Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
Radian Group (RDN)Stock (Financial Services Industry, Surety & Title Insurance Industry)
 However, Radian's revenues fell from $1.3B to $201M from the end of 2006 to the end of 2007 due to the credit crisis. During that period the mortgage insurance segment had an usual volume of claims since delinquent loans were defaulting due to the subprime lending crisis, and several monoline bond insurers (including Radian) have been hit hard. At the end of year 2007, Radian Group had a net loss of $1.8 billion,[2] and Radian Group stock has fallen from a 52-week high of 55.96 to 1.04 per share, a loss of 98%. The subprime mortgage meltdown created adverse conditions across the whole financial services industry, including major failures by companies like Countrywide Financial (CFC), bought out by Bank of America (BAC) and Bear Stearns Companies (BSC), which was bought out by J P Morgan Chase (JPM). Accordinglly, in early 2007, Radian Group and MGIC proposed a merger, but due to adverse industry conditions the merger was cancelled in the Fall of 2007.
[edit] Company Overview  Radian Group Inc. is an insurance provider that helps other companies improve their credit rating for different types of assets. Their strategy is to grow the core mortgage insurance business while providing service to clients in acquiring, distributing, and managing credit risk. Radian Group business is divided into three segments.
Over the past year, the mortgage insurance industry had deteriorated due to the subprime mortgage meltdown, where the market faced defaults of bad loans and forcing the securities that contained these bad loans to become unsellable. Thus, Radian Group had negative operating profits in 2007, while their revenues decreased by 85% from 2006 to 2007.
[edit] Business Segments[edit] Mortgage InsuranceThe main business of Radian Group is primary mortgage insurance. The mortgage insurance business provides credit-related insurance coverage, principally through private mortgage insurance, and risk management services to mortgage lending institutions. Primary mortgage insurance provides protection at a specified rate on prime and sub-prime mortgage defaults. In 2007, Radian Group wrote $57.1 billion of primary mortgage insurance compared to $40.1 billion of primary mortgage insurance written in 2006. [7] Pool insurance is offered on a limited basis. Pool insurance differs from primary mortgage insurance in that the maximum liability is not limited to a specific coverage percentage on each individual mortgage. Premium pool rates are also lower than the primary mortgage insurance rate. In 2007, RDN wrote $261 million of pool insurance risk, compared to $359 million of pool insurance risk written in 2006. [8] [edit] Financial GuarantyFinancial guaranty insurance provides an assurance to the holder of a financial obligation of full and timely payment of the obligation with interests. There are four products offered: Public Finance, Structured Finance, Financial Solutions, and Reinsurance. [9] Public finance provides credit-risk reduction on bonds, notes and other liabilities issued by states, school districts, utility districts, public and private non-profit universities and hospitals, public housing and transportation authorities, public and private higher education and healthcare facilities. Public finance business represented 26.8% of financial guaranty net insurance premiums written, including credit derivatives, in 2007, compared to 30.5% in 2006. [10] Structured finance consists of CDOs, which generally consist of pools of corporate debt and mortgage debt. At December 31, 2007, Radian Group had $47.9 billion of exposure from structured finance compared to $45.0 billion at December 31, 2006. Structured finance direct business represented 25.3% of financial guaranty net premiums written, including credit derivatives in 2007, compared to 29.7% in 2006. [11] Radian also provides reinsurance on direct financial guaranties written by other institutions. Reinsurance lets a company to write larger single risks and larger aggregate risks while remaining in compliance with the state insurance laws and credit rating firms.