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Options are limited for United Guaranty

Wednesday, June 10, 2009

(Updated 12:40 pm)

By Richard M. Barron
Staff Writer

GREENSBORO — Since last September, United Guaranty’s 500 local workers have endured wrenching change at the mortgage insurer.

They’ve stood by, helpless, as parent company American International Group foundered and became a target of ridicule and blame.

They saw their business get pummeled by last year’s financial crisis, resulting in a massive $2.5 billion loss.

Most recently, employees could do little but watch as CEO Billy Nutt, with 30 years experience with the company, was shown the door and replaced by AIG with Eric Martinez Jr., who has been involved in selling properties for AIG and most recently did a strategic analysis of United Guaranty.

Employees have declined both privately and publicly to talk about what’s going on at their headquarters at Elm and Bellemeade.

But it’s clear that more difficult change is ahead for the company that has been a stalwart of community support.

United Guaranty employees field everything from recreational league softball teams to United Way volunteers. They fill blood banks, Christmas toy drives and the downtown Center City Park at lunchtime.

AIG officials have said all options are on the table for United Guaranty, which insures the companies that lend money for mortgages.

One option includes an outright sale of the company. Analysts say with the right support from a strong owner, United Guaranty could turn around and become profitable again.

“From the ashes of AIG may come a good business (United Guaranty) provided it is owned by and run by an institution that has the capital and the savvy to run it,” said Bruce Krasting, a retired Wall Street insider, who still writes a financial blog. “I have heard Wells Fargo is taking a hard look.”

Another option facing the company amounts to what is basically a slow-motion, going-out-of-business sale.

In the insurance industry, it’s called a “runoff.” That’s where an insurance company stops taking new business and instead services existing clients and policies until they expire.

Other industry analysts have begun to lean toward runoff.

One, Fitch Ratings, has downgraded its view of United Guaranty’s financial health and is watching it closely.

Sources have told other media that the company is seriously considering runoff for any business it can’t sell.

In a runoff, sales and support staff would be the first workers to go. With nothing left to sell, they simply wouldn’t be needed.

Claims representatives and financial staff are essentially those who remain.

Then business begins to slowly drain away as policies expire. Executives manage a gradually shrinking business until there’s nothing left to manage.

For at least one Triad business, this is all too familiar. For nearly a year, Triad Guaranty Insurance of Winston-Salem has been operating like this.

A much smaller company, Triad Guaranty said last July that it would no longer write new policies. It immediately laid off 100 workers and now employs about 150.

Triad Guaranty is registered in Illinois. Regulators there have chosen to allow company executives to manage the runoff.

Company officials declined to comment for this story, but financial records and other reports filed with regulators offer some details.

Executives must make weekly phone calls to Illinois regulators and submit detailed financial information during the process to be sure that all claims are covered.

To be sure that the cresting foreclosure wave doesn’t wipe out all of Triad Guaranty’s payment reserve, regulators ordered in April that the company pay claims with 60 percent cash and 40 percent in “deferred” payment — a kind of IOU for policyholders.

United Guaranty is regulated by the N.C. Department of Insurance. Privacy rules prevent staffers from talking about any company finances.

The seven major mortgage insurers have rarely had to wind down their business because the real estate market was considered unsinkable.

But that’s clearly possible, said one former insurance regulator. The evidence is in a variety of financial documents she has studied.

“The general theme was if the mortgage industry didn’t bounce back in 2009 then runoff was something that was certainly in the future for a number of them,” said Debra J. Hall, an insurance consultant and former general council for the Illinois Office of Special Deputy Receiver.

But Krasting said a runoff “shuts the door” on future earnings.

“It’s just a black hole of losses. I don’t know how big those losses are,” he said. “When you close the door to premium income you then play the game of how much” money is left in reserve.

“It is scary,” he said “to say run(off) is an option.”

Contact Richard M. Barron at 373-7371 or richard.barron@news-record.com

Accompanying Photos

Joseph Rodriguez (News & Record)

Photo Caption: AIG’s United Guaranty Corp. in Greensboro.

