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Shares of MGIC Investment Corp (MTG) plunged by more than 64% on Thursday following news that the company has breached the maximum risk levels allowed to write new insurance. The news also sent shares of Radian Group (RDN) sharply lower as RDN & MTG are the only existing monoline mortgage insurers remaining. However, MTG's inability to write new insurance could be a major positive for RDN.

MTG ChartMTG data by YCharts

Radian Capital Levels

As RDN noted in its recent second quarter earnings conference call, the company has taken many steps to ensure that its mortgage insurance subsidy continues to meet capital regulations.

What Can MGIC Do?

In short, as explained by this Wall Street Journal piece, MTG is stuck in the middle of a tug of war between Freddie Mac and the Wisconsin insurance regulators. As it stands now, it looks unlikely that any time of agreement will be reached. However, while very unlikely, there is an outside chance that the parties come to some kind of agreement. MTG could also look for ways to raise additional capital, but this would likely be difficult given the company's financial situation.

MGIC & Radian Credit Downgrade

During the afternoon on Thursday, S&P decided to once again lower both MTG and RDN's credit ratings. The S&P downgrade highlights the risks the both companies face.

How Radian Could Benefit

RDN may benefit from MTG's inability to write new insurance because RDN will be one of the few companies writing new mortgage insurance business. As discussed in RDN's conference call, the company continues to be aggressive in writing new business. In the second quarter, RDN wrote more than $8 billion in new insurance. In the second quarter, MTG wrote $5.9 billion in new insurance. If MTG is no longer able to write new insurance, RDN will probably pick up a substantial amount of the business. This will help RDN as the new mortgage insurance business being written tends to be of high quality. Such a situation would be similar to the boost in sales received by Best Buy (BBY) after its chief rival Circuit City went bankrupt.

How To Play It

Given the uncertainty over RDN's financial health, I would only suggest speculating on RDN with options, a strategy I previously discussed here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: MGIC's Pain Could Be Radian's Gain