Friday, May 2, 2014

Genworth and Friends Announce Radian Likely to Surprise

Genworth announced earnings on Tuesday night, slightly beating consensus with strong performance in US MI and Long Term Care making up for poor life insurance mortality.

The US MI unit reported a quarterly loss provision of $63M, the lowest since Q2 2007. This is particularly relevant to Radian because of the similar size and reserves of legacy portfolios and defaults.

Radian ended the first quarter with 53,119 loans in default having had 12,113 new delinquencies and 13,645 cures. Genworth ended with 45,861 loans in default having had 12,100 new delinquencies and 13,678 cures. In a normal quarter, new delinquencies are the main drivers of loss provisioning.

MGIC provisioned about $5.3m for every new delinquency in the quarter compared to Genworth's $5.2m.  

The other big swing factors in operating earnings are mostly determined by actuarial assumptions. While books of business vary, Genworth and MGIC all have a primary reserve per delinquency with a $26m handle (Q4 for AIG had a $25m handle, but they haven't reported Q1 yet.) (Genworth and AIG report the components and not the actual figure. Genworth: 1,197mm reserve, 45,861 defaults. AIG: 1,220mm reserve, 47,518. This is not to be confused with "Flow Reserve per Delinquency.") Radian's Q4 reserve per default stands at $26.7m.

Consider also that Old Republic reported a $22.9M Q1 loss provision in its MI unit with an ending delinquent inventory of 35,042 loans, a lower provision to inventory ratio than Genworth. This looks like the result of beneficial developments in expected roll rates, principal actuarial assumptions. While Old Republic does not report report new delinquencies, its provision per delinquency was certainly less than MGIC and Genworth.

So what's the punch line? Radian Guaranty (the MI unit) will probably put up a loss number within the $65-75M area if actuarial adjustments are neutral. Core revenues (earned premiums + investment income) for the MI unit look like they will be in $220M area and $250M for Radian overall. Mgmt guided other operating expense excluding charges associated with stock price changes at down 10-15% for 2014. That implies quarterly core expenses (Other Op Ex - Stock Px Ex + Policy Acquisition Ex + Interest Cost) of less than $83M. Knowing of no deterioration in Radian Asset's book and the expected recovery of TRUPs losses, a $10M loss provision seems conservative, though this number can be volatile. This all adds up to what I'll call a conservative economic earnings number likely to be north of $60M and comfortably above consensus EPS of $0.21.

There are plenty of chances for this number to be muddled in a single quarter. For instance, we already know that the stock px rose slightly in the quarter so there will be a pretax charge of, oh, say  $10Mish. Maybe there will be a random actuarial provision, a legal charge, a single premium business revenue charge.

Still if you twist my arm,  I might tell you that I really think the economic earnings number will be above $75M. I really don't think it matters though. The only real message that investors need to take away from this report is the same one that has been broadcasted since the start of 2013: the foundation has been poured for a long term earnings renaissance.

Radian's core revenues will pass $1B this year before continuing higher despite today's puny origination market. The investment portfolio will continue to compound tax free for many years. Core op ex looks to level off around $350M. The loss ratio of new business is peaking in the high 20% range. Radian is positioned to be earning $400M in 2015 without a growing mortgage market or housing finance reform, both of which currently look more likely to help or greatly help the MI industry.

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