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MtgInsChick

June 10, 2009 - 9:59 am EDT

Why would anyone purchase this company when it's losing so much money? Wouldn't it be cheaper to start a new mortgage insurance company from scratch?

As for "employees could do little but watch" as Billy was shown the door, the NR should check it's bias at the door. Many employees felt they could to "little but watch" over the past several years as Billy and his cohorts destroyed the company.

minkheel

June 10, 2009 - 10:54 am EDT

Based on this and your other comments about UG, you seem to have a pretty substantial bone to pick with the company. What is happening to UG is a tragedy for its employees and for Greensboro. Billy Nutt made UG a much more prominent corporate citizen that it had been and did a lot of good for Greensboro. No one predicted the total collapse of the real estate market. UG had been profitable for years and years, but when you insure mortgages and foreclosures go through the roof, you lose money . . . period. If you have specific examples of what Billy Nutt and the other executives did, in your view, to drive UG into the ground, please state them. This is an anonymous forum, so what risk is there to you -- none.

MtgInsChick

June 10, 2009 - 11:29 am EDT

There were many, many people who objected to the changes in underwriting standards. Many people walked out of the company, and there were other people who were shown the door, because they were not comfortable approving loans or insurance coverage for people who were unlikely to repay on homes that were being overvalued.

Before approving or a loan or agreeing to insure the loan, the lender and insurer need to take the time to examine the loan. This is called underwriting. Starting about seven years ago, UG basically stopped underwriting loans. They were insuring things that their own underwriters were saying would go bad. Underwriters were expected to examine nine loans a day. That's does not allow enough time to look at the application, employment verifications, bank statements, appraisal, loan guidelines, etc... On top of that, underwriters were told not to over-condition loans. Even if the underwriters saw the loan was not likely to perform well, the underwriter would get written up for not approving the loan.

Another bone-headed idea was to corner the market on insurance coverage for second mortgages. Why do you think the other PMI companies avoided this coverage? The leaders at UG bet the house on this coverage. They bet people's jobs on this coverage. People in the building would whisper that this coverage was a ticking time bomb. Those that spoke up were shown the door. They weren't team players.

You seem to think that UG's problems are because of the housing crisis, when, in fact, the housing crisis was brought about because companies like UG threw the rule book away. Had UG executives been more conservative, UG would be one of the surviving companies.

The frustration is that very people who were pushing these policies are still sitting on the seventh floor, while the underwriters and others who could see the writing on the wall had careers destroyed. I do not feel comfortable naming names on this board, but anyone who worked at UG can list the names of those who walked or were shown the door.

I do not have a "substantial bone to pick with the company." I have many friends who still work there and want them to remain employed. As far as anyone was concerned, I left on very good terms. If I could go back to UG the way it was under Charlie R, I'd do it in a second.

Rollin Dirty

June 11, 2009 - 7:54 am EDT

It's funny (and sad) to think that anything is going to happen to most of United Guaranty's book but going into runoff.

I write the following as an observer of the past few weeks of the news cycle:

Martinez is being brought in as the person to cut costs, cut employees and cut UG down to pieces that can be sold for profit.

I do think AIG would be better served trying to make a profit from United Guaranty, but there are few people out there willing to take the losses right now in hope of seeing profitability in 2011-2012. All of the surviving MI companies will see good growth in the future, as Krasting mentions above.

Where does the blame lie? Not solely at UG's feet. AIG started to control more of UG's destiny, as the company made more money during the housing boom after 9/11. Did folks at UG make some bad decisions? Absolutely. However, when your parent company mandates a certain amount of growth, you have to try to meet those goals. Getting into things like education loans and the like was a sign of the times for UG. Not smart moves in retrospect, but hindsight is always 20/20

Those of you calling for "the 7th floor" folks to resign; let's not be childish. Letting Billy Nutt go was AIG asserting their authority over the company as it drifted back from the newly established AIU Holdings to AIG proper. UG is classified as neither core business in AIU, or AIG. Basically, UG, ILFC and Transatlantic (along with American General Finance, also in trouble now) are outliers to the "core" AIG business . . .and they are to be either sold or wound down.

