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Radian Sells Unit to Comply with New Capital Regulations - Analyst Blog

Private mortgage insurer Radian Group Inc.RDN has successfully completed the sale of its financial guaranty insurance subsidiary, Radian Asset Assurance Inc., to Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd. AGO .

The company had made an announcement to this effect last December. This move is in sync with the company's efforts to rake in funds which would fortify its capital that is required to comply with the newly issued capital regulations called Private Mortgage Insurer Eligibility Requirements (PMIERS).

The PMIERS proposed by the Federal Housing Finance Agency last July, set new capital requirements that private mortgage insurers are required to meet in order to carry on business with the Government-sponsored enterprises Fannie Mae and Freddie Mac.

These rules are intended to resurrect and protect the housing industry which suffered tremendously when the housing bubble busted. During the financial crisis in 2008, mortgage insurance companies were unable to clear insurance obligations as claims on bad loans chipped away capital reserves. A default by these mortgage insurers led to huge losses for Fannie Mae and Freddie Mac which relied on the former for payments 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 make claim payments. PMI Group filed for bankruptcy protection in Nov 2011 after the Arizona Department of Insurance took over 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 cut down its mortgage insurance business after suffering huge losses.

The new regulation is a measure sought by the Government to boost up the inherent strength of mortgage insurers, so that they can better manage and avoid the kind of loss and failure faced earlier.

Coming back to Radian, the sale, has released funds of $789 million. Radian was keen to sell Radian Asset as financial requirements stated in the proposed capital regulations of PMIERS excluded the capital from Radian Asset. This prudent sale will strengthen the company's balance sheet. This will in turn help it to regain its investment grade credit ratings, which are crucial for mortgage insurers, in the future.

The transaction will also enable the company to focus on and expand its core operations of mortgage and real estate markets, while doing away with riskier business, attached with Radian Asset.

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

Radian carries a Zacks Rank #4 (Sell). A better-ranked stock is Cigna Corp. CI , which carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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