Radian Group - Wait Before You Buy This Mortgage Insurer

| About: Radian Group, (RDN)
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Private Mortgage Insurers

The U.S. housing markets are enjoying a healthy recovery as represented by the National Case Shiller Price index, which is at a level of 131.08, up from last year's level of 128.2. New homes and apartments are being constructed at the fastest rate since 2008. That's also the case with the newly requested building permits. While the U.S. housing markets are on their way to a rebound, the U.S. private mortgage insurers, particularly the big three, are facing difficulties, according to a report by Barron's. Shares of the companies plunged more than 10% the day the report was published.

Private mortgage insurers provide lenders with an alternative market for the federal government insurance programs by compensating for losses owing to defaults by borrowers. Borrowers or homeowners with less than 20% down payments are required by law to get themselves insured for their loans. Barron's report supports our stance on MGIC Investment (NYSE:MTG) and Radian Group (NYSE:RDN) in our earlier report, in which we came up with reasons for investors not to buy the two stocks. In this article, we will discuss why RDN does not present a buying opportunity.

Radian Group

The company has been involved in some financial maneuvers, resulting in a strengthened capital base while maintaining a strong cash flow. These initiatives could only benefit the company in the short term. The company's mortgage insurance business segment has been losing money for quite some time now, and if the situation continues, S&P expects Radian to default on its $250 million debentures that expire in 2015.

The claims rejection rate at Radian climbed to around 50% during the second quarter from around 30% in the first quarter of 2011. In comparison, MGIC, which is facing capital issues, rejected less than 7% of its incoming claims. This reflects the fact that the company has resorted to rejecting claims. A large proportion of the claims were rejected due to a lack of paperwork, while the rest were rejected for improper due diligence of the mortgage issuers. This higher claims rejection rate allows Radian to delay big payments in claims, which could result in depletion of the company's capital.

The company reported better-than-expected third-quarter performance on Nov. 1, 2012. The company posted a profit of $0.11 per share against the expectation of $0.52 loss per share, while the reported top line of $260 million was able to beat estimates by 16%. The results were positively affected by higher mortgage insurance writing and higher net gain on investments. However, compared to the prior year, the reported revenues dropped 49%.

Latest Operating Statistics

September operating figures for the company remained encouraging. According to the latest operating statistics released by the company on its investor relations' website, the company wrote $4.01 billion during the month of October, vs. $3.54 billion during the month of September. Ending inventory of delinquent loans declined moderately to 93,930 for the month of October when compared with the previous month.

Analyst Sentiment

Analysts have a consensus mean price target of $4.54 per share for a stock that is currently trading at $4.56. Of the nine analysts covering the stock, eight support our stance, which is why they recommend their investors to hold the stock, while one has rated the stock an Underperform. Analysts expect a loss per share of $0.57 for the quarter ended December 2012.

In conclusion, despite better-than-expected third-quarter results and an improvement in the latest operating statistics, we believe Radian still has to go a long way before we recommend the stock to our investors. Therefore, we reiterate our neutral rating on the stock.

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

Business relationship disclosure: The article has been written by Qineqt's Financial Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.