Further to the above points: look at recent headlines; ILFC is for sale, AIG just took a minority stake in Transatlantic after an IPO and AIG just sold their Pine Street HQ (more than likely thanks to the new UG CEO Martinez, who is also in charge of AIG's corporate real estate sales) in New York. They (AIG) are maneuvering to get as much value out of their investments/companies as they can now as AIG becomes little more than a shell in the coming years.

Anyway, there are a lot of people who are getting the short end of the stick here. Greensboro loses more jobs, and the city loses a corporate presence that donated quite a bit. It's not time to be happy about anyone losing their jobs, no matter what kind of bone you might have to pick with the company, its senior management or elsewhere.

Hopefully, those affected by this will be able to land somewhere in the coming months. The job market here is depressed, though, so we may not see these folks continue to live and work in the area.

When you examine the human component of the issue: the single salary earner who has to support a family losing a job, the fact that more foreclosures could come down the pipe in the Greensboro area from the loss of wages, and the very real fact that these folks are real people, not some faceless members of an "evil AIG company", it starts to sink in a little as to what may take place down the road.

Keep your fingers crossed. Perhaps someone may take a chance on the company proper, keep it together and not divvy things up to the highest bidder. I have my doubts, but stranger things have happened.

DisIllusioned

June 15, 2009 - 4:54 pm EDT

It seems quite apparent that the positive entries on this blog which are in support of Billy Nutt, all reference what he has done as a civic leader in the Triad. A very few even speak of what a great business man he is. They all share one other thing in common. They all come from people who never worked at United Guaranty and certainly never worked for Mr. Nutt. On the other hand, all the negative comments about his personality and his inability to function as the CEO of a major corporation, come from people who currently work at or at one time, worked at United Guaranty. Had United Guaranty gotten into this same type of trouble financially by plunging so deeply into the second mortgage guarantees, previously a very small part of the company's business, while under the leadership of any of it's three previous CEOs, one has to doubt very seriously that we would be seeing the same type of personal attacks that Mr. Nutt is experiencing. The old First Mortgage Insurance Company, which later became United Guaranty and was subsequently purchased by AIG, had deep roots in Greensboro and always had a strong "family" feel to it, even after it was acquired by AIG. That feeling disappeared quickly as soon as Charles M. Reid severed his final ties with the company and retired as Chairman. The three previous CEOs were by most any standard of comparison, superior executives to Mr. Nutt, but still managed to keep the company prospering without losing that family touch. It is now, and always will be open to conjecture as to what kind of an executive Billy Nutt was. Employees, disgruntled or otherwise seem to have one opinion and community leaders another. Insiders and outsiders can debate his leadership and people skills for years to come if they choose. Only time will tell whether he is ever given another opportunity to run a major corporation. It is extremely doubtful that he will ever be offered anything of the size and scope of that United Guaranty was when he assumed the reins though. At any rate, a prospective employer would be well advised to investigate the truth or fiction of his people skills and ability to lead and motivate people who work for him as opposed to fellow volunteers at United Way, etc., before entrusting their company to him.

AIGsucks

June 15, 2009 - 11:02 pm EDT

I don't think one will have to investigate hard to see his CEO skills. 2.5 B loss in 2008......and the losses continue on. The fact he ran another part of the company in the ground as well.

Yes, he raised lots of money for the United Way, played his part in bringing the Elon Law School downtown, the building of center city park...on and on....the golf tournament....on and on and on. With all he did in the community it is no wonder he lost sight of his real job being the CEO of UGC! All of his time was spent on the golf course increasing his PR!

This same nice guy out in the community who spoke like he cared so much for Greensboro is the same guy that eliminated a department of approximately 30 people when the company was raking in the most profits ever! And sending AIG 100B dividends which I am sure they used to finance executive bonus pay! And at the same time UGC was donating thousands to Center City Park they were cutting a few employee positions. So YOU tell me...does he really care about GSO and the families of his own employees to be donating all kinds of cash but eliminating their livelihood? Ask yourself that question? How would you feel it was you that just lost your job while Mr. Nutt was parading around downtown donating thousands to a park outside UGC's building?