[12] [edit] Financial ServicesThe financial services segment are composed of two credit-based firms, C-BASS and Sherman. Radian holds a 46% equity interest in C-BASS and a 21.8% equity interest in Sherman. [13] [edit] Financial StatisticsRisk in Force is the operating metric for credit risk in the mortgage insurance industry, which represents the maximum exposure that Radian has at any point in time. Net par outstanding in Radian's financial guaranty business represents Radian's proportionate share of the aggregate outstanding principal on insured obligations. Radian's total mortgage insurance risk in force and financial guaranty net par outstanding was $161.2 billion as of December 31, 2007, compared to $142.6 billion as of December 31, 2006. [14] Total Loss Reserves: Radian establishes reserves to provide for losses and the estimated costs of settling claims in both mortgage insurance and financial guaranty businesses, also known as total loss reserves. [15] This is an operating metric to determine the valuation of mortgage insurers. The total loss reserves for the mortgage insurance grew 160%, while the total loss reserves for financial guaranty fell 9% from 1Q of 2007 to 2008. Thus, there were an increase in claims filed from 2007 to 2008 in the mortgage industry, resulting from the delinquent loans defaulting from the credit crisis. [edit] Key Trends and Forces[edit] Demand for refinancing home loans has slowed, limiting the number of new policies Radian writesThe fluctuations of interest rates are critical factors in the mortgage banking industry's sales and operating profit. When interest rates are low, people are inclined to refinance their homes or purchase new ones. With higher interest rates, the refinancing and purchasing slows down. There has been a steady market for refinancing and purchasing homes from 2004-2007. However, the Fed funds target, Federal Open Market Committee's (FOMC) target level for the fed funds rate, has increased 17 times until the middle of 2007, which cooled off the housing market. [16] Therefore, Radian Group had less demand up to the mid 2007 for their mortgage insurance, and revenues fell 85% from 2006 to 2007. [edit] Changes in the yield curve affect RDN's investments Radian Group has investment portfolios in long-term bonds (fixed maturities), therefore any shifts of the yield curve will affect the market value of the portfolio. The book value of total investment portfolio was $6.6 billion at March 31, 2008 with 70.9% in fixed maturity assets and on December 31, 2007, $6.4 billion book value, of which 73.3% was invested in fixed maturities. On March 31, 2008, the market value and cost of long-term debt was $509.4 million and $759.2 million. Since the market value of the long-term debt is less than its cost because the long-term interest rates have increased, the value of the debt is lower. This is due to time value of money, discounting at a higher interest rate will lower the market value even more. [18] [edit] Legislation and Regulatory Changes and InterpretationsLending and insurance laws affect Radian Group's ability to compete against public insurance companies. For example, in 2006, legislation was passed to provide greater assistance to the Federal Housing Administration, allowing flexible down payment programs.[19] Therefore consumers would have the incentive to switch to FHA since their payment plan can have greater flexibility. Mortgage insurers have also faced lawsuits from captive reinsurance arrangements (where builders receive referral fees, with reinsurance companies receiving payments from insurers despite paying little or no claims) - [20] for example, on November 18, 2003, Nutmeg Insurance Company filed a lawsuit to sue Radian Group for pool insurance, captive reinsurance arrangements, and others [21]On June 20th, 2008, Radian Group was approved as a Type-1 insurer for Freddie Mac. [22] Therefore, even though there has been a spike for delinquent loans from the credit crunch, Radian Group Inc. will continue to be eligible to insure Freddie Mac-approved mortgages. Thus Radian Group will maintain their revenue streams from mortgage insurance. [edit] Credit Rating Upgrade and Downgrade from MoodysWhen Radian Group's credit rating is downgraded, the bonds insured by Radian Group are also downgraded, and the risks taken by Radian Group will be recaptured by customers. For example, on June 25th, 2008, Moody downgraded Radian Asset Assurance, the bond insurance unit of Radian, from A3 to Aa3. The downgrade will result in the customers absorbing some of the risks taken on by Radian Group. Therefore Radian will need less capital to support the remaining obligations. Radian will shift some of the capital from the bond insurance into the mortgage insurance, in the form of a $107 million dividend. [23] [edit] CompetitionThe main competitors to Radian Group are other private mortgage insurers, federal and state governmental and quasi-governmental agencies, and mortgage lenders that demand participation in revenue sharing arrangements. The governmental agencies have different capital requirements, and they have more financial flexibility in pricing and capacity that gives them a competitive advantage. [24] Radian Group differs from other competitors since they have three main line of businesses, while the other competitors have a large stake only in mortgage insurance. Radian Group's operating profit was -180%, and Radian Group's C-Bass affiliate had to liquidate their loans, thus resulting in only $805.92 million in revenues and $245.5 million in net premiums.
[edit] References
|
The Shelf
|
Edit
History
Bookmark
