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AUGUST 5, 2009, 3:49 P.M. ET 2nd UPDATE: Radian Sees Bottom In Mortgage Insurance Losses
By Lavonne Kuykendall Of DOW JONES NEWSWIRES
Mortgage insurer Radian Group Inc. (RDN) on Wednesday provided fresh evidence of a possible turnaround for an industry that's been buffeted by the housing downturn of the past two years.
The Philadelphia company swung to a $231.9 million profit in the second quarter, blowing away expectations thanks to hedging gains and lower-than-expected claims by policy holders. The company cut its claims payments guidance for the year and said it is in good shape to continue writing business.
Sanford A. Ibrahim, Radian's chief executive, said business written in 2008 and after "represents a turning point for our book." Efforts to reduce losses in older vintage policies were also producing results, he said during a conference call with analysts.
The rosier outlook from Radian, coming along with news of an overall increase in new mortgage applications, sent shares of mortgage insurers soaring Wednesday. Radian shares were up 76% at $6.45 recently, while MGIC Investment Corp. (MTG) rose 19.4% to $8.54. Triad Guaranty Inc. (TGIC), which reports its results Friday, rose 47.5% to $1.49.
Mortgage insurers, which cover potential losses on loans to borrowers who can't come up with a 20% down payment, suffered in the past year from skyrocketing claims and credit-rating downgrades that limited their ability to write new business. As delinquencies and defaults increased and new business opportunities slowed, mortgage insurers took steps to reduce their exposure to risky policy holders.
The optimism from Radian comes at a time when there are increasing signs of stability in the housing market. Mortgage applications filed last week rose a seasonally adjusted 4.4% from the week before, as rates on fixed-rate mortgages dropped, the Mortgage Bankers Association said Wednesday. The four-week moving average for all mortgages was up 1.2%.
Nonetheless, Radian's return to profits and positive outlook stand in contrast to other mortgage insurers. MGIC reported a second-quarter loss of $339.8 million earlier this month and said delinquencies were increasing. Old Republic International Corp. (ORI) reported a $15.8 million loss, saying that recovery would be a slow process.
Radian has concentrated on writing business for prime credit quality business, and Ibrahim said new business is performing well. In the second quarter, Radian had a 25% market share of new business, helped along by the troubles of some competitors, he said.
"This illustrates our success in transforming our mortgage insurance business away from a legacy strategy," Ibrahim said. He estimated that about 27% of the company's primary risk in force comes from the well-performing 2008 and 2009 vintage years. The vast majority of new coverage it wrote in the quarter was on mortgages made with at least a 5% down payment.
Radian's $231.9 million profit, equal to $2.82 a share, compared with a year-earlier loss of $392.5 million. The latest results included hedging gains of $272.3 million, pushing revenue to $577.4 million, a 58% jump from a year ago. Analysts polled by Thomson Reuters expected a loss of $1.58 a share on revenue of $284 million.
Loss provisions fell 78% to $132.8 million. First- and second-lien claims were $167.7 million, far below expectations of about $300 million. The company expects claims of $275 million to $300 million for the third quarter, and again cut its full-year estimate to about $1.1 billion.
Radian cut some risk through a July deal to commute, or cancel, some guarantees it wrote for bond insurer Ambac Financial Group Inc. (ABK). Radian said it is pursuing more commutation deals, which could free it from even more potential losses.
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