Radian Shares Down on Decline in Top-Line in August

The shares of private mortgage insurer Radian Group Inc. (RDN) lost nearly 0.9% in trading on Sep 9, after the company reported lower primary new insurance written for the month of Aug 2014. Primary new insurance written of $3.6 billion was down 23.1% year over year and 7.9% sequentially.

However, delinquency loans (loans which have failed to pay back) at Radian witnessed an improvement. Delinquent inventory for Aug 2014 was 47,364, down 27.6% year over year.

Despite the last month's decline in top line, we remain optimistic about the company's future earnings given that its insurance in force increased by 9% year over year in the second quarter. Radian is one of the biggest players in the mortgage insurance market with insurance in force of $165 billion. Its rival MGIC investment Corp. (MTG) had insurance in force of $159.3 billion as of Jun 30, 2014.

Going forward, we expect this Zacks Rank #2 (Buy) insurer to benefit from positive impact from its large profitable post-downturn mortgage insurance book, continued credit improvement in its legacy mortgage insurance book, and the steadily improving housing finance environment.

Along with growing its mortgage insurance business, Radian is trying to diversify witnessed by the recent completion of acquisition of Clayton Holdings LLC in Jun 2014. This transaction will enable Radian to diversify its franchise beyond its core mortgage insurance business, while remaining within its field of expertise.

After suffering losses for the past six years due to the subprime crisis, the industry is now on its recovery path. The transformed market structure with characteristics such as better credit quality of loans that are being insured now, wipe out of the portfolio of pre-crisis mortgages, and the possibility of a decrease in Federal Housing Administration’s share of the mortgage insurance market may encourage new entrants.

Until 2010, the mortgage insurance industry faced a prolonged dearth of new entrants. In 2010, Essent Guaranty, Inc. (ESNT) began writing mortgage insurance. Bermuda-based Arch Capital Group Ltd. (ACGL) announced this January that its U.S.-based subsidiary (Arch U.S. MI) had completed the purchase of a competitor, CMG Mortgage Insurance Company.

Another player MGIC Investment recently reported primary new insurance written of $3.5 billion, up 20.7% year over year for Aug 2014. Its delinquent inventory also improved and was 83,748, down 26.1% year over year and 1.4% sequentially.