Radian Group Surpasses A Huge Hurdle With Fourth Quarter Earnings

Investors are happy to reward the private mortgage insurer for its hard-won battle for profitability.

Feb 10, 2014 at 12:00PM

Source: RDN Q413 Press Release

The earnings report from Radian Group (NYSE:RDN) on Wednesday was exactly what investors had been waiting for. With the newly achieved profitability in the company's core operations, investors rewarded Radian with a 6% bump following the report's release.

Long road
Though investors have never given up on Radian, they had to practice the patience of a Buddhist monk, waiting for the company's mortgage insurance unit to finally post a profit. And that's exactly what the insurer did during the fourth quarter of 2013.

For the final quarter of 2013, Radian reported a net income of $36.4 million, a significant improvement from the 2012 fourth-quarter loss of nearly $180 million. Though roughly 84% of the current quarter's profit stemmed from the change in fair value of derivatives and other financial instruments, the company deserves a pat on the back.

Mortgage insurance
Up 27% over the prior year, Radian's mortgage insurance sales have propelled it into the top spot for private mortgage insurers, based on the amount of insurance currently in-force. With $161 billion of in-force insurance, Radian surpasses the MI segments of American International Group (NYSE:AIG), Genworth Financial (NYSE:GNW), and its other top rivals.

Developing the MI segment into a profitable venture was management's top goal for 2013, which it achieved with $1.7 million in adjusted pre-tax operating earnings. Though the housing market slowed considerably during the fourth quarter, Radian still wrote $9.3 billion in new mortgage insurance, with 70% of the new business providing monthly premiums.

Out with the old, in with the new
Just as Radian was focused on bringing in new business, it was also clear on other priorities, including the reduction of risk. During the quarter, the insurer was able to further reduce its financial guaranty portfolio by 29%, as well as manage its 2005-2008 MI book. As of Dec. 31, 71% of Radian's total PMI risk in-force is business closed after 2008-a big improvement.

The company continues to underwrite new policies with care, with 70% of its business having a FICO score of 749 or higher. This has allowed Radian to experience much lower delinquencies, with primary delinquencies falling another 7% during the fourth quarter -- resulting in a 35% decrease in delinquencies since year-end 2012.

The company is still going to feel pressure from investors to improve its profitability and margins -- less than two million in profits isn't sufficient if you're the largest PMI in the business. With its competitors pulling in nearly 100 times its MI earnings (Genworth Financial reported $107 million in operating earnings from its MI division for the fourth quarter), Radian will have to step up its game.

One of the areas that could help the company reach higher profitability revolves around expenses. Unfortunately, the firm has some compensation expense that was tied to the share price of its stock, leading to very high costs in the past few quarters -- including $11.8 million in the fourth quarter. But as the firm noted last earnings season, the cost will end in 2015.

For current investors of Radian, the fourth-quarter results are a sight for sore eyes. Though the company has been struggling to reach investor expectations, there are still headwinds for it in the coming year. For new investors, the earnings may be exciting, but don't get too wrapped up in it -- following the 6% jump in share price following Wednesday's release, the company now trades at over 2.8 times book value. Looking at some of Radian's competitors might afford you a better bang for your buck.

Room to run
Of course, if Radian is able to keep expenses in check, minimize delinquencies further, and match competitor's profitability, there's a great chance that this company's stock would experience tremendous price growth. Finding successful growth stocks isn't always the easiest task,  but David Gardner has found them time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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