Radian to Sell Subsidiary to Meet PMIERS Capital Requirement

Private mortgage insurer Radian Group Inc. (RDN) has entered into a deal to shed its financial guaranty insurance subsidiary, Radian Asset Assurance Inc., to Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd. (AGO).

The sale proceeds would help the company to accumulate capital required to comply with Private Mortgage Insurer Eligibility Requirements (PMIERS) – the newly issued capital regulation. Proposed by the Federal Housing Finance Agency (FHFA) in July, PMIERS requires private mortgage insurers to maintain a capital level to carry on their business with government-sponsored enterprises Fannie Mae and Freddie Mac.

These rules are intended to resurrect and protect the housing industry which tanked when the housing bubble burst. During the 2008 financial crisis, mortgage insurance companies were left incapable ofclearing insurance obligations as claims on bad loans drained their capital reserves. A default by these mortgage insurers resulted in huge losses for Fannie Mae and Freddie Mac since they had relied on mortgage insurers to pay the former in case the borrower defaulted on loan.

A number of players were forced to exit the market after they were left with insufficient capital to pay for claim payments. PMI Group filed for bankruptcy protection in Nov 2011 after the Arizona Department of Insurance tookover the main unit as claims on soured mortgages drained capital. Triad Guaranty Inc. also had to stop selling new policies when capital ran short, and Old Republic International Corp. (ORI) also trimmed its mortgage insurance business after suffering huge losses.

The new regulation is a measure sought by the government to build up the inherent strength of mortgage insurers, to better manage and avoid the kind of loss and failure faced during the 2008 financial crisis. The government is also trying to shore up the market share of private mortgage insurance by limiting the role of its insurer – Federal Housing Administration.

Coming back to Radian, the sale, subject to regulatory approvals, will consummate in the first half of 2015 and bring $810 million in cash. Goldman Sachs & Co. of The Goldman Sachs Group, Inc. (GS) is acting as the financial advisor on the sale of Radian Asset.

The financial requirements stated in the proposed capital regulations of PMIERS exclude the capital from the company’s Radian Asset unit. Since the capital from the subsidiary does not account for the group’s required capital level, it makes much sense to sell it off. The sale will also enable the company to focus on its core operations in mortgage and real estate markets.

Though the sale of Radian Asset will expectedly lead to a GAAP and statutory loss in the fourth quarter of 2014, the transaction is expected to increase Radian Guaranty’s available assets by approximately $790 million.

With this step, the company now expects to meet the new capital requirements as per the FHFA within the stipulated time and will not have to raise any additional capital.

Radian carries a Zacks Rank #2 (Buy).