Will Radian Earnings Turn Profitable This Week?

Radian Group (RDN 1.00%) will release its quarterly report on Wednesday, and given the huge bounce in the housing market, shares of the mortgage-insurance provider have soared over the past year. Yet until now, Radian earnings have been stuck firmly in the red. That might not change this quarter, but improving prospects are inexorably moving the company toward profitability.

Like most of its peers, Radian got in trouble writing mortgage insurance at the top of the housing boom, only to see home prices plunge and find itself on the hook for billions of dollars in claim losses. Having survived the worst of the housing bust, Radian has finally benefited from home prices having apparently hit bottom, and new business from high levels of refinancing activity have allowed the company to replace bad business with good. Let's take an early look at what's been happening with Radian over the past quarter and what we're likely to see in its quarterly report.

Stats on Radian

Source: Yahoo! Finance.

Does Radian have a positive earnings surprise in store for shareholders this quarter?
Analysts have had mixed views on Radian earnings in recent months. They've narrowed their June-quarter loss estimates by $0.02 per share, while pulling back in their 2013 and 2014 full-year figures much more extensively. Most of the 2013 widening came from a much bigger-than-expected loss in the first quarter due to a charge related to the fair value of its derivatives positions, but a $0.12 per share drop for 2014 estimates more accurately reflects the uncertainty analysts have about the company's future prospects. The stock, though, has climbed 30% since mid-April.

Radian is far from the only mortgage-insurance company to rebound sharply, but it has been one of the biggest beneficiaries from the housing recovery. In June, the company wrote $4.76 billion in primary new insurance, marking its second-largest month in company history, and reduced the number of delinquent loans in its portfolio by more than 1,000 to just over 78,250.

The company has also gotten substantial attention from hedge-fund investors seeking to play the rising home-price theme. Radian and fellow insurer MGIC Investment (MTG 0.75%) have been favorites of hedge-fund investor John Paulson and other funds, as every piece of new post-crisis business has a better loss profile than its pre-crisis loans. For its part, Radian has become the No. 1 small-cap pick for hedge funds in 2013.

Still, you can expect competition to be fiercer than ever for Radian. Ambac Financial (AMBC 1.44%) has emerged from bankruptcy and promises to identify the most lucrative opportunities in moving forward, which could easily include the mortgage-insurance industry. Meanwhile, fresh off a big settlement win, MBIA (MBI 1.32%) has the financial capacity to make a big play in mortgage insurance and keep its momentum up.

In the Radian earnings report, look to see whether the company has resolved the derivatives issues that caused problems last quarter. In such a favorable environment, surprises like that are the biggest threat to Radian's eventually starting to make money again.

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