And no if you didn't work there you didn't see how Mr. Nutt mistreated and disrespected employees. You can say what you want but the people that really know Mr. Nutt know that he should have been doing his "job" instead of out making like he cares about GSO so bad.

Has anyone seen him out leading up the United Way campaign the past two weeks? Or maybe raising money for Big Brothers/Big Sisters?

roundhere

June 16, 2009 - 7:50 am EDT

Your comments are well stated. I still work at UG and watched Mr. Nutt destroy not only a company but a culture. Good leaders grow not on their businesses but their employees by example. Under Billy not one single effort to expand our boundaries outside MI was successful. We had a goal to have $ 1B of non core income by 2012 and he managed to tuen that into $ 2B core losses. Greensboro wake up and smell the roses. Your native son that built parks, filled the coffers of charities, and served on your boards also managed or should we say mismanaged one of your major employers right out of business. He will see you to this day and speak of these outrageous times of financial downturns as the key to the results,but will never accept responsibility for bullying people into acceptance and agreement of his decisions. Charlie, your legacy deserved better and I hope that Billy some day apologizes to you for misleading you as to his ability and intent to manage the company as you would have expected.

AIGsucks

June 17, 2009 - 10:29 pm EDT

Yes, Mr. Nutt has done more harm to GSO than good by most likely costing GSO 500+ jobs! Anyone who says what a great leader and businessman he was need only read his comment to the GSO rotary club in which he said it finally came to him that it was the beginning of the end while sitting in bed with his wife watching Flip this house! Now you tell me, does a great businessman figure that out while watching a TV show on cable? Is that what he learned in business school at College?

Good Grief

June 17, 2009 - 11:35 pm EDT

You need counseling.

gboroborn

June 20, 2009 - 8:04 pm EDT

As a Greensboro native, I can see where he did well for the community. But being a spouse of a UG employee, I can also say that he did not have total focus on the company. The Good ole boy network was the most powerful group at UGC. All the executive's kids came and got jobs every summer making more money than employees that have been there for years. Mr. Nutt's poor management had a trickling effect on the company. All his managers operated the same way that he did. If they were given information from their analysts and thought they were being outdone, the analysts were shown the door. I know of one who warned his boss that this housing meltdown would come and he got transferred lol.

The management in that company just sucked overall. In the job postings they would always put that bachelor degrees were required but, managers of those departments have never even been to college. I know of one department that has 3 college grads and a supervisor who stated that they "barely made it" out of high school. That happens all over the company! Why require the highest degree of your worker bees and the queen doesn't even know that she can type in excel!

LONESTAR

June 23, 2009 - 11:13 pm EDT

Totally agree with your comments, management was never hired or promoted based on qualifications. If Billy liked you then you were in, one field manager had no business skills, people skills or leadership -yet he was promoted and awarded.He could not even read risk reports to safe his life. But was always saved by the "good old boy" network- You have everything here for a good trash novel; lies, cheating. affairs!

DisIllusioned

June 26, 2009 - 5:19 pm EDT

Some of the very best senior executives at UG, with long years of service, both in Greensboro and in the field, were forced out of the company several years ago for no other reason than that they did not "play ball" with Billy Nutt and always stood up for their people. As soon as Charles Reid left, Nutt began to get rid of anyone who did not think exactly like he did. If you went to UNC Chapel Hill, your job was practically guaranteed whether you could do it or not. A new EVP was hired who went to UNC but he only talked a good game and was never held accountable for anything. He even stopped coming to meetings so he would not be blamed if things went wrong. In the field, they called him "vapor" because there was nothing to him. He was a good example of the "good old boy" club (no girls allowed) at it's finest! Now we are losing our jobs but "vapor" is holding on to his.

really

June 27, 2009 - 11:40 am EDT

Some very interesting comments. With the possibility of more layoffs coming, those management folks like "vapor" may acually have to do some of the work for a change. UG has had some very good managers who are no longer there or will be gone soon. There also are many great employees who've worked hard to make UG a better company. It's sad to see a good company in so much trouble.