Radian Group Inc. Reports Operating Results (10-Q)
Radian Group, Inc. has a market cap of $609.4 million; its shares were traded at around $4.575 with and P/S ratio of 0.3. The dividend yield of Radian Group, Inc. stocks is 0.2%.
Highlight of Business Operations:Dividends. Our quarterly common stock dividend is $0.0025 per share, and based on our current outstanding common stock, we would require approximately $1.3 million in the aggregate to pay our quarterly dividends for the next 12 months. Radian Group is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as Radian Group, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation s capital surplus or (subject to certain limitations) recent net profits. As of September 30, 2012, our capital surplus was $914.1 million, representing our dividend limitation under Delaware law.
For our first-lien insurance business, because the combination of the net present value of expected premiums and already established reserves (net of reinsurance recoverables) exceeds the net present value of expected losses and expenses, a first-lien PDR was not required as of September 30, 2012 or December 31, 2011. Our pre-tax investment yield used as the discount rate in these present value calculations was 1.73% and 2.62% as of September 30, 2012 and December 31, 2011, respectively. Expected losses are based on an assumed paid claim rate of approximately 12.4% on our total first-lien insurance portfolio (7% on performing loans and 46% on defaulted loans). Assuming all other factors remained constant, if our assumed paid claim rate increased to 14.4%, we would be required to establish a PDR. New business originated since the beginning of 2009 is expected to be profitable, which has contributed to the overall expected net profitability of our first-lien portfolio. In addition, estimated rescissions and denials on insured loans are expected to partially offset the impact of expected defaults and claims.
A net claim liability is established for a performing credit if there is evidence that credit deterioration has occurred and the expected loss on the credit exceeds the unearned premium revenue for the contract based on the present value of the expected net cash outflows. Included in accounts and notes receivable and unearned premiums on our condensed consolidated balance sheets are the present value of premiums receivable and unearned premiums that are received on an installment basis. The premiums receivable is net of commissions on assumed reinsurance business. The present values of premiums receivable and unearned premiums that are received on an installment basis were $29.2 million and $34.8 million, respectively, as of September 30, 2012, and $34.3 million and $39.8 million, respectively, as of December 31, 2011.
Defaults. Our first-lien primary default rate at September 30, 2012, was 12.6%, compared to 15.2% at December 31, 2011. Our primary default inventory comprised 94,831 loans at September 30, 2012, compared to 98,450 loans and 110,861 loans at June 30, 2012 and December 31, 2011, respectively. The reduction in our default inventory is the result of the total number of defaulted loans: (1) that have cured (“cures”); (2) for which claim payments have been made; and (3) that have resulted in insurance rescissions and claim denials, collectively exceeding the total number of new defaults on insured loans. Despite this positive trend, our overall primary default rates continue to remain elevated compared to historical levels due to continued high unemployment and weakness in the U.S. housing and mortgage credit markets. We believe that a return to sustained profitability in our mortgage insurance business is dependent upon both a further reduction in the number of new defaults and an increase in the number of cures, particularly with respect to loans that have been in default for more than twelve months. We are experiencing improved operating results in our mortgage insurance business in 2012 compared to 2011, and although we expect an operating loss for our mortgage insurance business in 2012, based on our current projections, which are subject to significant risks and uncertainties, we expect to achieve marginal operating profitability in our mortgage insurance business in 2013. We are projecting a 20%-25% total decrease in new primary defaults in 2012 compared to 2011, which compares to an 18% decrease in new primary defaults in 2011 compared to 2010. During the third quarter and first nine months of 2012, new primary defaults decreased 23% and 21%, respectively, compared to the same periods of 2011.
Premiums on our mortgage insurance products can be paid either monthly, up-front as a single premium, or as a combination of an up-front premium plus monthly renewal. For monthly paid premiums, we receive premiums and provide insurance coverage on a month-to-month basis as compared with our single premium business where we receive one payment at the time of origination and provide insurance coverage for the life of the loan. Our projected rate of return on our single premium business is lower than that on our monthly premium business. The realized rate of return of our single premium business will be affected by the ultimate life of the loan. We underwrite our single premium business using current market expectations regarding loan prepayments. If loans prepay earlier than expected, then our profit will be higher than anticipated. If loans are repaid later than expected, our profit will be lower than anticipated. As a result, the ultimate profitability of our single premium business is dependent in part on mortgage prepayment speeds. We believe that because prepayment speeds are difficult to project, a mixture of single premium and monthly premium business is desirable to protect against actual prepayment speeds that are significantly different from expectations. Approximately 34% of our NIW for the first nine months of 2012 was written with single premiums compared to 44% for all of 2011.
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