Mortgage insurer Radian (NYSE:RDN) reported fourth-quarter earnings of $0.79 per share, compared to $0.64 per share a year ago. For the full year, the company earned $3.20 a share compared to $2.77 in 2018. Book value per share increased 23% on a year-over-year basis to $20.13 per share. Radian has taken some steps to improve performance and is trading at a low multiple for a company with a lot of things going its way.

A restructuring of the company pays off

Radian has been working to restructure the company, and 2019's earnings were evidence that the strategy is working. Radian's CEO Rick Thornberry said in the earnings press release: "We took several steps to execute our capital strategy and strengthen our risk profile, including returning capital from our mortgage insurance subsidiaries to Radian Group, repurchasing shares of common stock, executing a mortgage insurance-linked notes transaction, reducing our total debt outstanding, and improving our debt maturity profile."

picture of a house, money, and a calculator

Image source: Getty Images.

As part of the restructuring, Radian eliminated the intercompany reinsurance agreement between Radian Guaranty and Radian Reinsurance. This freed up $370 million in capital that the company used partially in a $300 million share repurchase. Earlier in the year, Radian also issued $562 million of insurance-linked notes. As of Dec. 31, the company had regulatory assets of $3.6 billion, which was 29% higher than the minimum regulatory requirements. Liquidity was just over $652 million, and lines of credit pushed it over $920 million. Finally, Radian launched a new quota share reinsurance program, which allows the company to lay off some of its risk to reinsurers. This allows Radian to write more business. 

A new emphasis on data in pricing

Radian changed its pricing model for mortgage insurance by moving toward a more factor-based model for mortgage insurance pricing. Instead of using broad rules (historically called rate cards) to price insurance, Radian introduced its RADAR mortgage insurance pricing model in 2018. This is a much more sophisticated way of modeling risk that also includes characteristics of the borrower and the property in addition to the usual loan considerations. Radian expects this tool to make the service more customer-centric and aid in the management of the portfolio. Radian isn't the only insurer doing this, and the mortgage banking industry is becoming more accepting of this new mortgage insurance environment. Radian is also benefiting from a 40-year low in mortgage delinquencies, according to the Mortgage Bankers Association.

The regulatory lay of the land

The potential release of Fannie Mae and Freddie Mac from conservatorship will affect the mortgage landscape, and no one really knows how it will look. The Consumer Financial Protection Bureau plans on moving away from strict debt-to-income ratios into a more holistic evaluation of a borrower's ability to repay.

Finally, the government expressed support for the MI industry in general, as Thornberry noted on the conference call: "Finally, we continue to be encouraged by the receptivity of Members of Congress, the administration, the FHFA, and other regulatory agencies regarding the important role that our industry plays as a private investor imanaging and distributing mortgage credit risk. As FHFA Director, Calabria, has stated on more than one occasion, the MI industry is an example where private capital is working well within the housing finance system."

Ultimately, the upcoming year will depend on the housing market

The most important driver for Radian is the housing market itself. If mortgage origination is strong industrywide, then Radian will see growth in new insurance written. A market dominated by purchase applications is better for Radian as a general rule, and it looks like the homebuilders are ramping up production for 2021. With a strong economy, growing home construction, and a benign Fed, Radian is positioned well for 2021. Trading at 7 times estimated 2020 earnings, Radian is a value stock worth a look.