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MGIC and Radian Combo Will Control 38% of MI Market

The proposed merger of MGIC Investment Corp. here and Radian Group would create a combined unit that holds 38% of mortgage insurance in force.

The terms of the transaction call for MGIC to exchange 0.9658 shares of its common stock for every share of Radian. After the deal closes, the combination will be known as MGIC Radian Financial Group Inc.

It will be headquartered in Milwaukee. MGIC will be the name of the mortgage insurance business, while the financial guaranty business will retain the Radian Guaranty name.

MGIC chairman and chief executive Curt S. Culver said his company's merger with Radian Group Inc., Philadelphia, "restored his credibility" because for the past five years, he has been preaching about the need for consolidation in the private mortgage insurance business.

Mr. Culver will take the reigns of the combination at first, holding the chief executive slot until 2009 and the chairman position until 2010. After that, S.A. Ibrahim, Radian's current chief executive and the designated president and chief operating officer of MGIC Radian, will assume those titles.

It is how these social issues got resolved that is a positive influence on the transaction's future success. Paul Miller, an analyst with Friedman Billings Ramsey, said past discussions got bogged down over the fact that MGIC would be the dominant partner in management and on the board.

The new company, besides designating Mr. Ibrahim as Mr. Culver's successor, will have a board comprised of six members appointed by MGIC, five by Radian and a sixth nominee from Radian who will need to be elected by the shareholders of MGIC Radian.

Both companies are already familiar with each other, as equity investors in two joint ventures, C-BASS and Sherman. However rather than consolidating those interests post merger, plans are for MGIC Radian to divest much of the holding. The specific amount is to be determined based on what is the acceptable level for the rating agencies.

There will be $1 billion share repurchase upon the merger's closing. A second repurchase of $750 million will follow, funded in part by proceeds from the C-BASS/Sherman equity sale.

The parties predict pretax cost savings of $128 million, a number they labeled as conservative and Mr. Miller agreed.

Where the parties might have been optimistic, he said, is the projected loss of market share. They predict lost business volume of approximately $12 billion in new insurance written.

The pair looked at HMDA data, not proprietary data, and found where there were overlaps at the customer level the market share of the company the customer did less business with was taken out.

Mr. Miller pointed to the transaction that created Radian, the merger of Amerin into Commonwealth Mortgage Assurance Corp. The market share loss was far beyond what had been predicted. Combined market share might be an issue federal anti-trust regulators would look at in this transaction.

According to the Mortgage Servicing News Quarterly Data Report, the parties will have a combined market share of policies in force of nearly 38%. MGIC is already the largest player in the industry with $173.4 billion in-force, with Radian ranked third with $115.3 billion.

Mr. Miller pointed out there are other non-MI industry competitors for MGIC Radian, including piggyback loans, structured transactions and even the Federal Housing Administration program.

Fitch Ratings, New York, has placed MGIC on ratings watch negative status. "Given the competitive pressures impacting the mortgage insurance industry, Fitch believes the announced merger makes economic and strategic sense, and if consummated, the new entity will solidify its position as the premier mortgage insurer in the U.S." But it added the deal would increase MGIC's risk profile vs. its historical norms.

Mr. Miller believes there is room for further consolidation of the business. But of the five other private mortgage insurers, only two have mortgage insurance as their primary business, PMI and Triad. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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