One of the hottest markets for investment over the past few months has been the housing market. But for those who aren't all that interested in builders or home-improvement stores, private mortgage insurers have been key players that straddle the housing and financial sectors. Radian Group (RDN 1.09%) reported its third-quarter earnings last week, giving investors a closer look at the company's viability as an investment. Based on its most recent results, here are the top-three reasons to invest in Radian Group.
1. Earnings slump
Over the past few trading days, Radian has lost 14.4% since it reported a $12 million net loss for the third quarter. Of course, no investor wants to see a company report a quarterly loss; but this is nothing new for Radian. And there is one big factor clouding the company's bottom line: one-time items.
During the quarter, the company closed a deal with the Freddie Mac, which required it to report a $22 million loss. At face value, the deal is a ballbuster, but it actually helped reduce the company's exposure to 14,342 loans -- reducing the total of primary delinquent loans by 31%. The long-term value of the deal with Freddie Mac is much more than the initial loss recorded on the company's books.
On top of the deal with FMCC, Radian paid out $17 million in compensation directly related to the increase in its stock price. The awards create a $7 million impact per dollar increase in share price, leading to increased volatility. But the awards will not plague the company forever -- half of the awards will mature in June 2014, with the majority remaining maturing by June 2015.
It's these two items that really took the wind out of Radian's sails this quarter -- but the company remains a strong operator.
2. High demand
Private mortgage insurance is gaining steam in the market. With the FHA taking a step back, PMI has grown to 12%-13% of new housing loan deals, up a whopping 70% from the third quarter of 2012. The result has been record new business for mortgage insurers, including Radian. During the third quarter, the company wrote $13.7 billion in new insurance -- the second highest quarter of new flow in company history. One of Radian's main rivals, American International Group (AIG 1.40%), reported new insurance written of $14.4 billion for the same quarter, an increase of 34%.
Perhaps a more telling statistic is that 26% of the new business in the third quarter came from new customers. Even though rising interest rates have dramatically stifled refinancing activity, the market for home purchases was still performing at a high rate. And since Radian experiences three to four times greater penetration in new home purchase transactions, the transition is actually helping the company's volume.
3. Better credit trends
Though the demand for housing investments remains high, that doesn't mean that Radian is lowering its standards. In fact, the company reported that 69% of its portfolio is made up of loans with a FICO score of 740 or higher. Because of the higher credit standard, as well as its deal with Freddie Mac, Radian has reduced its exposure to delinquencies -- resulting in a default rate of 7.8%. By comparison, AIG's delinquency rate was 6.4% for the third quarter. Though Radian doesn't stack up exactly to AIG, the company has made significant improvements over the past year, with the trends in delinquencies and lower loss ratios both falling.
Bonus!
For the years between 2010 and 2025, the Census Bureau estimated that 17 million new households will be formed, with 40% coming from the Hispanic community. And the formation of households brings with it the hope of realizing the American dream of homeownership. With that in mind, Radian has increased its exposure to the Hispanic community by partnering with the National Association of Hispanic Real Estate Professionals in order to help potential buyers. By focusing on the changes to the nation's demographics, Radian is being proactive with its resources, and planning for the future.
Summing it up
On the surface, Radian's earnings were nothing special. In fact, they were disappointing for many investors, who promptly sold out of their positions. But for the long-term investor, the earnings slump may be just the time to take a closer look at Radian. With huge demand for private mortgage insurance in the pipeline, Radian has the potential to be a huge player as the housing recovery moves forward.
