Radian Group Inc. (NYSE: RDN)

Radian Group Inc. engages in providing credit-related insurance enhancement coverage and financial services. Through its subsidiaries, the Company operates in three segments, including Mortgage Insurance, Financial Guarantee and Financial Services. The Mortgage Insurance segment provides protection to mortgage lenders against mortgage defaults and eroded valuations. The Financial Guarantee segment provides insurance against defaults and declining asset values of municipal bonds, structured financial instruments through guarantees and default swaps. The Financial Services segment provides credit card and sub-prime credit card receivables.

Founded in 1977, the Company is headquartered in Philadelphia, Pennsylvania.

Source: Reuters.com, SEC Filings.

Financial Summary

Source: Reuters.com, SEC Filings.

Analyst Consensus

The mean of six analysts polled by Thomson Reuters rate shares of RDN a “Hold.”

Analyst Recommendations and Revisions

Source: Reuters.com, SEC Filings.

Investment Highlights

Market

The financial services industry is under increased pressure since the recession in the residential real estate market, and now in the commercial market. Throughout the insurance and reinsurance industry, demand for mortgage-guarantee insurance has steadily declined each month during the first half of the year, and is expected to remain weak through 2009 and much of 2010.

The overhang of collateralized default swaps (CDSs) and obligations (CDOs) remains large enough to materially impair the balance sheets of financial institutions engaged in these instruments, bankrupting institutions with too many of these instruments on its books. According to an Office of the Comptroller of the Currency (OCC) report ended December 31, 2008, the total notional value of derivatives on the books of member banks of the Federal Reserve totaled $200.4 trillion, exposing the entire financial system to insolvency.

Losses in the mortgage insurance industry have reduced surpluses against defaults and increased risk-to-capital ratios. Additional new capital is needed to offset future losses in the industry, or further underwriting of new insurance cannot be written.

The industry is dependent on the health of the economy and ability of consumers to gain access to credit, which remains depressed in the first case and is severely limited in the second. Most economist believe the U.S. economy will not show real signs of recovery until sometime in 2010, or beyond, as recent data of a rebound in consumer spending and durable good orders are temporarily manifest as a result of Washington stimulus programs. As this stimulus recedes, the economy is not expected to recover while unemployment continues to rise, as approximately 70% of U.S. GDP is dependent upon consumer spending. Other sources of spending such as residential equity mortgages will not be available to the consumer, as this access to credit drove consumer spending since 2003. Further delinquencies and defaults are expected through 2010 in both the residential and commercial real estate markets through 2009 and 2010.

Company

The Company’s ability to remain solvent is contingent upon the discretion of the Financial Accounting Standard Board through the advice of the U.S. Federal Reserve and U.S. Treasury. According to the latest decision of the Financial Accounting Standards Board (FASB), Statements of Financial Accounting Standards no. 157 (SFAS-157), banks and other financial institutions are given discretion as to the fair market value of its securities where very little to no input data are available.

Instead of marking to market value, FASB has directed financial institutions to ‘model’ the value of securities that have no reasonably liquid market. Under these conditions, the Company’s transparency regarding its exposure to loss in these securities and third-tier assets is seriously impaired. Contained in its 10-Q ended September 30, 2009, the Company states:

Financial Guaranty Exposure Subject to Recapture or Termination. As a result of S&P’s downgrades of our financial guaranty insurance subsidiaries in June and August 2008, after giving effect to the Ambac Commutation discussed above, approximately $65.9 billion of our net par outstanding as of June 30, 2009, remains subject to recapture or termination at the option of our reinsurance customers, our credit derivative counterparties or other insured parties.

The Company’s free cash flow and profitability remains questionable due to further increases in expected mortgage defaults due to expected increases in unemployment, corporate bankruptcies and further deteriorating real estate values. A closer look into the Case-Shiller index “rebound” reveals that more homes at higher prices were sold at distressed sales, accounting for the blip up in the average home price.

The fundamentals of the U.S. economy will affect the fundamentals of the Company this year and in the intermediate future. The Company’s 10-Q reveals the exogenous risks to its business, stating it remains “difficult to predict,” but does predict that its risk-to-capital ratio could reach 25:1 by the close of 2009.

We believe that we will continue to incur and pay material losses. The ultimate amount of losses will depend in part on general economic conditions and other factors, including the health of credit markets, home price fluctuations and unemployment rates. We are significantly limiting PMI’s new business writings to conserve capital and are exploring other alternatives, including, restructuring certain pool contracts, debt or equity offerings, obtaining reinsurance for our insurance subsidiaries’ current and/or future books of business, potentially obtaining capital or other relief under the U.S. Treasury’s Financial Stability Plan (including the Troubled Asset Relief Program, or TARP) and/or other capital relief initiatives at PMI.

Topping the list of the reason for the Company’s expected poor performance include its under-performing assets, losses from its financial instruments insurance and other third-tier reinsurance business. The full extent of the Company’s losses from its entire line of business have been sanctioned to remain unrealized and underreported.

Recent News

On December 1, the Company’s chief financial officer Bob Quint said to the Associated Press (AP) that delinquencies insured by RDN rose less than expected in both the months of October and November.

November data suggest that delinquencies are slowing in rate according to Quint in a presentation at the Friedman, Billings, Ramsey Capital Markets Fall Investor Conference in New York. Quint said to a group of analysts and investors that he is pleased by the November results.

On November 12, the Company announced a quarterly dividend of $0.0025 per common share, and payable on December 23, 2009, to stockholders on record as of the close of business on August 24, 2009.

Technical Analysis

RDN trades above its 13-day moving average. This bullish sign is less significant, however, because the 13-day moving average is downwardly sloped.

The MACD for RDN currently indicates a bullish signal. The MACD is above the signal line, a 9-day moving average of the MACD. The MACD is, however, below the critical level of 0, which implies the past price action has been negative. Overall, the chart is bullish.

Comparative Analysis

Source: Thomson Financial

Insider Trading Activity

Source: Yahoo Finance

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