 million shares at $23.47 per share. The investment in the triple AAA-rated company follows WL Ross’ announcement in February that it would purchase up to $750 million of common stock in Assured.
Separately, Ross also made an investment in the mortgage loan area with its $1.07 billion acquisition of H&R Block’s servicing business Option One earlier this year.
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